PC Connection's (PCCC) CEO Tim McGrath on Q1 2016 Results - Earnings Call Transcript

| About: PC Connection, (PCCC)

PC Connection, Inc. (NASDAQ:PCCC)

Q1 2016 Earnings Conference Call

April 28, 2016, 16:30 ET

Executives

Tim McGrath - President & CEO

Bill Schulze - Controller

Analysts

Operator

Welcome to the First Quarter 2015 PC Connection Incorporated Earnings Conference Call. My name is Taria, and I’ll be your coordinator for today. [Operator Instructions].

On the call today is Tim McGrath, President and Chief Executive Officer; and Joe Driscoll, Chief Financial Officer and Bill Schulze, Controller. 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 website. Today’s call is being webcast, and will be available on PC Connection’s website. The earnings release is also available on the website.

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

Tim McGrath

Thank you. Good afternoon everyone and thank you for joining us today to review the company's first quarter financial results. We had a solid first quarter performance in a challenging IT environment. We were able to increase gross profit and earnings per share due to significant improvement in gross margin %age. As we review our results please note that unless otherwise stated all of our first quarter 2016 comparisons are being made against first quarter 2015. Consolidate net sales decreased year over year by 9 million or 1.5% to 572 million. The month of January was very soft for the IT supply chain, a combination of lower corporate profitability plus stock market volatility caused many companies to hold off on large projects. In addition there was some confusion in the marketplace regarding new product introductions that also caused customers to delay purchases in the quarter.

Although February and March were better than January overall demand was still lower than the prior year quarter, gross profit dollars in the quarter increased by 6% to 82 million. Consolidated gross margin increased to 14.4% a substantial increase over the 13.3% in Q1 2015. The 14.4% represents the highest quarterly gross margin in company history. SG&A increased this quarter to 67 million from 63.4 million. The increase was due to higher variable compensation from increased gross profit plus the higher we've done over the last year in sales and technical areas. During Q1 we made good progress in hiring people the new call centers located in Illinois and Ohio which we believe will fuel future growth.

Net income for the quarter increased 5.6% to 9.1 million and diluted earnings per share increase from $0.32 to $0.34.

And now I will turn the call over to Bill Schulze to discuss the results of our business segment and financial highlights. Bill?

Bill Schulze

Okay. Thanks, Tim. Sales for our SMB segment which serves small to medium sized businesses Increased by 4.6% to 261 million. Gross margin was very strong as it increased by 41 basis points to 15.9% led by solid performance in advanced solution categories such as software and networking. As a result gross profit dollars increased by 7.3% for SMB.

Sales by our larger account segment decreased by 4.5% to 200 million. This segment was significantly impacted by the deferral of large projects as previously discussed by Tim. In addition in Q4 of 2015 had 23 % growth for large accounts as many projects were polled into Q4 due to incentives for manufacturers. Q1 did have an 8% increase in the volume of orders but those orders were relatively smaller than normal as larger projects were put on hold by many customers.

Gross margin however was favorably impacted by this shift to smaller transactions as larger orders generally have lower gross margins. Gross margin in Q1 was 13.1% an increase of over 100 basis points from the prior year. As a result gross profit dollars increased by almost 5% despite the decrease in revenue. Sales in the public sector segment which includes sales to government and education customers decreased by 8.9% to 111 million. The public sector segment had a very challenging comparison to 2015 as in Q1 of last year sales grew by 16%, gross margin for the public sector segment was strong. It increased 161 basis points to 12.8%. Product mix drove the margin improvement and gross profit dollars for the public sector were up 4% over last year.

Our healthcare vertical which includes customers in all three of our business segments had a very strong quarter with 13% growth in revenues. We continue to focus on connecting health care customers with customized solutions in the specialized vertical which is projected to be a growth area for IT spending for the foreseeable future. Overall our bottom line performance exceeded the prior year each increased to $0.34 per share up from $0.32 last year. Trailing 12 month adjusted EBITDA increased to an approximately 90 million. Our balance sheet is in very good shape as well. The Q1 2016 cash balance of 91 million is well above the year ago amount of 80 million. In Q1 we paid a special dividend of 10.6 million so the quarterly cash flow before the dividend was over 21 million.

Our goal with excess cash is to maximize shareholder value while maintaining financial flexibility. We continue to assess M&A opportunities in other capital allocation such as dividends and stock buy. As a reminder we still have 17.8 million in previously authorized share repurchases.

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

Tim McGrath

Thanks, Bill. Our first quarter results reinforce the importance of product mix and advanced technologies upon our gross profit margin. We are confident that our plan is on track and that our strategy is working. Despite the weakness in overall IT spending we're able to produce strong gross margins and therefore grow our earnings per share. Looking ahead at the rest of the year, current industry growth projections for 2016 are in the 3% range. We are hopeful that that there will be a recovery in IT spending for the balance of 20156 but we will continue to run the business conservatively in order to achieve solid bottom line performance. Our goal is to grow faster than market by taking share. We’re highly focused on the company's mission connecting customers with technology solutions while it continue to grow the bottom line faster than the top line.

We want to deliver strong and predictable financial performance while making the required investments to strengthen our capabilities as a leading national solution provider.

We’re also focused on advanced technologies and are investing in complex areas in order to help our customers drive their business outcomes through IT investments. For example our software business continues to grow including cloud, virtualization and security. We’re also seeing very strong growth in the converged infrastructure. We can hear your focus on vertical markets such as healthcare which grew at 13% in the first quarter of 2016. Our business model is more relevant than ever as we help our customers navigate through technology it's more complex and more disruptive. We must add value every day our customers and our vendor partners in order to take market share and increase our relevancy in the IT supply chain.

As changes in the market continue to unfold we'll continue to manage our growth appropriately with a focus on expanding margins and investing in solution capabilities and keeping our balance sheet strong. We also believe that our balance 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 and we will entertain your questions. Operator?

Question-and-Answer Session

Operator

Tim McGrath

Thank you operator. 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 would also like to thank those of you who are listening to our call this afternoon. Your time and interest in PC Connection are appreciated. Have a great evening.

Operator

Ladies and gentlemen thank you for your participation on today's conference. This concludes your program. You may now disconnect. Everyone have a great day.

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