PC Connection Inc (CNXN) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the PC Connection second quarter, 2004 earnings conference call. At this time all participants have been placed on a listen-only mode and the floor will be open for your questions following presentation. It is now my pleasure to turn the floor to your host Mr. Mark Gavin. Sir, floor is yours.

Thank you, and good morning everyone, this is Mark Gavin, CFO. I'm pleased to have you join us today for PC Connection's 2004 Second Quarter Conference Call. If you haven't already seen our press release, you can contact Eileen Gagnon at 603-683-2322 and, she will fax or e-mail a copy to you immediately. You can also view it at our web site. Today's call is also being web cast. It will be available from PC Connection's web site and, at streetevents.com.

Before I turn the call over to Patricia Gallup, Chairman and CEO, of PC Connection, I would like to inform our participants that any statements or references made, during the conference call, that are 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 purposes of Safe Harbor provisions under 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 and factors that may affect future results and financial condition in the company's quarterly report on form 10-Q, for the quarter ended March 31, 2004, which is on file with the Securities & 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'll now turn the call over to Pat Gallup, Chairman and CEO of PC Connection. Pat?

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 June 30, 2004, increased by $13.7 million, or 4.3 % to 335 million, from 321.6 million, for the quarter ended June 30th, 2003. Net income for the quarter ended June 30, 2004, on a generally accepted accounting principle GAAP basis, with 2.3 million, or 9 cents per share, compared to 1.4 million or 6 cents per share for the Quarter ended June 30, 2003.

The three-month period ended June 30th, 2004, and 2003, included special charges that Mark will comment on shortly. Had these charges not been incurred, pro forma net income for the quarter ended June 30th, 2004, would have been 2.7 million, or 11 cents per share, compared to 1.6 million, or 7 cents per share for the quarter ended June 30th, 2003.

Our press release includes a reconciliation of these amounts. Net sales for our small and medium sized business, SMB segment, increased by 4% from, the second quarter of 2003, to 194.1 million. Sales to government and education customers, our public sector, increased sequentially by 17.6% over the immediately preceding quarter, but declined year-over-year by 15.6% to 63.3 million.

More specifically, sales to the federal government decreased sequentially by 24% and, decreased year-over-year by 65%, reflecting the loss of the general services administration, or GSA contract, reported previously. However, sales to state, local and education customers, increased sequentially this quarter, by 32.9%, and increased year-over-year by 20.2%. Furthermore, sales to large corporate account customers, our large account segment, increased sequentially by 17.5%, to 77.9 million, and increased 30% from the corresponding period a year ago.

During the year we continued our efforts in recruiting more sales representatives. The total number of sales representatives increased year-over-year from 546 at June 30th, 2003, to 570 as of June 30th 2004. Our goal for the remainder of 2004 is to increase the total number of sales representatives by 11.4%, to 635.

On a consolidated basis, annualized sales productivity for this quarter remained flat, both sequentially and year-over-year. Sales productivity in our SMB segment decreased 3.8% from the second quarter of 2003, and increased 9.1% from the first quarter of 2004.

Sales productivity in our public sector segment, decreased 12.5% from the second quarter of 2003, but increased 14.4% over the first quarter of 2004. The public sector decrease was attributable to decreased federal sales, resulting from the loss of the GSA contract. Together with our decision to retain sales personnel in anticipation of receiving a new contract.

Offsetting these decreases, however, sales productivity in our large account segment increased by 20.6% over the first quarter of 2004, and by 31.7% over the second quarter of 2003. Gross profit margins increased this quarter to 10.8% from 10.4% in the first quarter of 2004, and 10.3% for the second quarter of 2003. Overall gross profit dollars increased year-over-year in the second quarter by 3.2 million. The largest contributor to our improvement in gross profit dollars and gross profit margins was our SMB segment.

Year-over-year, this segment increased gross profit dollars by $2.7 million and gross profit margins by 100 basis points. Our ongoing efforts to improve product margin continued to focus on increasing add-on sales of accessories and other companion products to our systems sales and increasing the level of enterprise product sales and sales of third party warranty, installation and other services.

