PC Connection Inc (CNXN) 2004 Q1 法說會逐字稿

Thank you for your patience and please please continue to hold. Your teleconference will begin shortly. If you do experience any audio difficulties, press star 0 and an operator will assist you. Once again, thank you for your patience, and please continue to hold . Good morning, and welcome to the PC Connection first quarter 2004 earnings conference call. At this time, all parties have been placed in a listen only mode with the floor will be open for your questions following the presentation. It is now my pleasure to turn the call over to your host, Mr. Mark Gavin. Sir, the floor is yours.

Good morning, welcome, everyone. This is Mark Gavin, Chief Financial Officer. I am pleased to have you join us today for PC Connection 2004 first quarter conference call. If you haven't already seen our Paris release you can contact us at 603-243-6822 and she will fax or e-mail it to you immediately. You can also view it on our website.

Today's call is also being webcast. It will be available for PC Connection's website and street events.com. Before I turn the call over to Patricia Gallup, chairman and CEO of PC Connection I would like to inform participants that any statements or references made during the conference call, are not statements of historical fact, may be deemed to be forward-looking statements. Various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements for the purpose of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 19095. Actual acts may differ materially by those indicated by the forward-looking statements as a result of various important factors, including those discussed and factors that may affect future results and conditions in the company's annual report form 10K for the year ended December 31, 2003, which is on file with the Securities and Exchange Commission.

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, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. I will now turn the call over to Patricia Gallup, chairman and CEO of PC Connection. Pat.

Good morning, and thank you again for joining us. Bob Wilkins, executive vice president is also on the call today. As reported on our press release, net sales for the three months ended March 31, 2004, increased by $44.1 million or 15.6% to 327.6 million from 283.5 million from the quarter ended March 31, 2003. Net income for the quarter ended March 31, 2004 on a Generally Accepted Accounting Principles basis was $1.2 million or 5 cents per share compared to 1.6 million or 6 cents per share for the same period a year ago. The three- month period ended March 31, 2004, included special charges that Patricia Gallup will comment on shortly -- that Gavin will comment on shortly. Quarter ended March 31, 2004 would have been 1.8 million or 7 cents per share.

Net sales for the small to medium sized business, SMB segment, increased by 16.1% from the first quarter of 2003 to $207 million and increased sequentially by 3.9% over the immediately preceding quarter. Sales to garment and education customers, the company's public sector segment decreased sequentially by 37.9% over the immediately preceding quarter but grew year over year by 2.3% to $54 million. More specifically, sales to the Federal Government decreased sequentially by 71.6% and decreased year over year by 37.5%. Sales to state, local and education customers increased sequentially this quarter by 2.3% and grew year over year by 30.6%. Sales to large corporate account customers decreased by 3.4% from the first quarter of 2003 to 66 million but increased 27% from the corresponding period a year ago.

The first quarter of 2004 saw increases in both the number of sales representatives and an annualized sales rep product -- productive. We also saw growth in total number of active sales customer and and accounts from business sales program while reducing SG&A as a percentage of sales. During the year we continued our efforts in recruiting account managers. The total number of sales representative, as of March 31, 2004, increased year over year by 10.5% from 505 to 558 as of March 31, 2003. Our goal for 2004 is to increase the total number of sales reps by 14% to 635.

On a consolidated basis, annualized sales productivity increased 6.4% for the first quarter of 2003. Our S and B segment increased 2.7% in the first quarter of 2003 and increased 5.2% from the first quarter of 2003 -- fourth quarter of 2003. Sales from the public sector segment decreased 3.2% in the first quarter of 2003 and 41% from the fourth quarter of 2003. The latter was due to decreased Federal sales related to the seasonality of Federal sales and the loss of our general services administration contract. Our large account segment increased annual sales, annualized sale productivity in the first quarter of 2004 by 4.2% over the fourth quarter of 2003 and 20.5% over the first quarter of 2003.

Our number of active customers increased by 3.9% over the first quarter of 2003 to 478,000. We believe the investments we made in building a new internet business accounts or IBA program should continue to produce positive results in the second quarter of 2004. Net sales for IBAs grew sequentially over the first quarter of -- fourth quarter of 2003 by 14% and increased over the first quarter of last year by 33%. The number of IBA users as of March 31, 2004 expanded to 90,000 compared to 44,000 as of March 31, 2003, an increase of 105%.

Total SG&A expenses as a percentage of sale was 9.4% for the first quarter of 2004 compared to 9.2% for the fourth quarter of 2003 and 10.5% for the first quarter of 2003. Our year over year improved SG&A rates were due to higher sales volumes in the first quarter of 2004 and continued cost improvement initiatives. Gross profit margins increased this quarter to 10.4% from 10.1% in the fourth quarter 2003 but decree he is -- decreased 11.5% in the first quarter of 2003. Gross margin declined year over year as a result of more competitive pricing in all three sales subsidiary areas.

