PCM, Inc. (NASDAQ:PCMI) Q1 2016 Earnings Conference Call April 28, 2016 4:30 PM ET
Brett Maas - Hayden IR
Jay Miley - President
Frank Khulusi - CEO
Brandon LaVerne - CFO
Kara Anderson - B. Riley & Co
Bill Dawkins - Burleson & Dawkins
Good day ladies and gentlemen. And welcome to the First Quarter 2016 PCM Incorporated Earnings Conference Call. My Name is Mariana 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 introduction I would like to turn the call over to Brett Maas of Hayden IR. Please go ahead, sir.
Thank you good afternoon everyone, we appreciate you joining us today to discuss PCM's first 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 our website. All comparisons will be relative to the first quarter 2015 unless otherwise noted on our reflective of continued operations.
Now I'd like to turn the call over to Frank. Frank, the floor is yours.
Thank you, Brett. Good afternoon, everyone, and thank you for joining us today. We are off to a great start in 2016, exceeding our Q1 targets on gross profit and gross profit margin, exceeding the top end of our sales guidance with $498 million in revenue and delivering $0.17 a share in adjusted EPS, which is at the high end of our guidance for this metric.
Over the last few years, we have strategically transformed PCM into an IT powerhouse. While this transformation is a journey that is still ongoing, we now have the scale, offerings and customer base necessary to not only succeed in this competitive marketplace but to lead the charge. While we could have easily traded short-term margins for long-term relevance, we took a different approach. We invested in many areas of our business. We revamped our sales force and invested heavily in advanced technologies engineering resources. We strengthened our management team in many areas of our business. We also acquired strategic assets at attractive valuations.
The results we are reporting today begin to validate these investments and demonstrate that we are increasingly adding value to our customers. All of our efforts in this regard are designed to create sustainable value for stakeholders over the long term.
The integration of the businesses we acquired in 2015 continues to progress nicely, and the synergies we identified are materializing, both in terms of commercial market success and in our financial results. With these acquisitions, we have increased our capabilities and significantly expanded our scale and installed customer base in every segment of our business. We have a differentiated offering to sell and cross-sell to this growing installed base and the right sales organization in place to take advantage of these assets.
Now let me turn the call over to our President, Jay Miley. Jay?
Thank you, Frank. As Frank mentioned, we have successfully transformed PCM into a sizable world-class IT solution provider, and we are now focused on reaping the benefits of our improved position in the marketplace. With a compelling, comprehensive, and differentiated suite of solutions to sell, our sales teams are more energized than ever. Our teams are laser-focused every day on increasing our market share in both the US and Canada.
As we have previously indicated, we have reorganized our go-to-market teams around solutions, including advanced, managed, and endpoint solutions. While each of these areas continues to be an important strategic focus for us, we have more heavily weighted our recent investments towards our advanced solutions business. These investments are beginning to pay off, as reflected in the 99% growth year on year in the advanced solutions group, which is outpacing our lower growth rate.
We also saw a strong year-on-year growth in several individual categories. For example, software grew 117%; notebooks and tablets grew 37%. Desktops grew 56%. Storage grew 66%, and printers grew 111%. Our ability to cross-sell a wide assortment of these solutions to a loyal customer base is enabling us to better leverage our fixed costs and expand operating margins.
During the quarter, we also completed approximately $10 million in annualized cost savings. A significant portion of this was completed during February, and we expect the full benefit of these reductions to be realized by the end of the second quarter. As part of this reduction, we have consolidated warehouses, eliminating the need for our Memphis distribution center. For strategic warehouse and logistics functions, we are relying more heavily on our Columbus facility, which we own. For non-differentiating warehouse and logistics functions, we are outsourcing the distribution functions. We continue to see opportunities for additional efficiencies beyond the $10 million.
Frank and I will continue to work with the rest of our PCM teammates to optimize our operating model to achieve further operating leverage. 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?
I'll now turn the call over to Brandon LaVerne our Chief Financial Officer who will discuss our first quarter financial results in detail. Brandon.
Thank you, Jay. Total consolidated net sales for the first quarter of 2016, were $498 million compared to $296 million in the first quarter of 2015 an increase of $202 million or 68%. Breaking down sales by segment, commercial net sales increased 48% to $384.4 million and represented 77% of the total. Public Sector net sales increased 98% to $72.5 million and represented 15% of the total. The increase in sales in both our commercial and public sector segments was primarily driven by additional sales from our 2015 acquisitions and investments we’ve made in advance technologies in software for the benefit of the overall business. It was partially offset by the continued impact in the shift and sales mix towards product reported on net sales in our state local and education business within the public sector segment.
