PC Connection Inc (CNXN) 2012 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Third Quarter 2012 PC Connection, Inc. Earnings Conference Call. My name is Shawn, and I will be the coordinator for today. (Operator Instructions). As a reminder, this conference call is the property of PC Connection and may not be recorded or rebroadcast 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 purpose 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 Factor section of the Company's annual results 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 on PC Connection's Website.

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

Good afternoon, everyone, and thank you for joining us today to review the Company's financial results for the third quarter of 2012.

During the quarter, the IT market experienced softness due to ongoing tough market conditions, concerns related to the outcome of the election, potential tax increases, and federal spending cuts. The overall softness in the economy resulted in customers delaying IT investment spending. Based on market projections, we expect the effects of these concerns to linger into 2013 and industry sales growth to be in the low, single-digit range.

We will continue to execute our core strategies -- delivering a broad spectrum of IT solutions; increasing our market share; investing in our cloud computing practice, [Cloud Connection]; enhancing our operational capabilities; and driving productivity gains. Our Companywide focus on these goals resulted in a solid Q3 performance.

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

Net sales for the quarter decreased year over year by 2% to $561 million. Sales for our public sector and small to medium-sized business customers increased year over year; however, these increases were offset by continued weakness in our consumer SOHO sales and the effect of $36 million in one-time, Large Account sales in Q3 2011 that did not repeat this quarter.

The healthcare vertical remains strong for us, as revenue increased 18% over the prior year.

We continue to invest in and focus on improving our operations and expanding our solution sales capabilities, our status of excellence, including datacenter, network services, software, mobility, storage, and lifecycle services. We expect to continue to invest in these important practice areas, which are part of our branding strategy for Cloud Connection.

Net income for the quarter increased by 5% to $9.9 million, and earnings per share increased from $0.35 per share in 2011 to $0.37 in 2012. We continue to strive to increase earnings per share at a faster rate than the growth rate in sales by focusing on improving gross margins and controlling costs.

Gross profit dollars in the quarter increased by $2 million, or 3%, to $72 million. Gross margin increased to 12.9% compared to 12.2% in the prior-year quarter. Our strategic focus on selling has resulted in nine straight quarters of year-over-year margin growth. While we're focused on expanding our margins, we believe the gross margin rate for the next quarter will be slightly lower than Q3 due to more challenging market conditions.

We continue to look for ways to manage our costs as we expand our margins. Total selling, general, and administrative expenses for the quarter increased year over year by $1.4 million, or 2.4%, and increased this quarter as a percentage of net sales from 9.4% to 10%. Due to the tight cost controls on a sequential basis, we decreased our SG&A costs by $1 million, or 53 basis points as a percentage of net sales from the second quarter of 2012.

As you know from our previous calls, we are implementing our Customer Master Data Management, or MDM project. We're confident this initiative will give us enhanced capabilities in customer service and provide a platform for additional opportunities to sell more products and services. The project will be fully placed into service in 2013. We expect depreciation expense for the project to add approximately $2 million in annual SG&A expenses.

And now I'll discuss our quarterly results for our business segments and cover product trends.

The top three growth trends for our business are the result of our focus on delivering solutions that help our customers execute their business strategies with IT products and services. We continue to see good growth in mobility, cloud, and big data solutions.

Net sales for the SMB business segment were $219 million in the third quarter of 2012. Sales to small and medium businesses increased by 2.2% year over year. However, when combined with the lower consumer and SOHO sales, the overall segment decreased by 2.3%. Gross profit dollars for SMB decreased by 3% in the quarter. SMB had a slight decline in gross margin of 18 basis points, resulting in a 15.4% margin. However, SMB continues to have the highest gross margin of our three business segments.

Sales by our Large Account segment decreased this quarter by 7% to $193 million. The decrease was due to two, large product rollouts in the prior year that totaled $36 million, which did not repeat for 2012. Gross profit dollars increased by 10%, and the margin rate increased from 9.8% to 11.5% during the quarter as a result of our strategic focus on improving results through higher-margin sales and the impact of the two product rollouts which had relatively low margins.

Quarterly sales in the Public Sector, which consists of sales to government and education customers, increased by 3% to $149 million. Sales to the federal government increased by 1.6% compared to last year due to higher contract sales. Sales to state and local government and education customers increased 4.1% compared to the prior year. Gross margin for the Public Sector increased by 30 basis points compared to Q3 of last year. We continue to increase gross margin in the segment with seven straight quarters of year-over-year improvement due to our focus on higher-margin solution sales.

In each of our business segments, we continue to invest in people, systems, and infrastructure to fuel future sales growth and improve operational efficiencies. We're focused on developing and maximizing services capabilities in our Cloud Connection practice in order to drive growth in a strategically important market.