Sequentially, declines in our SMB and large account segments were offset by 70 basis point increase in in our public sector segment. Our ongoing efforts to improve product margins continued to emphasize enhancement of add on, add on sales for accessories and consumables, increasing sales of enterprise class product as a percentage of total net sales, increasing a cost penetration with PC Connection and third-party value added service offering and a greater focus on solution sales. In a moment, Mark will expand on efforts to improve product margin. In our first quarter, net sales of enterprise class products were 25.7% of total net sales, compared to 28.4% in the fourth quarter of 2003 and 27.6% in the first quarter of 2003.

We continued to devote significant resources to the expansion of our enterprise class product offering and believe additional growth is achievable in this area. Finely, as we have commented in past conference calls, we remain alert for opportunities in a consolidating market. However, we will only consider acquiring businesses with complementary corporate cultures that add new customers and management talents and that are immediately accretive to our earnings and key operating ratios.

Our GovConnection subsidiary is is continuing on its time line regarding negotiations with the GSA for a new Federal contract. The standard process requires a preaward product of the pricing proposals compared to our pricing history, as well as a concurrent audit of our systems and procedures for handling government orders. An audit can take from 90 to 120 days to complete. The audit began in March with our submission of records in a nonsite audit at our offices in Rockville, Maryland on the 5th of April. The contract negotiations with the GSA is expected to progress on a parallel path and and take upwards of 90 days to complete. The timing of the contract award is entirely in the hands of the government and not under the control of GovConnection.

Our sense and belief is that the government teams are focused and are cooperating fully to allow us to be awarded a contract and the shortest possible time. We are optimistic that we will be awarded the contract in the next calendar quarter. We cannot speculate further as to the timing, because we do not control the audit or the contract award process. We are satisfied that the government is working to complete its work in a timely manner. In summary, during the quarter, the company grew sales and pro forma earnings, earnings before special charges, by 15.6% and 16.6% respectively, reduced expense rates, improved sale of productivity, increased the number of sales represented actives by 10.5% and increased our total number of active customers by 3.9%. With the improving economy and accelerating sales productivity, we believe PC Connection is in a strong position in 2004 to gain market share and enhance long- term shareholder value. Mark?

Thanks, Pat. Average selling prices of PC decreased about 3.4% compared to the first quarter of last year and 3.8% compared to the fourth quarter of 2003. This sequential decrease resulted from a 17% sequential did he in server ASPs, a 3.1 decrease and a 5.7% decrease in desktop ASPs. The year over year decrease in ASPs resulted from a 21% decrease in server ASPs, a 6.2% decrease in, offset by a 1.8% increase in desktops. Norfolk unit and net sales dollars increased 34.1% and 25.7% respectively compared to the first quarter of 2003. Desktop revenues increased 3.2% year over year on a 12.2 increase in unit volumes. Revenues from service sales decreased 3.4% while unit volumes increased 22.3% as a percent compared to first quarter of 2003.

The average order size our first quarter increased year over year by 11% to $242 but decreased sequentially by 5%. As PAT mentioned, we are engaging in ongoing efforts to improve product margins. During the quarter we launched a companywide project to improve company margins, this project involves commission plans, pricing methodologies, inappropriate sales discounting, rebate systems and processes, sales training, customer returns, product and tax rates and vendor contracts, etc. Since watching this project in the middle of the quarter, we have seen our overall product margins improve from January, 2004, to March, 2004 by 100 basis points.

Our goal for Q2 is to improve gross profit margins sequentially and in a year over year basis by at least 307 basis points. Our improved operating costs are primarily the result of our focus in reducing costs in our core business. During the quarter the company completed our process improving initiative in sales support areas with the goal of becoming more efficient and effect Schiff -- effective in supporting our sales organization and customers. This effort effort combined sales support positions together and eliminated redundant positions in the company. This initiative allowed the company to save on an annualized basis, $3.4 million. In addition, since September 1 of 2003, the company has saved an additional $900,000 on enhance you'll basis through reductions and other nonsales area bringing the total annual savings since September 1, 2003 to $4.3 million.

We continue to review all spending plans and programs to insure the best possible deployment of our resources. Total restructuring costs and other special charges include 272,000 and after tax special charges for the internal review of GovConnection's GSA contract cancellation and $340,000 in after tax restructuring charges related to workforce reductions.

Now, let's take a look at the balance sheet. Cash flow, generated from operations for the first quarter of 2004 was 12.9 million compared to 11.1 million in the same period a year ago. Accounts receivable were down 17 million to 127 million as of March 31, compared to December 31, due to the decrease in both sales and day sales outstanding or DSOs. DSOs were 44 days, compared to 47 days in Q4, and 51 days in Q1 of last year. Inventory balances decreased to approximately 69.5 million as of March 31, from 80.1 million as of December 31, 2003. Inventory turns were 16 compared to 17 in Q4 of 2003 and 19 in the first quarter of 2003. Based on quarterly levels, inventory days were 22 at March 31 versus 21 as of March 31, 2003. We believe inventories are in excellent condition both in quantity and quality. In summary, the balance sheet remains very healthy. Net sales of products by distributors and other vendors directly to customers accounted for 37.1% of total net sales in the first quarter, compared to 36.6% of of total net sales in the first quarter of last year and 40% of total net sales in the fourth quarter of 2003. Both are Federal Government and large commercial comp businesses primarily use drop shipping to meet their demand.

