PCM's (PCMI) CEO Frank Khulusi on Q4 2015 Results - Earnings Call Transcript

| About: PCM, Inc. (PCMI)


Q4 2015 Earnings Conference Call

February 18, 2016 04:30 PM ET


Frank Khulusi - Chairman and CEO

Jay Miley - President

Brandon LaVerne - Chief Financial Officer


Kara Anderson - B. Riley & Company

Bill Dawkins - Burleson & Dawkins


Good day ladies and gentlemen. And welcome to the Fourth Quarter 2015 PCM Incorporated Earnings Conference Call. My Name is Brian 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; Brandon LaVerne, CFO and Jay Miley, 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.

Now, I would like to turn the call over to Frank Khulusi. Please proceed, sir

Frank Khulusi

Thank you, Brian. Good afternoon everyone. Welcome and thank you all for participating on this call with PCM. Today we will be discussing the company’s financial results for the fourth quarter.

We continue to outpace the industry and our peers as we deliver 34% sales growth, reaching a record $482.2 million and 26% growth in gross profit to a record $63.1 million. This strong performance accelerated from our Q3 growth rate of 20% and especially noteworthy considering the insignificant sales contribution of our TigerDirect acquisition.

As we previously stated, the Tiger Acquisition added considerable cost during the quarter and we spent December training the sales reps on our systems and bringing them up to speed, actions which have continued during the first quarter of 2016.

In 2015, we consummated three acquisitions in rapid fashion, the last two of which closed in the fourth quarter. As a result of the rapid succession and magnitude of these acquisitions and the necessity of spending the time and resources to onboard, integrate and assimilate the considerable number of additional resources, we were forced to delay various contemplated synergistic moves and other cost savings activities until the first quarter. We also experienced a ramp-up cost of the yet-to-be productive Tiger sales reps.

We have since completed much of the synergistic moves and cost savings activities in the second week of February, at an estimated annualized savings of approximately $10 million over our fourth quarter run-rate, or approximately $2.5 million per quarter, none of which came from the newly acquired Acrodex or TigerDirect businesses.

Sales from the account representatives acquired have also begun to ramp-up very nicely in Q1, even though we did not take control from Systemax of certain intellectual property including the TigerDirect.com website until this week. We do expect these intellectual property assets to be fully operational within our environment until sometime in the second quarter.

Further, in February, we have transitioned nearly all of the management overhead that was dedicated to the MacMall business out of our company, thinned out its cost structure, and folded it under the management and supervision within our Commercial segment. As a result, we will no longer report a separate MacMall segment beginning in 2016.

Now, let me turn the call over to our President Jay Miley. Jay?

Jay Miley

Thanks Frank. During 2015, we were busy adding significant scale and capability to our company, thereby transforming PCM into a sizeable, world-class IT solutions provider. Like Frank, I believe we are now well positioned to reap the benefits of our efforts. Our teams our energized, aligned and focused on selling and supporting software, solutions and services to commercial and public sector customers across the United States and Canada.

In the fourth quarter, we grew our software category by 121%, which now represents 27% of our mix. We also grew our servers, services and notebook categories at 77%, 22% and 21%, respectively. I’m very proud of our teammates around the world who have gone above and beyond to make this transformation possible, and I’m looking forward to the many individual contributions they will make in 2016 and beyond.

I will now turn the call over to Brandon LaVerne, our Chief Financial Officer who will take you through our results in a bit more detail. Brandon?

Brandon LaVerne

Thanks, Jay. 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 Q4 2014 unless otherwise noted and are reflective of our continuing operations.

In connection with our acquisitions of Acrodex and certain Canadian assets, the Systemax’s North American Technology Group in October and December 2015 respectively and resulting entrance into selling products, services and solutions in the Canadian market, we formed a new operating segment called Canada. This segment will include our operations related to these Canadian market activities, beginning as of the respective dates of these acquisitions.

Our consolidated net sales were $482.2 million in Q4 2015 compared to $359.2 million in Q4 2014, an increase of $123 million or 34%. Sales in our commercial segment increased 43% to $367.6 million and represented 76% of our consolidated net sales.

Sales in our public sector segment increased 8% to $68.8 million and represented 14% of our consolidated net sales. Commercial and public sector sales are both fueled by our 2015 acquisitions and were also impacted by the continued shift in sales mix from products reported on a net basis. Our federal business within the public sector segment was impacted by sales reductions under a large federal contract vehicle during 2015.

