PC Connection Inc (CNXN) 2011 Q3 法說會逐字稿

Good day, and welcome to the PC Connection third quarter 2011 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jack Ferguson, Executive Vice President and Chief Financial Officer of PC Connection. You may begin, sir.

Thank you. And good afternoon, everyone. This is Jack Ferguson, Executive Vice President and CFO. Joining me is Tim McGrath, President and CEO of the Company. We're pleased to have you join us today for PC Connection's 2011 third quarter earnings 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. You can also view it on our website. Today's call is 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 the Risk Factors Section of the Company's Annual Report on Form 10-K for the year ended December 31, 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 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, Tim McGrath, for his remarks on our quarterly results. Tim?

Good afternoon, everyone. And thank you for joining us to review the Company's financial results for the third quarter of 2011. Unless otherwise noted all third quarter 2011 results are being compared to our third quarter 2010 results.

I'm pleased to report that we achieved record third quarter sales of $576 million, an increase of $43 million or 8%. As previously discussed, we are investing in our solutions sales capabilities, including our recent acquisition of ValCom. We are confident that as we execute our business plan we will capture additional market share.

Net income for the quarter increased by 9% to $9.4 million, and earnings per share increased to $0.35 for the quarter. Consolidated gross profit dollars in the quarter increased by 14% or over $8 million to $70 million. Gross margin, representing gross profit as a percentage of net sales, increased by 60 basis points due to our continued focus on margin improvement. Our SMB, Public Sector, and Consumer/SOHO segments each improved their invoice selling margins.

Consolidated SG&A expenses in the quarter increased by 15% to $55 million. We attribute the increase to our investments in solution sales capabilities and internal IT systems, as well as higher variable compensation associated with improved operating results.

SG&A also includes ValCom's operating costs for the quarter. In addition, investments in our solution sales capabilities have included additional technical services personnel to support sales of data center, netcom, software, and storage products. We continue to monitor our SG&A expenses to ensure that we are incurring costs that will fuel our growth. Accordingly, SG&A expense as a percentage of sales was 9.4 for the quarter compared to 8.9 for the prior year quarter. We anticipate our investments will continue at these levels through the remainder of the year.

Income from operations for the quarter was $15.9 million or 2.8% of net sales compared to $14.3 million or 2.7% for the prior year quarter. The increase was due to our growth in sales and gross margins. We are encouraged by the initial return on these investments, particularly our ability to offer expanded service offerings.

And now I'll discuss our business segments and cover product trends. Our overall Commercial business, which is the combination of our SMB and Large Account segments, grew by 13.7%. Our SMB segment, which primarily serves small to medium business sized businesses, increased sales this quarter by approximately 2% to $212 million.

Our two largest supply categories -- Notebook PDA and Desktop/server continued to show solid growth, albeit a more moderate pace compared to last year. In addition, the year-over-year growth rate for the quarter was lower due to higher sales of tablets in the third quarter of 2010.

Gross profit dollars for SMB increased by 13% in the quarter, primarily due to higher gross margins, which improved by 170 basis points to 15.9%, due to its focus on margin improvement.

Sales for our Large Account segment increased this quarter by 29% to $207 million. Consistent with prior quarters, we've included the operating results of ValCom under this segment. Excluding ValCom sales for the quarter Large Account sales would have increased by 24% due to sales growth in both new and existing customers.

Gross profit dollars increased by 26% for this segment, but gross margin decreased by 30 basis points due to lower agency revenues. Invoice selling margins improved as the higher margin service revenues of ValCom offset lower margin project rollouts.

Overall, our sales in the Public Sector segment, which includes sales to Government and education customers, decreased by approximately 1%. Sales to the Federal Government declined by 14% due to budgetary constraints. However, sales to state, local, and education customers grew by 8%. We attribute the growth to our investment in sales representatives and solutions capabilities.

PCC Connection Express focuses on the specialized needs of consumer and small office, home office customers. Q3 sales were $12 million, a decrease of 35%. However, gross profit dollars decreased only 5% as gross margin improved by 350 basis points. This segment is continuing to focus on profitability and gross margin improvements.