Beginning in the fourth quarter of 2015, we formed a new operating segment for our Canadian business; this segment includes operations related to our acquisitions of Acrodex and certain Canadian assets of Systemax's North American technology group in the fourth quarter 2015 and resulting entrance in selling products services and solutions in the Canadian market. This segment includes our operations related to these Canadian market activities. Canada net sales were $41.2 million for the first quarter of 2016, representing 8% of consolidated net sales. Our top partners that billed revenues in the first quarter of 2016 were Microsoft, Dell, Hp Inc, Cisco, Apple, Lenovo, Hewlett-Packard Enterprise and Oracle. Collectively these top eight partners represented approximately 68% of growth billed revenues.
Turning to the account executive headcount, year over year average account executive headcounts increase from 716 in the first quarter 2015 to 1009 in the first quarter of 2016. Our commercial segment head count grew by 26% and our public sector headcount grew by 47%, our newly formed Canada segment average 82 account executive during the quarter. Consolidated gross profit was $70.3 million and 80% increase over the prior period. Consolidated gross profit margin was 14.1% in the first quarter of 2016, up from 13.2% in the first quarter of last year. The increase in consolidated gross profit was primarily due to our 2015 acquisition and the investments we’ve made in advance technologies and software for the benefit of the overall business and the change in gross profit margin was primarily due to a change of sales mix during the quarter. SG&A expenses were $68.8 million in the first quarter of 2016, a year over year increase of $24.5 million or 55%.
The increase is primarily related to our 2015 acquisitions and the investments we’ve made in advance technologies and software for the benefit of the overall business, including an $18 million increase in personal cost as well as $1.4 million increase in net outsourced administrative cost, a $1.4 million increase in amortization expense related to the purchase intangibles and this expenses $1000 increase in M&A related expenses.
Our effected tax rate for 2016 is currently 36.5% and we further benefited in Q1 from a $127,000 of screed items related to R&D credit. GAAP diluted earnings per share from continued operations were $0.01 compared to a GAAP diluted loss for share of $0.29 in the year ago quarter. Adjusted EBITDA for the first quarter of 2016 was $7.1 million compared to an adjusted EBITDA loss of $1.4 million in the year ago quarter. Non-GAAP EPS or adjusted EPS from continued operations were $0.17 for the first quarter 2016 compared to adjusted loss per share of $0.23 in the first quarter of 2015. Turning to the balance sheet cash and cash equivalents totaled $9.1 million on March 31, 2016 compared to $11.2 million in December 31, 2015. Accounts receivable on March 31, 2016 was $344.6 million, an increase of $3.5 million over the $341 million at the end of last year.
Inventory at March 31, 2016 were $56.7 million, an increase of $1.3 million from the December 31, 2015 balance of $55.4 million. Accounts payable at March 31, 2016 was $233.1 million, an increase of $31.6 million from the end of last year. Outstanding borrowings under our line of credit decreased by $28.6 million to $133.9 million at March 31, 2016 compared to December 31, 2015. Total notes payable, including $4.7 million of notes payable related to asset held for sale in connection with our Irvine property, decreased by $1.2 million to $33.2 million of March 31, 2016 compared to December 31, 2015. On that subject we reported this morning that we’ve entered into an agreement to sell this Irvine property which we purchased one year ago for $5.8 million for a fair price of $13.2 million, we anticipate this sale and related $7.4 million gain will close in mid-2016.
Taking a look at cash flow component, cash provided by operations for the three months ended March 31, 2016 was $44.1 million compared to cash provided by operations for the three months ended March 31, 2015 of $8.5. The increase in operating cash flow is primarily results of a $41 million increase in accounts payable. Cash flow used and investing activities during the three months ended March 31, 2016 total $1.3 million compared to $13.9 billion in the three months ended March 31, 2015. 2016 adjusting activities included $800,000 of capital expenditures and $600,000 of incremental acquisition related expenditures. We repurchased 2016,136 shares of our common stock and average price of $8.33 per share for a total of approximately $1.8 million in the first quarter of 2016. The Company’s total repurchase capitalization remained as of March 31, 2016 with approximately $5.8 million.
At this point I’ll the call back over to Frank for some closing remarks. Frank?
Thanks Brandon. Looking ahead, we are now focused on rapidly growing our bottom-line and delivering very strong shareholder return. For the second, we expect robust sales on adjusted EPS in the range of $580 million to $600 million and $0.36 per share to $0.42 respectively,
In addition, should we close the sale of Irvine property in the second quarter, we would expect incremental gap EPS of approximately $0.30 per share. We are raising our full year adjusted EPS estimate to a range of $1.27 to a $1.40 per share on estimated 2016 net sale of $2.2 billion to $2.25 billion, or sale increase of 32% to 35%. The new PCM enjoys the strongest strategic position in our history and I am increasingly excited about our future.
That concludes our prepared remarks. Mariana you may now open the call for question.
