PC Connection Inc (CNXN) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to the PC Connection First Quarter 2011 Earnings Conference Call. Today's Conference is being recorded.

At this time, I would like to turn the call over to Steve Baldridge, Senior Vice President of Finance and Corporate Controller. Please go ahead, sir.

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

We're pleased to have you join us today for PC Connection's 2011 First Quarter Conference Call. If you haven't already seen our Press Release, you can contact Janice Rush, at 603-683-2322, and she will 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'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 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 Annual Report on Form 10-K for the year ended December 31st, 2010 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'm now going to turn the call over to our CEO, Patricia Gallup, for her remarks on our quarterly results. Pat?

Good afternoon, everyone. And again, thank you for joining us to review the Company's financial results for the first quarter of 2011.

Net sales in the first quarter increased year-over-year by $54 million or 13%, to $462 million, compared to the first quarter of 2010. I am pleased to report that our three primary sales segments each achieved double-digit year-over-year sales growth. The PC Refresh, which started in late 2009, continues to fuel business investments, although at a more moderate pace compared to 2010. Net income increased to $4.5 million or $0.17 per share for the first quarter of 2011, compared to $2.4 million or $0.09 per share for the prior-year quarter.

On March 17th, 2011, we announced the acquisition of ValCom Technology, headquartered in the greater Chicago area. ValCom provides infrastructure management and onsite managed services to medium-to- large corporate organizations. In 2010, ValCom had $40 million in sales, of which approximately half was services. Operating income in 2010 was approximately 7.5% of its revenue. We are pleased to welcome ValCom into the PC Connection family of companies and look forward to leveraging its service offerings to our existing customers. We have included the operating results of ValCom under our Large Account segment only since the date of the acquisition.

I'll now comment on our SMB segment, our original core business. Net sales increased this quarter by $22 million or 12%, to $211 million, from the prior-year quarter. We attributed sales growth to our continued focus on solutions selling, deeper [preditation] of existing accounts, and an increase in the number of sales representatives. SMB sales also benefitted from investments in business-develop managers and lead-generation tools. Year-over-year SMB growth continued to be strong in notebooks and desktops due to the PC Refresh and improved profits of SMB customers.

Sales by our Large Account segment, which now includes both MoreDirect and ValCom, increased this quarter by $21 million or almost 17%, to $147 million, compared to the prior-year quarter. Excluding the two weeks of sales by ValCom, Large Account revenues still grew year-over-year by almost 16%. Strong corporate customer profits continued to drive the PC Refresh. However, this segment's largest growth categories were storage, Netcom products and accessories.

Sales to government and education customers, reported as our Public Sector segment, increased year-over-year by $11 million or 14%, to $90 million. Federal government revenues increased by 16% year-over-year. Sales to state and local governments and education customers, which we refer to as SLED sales, increased by 13% year-over-year. Our SLED sales increased in all market sectors compared to the prior-year quarter, with sales to higher education customers growing by almost 30% year-over-year.

PC Connection Express focuses on the specialized needs of consumer and small office/home office customers. This segment reported sales of nearly $14 million for the first quarter of 2011, which was substantially unchanged compared to the prior-year quarter. However, this segment significantly increased gross margin in the quarter by focusing on improving margins on targeted products. Profitability and initiatives to increase traffic on the PC Connection Express website continued to be its primary focus for 2011.

Consolidated growth profit dollars in the first quarter of 2011 increased by $10 million or 21%, to $59 million, compared to the prior-year quarter. Gross margins, representing gross profit as a percentage of net sales, increased year-over-year by 80 basis points to 12.7% in the first quarter of 2011.

Each of our reporting segments increased gross margin, with our Public Sector segment generating a 170-basis point increase. Consolidated gross margin increased due to improved invoice selling margin and increased vendor consideration as a percentage of net sales.

SG&A expenses in the first quarter of 2011 increased by 15%, to $51 million, from the prior-year quarter. SG&A expenses as a percentage of sales was 11.1% for the quarter, compared to 10.9% for the first quarter of 2010.

We attribute the dollar increase primarily to higher variable compensations associated with improved operating results, as well as investments in sales and sales support personnel. Our additions to sales support included solutions services personnel, added to increased sales of datacenter, Netcom, software and storage products. We expect to continue to invest in this group over the upcoming year.

SG&A expenses for the past quarter also included $1 million in nonrecurring costs, approximately half of which was attributed to the ValCom acquisition. Income from operations for the quarter increased to $7.5 million, or 1.6% of net sales; compared to $4.2 million, or 1% of net sales for the first quarter of 2010. Both the dollar and rate increase was due to our gross margin increase.

