PCM's (PCMI) CEO Frank Khulusi on Q2 2016 Results - Earnings Call Transcript

| About: PCM, Inc. (PCMI)

PCM, Inc. (NASDAQ:PCMI)

Q2 2016 Results Earnings Conference Call

July 27, 2016 04:30 PM ET

Executives

Jeff Stanlis - Hayden IR

Frank Khulusi - Chairman and CEO

Jay Miley - President

Brandon LaVerne - CFO

Analysts

William Gibson - Roth Capital Partners

Bill Dawkins - Burleson & Dawkins Inc.

Operator

Good day, ladies and gentlemen. And welcome to the Second Quarter 2016 PCM Incorporated Earnings Conference Call. My name is Sikiya 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.

For opening remarks and introductions, I would like to turn the call over to Jeff Stanlis of Hayden IR. Please go ahead, sir.

Jeff Stanlis

Thank you. Good afternoon everyone. We appreciate you joining us today to discuss PCM’s second quarter 2016 earnings. Our speakers on today’s call will be Frank Khulusi, PCM’s Chairman and Chief Executive Officer; Jay Miley, President; and Brandon LaVerne, Chief Financial Officer.

As usual, the call is being webcast at investor.pcm.com. Following the prepared comments, we’ll open the call to your questions and instructions will be given at that time.

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.

PCM assumes no obligation to update information presented during this call. 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 the Company’s website. All comparisons will be relative to the second quarter of 2015 unless otherwise noted and are reflective of our continuing operations.

Now, I’d like to turn the call over to Frank Khulusi.

Frank Khulusi

Thank you, Jeff. Good afternoon, everyone, and thank you for joining us on this call. The second quarter results reflect an exciting time for PCM. We smashed our EPS guidance by beating the high-end of our range by $0.24 per share. Our gross sales also exceeded the top-end of our expectations. We had higher than expected sales reported on a net basis and higher margin-rich sales, resulting in us handily beating our gross margin and gross profit target ranges.

Our results represent the highest levels of net sales and gross profit in our history and demonstrate that the changes and aggressive investments we made over the past few years, including our recent acquisitions, have successfully transformed us into a growing, diversified IT solutions powerhouse. We continue to unlock strategic and financial benefits of these transformative initiatives beyond expanded scale, a larger customer base and a more robust suite of capabilities, including experienced and successful leadership, enhanced IT systems, expanded geographic presence and heightened strategic value to our customer and vendor partners.

The second quarter results validate our strategic position as a larger, more profitable, and increasingly sophisticated player in a growing industry, and I am increasingly confident that we will capture a larger share of the IT solutions market and grow faster than the industry.

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

Jay Miley

Thank you, Frank.

I am especially encouraged by the performance of our go-to-market teams, including those who joined PCM with our recent acquisitions. Our teams are now fully trained in PCM’s combined offerings, and remain focused on increasing our market share in the U.S. and Canada. Our Endpoint Technologies, Advanced Technologies and Microsoft practice groups performed exceptionally well during the quarter.

Looking forward, we will continue to shift our investments and redeploy resources towards our strategic focus on advanced solutions. I am also excited about our recent announced plans for our new Rio Rancho sales office that opens in August. We expect to hire upwards of 220 sales professionals over the next three years, and target to have at least 100 sales professionals by the end of its first year of operations. Despite these investments, we will continue to be vigilant on managing our cost structure to drive operating leverage in the business.

I will now turn the call over to Brandon LaVerne, our Chief Financial Officer, who will discuss our first quarter financial results in detail. Brandon?

Brandon LaVerne

Thank you, Jay.

Total consolidated net sales for the second quarter of 2016 were record $581 million, compared to $478.9 million in the second quarter of 2015, an increase of $102.1 million or 21%. By segment, commercial net sales increased 19% to $445 million and represented 77% of the total net sales. This increase was primarily due to the addition of sales in Tiger Direct, which we acquired in December of 2015 and the investments we’ve made in advanced technologies and software for the benefit of the overall business.

Public Sector net sales decreased 6% to $99 million and represented 17% of the total net sales. The decrease was primarily due to reduction in sales to a single federal customer, coupled with the shift in sales mix towards products reported on a net basis in our state local and educational business.

Canada net sales were $37 million for the second quarter of 2016, representing 6% of total net sales. Canada sales represent sales from our Acrodex acquisition and the Canadian unit of the Tiger Direct assets acquired in the December 2015. Our top partners by billed revenues in the second quarter of 2016 were Microsoft, Cisco, HP Inc., Dell, Apple, Hewlett Packard Enterprise and Lenovo. Collectively, these top seven partners represented approximately 67% of gross billed revenues.