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

In summary, our bottom line results for the quarter were solid, especially considering the continuing macroeconomic concern.

Earnings per share increased from $0.35 to $0.37 in the quarter, an increase of 6%, despite the decrease in sales. On a year-to-date basis, EPS has increased 16%. This is our third straight year of double-digit earnings growth.

Other positive notes from the quarter include the following. Gross margins were well above the prior-year period. SG&A expenses decreased by $1 million from Q2 of 2012. And we maintained strong cost discipline, which resulted in generating significant, positive cash flow during the first nine months of 2012.

Our cash balance at the end of the quarter was approximately $54 million, and we had zero bank debt outstanding at September 30, 2012.

Cash flow provided by operations for the nine months ended September 30, 2012 was $64 million compared to $22 million in the first nine months of 2011. The primary driver for the increase was a $23 million decrease in accounts receivable.

Day sales outstanding, or DSOs, were 41 days as of September 30, 2012, compared to 47 days as of December 31, 2011. In addition, inventory levels decreased by $12 million from December 2011 due to tighter working capital management.

Capital expenditures in the first nine months of 2012 totaled $7 million. These expenditures were primarily related to our Customer Master Data Management project, which we expect to fully place into service in 2013.

Net cash used in financing activities in the first nine months of 2012 was $7.8 million, which included $5.3 million to repay bank debt during the first quarter 2012 and purchases of $1.5 million of our outstanding stock for treasury.

We expect a moderate decrease in cash in the fourth quarter due to increased seasonal working capital needs.

The overall IT spending market is still challenging. Despite this, we are staying focused and working hard to exceed the $0.28 per share we earned in Q4 last year. According to market research and announcements from other technology companies, 2013 is projected to be another challenging growth environment. As we look to develop opportunities in the coming year, we feel it is critical that we maintain a strong core and focus on margin improvement and cost controls.

We will now entertain your questions.

(Operator Instructions). Jared Shramm, Roth Capital Partners.

Any early indications from the Windows 8 launch thus far? If you could provide some color on that, I think that would be helpful.

So, it's interesting. We put a lot of emphasis behind the Windows 8 launch, and we're seeing really good traction. But, overall, it's really too soon to tell. The immediate benefit with Windows 8 is coming from our OEM partners who are shipping it with their products. But there's a great promise to Windows 8, but I think it's a little too soon for us to tell whether or not that's going to have a significant impact or the talked-about Windows 8 bump.

And, turning over to your healthcare business, I believe you mentioned it was up 18% year over year. What is your growth on a high level forecasting there looking out to 2013 and 2014? Is this a metric that can really start to ramp up in the upcoming years?

I think we're really optimistic about not only the programs that we're putting in place to go after that market that we think are going to make a difference but also the market itself. That's certainly a vertical, Jared, that, as you know, is projected to be strong for the next two years. So we're pretty optimistic that we can continue to grow at rates similar that we've been seeing.

And is there any implication from -- as ACA gets rolled out here in the upcoming years how that will impact the business from your end?

I don't have a good handle on that. Joe?

We haven't really tried to quantify that at this time, Jared.

Okay. And any notable vendor incentives in the quarter that would have affected margin, or is that pretty stable on a year-over-year basis?

It's a fairly stable environment in terms of vendor incentives.

Okay. And a more recent event here. Any detrimental impact from your business you can see from the storm in the east coast this past week that would possibly affect Q4? Is that not going to impact the Company all that much?

Overall, we were here, remained open. All sites remained open to serve our customers. We were able to help a lot of customers who were having challenges with power interruptions and other issues. But there was a pretty light couple of days for volume, but it will not impact the overall quarter.

Okay. And I believe you mentioned, in Public Sector, federal spending was up 1.6% year over year. How do you feel looking at the Public Sector; in particular, the federal segment there looking out into 2013?

Well, the outcome of the election, I think, will really help to craft our answer there. There's a lot of concern about proposed federal funding cuts and the fiscal cliff, as you know. And so we're a little bit guarded with that. So we don't have a projection at this time. I think the outcome of the election will help us to determine that.

Okay. Well, thank you very much for the time today, and look forward to being in touch.

(Operator Instructions). Brian Alexander, Raymond James.

Joe, you made a comment toward the end of your prepared remarks about trying to generate earnings close to the $0.28 from last year. I just wanted to see if you can clarify that. Were you suggesting that earnings would be roughly flat on a year-over-year basis? And, if so, what kind of revenue environment are you anticipating to get there?

I think we're trying to say that it's still a challenging environment. We'd like to think we're going to exceed the number from last year. But, still, a tough environment. And so we just want to make sure expectations are kind of properly set for our upcoming Q4. But we're not giving any specific guidance but, really, just trying to set the base properly.