Net MacMall sales decreased 24% to $28.8 million representing 6% of consolidated net sales and we generated $17 million of sales in the new Canada segment representing just a partial period of Acrodex and the Canadian portion of TigerDirect.

Consolidated sales of services were $33.9 million in the quarter compared to $27.8 million last year, an increase of $6.1 million or 22%, and represented 7% and 8% of net sales in Q4 2015 and Q4 2014, respectively.

Our top partners by billed revenues in Q4 2015 were Microsoft, Apple, Dell, HP, Inc., Cisco, Lenovo and Hewitt Packard Enterprise. Collectively these top seven partners represented approximately 53% of gross billed revenues.

Our average sales executive headcount in our commercial segment was 89 account executives or 12% with 580 this year as we invest heavily in the future growth in that segment as well as the addition of account executives from our 2015 acquisitions.

Public sector sales headcount grew by 29% to 137 account executives during the quarter while MacMall average headcount decreased by 24% to 57 account executives. Our new Canada segment averaged 40 account executives during the quarter. Those amounts were all averages during the quarter and significantly increased from those levels by the end of the quarter due to the TigerDirect Acquisition.

At December 31, 2015, commercial, public sector, MacMall and Canada account executive headcount stood at 746, 169, 60, and 86 totaling 1,061 total account executives as we head into the first quarter of 2016.

Consolidated gross profit was $63.1 million, a 26% increase over last year. Consolidated gross profit margin decreased to 13.1% in Q4 2015 from 14% last year. The increase in consolidated gross profit was primarily due to our 2015 acquisitions partially offset by a $3.6 million reduction in gross profit related to federal contract vehicle in 2014 and competitive pricing pressures.

The decrease in consolidated gross profit margin was due to a reduction in higher margin sales under federal contract vehicle, reduced vendor consideration related to a change in mix towards products of vendors with lower paying programs and competitive pricing pressures, partially offset by an increase in sales mix towards sales reported on a net basis.

Consolidated SG&A expenses were $85.2 million in Q4 2015, an increase of $39.6 million, or 87%. The increase in consolidated SG&A expenses was primarily due to a $22.1 million non-cash charge related to our previously announced decision to pursue En Pointe’s SAP solution over the AX ERP solution we’re developing. The SG&A expenses related to our 2015 acquisitions, and $900,000 of M&A related fees. We also experienced an unexpected $700,000 incremental benefits charge in the quarter due to increased claims activity under our self-insured health plan most of which hit our SG&A line.

We generated GAAP diluted amounts per share from continued operations of $1.21 per share. As excluding the special charges, our non-GAAP diluted EPS was $0.05 compared to non-GAAP diluted EPS of $0.17 last year.

Turning to the balance sheet and cash flow. Cash used in operations for the year ended December 31, 2015 was $52.9 million compared to cash provided by operations last year of $73.3 million as we had the fill the balance sheet of En Pointe and partially TigerDirect.

Accounts receivable at December 31, 2015 was $341 million, an increase of $141.4 million over the last year, with increase primarily due to the build of En Pointe’s receivables since the acquisition in April, 2015.

Inventory at December 31, 2015 was $55.4 million, an increase of $4.7 million from last year. Accounts payable at December 31, 2015 was $201.5 million, an increase of $79.2 million from last year primarily due to the addition of En Pointe.

Cash flow used in investing activities during the year ended December 31, 2015 totaled $65.6 million compared to cash flows used in investing activities last year of $26.7 million. 2015 investing activities this year included $44.2 million for our three acquisitions, $11.8 million for purchases of two buildings and $9.6 million related to traditional capital expenditures related to investments in our IT infrastructure and new ERP systems, which we expect to decline in 2016.

Outstanding borrowings under our line of credit increased by $109.6 million to $162.4 million at December 31, 2015 compared to December 31, 2014. Total notes payable, including the $4.8 million of note payable related to asset held for sale in connection with our Irvine property, increased by $13 million to $39.2 million at December 31, 2015 compared to last year.

Our debt positioned increased during the quarter partially due to the timing of certain large transactions and related cash flows thereto.

At this point, I’ll turn the call back over to Frank for some closing remarks. Frank?

Frank Khulusi

Thanks Brandon. We believe we are now extremely well positioned for the future. In 2016, as a result of our 2015 moves and progress, our customers and vendor partners are now recognizing us as a much bigger and more capable and more impactful force in the marketplace.