Our average account executive headcount increased to 1,068 in the second quarter 2016, up 35% from 794 in the second quarter of 2015 and up 6% sequentially from 1,009 in the first quarter of 2016. Our commercial segment headcount grew by 24% over the prior year and our public sector headcount grew by 29% over the prior year. Our newly formed Canada segment averaged 79 account executives during the quarter.

Consolidated gross profit was $83 million, a 34% increase over the prior year period. Consolidated gross profit margin was 14.3% in the second quarter of 2016, up from 12.9% in the second quarter of last year. The increase in consolidated gross profit was primarily due to our fourth quarter 2015 acquisitions and the investments we’ve made in advanced technologies and software for the benefit of the overall business. And the increase in gross profit margin was primarily due to an increase in vendor consideration as a percentage of net sales, a change in sales mix, including a greater mix of sales reported on a net basis and improved selling margins.

SG&A expenses were $69.6 million in the second quarter of 2016, an increase of $8.5 million or 14%. The increase in SG&A expenses was primarily related to our fourth quarter 2015 acquisitions, including an $11.5 million increased in personnel costs, primarily related to the acquisitions, a $1 million increase in amortization expense related to purchased intangibles and $900,000 increase of variable credit card related fees, partially offset by a $1.3 million gain resulting from a class action settlement related to DRAM antitrust litigation. Also, there were certain 2015 expenses that did not recover, such as $3.3 million write-off of to CRM software and $1.6 million of restructuring related costs.

Our effective tax rate in the second quarter of 2016 was 37.8% and is in line with our expectations for the year. GAAP diluted EPS from continuing operations was $0.61 per share compared to $0.01 per share in the second quarter of 2015. Adjusted EBITDA for the second quarter of 2016 was $16.9 million, up 78% from $9.5 million in the second quarter of 2015. Non-GAAP EPS or adjusted EPS from continued operations was $0.66 per share for the second quarter of 2016 compared to an adjusted EPS $0.26 per share in second quarter of 2015.

On the balance sheet, cash and cash equivalents totaled $9.2 million at June 30, 2016 compared to $11.2 million at December 31, 2015. Accounts receivable at June 30, 2016 was $396.5 million, an increase of $55.5 million over the $341 million at the end of the year of last year on our strengthened revenues.

Inventory as of June 30, 2016 were $85.5 million, an increase of $30.1 million from the December 31, 2015 balance of $55.4 million. The increase in inventory was primarily due to enterprise build up for large expected rollouts in the third quarter. Accounts payable at June 30, 2016 was $339.2 million, an increase of $137.7 million from the end of last year, resulting primarily from the timing of purchases and scheduled payments within the quarter. Outstanding borrowings under our line of credit decreased by $69.1 million to $93.3 million at June 30, 2016 compared to December 31, 2015. Total notes payable, including $4.7 million of note payable related to the asset held for sale in connection with our Irvine property, decreased by $2.5 million to $36.7 million at June 30, 2016 compared to year end.

On our cash flow, cash provided by operations for the six months ended June 30, 2016 was $99.2 million, compared to net cash used in operations for the six months ended June 30, 2015 of $3.8 million. The increase in operating cash flow was primarily the result of the increase in accounts payable partially offset by the increases in accounts receivable and inventory mentioned earlier.

Net cash flow used in investing activities during the six months ended June 30, 2016 totaled $3 million compared to $34.5 million in the six months ended June 30, 2015. 2016 investing activities included just $2.5 million of capital expenditures and $500,000 of incremental acquisition related expenditures. In the first quarter of 2016, we repurchased 189,562 shares of our common stock at an average price of $9.16 per share, bringing the total to approximately $3.6 million in the first half of 2016. The Company’s total repurchase authorization remained as of June 30, 2016 was approximately $4.1 million.

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

Frank Khulusi

Thanks Brandon.

We remain focused on aggressively growing our bottom line and delivering strong shareholder returns. For the third quarter, we expect sales in the range of $545 million to $560 million, and adjusted EPS of $0.29 to $0.35. Our strong year-to-date performance, and encouraging Q3 outlook has enabled us to increase our full-year earnings outlook for the second quarter in a row. We are therefore increasing our full year adjusted EPS guidance by $0.24. We now expect full year adjusted EPS in the range of $1.51 to $1.64 per share on estimated 2016 net sales of $2.2 billion to $2.23 billion, or a sales increase of 32% to 34%.