Got you. And, then, Tim, as you think about industry growth next year, low, single digits seems pretty reasonable from my perspective. Do you think you guys can outgrow that? And what segments do you have more confidence that you can actually exceed market rates?

So, we always strive to -- we look at the GDP. We look at industry growth rates. And we always strive to outperform the standard growth rates. And we're very bullish on the investments that we've made with Cloud Connection, with our [Pro Connection] business overall. And we do think that's going to drive growth in strategically important areas. I feel very good about the enterprise growth for next year. I think our SMB business is going to be solid. And there's probably a little bit more of a question mark around the Public Sector, as noted in all of the industry reports.

Okay. And, then, I think you guys made a comment about gross margins coming down sequentially in the December quarter. If I go back over time, it's pretty typical to see that happen. Perhaps that has something to do with large deals in your traditional, more direct business. Were you suggesting that it might be down a little bit more than seasonal in the fourth quarter? And, if so, is that more a function of competitive pricing or some anticipated changes in vendor incentives? I'm just trying to get a sense for how you're thinking about gross margins.

Yes. We would just be thinking about it in terms of how it normally behaves. So just the normal seasonality would be the basis for our comment there.

Okay. Good. And, then, maybe just a couple more on the IT system. When should we start to see that expense creep in? And is there a specific timeline in 2013 where you cut over that we should be thinking about? And then just talk about your ability to maybe offset that increased cost -- if there's any expense initiatives that you're planning as the revenue environments become more challenged.

Sure. So, it should add about $2 million of expense on an annual basis. Right now, we're looking at probably Q1 to start the depreciation on that asset. We're actually rolling it out in three elements; first, the SMB division, then the gov, then the large enterprise. And so the SMB will be the first one to roll out. That would be in Q1 and then the other entities to follow later in the year. But we would start depreciating it. Right now, it looks like Q1 of next year.

And, in terms of other expenses to try to cut -- to offset the $2 million, we're constantly looking at every expense we can to try to reel it in, hold off on adding headcount, really watching every penny. So there's no specific cost initiative at this time to kind of totally offset that $2 million add. But I guess we're trying to say we're constantly looking at costs and trying to keep them in line.

And MDM is the foundation for big data. And it will certainly give us a lot more capabilities.

And are you planning on running systems in parallel as you go through that process? Or is there a hard cut over in the first quarter?

We have some -- because this really is a database initiative, we have some redundancies. So we will run in parallel. And then, as Joe mentioned, we're going to phase this in over -- it will take us, really, the entire year. So we'll roll one group at a time.

Got you. Maybe two more quick ones. Notebooks were unusually strong, given the PC environment that we're seeing. So I don't know if you had any large deals or if there's anything that you would call out there.

And then the final question from me would just be on your cash balance. I guess it's a high-class problem, but you guys continue to do a nice job on the balance sheet. You've got over $50 million in cash. And just wondering whether you're contemplating another special dividend or a share buyback.

And that's it for me. Thanks.

I'll start with the -- talk a little about the product category, and I'll turn it over to Joe.

So, the notebook category has been strong. And that's an important part of our business when you look out at our mobility initiatives as we're helping our customers access the cloud. We're seeing our tablet business has got very strong growth. Our tablet business is well north of 23% growth. Our notebook business is a little south of that when you combine all the categories together. But I think it's a critical part of the business as we see customers shifting more towards mobility and devices and away from desktop. So there's not one particular deal that's driving that. I think it's our Companywide focus on helping our customers mobilize their environments.

Okay. And cash?

Cash. You know, we don't have any specific plan at this time for dividends or buybacks. We try to look at all the options we have with cash, whether that's one of those options or acquisitions or other investments that we can do. So there's no specific plan at this time for any particular thing. But we are constantly looking at it and trying to size up what's the best way to deploy that.

Great. Nice job in a tough market.

I'm showing no further questions in the queue. I'd like to turn it back over to Tim McGrath for closing comments.

Well, thank you, operator.

During the quarter, we continued to strengthen our core and improve our profitability while facing weaker demand resulting from the macroeconomic uncertainty. As reported throughout the industry, the soft IT market is projected to continue throughout 2013.

However, I am pleased with our growth in both gross margin and earnings this quarter. We believe our strong management team and our business strategies have positioned us well to enhance long-term shareholder value, even in this challenging marketplace.

Thank you for joining us on this quarterly earnings call. I'd like to extend a special thanks to all of our customers, vendor partners, and shareholders for their continued support and our dedicated coworkers for their efforts. Your time and interest in PC Connection are appreciated. Have a great evening.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.