Consolidated sales productivity increased slightly. We entered the quarter with 636 sales representatives compared to 595 on September 30th, 2010, and 630 on June 30th, 2011.

Desktop and server sales, our largest category this quarter, grew by 20% and accounted for 17% of net sales in the quarter compared to 15% last year. Sales of Notebooks and PDAs grew by 6% and accounted for 17% of net sales. Both product categories saw robust unit gross sales during the quarter. Although the Commercial Refresh cycle is aging, strong corporate profits continued to fuel technology investments by our business customers.

Software sales remained relatively level, accounted for 14% of net sales in the quarter, and compared to 15% the prior year quarter. We continue to experience strong demand for advanced technologies, like virtualization, security, and cloud computing.

Video, Imaging and Sound sales grew by 27% due to a large enterprise sale during the quarter. Average selling prices, or ASPs, for computer systems decreased by 8% in the quarter compared to the prior year. ASPs for Notebooks decreased by 10%, while Desktop ASPs were comparable to last year.

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

Thanks, Tim.

Our operating results reported for the quarter were generally very positive considering this economy -- 8% increase in overall sales with our Large Account segment growing organically at 24%, improvements in overall gross margin with increases in three of our four business segments, and continued improvements in our operating income and earnings per share.

Maintaining positive operating results and continued growth requires ongoing liquidity and a strong financial base. We believe our balance sheet and cash flow demonstrates that strength. Cash flow provided by operations for the nine months ended September 30, 2011 was $22.4 million, which represented an increase of $21.5 million over the corresponding prior year period, despite a $30 million organic increase in receivables this year.

Operating cash in 2011 was generated primarily by higher earnings and an increase in accounts payable, partly offset by the increase in receivables.

Cash used for investment activities in this nine-month period was $13.7 million compared to $3.1 million in the comparable 2010 period. Our net cash investment for the ValCom acquisition in March of this year was $4.7 million.

You may recall from our first quarter release that we had agreed to pay up to an additional $3 million in contingent consideration for this acquisition upon the achievement of certain milestones. The first of these milestones was successfully achieved during the second quarter, and as a result we paid $1 million of this contingent consideration. The remaining two milestones have measurement dates in 2012 and are based on the achievement of certain revenue goals.

Other capital expenditures in the nine-month period increased by $6.1 million to $8.5 million. These expenditures related in large part to the first phase of our IT initiative, which we expect to complete late next year. As reported in prior calls, we are continuing to make comprehensive upgrades to our IT systems, and this additional capital investment will likely exceed $20 million over the next three years.

Net cash used for financing activities in the first nine months of this year was $4.3 million compared to the prior year's net use of cash of $3.5 million. We purchased $4 million of our outstanding stock from Treasury in the first nine months of 2011 at an average price of $8.28 per share. We consider block repurchases directly from larger stockholders, as well as open market purchases in carrying out our ongoing stock repurchase program.

Our cash balance increased by $4.4 million in this nine-month period compared to a $5.8 million decrease in the prior year period. We did not access our credit facility in either nine-month period and, as a result, we had no outstanding borrowings at quarter end. We ended the quarter with a cash balance of nearly $40 million.

Turning to the remainder of the balance sheet, accounts receivable increased by $32 million in total during 2011 to $270 million at September 30.

Days sales outstanding, or DSOs, improved to 46 days as of September 30, 2011 compared to 49 days as of September 30, 2010. The improvement in DSO days resulted primarily from the relatively higher percent of sales by the Large Account segment, whose customers generally have faster bill to cash cycles compared to our public sector segment. We are continuing to monitor ongoing credit exposure from all of our customers given the ongoing liquidity environment, in order to minimize credit risk from our customers.

Turning to inventory, inventory levels decreased slightly compared to the prior yearend despite higher revenues in 2011. Inventory turns for the quarter increased to 28 compared to 26 turns in the third quarter of 2010 and 25 for the second quarter of 2011. 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 was 66% of total net sales in the third quarter of 2011 compared to 64% in the corresponding prior year period. We continue to focus on increasing drop shipments where appropriate and cost effective, which supports lower inventory levels. Even so, we will continue to make opportunistic buy-ins where it makes business sense to do so.