That concludes our prepared remarks. Operator, you may now open the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. And our first question comes from William Gibson of Roth Capital Partners. Your line is now open.

William Gibson

Thank you. Could you go in a little bit more into the change of accounting? It sounds like on the public sector, you’re now reporting revenue on a net basis as opposed to gross before?

Frank Khulusi

There is no change in accounting, Bill. So, what we are referring to with respect to net basis, there are certain sales such as certain software products that have been for years reported on a net basis. We just had higher percentage mix than we originally anticipated, baked into our numbers. So, we actually exceeded our gross sales target, and we had a higher level of net down built into our results, which is part of the reason why gross margin was so high, but the other reason our gross margin was high was because we sold more sales at higher margin.

William Gibson

Yes, I notice deferred revenue up quite a bit as well sequentially. I assume that was a -- is that something a hardware yet to a latter [ph] or is that more of a services function?

Brandon LaVerne

Bill, that’s very typical; we have a large sales that usually happens in the second quarter, and you’ll see that typically trail out over the course for the next three quarters from now -- next four quarters from now.

William Gibson

Okay. And I assume the buildup in inventory you talked about an enterprise rollup and that’s build into the guidance?

Brandon LaVerne

Correct.

Operator

Thank you. And I’m showing no further questions at this time. I would like to turn the call back over to management for any closing remarks.

Frank Khulusi

I would like to wait a little bit longer to see if there are any more questions.

Operator

[Operator Instructions] Our next question comes from Bill Dawkins from Burleson & Dawkins Inc. Your line is open.

Bill Dawkins

Down here, we call that [indiscernible]. Excellent, excellent.

Frank Khulusi

Thank you.

Bill Dawkins

Once again, Frank, great job my friend. Keep up the good work. One question, in respect to the small and the mid-size enterprise, where are they in the sector to catching up technologically?

Frank Khulusi

Jay, do you want to take that?

Jay Miley

In terms of the customers taking self build? [Ph]

Bill Dawkins

Yes. Where they are? I know there’s been a lack of spending out there for a long term. Where are they in adoption of the cloud and all the new network equipment and all that kind of stuff, where are they?

Jay Miley

Yes. I’d tell you in terms of the adoption rates in cloud in particular,. I think you are seeing traction in SMB first. to be quite candid with you. The segment in general terms outside the cloud comments for us has been a business segment that has been growing, and we expect it to grow even further. And I think it’s function of the fact they are adopting new technologies around mobility and not just cloud oriented technologies. For us, you will see that within our commercial segment, SMB is -- it’s a large element of our commercial business and we wouldn’t be seeing the type of growth rates we are seeing in commercial overall if it wasn’t for the traction and the spend of SMB

Bill Dawkins

What about the length of the runway?

Frank Khulusi

We think it’s very long. We think that there is a lot of tailwind with respect to -- I mean our base is also in that. There is always a next big thing. We are really just not even scratching the surface in terms of what can be done out there, IoT has been used, a lot of the buzz word really has not taken that much hold yet. We do believe that at some point, it’s going to be very prevalent, and the need associated with that in terms of storage and security will go through the roof from an end point perspective. And then the whole cloud thing continues grab hold and there continues

to be a lot of opportunities and us helping our customers figure out what their needs are between on-prem, a hybrid, which is kind of in between operation and then clearly being on the cloud. So, there is -- the breakneck pace of acceleration is more than it’s ever been, with that comes significant opportunity for people in our space.

Operator

Thank you. And our next question will come from William Gibson of Roth Capital Partners. Your line is now open.

William Gibson

You know you are given us the number of sales people each quarter but could you share with us in broad way, not specific but just the number of engineers and technicians and project managers supporting them?

Jay Miley

Yes. Bill, we don’t disclose that for competitive reasons. But that said, I’d tell you that that is an area that we continue to make investments in. I would indicate to you that you should see us -- when I talked about redeployment earlier in my remarks, you will see us redeployed resources away from areas that we don’t believe we get fair return on, into pre-sales, engineering which is an area that we do believe we get a very healthy returns.

Frank Khulusi

What I’ll tell you is that from our overall services perspective, our services portfolio is very wide and deep and our services organization as a result is very wide and deep. And overall, from a headcount perspective, we have more than a 1,000 people involved in our services organization.

Operator

Thank you. [Operator Instructions] And I’m showing no further questions at this time. I would like to turn the call back over to management for closing remarks.

Frank Khulusi

Thank you, Sikiya. And thank you all for joining us this afternoon. We look forward updating you again on our progress in the coming quarters. Good bye.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. And you may now disconnect. Everyone, have a great day.

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