[Operator Instruction] Your first question comes from the line of Kara Anderson from B. Riley & Co, your line is open.
Hi good afternoon guys.
Kara before you get started, how are you? I do want to correct something I said on the call. We expect our incremental GAAP EPS from the sale to building to be $0.30 per share and that figure is actually $0.38 a share. Thanks for joining us Kara, what can we do for you today?
Yes, I am just wondering if you can provide some color to the contribution you saw from TigerDirect in a quarter and then your expectations for when that might be running at more normalize rate?
Yes, actually -- as it's harder and harder to tell anything from anything because we are moving to management and consolidating these businesses etcetera. We can tell is that we are pleased with the performance and [indiscernible] that the level the level we have stated prior it's not even high, already.
And the number of sales represent came over from TigerDirect, Has that largely state intact?
Well it was never intended to stay for say because that number of constituted both Tiger can be productive and historically more productive as well as sales were not adapted. So just like our main sales organization where you are going to have a certain level of intentional [indiscernible] by us you will have that as part of that organization as well as that was always part of our so we expect I mean that number did drop a little and we expect that number to dropped further as we go forward and we have a nice where we are driving productivity.
Can you update us on the competitive landscape and how PCM is performing relative to its competitors in the market today?
I think as evidenced by our results in the first quarter we are doing very well I mentioned it in our last quarter conference call are we have a lot of momentum in our marketplace that momentum has accelerated our vendors are very pleased with our performance and our go to market strategies and our customers awarding with their dollars it's not easy to definite leader is not a lot of wins in our back went behind our sales I think our market position is such that we can maneuver even in this current environment. Obviously it's the environment gets worth so that can affect us so our EPS guidance and sales guidance for the year assumes kind of a steady state in terms of where we are right now we don’t see any reason why that should change and we are very bullish of also the year and for our future.
And then lastly now just a rewind facility is under our contract to be sold what are the plans for the subsidiaries that currently occupied us safe?
That's basic both our warehouse space as well as an office space we currently utilize most of the warehouse space and the office space and the warehouse space is utilized to allow this trend the office space is only fractionally utilized and we will be moving into most probably two separate facilities one for office and the other one for distribution and likely were going to do from a distribution perspective what we did in terms of domestic facility i.e. we will I think the strategic shipments and consideration was on so our Columbus facility and then how use it local distribution and the west coast to do there are less strategic type shipments if we do find the need that we do need a small and the area we will open a small and regardless connected it will be considerable.
Your next question comes from the line of Bill Dawkins, Burleson & Dawkins. Your line is open.
I'm about speechless. Wow, that is terrific. Absolutely terrific. I mean, I think the only thing we can be upset about is if we're going to wish you'd bought more stock. That's great. Just really --.
We have bought a lot of stock. We bought at maximum as we can get.
I’m just kidding Frank. I mean at $8.60, whatever the price was, that’s cheap compared to what these numbers look like. These are fantastic.
Well, thank you. Thanks for the kind words.
Just real quick, on, does Canada and the US, do they have the same seasonality?
No, Canada seasonality tends to be more Q1 that Canada business is just like our US business. It's a combination of SLED and commercial, while I'm not going to say SLED; actually public sector and commercial and that season is Q1 for them, and the end of year budget flush is definitely Q1. So, however, don't forget that we have a TigerDirect portion, which is the SMB portion of that business. I mean, that business is now very well represented with SMB, with MME, midmarket enterprise, and the public sector. Both MME and the public sector having come from the Acrodex acquisition and the SMB coming from TigerDirect acquisition and then there's a strong Microsoft component. So both the Microsoft component, which will be strong in Q2, as well as the TigerDirect, which is still in process of ramping for them just like it is in the United States, will offset that, some of that seasonality. So we think that business will be very strong, will be very strong for the remainder of a couple of years, what I meant to say.
The other thing to keep in mind as well for Canada is that, as I said on our last Q call that business tends to be tied to the economy in Canada, because it is a very large business. As far as the Canadian market is concerned, we're one of the largest players already. And as the price of oil goes, so does the Canada economy to a certain extent and since oil has rebounded a little bit, that could end up being a good thing for us for the next few quarters. So generally, we are very optimistic about the Canada business. But the short answer to your question on a normalized basis, yes, it is seasonally up for the first quarter.
Got you. Well, we've been dating a long time, and I'll tell you, that, for you to give your guidance, it shows some confidence. I appreciate it. And good work this quarter, you all. Thank you.
[Operator Instruction] There are no further questions at this time. I’ll now turn the call back over to Frank Khulusi.
Thank you for joining us this afternoon. We look forward to updating you on our progress in the coming quarters. Until then, goodbye.
This concludes today’s conference call. You may now disconnect.
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