PC Connection Inc (CNXN) 2021 Q4 法說會逐字稿

Good afternoon, and welcome to the Fourth Quarter 2021 Connection Earnings Conference Call. My name is Justin, and I will be the coordinator for today. (Operator Instructions) As a reminder, the conference call is the property of Connection and may not be recorded or rebroadcast without specific permission from the company.

On the call today are Tim McGrath, President and Chief Executive Officer; and Tom Baker, Senior Vice President and Chief Financial Officer. I will now turn the call over to the company.

Thanks, operator, and good afternoon, everyone. I will now read our cautionary note regarding forward-looking statements. Any statements or references made during the 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 year ended December 31, 2020, 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 other than as required by law, even if estimates change. And therefore, you should not rely on these forward-looking statements as representing management's views as of any date subsequent to today.

During this call, GAAP and non-GAAP financial measures will be discussed. A reconciliation between the 2 is available in today's earnings release and on the company's website at www.connection.com. Please note that unless otherwise stated, all references to fourth quarter 2021 comparisons are being made against the fourth quarter of 2020.

Today's call is being webcast and will be available on Connection's website. The earnings release will be available on the SEC website at www.sec.gov and in the Investor Relations section of our website at www.connection.com.

I would now like to turn the call over to our host, Tim McGrath, President and CEO. Tim?

Thank you, Samantha. Good afternoon, everyone, and thank you for joining us today for Connection's Q4 2021 conference call. I'll begin this afternoon with an overview of our fourth quarter results, highlights of our performance and then share our updated thoughts on 2022. Tom will walk us through a more detailed look at our financials and our capital allocation strategy.

We are pleased to announce another record quarter. Revenue and gross profit for the fourth quarter were the highest in the company's history. These results demonstrate the continued execution of our business strategy to connect our customers with technology that enhances growth, elevates productivity and empowers innovation.

A number of factors contributed to our strong performance, including our continued focus on helping our customers navigate and optimize their supply chain needs. In addition, we saw strong demand across the majority of our customer base. Our commitment to helping customers accomplish their work from anywhere initiatives and our continued focus on cloud and data center transformation helped to drive these record Q4 revenues.

On a consolidated basis, Q4 revenue grew by 18.4% compared to last year's fourth quarter. Looking at our segments, the Enterprise segment grew 33.4%, Business Solutions grew 14.4%, while the Public Sector declined 4.1%. The supply chain issues, that we referenced in past quarters, have persisted throughout Q4. Consequently, our backlog increased slightly quarter-over-quarter.

Our team has continued to leverage our capabilities and scale to navigate the ongoing supply constraints on behalf of our customers. However, supply chain is yet to recover to the point that it can consistently fulfill the demand of our customers on a timely basis. We anticipate some of these challenges will persist through the first half of 2022.

Our loyal customers know that we have the expertise, scale and capacity to secure and store product on their behalf. Consequently, our inventory levels have increased slightly in the fourth quarter when compared to the third quarter. We delivered strong growth across all of our vertical markets. Our Healthcare vertical, which is our largest vertical, grew 29% year-over-year. while our Retail and Finance verticals grew 31% and 14%, respectively.

Now let's discuss our Q4 performance in a little greater detail. As I stated earlier, fourth quarter revenue was up 18.4% to $800.2 million from 2020, while gross profit was up 16.7% to $127 million. Gross margins were 15.9%, down 23 basis points from Q4 2020. The decrease in margin resulted from the Enterprise segment comprising 46% of consolidated revenue versus 41% in the prior year.

Additionally, margins were impacted from a higher mix of endpoint devices. Operating income in Q4 was $31.3 million, an increase of 58.4% or 3.9% of net sales, compared to $19.8 million or 2.9% of net sales in the prior year quarter. In Q4 2021, diluted earnings per share was $0.85, an increase of 37.1% from $0.62 in Q4 2020. We ended Q4 with $108.3 million of cash and cash equivalents.

We will now look a little deeper into segment performance. In our Business Solutions segment, our Q4 net sales hit an all-time record of $303.5 million, an increase of 14.4% compared to $265.2 million a year ago. Gross profit in the Business Solutions segment was $58 million, an increase of 14.4% from a year ago. Gross margin remained flat at 19.1% in the quarter, compared to the prior year.

In our Public Sector Solutions business, Q4 net sales were $129.4 million, a decrease of 4.1% compared to $134.9 million a year ago. Sales to state and local government and educational institutions were $103.6 million, an increase of 9.1%, compared to the prior year. Sales to federal government were $25.8 million, a decrease of 35.3% compared to the prior year, primarily due to the timing of project rollouts.