The strategic and tactical initiatives executed during the fourth quarter of 2015 and the first few weeks of 2016 give us what we believe is a solid and sustainable base, and we intend to build on this momentum throughout the year.

We expect 2016 to be a banner year, with sales between $2.2 billion to $2.25 billion which represent growth of 32% to 35% and adjusted EPS between, $1.25 to $1.40 per share a nice base, from which we intend to grow rapidly for the foreseeable future.

With our new sales mix, Q1 is now our seasonally weakest quarter by a wide margin. Due to this fact, as well as the expected ramp time of TigerDirect, we currently expect our Q1 sales to be in the range of $485 million to $495 million and our 1st quarter adjusted EPS to be between $0.12 and $0.18.

At this point, I’ll turn the call back over to Brian and open it up for any questions.

Question-and-Answer Session


[Operator Instructions]. Our first question comes from the line of Kara Anderson with B. Riley & Company. Your line is now open. Please go ahead.

Kara Anderson

Sure, good afternoon.

Frank Khulusi

Hi Kara.

Kara Anderson

I’m wondering if you can talk - hi, how are you?

Frank Khulusi

Good, how are you?

Kara Anderson

Great. Can you talk in terms of growth for your commercial and public segments when you back out En Pointe and how that’s tracking versus your internal expectations?

Frank Khulusi

Sure. We were doing very well from these acquisitions of En Pointe, it’s executing at a very higher level. We’re very pleased with the results. And we’ve begun assimilation and it’s very hard for us to really pinpoint with extreme precision what is attributable to what.

However, based on some internal review, we believe that our legacy core business even when you exclude En Pointe and the contribution of En Pointe grew somewhere in the order mid-single-digits to high-single-digits possibly, it’s right in the middle about 8%.

Kara Anderson

Great. And then also, Brandon I know you went over what impacted the gross margin in the quarter, I didn’t catch all that. But I’m wondering if you could talk about sort of expectations moving forward whether those issues you cited were more one-off or what we should see going forward especially given the fact that we have now two new acquisitions to fold in?

Jay Miley

Yes, Kara, this is Jay Miley, I’ll answer that question. So, as you know, our margin is bouncing around a little bit. Our expectations for the year, all that in the Q1, Q3 and Q4 quarters, you should expect a range of 13.5% to 14% in the Q2 range given the high weighting on the software business, the Microsoft business in particular. We expect it to be a little bit lower in the 13% to 13.5% range. We do have some margin proven plans that should help us as the year progresses as well.

Brandon LaVerne

This would be accretive to the ranges that Jay just handed you.

Kara Anderson

Great, that’s really helpful. And then, I’m just wondering if you could comment on sort of your expectations laid out for contributions from Systemax in 2016 and whether or not that’s changed and if those expectations hold true within your 2016 guidance?

Frank Khulusi

The productivity of those sales reps have started to ramp up very, very nicely. At this point though we have only now gotten a handle over some key intellectual property, not the least of which is the website. And we are not even operational with it yet, we can’t even accept orders at this point electronically.

So, we’re very busy ramping that up now. That’s not really just designed to take orders on the web but it also drives business into the organization, people have to do searches for products, things of this sort.

So, as we restore the business, we’re going to continue to see a further ramp. So at this time we have nothing new to report in terms of what we originally estimated, in terms of kind of sales targets for that business. However we do believe that we have some upside to that.

Kara Anderson

And then, maybe I should have asked this first. But could you go through the rationale behind the Systemax acquisition and your goals for that?

Frank Khulusi

Yes, this acquisition is very synergistic with our business. We if all, the very vocative of the acquisition and what’s surrounding, acquiring talent and sales people that are historically productive and experienced to our inside sales people. So, our inside sales people associate a very productive organization with hefty operating margins.

And the target market for that is small and medium-sized business customer. And we also have a group of folks that were also focused on the sale of education business as well as the Canada people. So, it gives us adequate representation on all fronts. And as far as our vendors go, and then the partners, they very much care about the F&B market because it’s a very hard market for them to reach into.

And as a result, the competitive aspect in the market and high barriers, as well and there are high barriers to enter - much higher than in other markets. And as a result of that the gross margin profile for that business tends to be higher as well.

So, for all those reasons, we think that this business made a lot of sense it’s very synergistic with what we do. And it significantly increases our relevance with the vendor partners that I talked about and for the customers we’re trying to address.

Kara Anderson

Okay. And then last, can you comment on sort of your appetite for additional acquisitions at this point?

