PC Connection Inc (CNXN) 2003 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the PC Connection Third Quarter Earnings Conference Call.

At this time all participants have been placed on a listen-only mode and the floor will be open for questions following today’s presentation. It is now my pleasure to turn the conference over to your host Mark Gavin. Sir you may begin.

Thank you and good morning everyone. This is Mark Gavin the CFO. I’m pleased to have you join us today for PC Connection’s 2003 third quarter conference call. If you haven’t already seen our press release, you can contact Eileen Gavin (ph) at (603) 423-2322 and she will fax or e-mail a copy to you immediately. You can also view it on our website. Today’s call is also being web cast. It will be available on PC Connection’s website and on streetevents.com.

Before I turn the call over to Pat Gallup, Chairman & CEO of PC Connection, I’d like to inform our participants that 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 we make about the company’s future expectations, plans and prospects constitute forward-looking statements for the purpose of the Safe Harbor Provisions of the Private Securities Litigations 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 and factors that may affect future results and financial conditions in the company’s annual report on form 10K for the year ended December 31, 2002, which is on file with the SEC.

In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update our forward-looking statements at some point in the future we specifically disclaim any obligation to do so even if our estimates change and therefore should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

I’ll now turn the call over to Pat Gallup, Chairman & CEO of PC Connection.

Good morning and again, thank you for joining us. Bob Wilkins, Executive Vice-President is also on the call with us today.

As reported in our press release, net sales for the three months ended September 30th, 2003 increased by $8.4m or 2.5% to $349.4m from $341m for the quarter ended September 30th, 2002. Net income for the quarter ended September 30th, 2003 was $2.2m or $0.09 per share, compared to $2.2m or $0.09 per share for the same period a year ago. Net sales for the small and medium sized business SMB segment increased by 2.9% from the third quarter of 2002 to $179.6m but decreased sequentially by 3.8% over the immediately proceeding quarter.

Sales to government and education customers, the company’s public sector segment grew sequentially by 38.1% over the immediately proceeding quarter to $103.6m and increased year-over-year by 7.6%. More specifically sales to the federal government grew sequentially by 64.5% and grew year-over-year by 0.6%. Sales to state, local and education customers grew sequentially this quarter by 19% and grew year-over-year by 16.8%. Sales to large corporate account customers decreased by 5.7% from the third quarter 2002 to $66.3m but increased sequentially by 10.5% over the immediately preceding quarter.

The third quarter of 2003 saw an increase in the number of sales representatives, an increase in the number of active customers, growth in sales from our internet business account program and reduced selling general and administration expense or SG&A as a percentage of sales. During this quarter we continued our efforts in recruiting account managers. The total number of sales representatives as of September 30th, 2003 increased year-over-year by 8% to 580 from 539 as of September 30th, 2002.

As a result of increased promotional activities, our number of active customers increased by 7% over the third quarter of 2002 to 486,000. We believe that the investments we made in building a new internet business account IBA program can continue to produce results in the third quarter of 2003.

Net sales for IBAs grew sequentially over the second quarter by 2003, by 15% and grew over the third quarter of last year by 2%. The number of IBA users as of September 30th, 2003 expanded to 61,000 compared to 33,000 as of September 30th, 2002.

Total SG&A expenses as a percentage of net sales was 9.2% for the third quarter of 2003, compared to 9.3%for the second quarter of 2003 and 9.6% for the third quarter of 2002. Our improved SG&A rates compared to the above prior periods were due to higher sales volumes in the third quarter and continued cost improvement initiatives.

Gross profit margins remained flat this quarter at 10.3% compared to the second quarter of 2003 and decreased from 10.9% for the third quarter of 2002. Gross margins declined year-over-year as a result of competitive pressures, product mix change, lower Microsoft rebates and increased lower margins government and education sales.

Our on going efforts to improve product margins continue to emphasize the enhancement of add-on sales for accessories and consumables, increasing sales of enterprise class products as a percent of total net sales, increasing account penetrations with PC Connection and third party value added service offering and a greater focus on solution sales.

Given recent changes in the competitive landscape, we see opportunities with several product lines. In particular, we see an opportunity to gain share in the Apple market and have taken several actions to increase penetration in this area. We have recently hired key personnel with a proven track record of success in the Apple market and we have taken a more aggressive inventory position on Apple’s new product lines in anticipation of the increased demand. Our focus on enterprise products continues to show positive results, with sales of servers increasing 26% on a sequential basis and 23% year-over-year.

In our third quarter, net sales of enterprise class products were 27% of total net sales, compared to 26% in the second quarter of 2003 and 26% in the third quarter of 2002. We continue to devote significant resources to the expansion of our enterprise class product offerings and believe that additional growth is achievable in this area.