We will continue to strengthen our business in 2011 by making further investments in our own internal IT systems and in our professional services capabilities. While we will incur additional expenses in 2011 as a result of these investments, we believe they will enable us to better serve our customers moving forward.

And now, I will turn the call over to Tim McGrath to cover sales and product trends. Tim?

Thanks, Pat. And good afternoon, everyone.

On a consolidated basis, sales productivity, which is annualized quarterly sales divided by the average number of sales representatives, increased for the first quarter of 2011 by 6% from the prior-year quarter. On a segment basis, sales productivity increased by 16% for the Large Account and Public Sector segments. SMB productivity increased by 1% despite a 12% revenue increase. This was due to the addition of 42 SMB sales representatives over the prior-year quarter.

The Consumer business is primarily Web-based. And accordingly, sales productivity is not applicable for this segment. We ended the quarter with 634 sales representatives, up from 583 on March 31st and 615 on December 31st, 2010.

Notebooks and PDAs, our largest product category, grew year-over-year by 26% due to higher unit sales in the quarter. This category accounted for 18% of net sales compared to 16% in the prior-year quarter. Desktops and service grew by 17% during the quarter and accounted for 15% of Q1 net sales in both 2011 and 2010. Sales on notebooks and desktops continued to be healthy, as a rebound in corporate profit and the related PC Refresh fueled capital investment within the business community.

Software, our third-largest product category, accounted for 14% of overall sales in the quarter and grew by 17% year-over-year. Sales of accessories grew 23% due to increased sales of mobile computing and point-of-sales products, as well as a focused initiative to increase our [attached] rate.

Average selling prices or ASPs for computer systems decreased by low single digits in the quarter on both a year-over-year and a sequential basis. ASPs for notebooks and PDAs, as well as servers, were down year-over-year; while desktops' ASPs increased.

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

Thanks, Tim.

First, the cash flow -- cash flow provided by operations for the three months ended March 31, 2011 was $29 million, compared to $14 million for the prior-year period. Operating cash in the first quarter of 2011 benefitted from decreases in both accounts receivable and inventory, partially offset by a small decrease in accounts payable.

Our net investment during the quarter in the ValCom acquisition was $3.7 million. This is net of approximately $4.9 million of cash acquired in the transaction. As Pat indicated earlier, we also agreed to pay the seller up to $3 million in additional consideration upon the completion of certain milestones over the next 18 months. Otherwise, capital expenditures in the first quarter of 2011 totaled $2.1 million, compared to $700,000 in Q1 of 2010.

As reported in prior calls, we are continuing to upgrade our IT systems. And this capital investment may exceed $20 million over the next three to five years.

Financing activities in the first quarter of 2011 were slightly lower than those in the prior-year quarter. Cash paid on the capital lease obligations this quarter was partially offset by the cash generated from exercise of stock options.

Our overall cash balance increased by $23 million in the quarter, compared to a $13 million increase for the prior-year quarter. We did not access our credit facility in the first three months of 2011. And we ended the quarter with a cash balance of $59 million.

Turning to the balance sheet -- accounts receivable at March 31, 2011 decreased by $20 million, to $218 million, compared to the balance at December 31, 2010. Days sales outstanding, or DSOs, were 47 days as of March 31, 2011, compared to 48 days as of March 31, 2010 and 44 days as of December 31, 2010. The year-over-year improvement in DSO days resulted primarily from a decrease in DSOs for the Public Sector compared to the prior year.

At March 31 of last year, we had a very large receivable due from the federal government, which we collected in Q2 of last year. We are continuing to monitor ongoing credit exposure from our customers, even as the economy begins to improve, and thereby manage credit risk from our customers.

Inventory balances decreased by $6.6 million compared to the prior-year balance. This was due to opportunistic purchases we made in the fourth quarter of last year that we sold in the current quarter, partly offset by higher inventory in transit to customers at March 31. Inventory turns this quarter were 24, compared to 25 for the first quarter of 2010 and 23 for the fourth quarter of 2010. 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 64% of total net sales in the first quarter of 2011, compared to 61% in Q1 of 2010. We continue to focus on increasing drop-shipments where appropriate and cost-effective, which supports lower inventory levels.

In summary -- our balance sheet remains very healthy.

We will now entertain your questions. Operator?

(Operator instructions) Brian Alexander, Raymond James.