Accounts payable increased by $24 million during the first nine months of this year to $139 million at September 30th, 2011. The increase was due primarily to the timing of product purchases late in the period. All payables are current and we regularly take full advantage of all cash discounts where it is cost effective to do so.

Net stockholders equity was 59% of total assets at September 30th, 2011. Accordingly, our overall leverage ratio remains relatively low.

In summary, the balance sheet remains very healthy.

We will now entertain your questions. Operator?

Thank you. (Operator Instructions)

Our first question today comes from Brian Alexander with Raymond James.

Thanks, guys. Could you just talk a little bit about the linearity in the quarter? One of your competitors last night said that they didn't see the normal pick-up in September, so just wondering what you saw across the SMB and large corporate space in September and October, specifically on the public sector side what did you see from a budget flush perspective?

Good afternoon, Brian. This is Tim.

Hi, Tim.

So there's no doubt that September -- August was a little larger than September, there were a couple more days in August -- but we did see the first part of September we saw a little bit of a slow-down, then started to pick-up more toward the end of the month, more toward a regular seasonality. But overall I think our Enterprise Group was very strong. They did have some large project rollouts, and our SMB Group was very level, very consistent. And we did start to see some budget flush for Public Sector in the end of the month, and we exited the quarter with a pretty healthy backlog.

Okay, and then just on the SMB side, pretty noticeable I guess deceleration in growth. Just wondering what you attribute that to? Do you think that was the market? Do you think maybe it got more competitive and you decided not to chase share? And then do you look at that SMB weakness as a leading indicator for other segments of your business?

So it's an interesting question. We've been very focused on solutions and margin improvement, and you see, in particular, in SMB we've done a terrific job there, the Team has. And we now are very focused in addition and laser focused on acquiring new customers to try to push those growth numbers back up.

But I think one of the things that really affected SMB was a year-over-year comparison. When you look at Q3 a year ago there were some very large non-repeating orders, and that really is the majority of the driver there. The business was pretty healthy.

Okay, so as you look into Q4 would you expect normal seasonality in SMB?

I think we do, you know, we're optimistic that we're going to see normal seasonality. We do have consistent with our major suppliers, consistent with what you've been putting out, we do have a lot of economic uncertainty. But that is offset by the fact that corporate profits are very strong, and in many cases the solutions we're offering help to make or save money for our customers, so.

And then the acceleration in Desktop/servers that you saw, was that mostly large corporate rollouts, along the lines of what you said with the PC Refresh earlier? And, therefore, that's maybe why the gross margins in the Large Enterprise segment were a little bit lower because of these large Desktop rollouts, or is there something else going on there?

Yes, so you're pretty much right on. In the Enterprise space we did see a couple of very large projects, and that did pull down the invoice margin a little bit.

And that was desktop driven, Tim?

Yes.

Okay, and then just a final thing. HP, any falloff from their indecision around their PC business that caused them to lose share in the quarter? And that's all I have. Thanks.

Brian, you know, it's interesting, we were very proactive on that point, and we spent a lot of cycle time working through that, but at the end of the day we tracked those numbers every single day and we did not see any falloff.

Okay, great. Thanks.

As a result of that, and specifically in the PSG Group.

Great.

And, ladies and gentlemen, if there are no further questions I will turn the call back to Management.

Well, thank you, Operator.

In closing, the Company achieved a record third quarter revenue and made significant gains in both gross margin and operating income. Our focus on margin improvement resulted in the highest quarterly operating income and earnings per share in over a decade. We believe our strong Team and our core business strategies position us well for future success.

I'd like to thank all of our customers, vendor partners, and shareholders for their continued support, and our dedicated coworkers for all of their efforts. I'd also like to thank those of you who are listening to our call this afternoon. Your time and interest in PC Connection are much appreciated. Have a good evening.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation.