PC Connection Inc (CNXN) 2012 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Second Quarter 2012 PC Connection, Inc. Earnings Conference Call. My name is Justin, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. As a reminder, this conference call is a property of PC Connection and may not be recorded or rebroadcasted without specific permission from the Company.

On the call today is Tim McGrath, President and Chief Executive Officer and Joe Driscoll, Chief Financial Officer. 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 management 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, 2011, which is on file with the Securities and Exchange Commission, as well as in other documents that the Company files with the Commission from time to time.

In addition, any forward-looking statements represent management's view as of today and should not be relied upon as representing views as of any subsequent date. While the Company may elect to update forward-looking statements at some point in the future, the Company specifically disclaims any obligation to do so even if estimates change. And therefore, you should not rely on these forward-looking statements as representing views as of any date subsequent to today.

If you have not already seen the 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 the Company's website. Today's call is being webcast and will be available from PC Connection's website.

I would now like to turn the call over to Tim McGrath. Please go ahead, sir.

Good afternoon everyone and thank you for joining us today to review the Company's financial results for the second quarter of 2012. During the quarter, we continued to execute our strategy by providing a full range of IT solutions, increasing market share, making operational improvements and driving productivity gains. We have a company-wide focus on these goals and we are pleased with the progress that we have made as evidenced by our solid Q2 performance.

As we review our results, please note that unless otherwise stated all of our second quarter 2012 comparisons are being made against our second quarter 2011 results.

Net sales for the quarter increased year-over-year by $30 million or 6% to $543 million. Lower sales to our consumer, SOHO and government customers were more than offset by strong Large Account sales.

We continue to invest in improving our operations and expanding our solution sales capabilities. These include centers of excellence in data center, network services, software, mobility, storage and lifecycle services. In addition, our healthcare business continues to achieve significant growth. We've experienced strong demand and expect to continue to invest in these strategically important practice areas.

Net income for the quarter increased by 18% to $8.8 million, and earnings per share increased from $0.28 per share in 2011 to $0.33 per share in 2012. We continue to strive for increased earnings per share at a rate faster than the growth in sales by leveraging our fixed cost over a larger sales base.

Gross profit dollars in the quarter increased by $5 million or 7% to $72 million. Gross margin representing gross profit as a percentage of net sales increased to 13.2% versus 13% in the prior year quarter. This is a result of our strategic focus on operational improvements, which have resulted in eight straight quarters of year-over-year margin growth.

While we're focused on expanding our gross margins, we believe that the gross margin rate for the next two quarters will be slightly lower than Q2 due to an expected seasonal increase in lower margin Public Sector sales and more challenging market conditions. We continue to look for ways to manage our costs as we drive growth.

Total selling, general and administrative expenses for the quarter increased year-over-year by $2.4 million or 4%, but improved this quarter as a percentage of net sales from 10.6% to 10.5%. As you know, from our previous calls, our customer Master Data Management or MDM project is expected to be substantially completed later this year and fully placed into service in 2013. We're confident that this initiative will give us enhanced capabilities in customer service and provide a platform for additional opportunity to sell more products and services.

Depreciation expense for this asset is expected to add approximately $2 million in SG&A expenses in 2013, which may increase our SG&A rates. Due to operational efficiencies, increased sales, cost control initiatives, we expect a further lower SG&A as a percent of net sales in Q3 and Q4 as compared to Q2.

And now, I'll discuss the quarterly results of our business segments. Our overall commercial business, which is the combination of our SMB and Large Account segments, grew by 9%. Net sales for the SMB segment were $229.6 million in the second quarter of 2012. Sales to small and medium business increased by 3.5% year-over-year, however, when combined with our lower consumer and SOHO sales, the overall segment decreased by 1.1%.

Gross profit dollars for SMB increased by 3% in the quarter. SMB had the highest gross margin improvement with a 65 basis point increase to 15.5% margin rate. We attribute this margin improvement to our focus on higher-margin products and services, the automation of deal registration and the use of predictive analytics.