Gross profit for the Public Sector segment was $18.6 million, an increase of 1% compared to Q4 '20. Gross margin increased by 69 basis points to 14.4%, primarily due to changes in product and customer mix.

In our Enterprise Solutions segment, Q4 net sales hit a record $367.3 million, an increase of 33.3%, compared to $275.6 million a year ago. Gross profit for the Enterprise segment was $50.5 million, an increase of 27.1% in the quarter. Gross margin for the quarter decreased by 67 basis points to 13.7%. The decrease in gross margin percentage was primarily due to a higher mix of endpoint devices. We've continued to see strong growth in the Enterprise Solutions segment. Our customers need to manage and secure endpoints and a work-from-anywhere environment helped to fuel our growth.

I'll now turn the call over to Tom to discuss additional financial highlights from our income statement, balance sheet and cash flow statement. Tom?

Thanks, Tim. SG&A was $95.7 million this quarter, an increase of 7.4% from $89.1 million a year ago. As a percentage of sales, this represented a decrease of 122 basis points year-over-year. The year-over-year increase in SG&A was primarily driven by an increase in variable compensation due to higher levels of gross profit and an increase in employee benefit costs.

Q4 operating income was $31.3 million, up 58.4% this quarter from $19.8 million a year ago. Our effective tax rate was 28.5%, up from 21.7% in the same period a year ago. As you may recall, in the prior year quarter, we recorded some onetime tax credits that favorably affected our tax rate. Net income for the quarter was $22.4 million, an increase of 37.4% from $16.3 million a year ago. Diluted earnings per share was $0.85, an increase of 37.1% from the prior year period.

Our trailing 12-month adjusted earnings before income taxes, depreciation and amortization or adjusted EBITDA, was $113 million compared to $90.6 million a year ago, an increase of 25%. Cash flow from operations for the year ended 2021 was $57.8 million versus $36.1 million for the same period a year ago. The increase in cash flow from operations was driven by an increase in accounts payables offset by an increase in inventory. Our net cash used in investing activities of $8.7 million for the year ended 2021 was primarily the result of equipment purchases and IT initiatives.

The company used $36.4 million of cash from financing activities during the year ended 2021, of which $34.6 million was returned to shareholders in the form of dividends. We also have $12.7 million for stock repurchases under our existing stock repurchase program.

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

Thanks, Tom. I'd like to take a few moments to review some of the highlights in our business. Our customers have always looked to Connection to deliver innovative IT solutions and with the changing landscape accelerated by COVID, hybrid work has become a more significant requirement for many of our customers. Our results in Q4 demonstrated that we continue to support our customers with products and solutions that enable them to be productive from anywhere. We expect this trend will continue at least into the first half of 2022.

Our years of experience with supply chain optimization, combined with our strong performance in these categories, leaves us well positioned to continue to be a leader in this mission-critical market segment. We also experienced strong performance across our vertical markets. Healthcare saw revenue growth of 29% year-over-year, which was largely attributed to organizations striving to improve overall productivity and patient care.

In the Retail vertical, we grew revenue 31% year-over-year as we saw companies invest to improve the technology experience and employee efficiency. Revenue for the Manufacturing vertical also increased slightly year-over-year as companies continue to invest in core IT technologies, including cloud, infrastructure, security and workplace productivity.

Looking forward to 2022, we believe that we can deliver long-term growth rates that are 300 basis points above the IT industry. We are focused on helping our customers with their cloud and data center transformation, optimizing their supply chain and enabling their work from anywhere with custom solutions.

I'd like to take a moment to thank our valued employees for their continued effort and extraordinary dedication during this rapidly changing environment.

We will now entertain your questions. Operator?

(Operator Instructions) And our first question comes from Adam Tindle from Raymond James.

Okay. Congrats on the record results here. Tim, I want to maybe start with those last comments, the 300 basis points above IT spending in 2022. You have kind of a consensus on what you're thinking is the baseline for IT spending that we should add the 300 basis points on top of, so we get a sense of how you're thinking about total company growth in 2022?

Yes. So thanks, Adam. It's a great question. We've been looking at Gartner, IDC and some industry predictions and we're seeing growth well above that for enterprise. We're seeing growth in that range for the commercial business. And then perhaps growth slightly below that in education and in the federal environment. So again, for us, that's between 6% and 7% on a blended basis. We really don't have much of a crystal ball, look to your research as well.

Understood. Maybe double clicking on some of the drivers behind that. I noticed in Q4, notebook and mobility was a very strong standout. And if I add desktop on top of that in terms of mix, you've got about half of the revenue coming from this PC or device category. So a big swing factor as I think on a go-forward basis. Any thoughts on that category, that notebook and desktop category in 2022? And maybe you can dovetail some comments on your current state of the backlog with that?