Finally, we remain alert for opportunities in a consolidating market. However, we will only consider acquiring businesses with complimentary corporate cultures to add new customers and management talent and are immediately accretive to our earnings and key operating ratios.

In summary, during the quarter, the company grew sales by 3%, improved expense rates, grew the number of sales representatives by 8% and increased the number of active customers by 7%.

Next, Mark will report on some additional operating metrics and the state of the balance sheet. Mark.

Thanks Pat. Average selling prices or ASPs for computer systems decreased during the quarter by about 18% compared to the third quarter of last year and were down approximately 2% compared to the second quarter of 2003. This sequential decrease resulted from a 5% sequential increase in server ASPs, offset by a 3% decrease in Notebook ASPs and a 4% decrease in Desktop ASPs.

The year-over-year increase in ASPs resulted from a 13% decrease in server ASPs, a 21% decrease in Notebooks and a 24% decrease in Desktops. Notebook unit and net sales volumes increased sequentially by 13% and 9% respectively. Desktop revenues increased by 8% sequentially on a 12% increase in unit volumes.

Server unit and net sales volumes increased sequentially by 20% and 26% respectively. The average order size for the third quarter decreased year-over-year by 2% and increased sequentially by 17%. Our improved operating costs are a primary result of our focus on reducing costs in our core business. All spending plans and programs remain under continuous review to ensure the best possible deployment of our resources.

Now let’s take a look at the balance sheet. Cash flow generated from operations for the first nine months of 2003 was $15.3m, compared to $16.7m for the same period a year ago. Accounts receivable were up $10m to $145m on September 30th compared to December 31st, due primarily to the increase in sales.

Days sales outstanding or DSOs were 48 days compared to 45 days in Q2 and 50 days in Q3 of last year. Inventory balances increased by approximately $72m at September 30th compared to $52m at December 31st. 60%of this increase in inventory was due to in-transit inventory.

Net sales of products [inaudible] by distributors and other vendors directed to customers accounted for 39% of total net sales in the third quarter compared to 42% of total net sales in the third quarter of last year and 36% of total net sales for the second quarter of this year.

Both our federal government and large commercial account businesses utilize [inaudible] heavily to meet customer demand. Inventory turns were 19 compared to 20 in Q2 of 2003 and 24 in the third quarter of 2002. Based on quarterly levels, inventory days were 21 at September 30th versus 17 at December 31st. We believe inventories are in excellent condition both in quantity and in quality. In summary, the balance sheet remains very healthy.

We continue to work to ensure the best possible near term results consistent with maintaining a strong financial position and investing for the future. And to break with past tradition we have determined that we are not in a position to provide forward guidance at this time.

Thank you for joining us today. We now entertain you questions.

Thank you. The floor is now open for questions. If you do have a question, please press the number one followed by four on your touch-tone phone at this time. If at any point your question has been answered you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question, that you please pick up you handset to provide optimum sound quality. Once again ladies and gentlemen, that is one followed by four on your touch-tone telephone at this time.

Your first question is coming Adam Drake (ph) of Robert Baird. Please go ahead with your question.

Hi. First question is where is the more competitive pricing coming from in the SMB segment, what is your outlook there?

We are not giving any outlook for the future at this time but I can tell you that based on what we saw in the third quarter and previous quarters, SMB has been very competitive and also I would say the federal government and state local education units have also been very, very competitive for the past nine months.

Yeah but where is it coming from? Are you seeing it from pressure from [inaudible]?

We are seeing it from other companies like us in our channel and also from Dell are the two major areas we have seen the competition from.

Okay and secondly, More Direct was down 6% year-over-year and up 11% year-over-year last quarter. I wonder if you could help me to understand that a bit?

Sure. More Direct, while the sales number is down slightly from last year, I can tell you from an operating income basis they are at the same levels from last year. So, I’m not overly concerned about the lack of top line growth, they continue to perform very, very well on the bottom line. I expect as they continue to hire sales reps and they continue to do that, we will see continued growth from that unit in the future.

Okay. And lastly, what was the impact of the upgrade to vantage across the segments?

Sure. Upgrade to vantage in the third quarter of last year as we all remember expired July 31st of last year - - it represented about $0.02 of our earnings per share last year for the third quarter. It also represented a change in margin rate from third quarter of this year compared to third quarter of last year of around 30 basis points and on a top line basis, we had last year in the third quarter over the second quarter - - about an increase of $7m in sales related to the Microsoft upgrade advantage program.

Alright. Thanks a lot, appreciate it.

You’re welcome.

Once again ladies and gentlemen, if you do have a question, please press the number one followed by four on your touch-tone telephone at this time. Sir I’m showing no further questions at this time.

This is Pat Gallup, if there are no more questions at this time then we’ll conclude the call. Thank you again for your time and have a good day.

Thank you.

Thank you ladies and gentlemen this does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day.