This is Brian Peterson, stepping in for Brian Alexander. Congrats on the quarter, guys.

Thanks, Brian.

(Inaudible) gross margins, which were a little bit better than we were expecting, how big of a benefit were the rebates this quarter? And is that something you're seeing? Obviously, with 13% growth, is that something that you see -- that will be sustainable going through the rest of the year?

Hi, Brian, this is Steve Baldridge.

There was an increased focus on gross margin rates during the quarter, with, as you can see, margin rates increasing year-over-year in each of our reporting segments. Our consolidated gross margin rate increased 81 basis points year-over-year, to 12.7%. And what drove the 81-basis point improvement was primarily improved invoice selling margins and lower customer rebates, which contributed approximately 50 basis points of the overall 81-basis point improvement. Increased vendor consideration and higher software referral fees represented the larger component of the remainder of the difference. So again, the invoice margin primarily drove the improvement, with some higher levels of vendor consideration.

In terms of sustainability -- I think, as you know, we don't give any guidance relative to margin rates. And historically, we have seen even a decline in our gross margin rates between Q1 and Q2, if you look at the previous two years.

I appreciate the color.

And I guess, kind of shifting gears to op margins -- I know you said that gross margins typically go down seasonally, [but the] first quarter usually is the low watermark for op margins. Do you think this is -- I mean, op margins were about 2% last year -- how high do you think margins could go this year, given that you're looking at probably at least a mid-single-digit growth rate over the course of 2011?

Hi, Brian, this is Jack.

While our margins -- our operating margin in the first quarter was $1.6 million, keep in mind that the Q1 is our GovConnection's lowest quarter, typically. And it has been year after year -- that's its lowest quarter. And costs are relatively fixed in the short run for that segment. So that probably helped to draw down some of the operating margins.

Additionally, as Pat indicated, we had about $1 million of nonrecurring costs in the quarter, which also helped to drive down the costs -- or drive down the margins. We have additionally added a number of people over the period of March of last year -- well over 100 people -- some of them in sales, and some of them are in our initiatives, our practice area initiatives, which I believe we've talked about in earlier periods. And that's an investment for the future. We will continue to make those investments as we move forward. But with sales growing, then that would be spread over a wider area.

So I think that the 1.6% is probably -- could be the lowest level that we would anticipate. While we can't give guidance going forward, hopefully that will give you some indication of our thoughts.

That's helpful.

Public Sector was a lot stronger than at least we were modeling. And I know that you said that both SLED and Fed were at least up in the teens. Can you maybe just give a little more clarity on what really surprised you in the quarter?

Thanks, Brian, this is Tim.

There were some large year-end rollouts in our federal business, and those were completed in Q1. Those were some carryovers from Q4. And we got a companywide initiative to focus on enterprise solutions which tend to drive margin and, along with that, key customer acquisition.

So when you kind of put all that together -- the large projects involving storage and other high-end enterprise type solutions, combined with our services and new customer acquisition initiatives -- overall, it came out, we think, pretty solid for Q1.

Okay --

(Inaudible) 14%.

Just last one for me -- I think you guys said that both server units and server ASPs were down year-over-year. Could you give a little bit of clarity on if that was any particular customer segment, or server mix or anything? Because that's a little bit different than what we're hearing from some other people.

That's correct, Brian, in terms of -- the server ASPs were down slightly on a year-over-year basis, and up mid-single digits on a sequential basis. And the units were down year-over-year, slightly.

I think, when you look at a number of the projects that we're involved in again, with the enterprise solutions, virtualization has really helped to spike our software business. But some of those competing technologies did put a little downward pressure on the server units in the quarter.

That's helpful.

Thanks, guys. Great quarter.

Thanks.

Thank you.

We have no further questions. I would now like to turn the call back over to Patricia Gallup for any additional or remaining comments.

Thank you, operator.

In closing, we are pleased with the leverage demonstrated by our business model, with healthy year-over-year operating and net income gains in the first quarter of 2011 of 80% and 85% respectively. Our teams worked hard to create opportunity in the marketplace. And each of our reporting segments contributed to our positive performance. We also continued to invest in new opportunities for future growth, including the purchase of ValCom Technology, which allows us to further expand our managed service offerings.

As our Q1 results demonstrate, we believe we have the right strategies and leadership in place to build our business and enhance long-term shareholder value.

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 afternoon. Your time and interest in PC Connection are appreciated. Have a good evening.

Once again, this does conclude today's Conference. We do thank you all for joining us.