We also implemented a number of sales and gross profit improvement initiatives, including tighter management of discounting, more extensive and focused sales training on costs and margins, and targeting improvements in sales pricing, sales incentives and account management.

Total SG&A expenses as a percent of this sale were held at 9.4% for the second quarter of 2004, compared to 9.4% for the first quarter of 2004, and 9.3% for the second quarter of 2003. SG&A rates for the current quarter held steady, despite our additional investment in our SMB sales force, and our planned retention of our federal sales force.

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 complimentary corporate cultures, to add new customers and management talent and that are immediately accretive to our earning and key operating ratios. During the quarter we announced the arrival of Jay Lambke, the new President of our GovConnection subsidiary. Jay is providing effective leadership for GovConnection and is proving to be an excellent addition to the PC Connection Incorporated Management team.

We believe Jay's extensive experience will be of great value in helping GovConnection meet the complex and ever changing IT needs of its customers. Our GovConnection to subsidiary began formal negotiations for new contract with the GSA on June 17, 2004. The GSA has advised GovConnection that we are now in final negotiations and there are no impediments to an award.

Based on this it is anticipated that the award of a new GSA schedules will be forthcoming. This will help us to expand our sales to the federal government. In summary, during the quarter the company grew sales and earnings by 4.3% and 50% respectively, with the improving economy, margin enhancement initiative, and continuing investment in our sales organization, we believe PC Connection is in a strong position in 2004 to gain market share and enhance long-term shareholder value.

Mark?

Thanks, Pat. During last quarter's conference call, I spoke about our initiatives increased gross profit dollars per transaction and, overall gross margin rate. I am pleased with the progress we are making with this initiative.

As Pat mentioned, our gross margins improved by 50 basis points over last year, and 43 basis points over the first quarter of this year. More importantly, our gross profit dollars grew over last year by 3.2 million, or 10% and grew sequentially by 2.2 million, or 7%.

Our focus on increasing gross profit dollars per transaction will continue in the second half of 2004 and we are cautiously optimistic that we'll continue to improve our overall gross margin rate.

Average selling prices or ASPs, for computer systems, decreased during the quarter by about 3.7%, compared to second quarter of last year, and decreased 3.3%, compared to the first quarter of 2004. This decrease resulted from a 1.1% decrease in server ASPs and, a 9.6% decrease in desktop ASPs, partially offset by a 2.1% increase in notebook ASPs. The year-over-year decrease in ASPs resulted from an 18 .1% decrease in server ASPs, a 3% decrease in desktop ASPs offset by a 1.3% increase in notebook ASPs.

Notebook unit and net sales dollars increased by 5.6% and 7% respectively, compared to the second quarter of 2003. Desktop revenues increased by 14.8% year-over-year, and on an 18 .4% increase in the unit volumes. Revenues from server sales decreased 7.1% while unit volumes increased 13.4% as compared to the second quarter of 2003. Average order size for the second quarter increased year-over-year by 18.7%, to $1,318 and increased sequentially by 15.4%.

Our stabilized operating costs are the primarily result, of our focus in reducing costs in our business. We continue to review all spending plans and programs to ensure the best possible deployment of our resources.

While we plan to continue our focus in control and, discretion of our expenditures, we expect that our SG&A expense may vary depending on changes in sales volumes as well as the levels of continued investment in growth initiatives such as hiring more experienced account Sales Managers, improving marketing programs, and deploying next generation internet web technology to support our sales organization. Total restructuring cost and, other special charges for the second quarter of 2004 included 427,000, and after tax special charges for the internal review of GovConnection's GSA contract cancellation.

Now, let's take a look at the balance sheet. Cash flow generated from operations for first six months of 2004 was 11.1 million, compared to 13.6 million in the same period a year ago. Accounts receivable were down 24.5 million, to 119.8 million, as of June 30th, compared to December 31st, 2003, due to the decrease in day sales outstanding or DSOs. DSOs were 41 days compared to 44 days in Q1, and 45 days in Q2 of last year. Inventory balances were substantially flat at approximately 80.4 million at June 30th, 2004, compared to 80.1 million at December 31st, 2003. Inventory returns this quarter was 16, compared to 16 in Q1 of 2004, and 20 in the second quarter of 2003.

