PC Connection Inc (CNXN) 2009 Q3 法說會逐字稿

Good day everyone and welcome to this PC Connection third-quarter 2009 conference call. Today's call is being recorded. At this time I would like to turn the conference over to the Senior Vice President of Finance and Corporate Controller, Mr. Steve Baldridge. Please go ahead sir.

Thank you. And good morning everyone. This is Steve Baldridge, Senior VP of Finance and Corporate Controller. Patricia Gallup, Chairman and CEO; Jack Ferguson, Executive Vice President and CFO; and Tim McGrath, Executive Vice President PC Connection Enterprises, are also here with us today.

We are pleased to have you join us today for PC connection's 2009 third-quarter conference call. If you haven't already seen our press release, you can contact Janice Rush, at 603-683-2322 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 webcast and will be available from PC Connection's website. Additionally, this conference call is the property of PC Connection, and may not be recorded or rebroadcast without specific permission from the Company.

I would 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 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 risk factors in the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2009, 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 forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

I am now going to turn the call over to our CEO, Patricia Gallup, for her remarks on our quarterly results. Pat?

Good morning everyone, and again thank you for joining us to review the Company's financial results for the third quarter of 2009.

Our results for the quarter continued to reflect the ongoing economic environment and related decline in demand for IT products and services. Net sales in the third quarter decreased year-over-year by $38 million or 9% to $403 million compared to the third quarter of 2008.

Increased Public Sector sales were offset by sales declines in our two corporate segments. Net sales did increase by $26 million or 7% over the second quarter, however, representing the second straight quarter of sequential revenue growth. This was due in part to the seasonal growth in our Public Sector segment, which I will discuss later.

Net income for the quarter was $2.9 million or $0.11 per share compared to net income of $3.2 million or $0.12 per share for the prior year quarter.

The third quarter of 2008 included $1.4 million of special charges related to workforce reduction and management restructuring. Had special charges not been incurred, pro forma net income for the third quarter of 2008 would have been $4.1 million or $0.15 per share. We did not incur any special charges in the third quarter of 2009. Our press release includes a reconciliation of these pro forma amounts.

I will now comment on our SMB segment, our original core business. Net sales decreased this quarter by $35 million or 16% from the third quarter of 2008 to $183 million. Both corporate and consumer sales declined at a similar rate year-over-year as the soft demand experienced in the quarter reflected the industrywide slowdown in the purchasing patterns.

Net sales, however, grew sequentially for the second straight quarter as sales to business customers increased by 9% compared to the second quarter of 2009.

Sales by our MoreDirect subsidiary, reported as our Large Account segment, decreased by $13 million or 11% to $104 million in the quarter compared to the corresponding prior year quarter. MoreDirect continued to experience aggressive price competition, as well as customers delaying purchases.

Sales to government and education customers, reported as our Public Sector segment, increased year-over-year by $10 million or 9% to $117 million. Our federal business increased by 13% year-over-year due to additional sales generated under federal contract programs. Education sales and sales to state and local governments increased by 7% year-over-year, primarily due to strong K through 12 education sales.

Consolidated gross profit dollars in the third quarter of 2009 decreased year-over-year by 13% or $7 million to $46.3 million. Gross margin, representing gross profit as a percentage of net sales, decreased to 11.5% in the third quarter of 2009 compared to 12.1% in the third quarter of 2008.

The lower margin rates were due to continued aggressive price competition, as well as increased federal government sales, which generally have lower profit margins compared to our corporate business.

We reduced SG&A expenses in the third quarter of 2009 by $5.6 million or 12% to $41.2 million compared to the third quarter of 2008. SG&A expense as a percentage of sales was 10.2% for the quarter compared to 10.6% for the third quarter of 2008, and 11.2% for the second quarter of 2009.

We attribute the year-over-year decrease in SG&A dollars to reduced headcount and variable compensation associated with lower sales volumes, as well as other cost savings implemented by management in the past year. We continue to review our operating costs to better align them with sales volumes. And we will implement additional cost reductions as required.

Our expected income tax rate in the third quarter of 2009 was 43% compared to 37% in the prior year period. We expect our effective tax rate will continue to vary in future quarters, given the complexities of financial reporting requirements and state income taxes.

Income from operations for the quarter was $5.1 million or 1.3% of net sales compared to $5 million or 1.1% of net sales for the third quarter of 2008. Net income for the quarter of 2009 was $2.9 million compared to $3.2 million for the third quarter of (technical difficulty).

Average annualized sales productivity for the third quarter increased slightly on a consolidated basis from the prior year period. On a segment basis average sales productivity decreased by 6% in Large Account and by 9% in Public Sector. However, productivity in the SMB segment increased by 3% due to reduced headcount.

We ended the quarter with 601 sales representatives, compared to 666 at September 30, 2008 and 603 at June 30, 2009.

Now on to Q3 product sales trends. Notebooks and PDAs, historically our largest product category, accounted for 15% of net sales in the third quarter of 2009 compared to 16% in the prior year quarter. Two product categories, desktop/servers and software, each accounted for 14% of net sales in Q3 2009 compared to 13% in the prior year period.

Accessories/Other Products accounted for 13% in the third quarter of 2009 compared to 12% last year due to the increased sales of point of sales products and mobile computing products.

Average selling prices, or ASPs, for computer systems decreased in the third quarter of 2009 by 15% year-over-year, but were level on a sequential basis.

Q3 notebook and PDA revenues decreased by 12% year-over-year, reflecting a decline in ASPs, partially offset by higher unit sales.