Sure. So first off, when you think about the work-from-anywhere category, we've always done that really well. And clearly, we're all seeing the same information. And the hybrid work is certainly going to continue. We're now looking at stats that say more than half of our customer base will continue in some form of a hybrid motion. So we're pretty bullish on that. We have a big history there. We were really able to connect those mission-critical managed services along with that.

So if you're working remotely you might need accidental damage, you might need help desk, you might need additional security, et cetera. So for us, it's a very strong category, and we think that, that strength is going to continue at least through the first half of the year and then perhaps we'll see a little slowdown. But we're also forecasting our cloud and data center transformation business to really pick up based on our forecast for the second half of the year.

When you think about our backlog, it is very strong. It's up just slightly from Q3 and consistent with what we've been reading, we think the backlog is really going to help the first half of the year, and certainly will drive very strong results for the first half of the year. And then with the second half we may see a tapering of more of that work from anywhere, as I mentioned. But again, I think that will be made up with more of the data center and cloud products. Does that answer your question?

Yes, that's certainly helpful. Maybe just one last one for Tom. When I look at the quarter, operating income was up mid-teens sequentially on a mid-single-digit gross profit dollar growth. So some nice operating leverage in the quarter. Maybe you can kind of speak to what you're seeing from that. And I know Tim talked about revenue growth in 2022. How we can think about profit dollar growth in 2022 as well?

Yes. I mean I think they see growth kind of in line with what we've done historically. And you see the operating leverage kind of along those lines as well. The one thing that I would tell you is on the G&A, we are certainly seeing pressure in terms of compensation and benefits. So when we look forward to like Q1, the G&A rate will certainly be better than last year's Q1, but it still might be a little bit tempered by some of those increased costs that are coming through.

Got it. Okay. And then maybe for the full year, I know it's -- I asked on -- or on profit dollars, because I know it's hard to predict margins, given the netting of revenue and stuff like that. But any other framework as we think beyond just the revenue growth, how you're thinking about either margins, profit dollar or earnings growth in 2022?

Yes. So I mean if we can keep -- I mean if we can grow with 6% to 7% on the revenue top line, we should start to get over our historical operating margin peak, I would think. Just because of the -- we're not going to grow fixed costs at the same rate we can grow revenue and gross profit. And especially if we see a shift in the product mix away from the endpoint devices, which has certainly put a little bit of pressure on our gross margins back to more software, data center and cloud.

Understood. Very helpful and congrats again on the results.

And our next question comes from Anthony Lebiedzinski with Sidoti & Company.

So just to piggyback on the -- one of the last questions here. As you see the business changing in the second half of the year towards more data center and away from the devices. So your gross margin -- your gross margin should be up second half relative to the first half. Is that a safe assumption to make?

Yes, Anthony, I think that is a safe assumption. Again, we don't have that crystal ball, but we do believe, the first half clearly will continue to be dominated by that work-from-anywhere category. And we're pretty excited about that, I think we're doing a much better job attaching managed services to those categories. We don't know exactly when that will taper off. But clearly, for the second half, companies are talking more about those infrastructure upgrades, more of the data center, more of that cloud, as they start to normalize on the work from anywhere.

Got you. Okay. And then you talked about federal government obviously hurting your results in Q4. When would you expect that trend to reverse and see actually some better results from the federal government?

So -- obviously, it's continuous improvement with our entire operation. But with the federal team, in particular, we're making a number of changes and we do expect that, just given the contract vehicles that we're a part of, we'll return the federal business to growth and we see that as being fairly immediate.

Got you. Okay. And then in terms of your capital allocation priorities, can you just talk about that including what's your outlook for acquisitions is now?

Sure. Thanks. So our capital allocation priorities really haven't changed. Obviously, we're going to continue to reward our shareholders. You saw the dividend that we did in December. We're also investing in the business. But when it comes to acquisitions, we are growing. We're taking market share. I think we have the right team and the right strategy in place. However, we are still interested in doing tuck-in acquisitions that are appropriate in some of those value-add categories. So we're open to that. We don't have anything on the immediate horizon, but as you know, our powder is dry and we remain open.

And I'm showing no further questions. I would now like to turn the call back over to Tim McGrath for closing remarks.

Thanks, Justin. I'd like to thank all of our customers, vendor partners and shareholders for their continued support. I'd also like to thank those of you listening to our call this afternoon. Your time and interest in Connection are appreciated. Have a great evening.

This concludes today's conference call. Thank you for participating. You may now disconnect.