Based on quarterly levels, inventory days were 24 at June 30, 2004, versus 20 at June 30, 2003. We believe inventories are in excellent condition both, in quantity and quality. In summary, the balance sheet remained very healthy.

Net sales of product structured by distributors and, other vendors directly to customers accounted for 40.8% of total net sales in the second quarter, compared to 36.1%, of total net sales in the second quarter of last year, and 37.1% of total net sales of first quarter of 2004. Both, our federal government and, large commercial account business primarily use dropped shipping to meet their demand.

Looking forward, our outlook for the third quarter of 2004 is as follows. Sales to SMB customers are expected to grow year-over-year in the low to mid teens. Sales to government and, education customers are expected to climb year-over-year in the mid to high 20s.

Sales for large account segments are expected to increase year-over-year in the mid to high teens. Therefore, for the third quarter of 2004, we presently expect to achieve sales in the range of 350 million to 365 million in earnings per share in the range of $ 0.11 to $ 0.14 per share.

We expect gross margin rate as a percentage of sales for Q3 to be in the range of 10.5% to 10.6% and, operating expenses as a percentage of sales to be in the range of 9% to 9.2%. We continue to work hard to ensure the best possible mid-term results consistent with maintaining a strong financial position and investing for the future. Thank you for joining us today, we will now entertain your questions.

Operator?

Thank you. The floor is now open for questions.

[OPERATOR INSTRUCTIONS].

Thank you. Our first question is coming from Adam Drake of Robert W. Baird.

Hi, sorry if this has been gone over already, I got here a little late. In the press release productivity was flat year-over-year and, I'm just inquiring about, what's kept it flat and what initiatives you might have in place to improve that?

There is a reason why the productivity is flat -- this is Mark Gavin -- is really due to the loss of GSA contract, the federal sales were down substantially this quarter compared to last year. When you factor that out, actually the productivity is continuing to improve on a year-over-year basis.

Our SMB segment had slight improvement in overall productivity but, our GovConnection segment had a decline, as a result of the federal GSA schedule, not being here this quarter compared to a year ago quarter and MoreDirect's productivity improved substantially during the quarter.

Several initiatives are underway, to continue to improve productivity, and it's really to try to make the work, or account managers easier transacting business with our customers and, we have several initiatives under way to make that happen.

All right. And then active customers, those I believe were down as well, 4% year-over-year, and, I'm just trying to get at what was behind that as well?

The change in active customers is really due to less consumers, in our active customer account this year, compared to last year. Our actually -- our business accounts have been growing on a year-over-year basis, but we have less consumers purchasing from us this year compared to last year.

All right, thank you.

Thank you. Our next question is coming from Brian Alexander of Raymond James.

Hi, this isn't Brian. This is Bob Grundike I work with Brian, I'm helping him out. He has a few questions that he would like to ask you all. One of your competitors talked about business slowing in June, but picking up at the end of the quarter. Could you talk maybe about some linearity you maybe have seen in the quarter and, how things have progressed into July?

I would say that June performed as expected, June is always the strongest month of the quarter, and that played out this year like it has in previous years, so I do not see the slowing that one of the competitors was talking about earlier in the month of June. It was very consistent throughout June. July has started off on a very good note. I guess July has actually surprised us, this being a big vacation month for our customers. July is doing better than we had anticipated.

OK. In terms of your margins, the increase in the SMBs, how much was driven by product mix versus your internal initiatives? And, if it was internal initiatives, what initiatives were they, that led to the increase in margins?

Sure. I would say the majority of the increase is due to the initiatives and, initiatives were -- there were probably about 15 different initiatives that we worked on, it was -- I would say the biggest initiative that contributed to the increase was, training of our sales force, and changing some of the behaviors of the sales force for inappropriate discounting. We walked down the ability to -- for certain people less than a year, to be able to discount. They have to consult with their manager before, they actually can set price and discount off the list. I would say that the more focused attention on the sales force in training and, the locking down of people be able to discount less than a year with us, is the primary contributors to the increase in margins.