Sales by our Large Account segment increased this quarter by 23% to $197 million. This growth was the result of stronger relationships with our existing Large Account customers, as we strive to simplify their increasingly compact IT environments with greater value and solutions. In addition, the timing of large project rollouts contributed to this quarter's strong performance. Gross profit dollars increased by 19% during the quarter as a result of the increased sales.

Quarterly sales in the Public Sector, which consists of sales to government and education customers, decreased by 3%. Sales to the federal government decreased by $4 million year-over-year. We attribute the decrease in federal government sales to softer demand in terms of number of orders and average size of contracts in the overall federal government space. Sales to state and local governments and educational customers had a slight increase compared to the prior year.

Gross margin for the Public Sector continued to improve with an increase of 27 basis points compared to Q2 of last year. This is the sixth straight quarter of year-over-year margin improvements for the segment.

Our Healthcare business, which is spread among all three sales segments, increased by over 28% from the prior year. Our investments in this high-growth market continue to drive year-over-year results. Overall, we continue to make investments in people, systems and infrastructure to maintain our sales growth and improve our operational efficiencies.

And now, Joe Driscoll will discuss our financial results in more detail. Joe?

Thanks, Tim. In summary, our operating results for the quarter were strong, especially considering the continuing macroeconomic concerns.

Consolidated sales for the quarter increased 6% on a year-over-year basis. We continue to drive operational efficiencies, which contributed to our 30 basis point improvement in operating margin.

Earnings per share increased from $0.28 to $0.33 in the quarter, an increase of 18%. And we generated significant positive cash flow during the first six months of 2012. Our cash balance at the end of the quarter was approximately $63 million compared to $5 million at December 31, 2011, and we had zero bank debt outstanding at June 30, 2012.

Cash flow provided by operations for the six months ended June 30, 2012 was $72 million compared to $33 million in the first half of 2011. The primary source of operating cash during the first half of 2012 was a $41 million decrease in accounts receivable. Days sales outstanding or DSOs were 41 days as of June 30, 2012 and June 30, 2011 compared to 47 days as of December 31, 2011.

In addition, our inventory levels decreased in the first six months of 2012 by $2.5 million, primarily due to much tighter working capital management. Inventory turns for the second quarter of 2012 increased to 28 times compared to 25 times in Q2 of 2011.

Capital expenditures in the first half of 2012 totaled $5.2 million. These expenditures were primarily related to our customer Master Data Management project, which we expect to have substantially completed in late 2012.

Net cash used in financing activities in the first six months of 2012 was $7.1 million. Of this total, $5.3 million was used to repay bank debt during the first quarter of 2012. We also purchased $1.5 million of our outstanding stock for treasury at an average price of $9.05 per share during the first six months of 2012, which was comparable to treasury stock purchases made in the first six months of 2011. Overall, we continued to experience positive cash flow in the first six months of 2012.

Note that we expect the cash balance to decrease somewhat over the balance of the year due to projected higher levels of sales and working capital in the last two quarters of 2012. We expect that the balance sheet will be healthy for the remainder of this year.

We will now entertain your questions. Operator?

(Operator Instructions) Jared Schramm, ROTH Capital Partners.

Good afternoon.

Good afternoon, Jared.

How are you doing?

Congrats on the quarter.

Thanks.

Looking at K through 12, you mentioned it was slightly up on a year-over-year basis. Have you seen any early indications in regard to purchases on the K through 12 levels so far, just through the month of July?

Interestingly enough, our education component of the Public Sector was our best-performing, highest-growth area. It's a little too early to call it, but clearly this is the quarter four Public Sector sales, as you know. So a little too early in the quarter to tell, but we've not seen anything significant yet.

Okay. And turning to the Windows 8 launch this fall, could you just give us some high-level thoughts on what you're doing to prepare yourself for this launch.