Software sales again showed only slight declines from the prior year quarters, as customers continued to renew their annual software licenses.

As always, we will continue to monitor our operating costs and review our spending plans and programs to enable the best possible allocation of our resources. On the other hand, we will continue to invest in the sales, marketing and technology programs that we believe are necessary to ensure our future growth and success. We will also continue to improve upon our software (technical difficulty) currently in use, as well as review commercially available software as part of our overall strategic plan.

And now, Jack Ferguson, will discuss our financial results in more detail. Jack?

Thanks, Pat. First, the cash flow. Cash flow provided by operations for the nine months ended September 30, 2009 was $24.4 million compared to $42.9 million for the prior year period. The positive operating cash flows in 2009 year-to-date resulted in part from an increase in accounts payable and a modest decrease in accounts receivable.

Capital expenditures in the nine-month period ended September 30, 2009 were lower than in the prior year, amounting to $5 million in 2009 compared to $8.7 million in the comparable 2008 period.

Financing activities in this nine-month period resulted in a $700,000 use of funds relating to repayments on a capital lease obligation, as well as Treasury stock purchases.

Our cash balance increased by approximately $19 million in the nine months ended September 30, 2009. This compares to a $33 million increase for the prior year period.

Our cash flows remain strong, with no outstanding quarter end borrowing from our credit facility. We ended the quarter with a cash balance of $66 million, representing 44% of our quarter end market capitalization.

Turning to the balance sheet. Accounts receivable as of September 30, 2009 decreased by $2 million to $181 million compared to the balance at September 30, 2008. Days sales outstanding were 45 days as of September 30, 2009 compared to 43 days as of September 30, 2008 and 47 days as of June 30, 2009.

The increase in DSO days over last year resulted from the increase in Public Sector sales, particularly in the last month of the quarter. Public-sector customers generally have longer bill to cash cycles.

We are continuing to monitor the credit granted to our customers and take the necessary steps to minimize credit risk, given the current liquidity environment.

Inventory balances decreased by $16 million compared to the balance as of September 30, 2008. Inventory turns for the quarter increased to 24 compared to 22 for the prior year period. We continue to believe that inventories are in excellent condition, both in quantity and in quality.

Net sales of products drop shipped by distributors and other vendors directly to customers were approximately 59% of total net sales in the third quarter of 2009, compared to 56% in the third quarter last year. We continue to focus on increasing drop shipments where appropriate and cost effective, which allows us to maintain lower inventory levels.

In summary, despite the current economy, our balance sheet remains very healthy. We will now entertain your questions. Operator.

(Operator Instructions). Nabil Hanano, Raymond James.

I just had a question about the gross margins. They were a little bit lower than I would have expected and they continued to decline in both the SMB and large corporate customer set. Could you talk about the competitive pressures that you are seeing, and if it is more acute in any particular customer set or product?

Yes, Nabil, Steve Baldridge. I will take the first part of that question. Our gross margin rate decreased, as you noted, to 11.5% in the third quarter of 2009 versus 12.1% in the third quarter of 2008. The lower margin rates were due to aggressive price competition in particular, as well as some increase in the Public Sector sales. So both factors year-over-year reduced our margin rate.

In terms of the margin rate in the specific segments, our SMB segment was down approximately 58 basis points year-over-year in the third quarter of 2009. That was due to primarily reduced invoice margins as a result of competitive pressures.

The Public Sector was up slightly. And our Large Account sector was down approximately 50 basis year-over-year. Both competitive pressures, but also in our large enterprise customers smaller amounts of agency fees year-over-year in the third quarter of 2009.

Thank you. Then regarding your commercial customers -- what has the feedback been on them deploying Windows 7? And related to that, what are your thoughts on a PC upgrade cycle, given the lengthening age of the installed base and the new release of the OS?

Thanks. This is Tim. I'll take that. Regarding Windows 7, we are pretty optimistic there will be a very long-term positive effect. We are over the short-term thinking that the upturn will not be that significant. It really won't be a significant driver of our revenue.

We think the adoption rate is going to start with our VSB and SMB customers who are a little more flexible, a little more nimble, and then gradually evolve into the big market and enterprise sectors of the business.

Regarding the adoption rate for 2010 for desktops, we are encouraged by what we are seeing there in just the trend analysis. It looks like about 85% of the installed base is aging. And so by the second half of the year we think there will be some upside there. But beyond that it is just too close to call.

Okay. That's helpful. And then finally, I know you guys don't give out specific guidance, but can you walk us through the puts and takes of the expected seasonality for Q4 by customer segment, given that you were more modestly better than seasonal in the third quarter?

Sure. This is Tim. I will take that again. So regarding the seasonality, for Q3 we did see the middle month in the quarter was the softest. August was the softest. September was a little larger, similar to last year, and as typical for the last month in the quarter.

Looking into Q4, we do see a slight seasonal increase in Q4 for SMB and enterprise, partially offset by seasonal declines in the Public Sector. Again, that is a typical Q4 pattern for us.

Okay. Well, thank you very much. That is all the questions I have as of now.

(Operator Instructions). It appears we have no other questions standing by at this time. I would like to turn the conference back over to Ms. Gallup for any additional or closing remarks.

Thank you, operator. In closing, despite the challenging business environment, we generated over $5 million in operating income and earnings of $0.11 per share in the third quarter. I would like to thank all of our customers, vendor partners and shareholders for their continued support, and our dedicated coworkers for their efforts.

I would also like to thank those of you listening to our call this morning. We appreciate your time and your interest in PC Connection. Have a great day.

And again, that does conclude today's conference call. Thank you for your participation.