Bear with me, I have a few more, hopefully you don't mind. In the public area, was the increase in margins due to the drop-off in the federal business, or internal initiatives again?

I would say it's internal initiatives. If you look at the two components of our GovConnection business, the federal business versus the state, local and education business, the state, local and education business improved their margins just like SMB.

Yes.

Quite substantially during the quarter, so same initiatives we had going on in SMB segment had going on within GovConnection, and again it's the same things that I mentioned a minute ago, was really what's driving up margins in that segment also.

And the large corporate sector, looks like we have expected -- should we expect continued year-over-year declines in margins in that area?

I would say that the margins in the large corporate segment would even out where it is right now. I don't expect to see the same level of declines that we've experienced in the year-over-year basis, in the first six months of this year and the second six months. I expect their margins to remain in the high 9% to low 10% range.

OK. Back to the GSA contract. Did you give a day or, a timeframe as to when you think it will be in place or, when you think you'll get it? I know you said you that you didn't see any impediments in landing the contract, but do you have an estimated timeframe?

Yes, this is Pat. I think, you know, the thing we need to keep in mind here is that, it's not our timing, at this point, it is the governments timing, and GSA's timing. So, we just need to, you know, work with them to get that, to happen as soon as possible.

OK.

We've done everything they've asked us to do and, we really are not aware of anything that's in the way of getting the contract back, and that's actually words coming from GSA's personnel.

OK.

So, we expect it hopefully any day.

Getting to the end. The inventory days went from like you said went from 20 to 24. Is there a reason behind that, maybe certain products, or is it across the board?

Yes, this is Bob Wilkins. There's two main things at the end of the quarter we saw. One, was we had some big buy-ins for rollouts for specifically education purchases that we do, for the slide group that happened in Q3, so that is up a little bit but, that was standard with last year also and, this year we saw a little bit more aggressive opportunities and, discounting from several vendors that we did buy into and, we're seeing results of those products moving out in this quarter with a little higher margin basis also.

Last one, guys. I know you gave a breakdown of total sales managers, but could you break it out by your different business segments, if possible?

Sure, let me pull up the schedule, to do that for you. OK, the SMB segment -- let me start with MoreDirect had 76, GovConnection had 110 and, the balance went with the SMB segment.

OK. I think that's it.

Great.

Thank you.

Thank you.

Thank you. Our next question is a follow-up from Adam Drake of Robert W. Baird. Mr. Drake, your line is live.

Adam?

Oh, my question was answered, thanks.

Thank you. I would like to remind our audience, if do you have a question, press star-1 on your telephone keypad at this time. Thank you. We do have a follow-up from Brian Alexander of Raymond James

Bob Grundike again. How would you characterize spending patterns in each of your major segments, and what would be above or below normal seasonality? And, is large corporate showing improvement?

I would say large corporate continues to show improvement, as we saw in the first six months of this year, expect that to continue in the second half of the year. If you look at the historical patterns, large corporate typically does better, in the second half of the year compared, to the first half of the year. I see no reason why that won't play out the same way this year. State, local and education, Q3, along with Q2 is a big quarter for them, all indications that will play out, as it has in the past, as a very strong quarter. Federal is really relying on us getting the GSA schedule back, but I expect federal sales, without the GSA schedule this quarter, to increase over first quarter and, second quarter of this year, just because we're in the heavy buying for federal government. And, SMB historically has done better, in the second half of the year, compared to the first half of the year and, all indications are that will play out this year like it has in previous years.

Thank you.

Thank you. As a reminder, for any further questions, press star one on your telephone keypad at this time. Thank you, at this time there appears to be no further questions. I'd like to turn the floor back over to management for any closing remarks.

Thanks, this is Pat Gallup. We appreciate everyone's time this morning and, hope you have a great day.

Thank you. And thank you, callers. This does conclude today's conference.

You may disconnect your lines at this time and have a wonderful day.