So we've got a multi-pronged initiative out there spanning all of the sales segments. We're doing a lot of training and a lot of promotion and development and we're optimistic. In working with our customers, there is a lot of anticipation, a lot of excitement about what Windows can do as it relates to mobility, security and the opportunity to have one common operating system from your handheld to your tablet to your desktop.

And turning now to Healthcare, you mentioned you saw 28% year-over-year growth in that sector across all three operating segments. What in particular are you doing from a sales force angle to really promote this channel?

So we have a company-wide marketing and training focus that we call HealthConnection, and we do a very detailed training with our sales force. We also give very specific areas of focus, digital medical records, for example, and a number of other areas that we look at, so that our sales force has an engineering team and a practice area and a marketing team to help them promote and reach their customers.

Okay. And lastly here on the MDM project, is that about going to be completed on schedule compared to your original expectations?

Basically on track with our original expectations. We are taking a little bit more time just to make sure we have a smooth transition with all of the sales teams. But it's basically on track, vast majority of it will be implemented later this year, some of it will roll into 2013, as we hit all of the different subsidiaries, but it's rolling along nicely.

Okay, congrats again. Thank you.

Thanks.

(Operator Instructions) [Hari Aloo] with Raymond James.

Hi, I'm just on the call for Brian Alexander today. Just a couple of questions. Did you see any incremental demand softness as the quarter progressed, which is one of your competitors suggested yesterday on their call? And if so, could you maybe by product sector or customer segment, tell me where you saw that weakness, if any?

Welcome, Hari. So we saw a fairly normal seasonality and linearity to the sales ramp-up throughout the quarter, but as you know and as you've been hearing, there are certainly some economic headwinds out there, and in particular in our Public Sector business, we are seeing some reduction in federal spending, as I mentioned earlier. So that will be the one thing that really stands out for us.

Got you. Thanks a lot. And if I could another one, operating margins continue to rise and right now approaching 3%, what revenue level do you need to achieve for operating margins to be sustainably above 3% and is that something that's conceivable for calendar year 2013?

Yes. It's probably around $600 million a quarter thereabouts, that if we maintain our gross margins or hopefully tick them up a little bit, but we should be getting leverage off our fixed SG&A cost structure. So probably somewhere around $600 million to $620 million a quarter should theoretically get us to that range.

Great. Thanks a lot. That was really helpful, and if I could ask one more?

Yes.

What should we think about our revenue growth in the second half relative to the first half? Which segments do you think will be accelerating and which ones do you think may be slowing?

So traditionally, the second half of the year is going to be larger than the first half of the year. There's a couple of reasons for that. One is that the Public Sector space, although we are seeing some softness there, traditionally due to budget cycles, it usually is stronger in the second half of the year than the first half of the year.

The other pieces of the business should be fairly steady in terms of year-over-year performance, we will see some upticks, but generally speaking that's what you'll see is that the second half will be somewhat higher than the first half of the year.

Great. Thanks a lot. I do have one more, if I could just exhaust my whole list here.

Sure.

Have there been any impacts from vendor incentive programs on gross margins and are any of them worth calling out?

No dramatic impacts except for some of our software deals have changed slightly from a year ago, that's about the only thing that we saw, but generally speaking it's fairly stable as far as we can tell.

Thanks a lot, guys. Thank you very much.

Thank you.

And that does conclude the question-and-answer session. I'll now turn the conference back over to Mr. McGrath for any closing or additional remarks.

Thank you, operator. I'm pleased with our solid second quarter results and continued improvements in gross margin and operating income. The macroeconomic environment continues to be a challenge, which includes constrained government spending, however, we believe that our strong team and our core business strategy 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 co-workers for their efforts. I'd also like to thank all of you listening to our call this afternoon, your time and interest in PC Connection are appreciated. Have a great evening.

And that does conclude today's conference. We do thank you for your participation today.

Thanks.

Thank you, sir.