Frank Khulusi

We, as you saw from the great deals we made on those acquisitions, we’re not only an acquirer but we tend to be a very active acquirer who likes to get a lot of value for the money. So when and if we do find such companies and such profiles, we would have a lot of appetite for that assuming that they all fit within our strategic objective.

However, at this point in 2016, like I said and that’s refined project company, we’re very focused on at this point assimilating what we have in driving the results that we talked about.

Kara Anderson

Great. Thank you very much.

Frank Khulusi

Thank you.


Thank you. [Operator Instructions]. And our next question comes from the line of Bill Dawkins with Burleson & Dawkins. Your line is now open. Please go ahead.

Bill Dawkins

Good afternoon guys.

Frank Khulusi

Hi Bill.

Bill Dawkins

It sounds as though you guys have been quite busy it looks like. Frank, this is for you. So, you have a great base no doubt to work from in fact, I was just going through my numbers and you’re a doing a quarter 150% more than you do in a year when I first started following your company believe it or not.

But anyway, what gives you other than the strong foundation, what gives you this feeling of excitement about this year, is it getting these companies together and reaping out of them what you want or is it excitement about you see maybe the business getting better?

Frank Khulusi

It’s both of those things I’ll give you an example. For example, we just concluded our National Sales Meeting, where we brought our key talent sales people into a common place. And we also brought our key vendors into that place. And there, this is an event that’s oriented towards the vendors sharing their repertory not sharing our objectives for them as well.

And I will tell you, we had a record number of turnouts in terms of the vendors and a record level of excitement. And common word out of that has been, they - the vendors really believe in us and they are willing to invest at levels that they haven’t historically in order to ensure our success going forward.

So this is an example, one of many of the level of what we see as really having been a transformative event for us. And we’re much bigger force now in all aspects. We’ve really significantly strengthened our public sector business, we’ve strengthened our SMB business, and we’ve strengthened our enterprise business. And we market into Canada, all in one swoop.

Bill Dawkins

And speaking of Canada, what are the reasons behind breaking Canada out, just out of curiosity?

Jay Miley

Canada is a market that tends to be more dependent on different economies. Obviously it’s dependent on the Canada economy. And that economy tends to be more focused on specific things so, for example the price of oil. And whereas we didn’t fill that into our assumptions that Canada economy has weakened a little bit.

When we did make the acquisition, we believed that we will get [indiscernible] perspective as a separate thing because that would not be reflective of what’s happening in the United States. And therefore when we do break it down internally, we think just to look at it separately, we think that it may be interesting to share with the shareholders. But we do believe that as Canada economy rebounds in the price of oil, rebounds a significant upside for that business.

Brandon LaVerne

And Bill, it’s Brandon. Keep in mind that the $17 million is only a partial quarter, so that’s how reflective of what we expect the results to be on an ongoing quarterly basis when full three months of Tiger and a full three months of Acrodex.

Bill Dawkins

And so, we should…

Brandon LaVerne

Go ahead.

Bill Dawkins

So, we shouldn’t expect since you’re breaking this out now, we shouldn’t look at Canada as any type of a growth engine for 2016 I guess is what you’re implying?

Frank Khulusi

Well, it will be a huge growth engine compared to before because we didn’t have it before and compared to the fourth quarter because it was partial for the fourth quarter. Relative to what their historical financials would be that wasn’t our business case for owning them. We do believe that there are synergies between their customer base and our customer base in the United States and vice versa.

And we also believe that going forward in future periods as the economy rebounds that would create significant upside. That could, happen end of 2016 or it could be 2017. But either way we’re very happy and very positive those opportunities.

Bill Dawkins

And that Canadian call center, and is that rolled into Canada as well now?

Frank Khulusi

That’s correct.

Brandon LaVerne

No, no, the Canadian call center that’s been in our business for years is still part of our commercial - predominantly part of our commercial segment also in the United States market.

Jay Miley

But the Canadian call center that we acquired as part of the Tiger Acquisition, that’s focused on Canada as part of the Canada segment.

Brandon LaVerne


Bill Dawkins

All right, may I wish you, guys the best you’ll got, a lot going on. And interested to see how it works out. Thanks so much for your time.

Frank Khulusi

Thank you. Exciting stuff.


[Operator Instructions]. There are no additional questions at this time I would like to turn the call back over to Frank Khulusi, Chairman and CEO for closing comments.

Frank Khulusi

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


Ladies and gentlemen, this does conclude today’s program. And you may all disconnect. Everybody have a wonderful day.

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