Looking forward, our outlook for the second quarter of 2004 is as follows. Sales to SNB's customers are expected to grow year over year in the mid to high single-digits. Sales to government and education customers are expected to decline -- climb year over year in the mid to high teens. Sales to large account segments are expected to increase year over year to mid to high teens. Therefore, for the second quarter of 2004, we presently expect to achieve sales of 330 million to 340 million and earnings per share in the range of 7 cents to 10 cents per share. We are expecting gross margin rate as a percentage of sales for Q2 to be in the range of 10.6% to 10.7% and operating expenses as a percentage of sales to be in the range of 9.4% to 9.5%. We continue to work to insure the best possible near term results consistent with maintaining our strong financial position and investing in the future. Thanks for joining us today. We will now entertain your questions. ++++.

Thank you. The floor is now open for questions. If you have a question, please press star 1 on your touchtone 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. Questions will be taken in the order you receive. We do ask while suppose your question that you pick up your hand set to provide the best sound quality. Please hold while we answer for questions. Once again, for any questions, please press star is on -- 1 on your touchtone phone at this time. Thank you, our first question is coming from Brian Alexander of Raymond James.

Good morning. Just a question on the gross margins, Mark, you talked up about 30 basis points sequentially. I think in terms of your overall segment mix, you have a negative variance, in other words, your SMB won't be up as much sequentially as others in that entire margin. Help us understand if you are adjusting for that and when you talk about gross margin improvement, how does that vary by segment. Are you expecting improvement in all three of your major segments, and then I have a couple of followups.

Sure. Brian, I will take your last question first. The gross margin improvement I am expecting in SMB and GovConnection. Not expecting much improvement and MoreDirect. I think MoreDirect's margins will be in the low 10% range for much of 2004. However, with a lot of initiatives that we are undertaking, I expect margin improvement of both SMB and in GOV. While we didn't see much margin improvement in Q1, and y SMB declined sequentially in Q4, what I saw continuing improvement from the beginning of the quarter to the end of the quarter and I am seeing that continue into the first part of Q2. So I am confident that these initiatives are really starting to pay off, and we will see gross margins improving in Q2 and the rest of the year.

Back to the comment about not expecting much improvement in the large corporate segment. If I go back about a year ago, that business was running gross margins in the high 11, low 12% range, and now it looks like we are going to be in the low 10% range. Could you just help us -- could you help us understand what changed there and why it is such a big drop in the large corporate segment?

Sure. I believe it's all due to customer mix, and this year they have much more diversification of their customer base compared to last year, and that has brought their margins down a bit, down into the low 10% range. It's all due to customer mix.

Okay, and then we have been hearing commentary for the -- the companies that they are expecting a large corporate pickup in IT. Given that you have generated a large piece of that business for your customers, it looks like there is sequential revenue decline in that segment was less than seasonal. Are you starting to see signs of a pick up in large corporate and also if you could comment on what you are seeing in SMB?

Certainly. Large corporate in the first first half of the year is lower than in the second half of the year. However, this year large corporate started off on a very strong footing. They have good rolls in this quarter compared to the first quarter of last year. I am seeing that continue into Q2 and expect that they will have good growth throughout Q2 versus last year. So I am seeing large corporate spending pick up. I think they are getting more comfortable with the overall economy improving and therefore starting to loosen up some of their budgets and beginning to spend money.

A final question I have is on the GSA. It looks like the timing got pushed back a little bit, at least relative to what I thought you had said earlier, and it sounds like maybe we won't see something in place until the end of the June quarter, if I am hearing you you correctly. Could you just walk us through what changed and if in fact it has been pushed back and what is your confidence level that you will have that contract in place in time for the strong seasonal quarter in September?

I think the reason why, it really hasn't changed. We get more new information as time progresses. We are very confident that things are progressing at a good clip right now, and we expect that we are we are we are cautiously op op -- optimistic we will have things back to normal at end of the quarter. Things are well well and we are cautiously optimistic with the government negotiations. We are dealing with a time line, not necessarily our time line. I understand they are working at a very expedited pace, so we are confident that things will move as quickly as they can potentially move, Brian?

Okay. Thank you very much.

Thank you. Once again for any questions, please press star 1 on your touchtone phones at this time. Thank you. I am showing no further questions at this time. I will now turn the call back over to the speakers for any further closing comments.

Thank you all very much for your time and have a wonderful day.

Thank you. This does conclude this morning's teleconference. Please disconnect your lines and enjoy your day