Q3 2019 Earnings Call

<unk> earnings Conference call. My name is Skylar and I'll be the coordinator for today.

At this time all participants are in listen only mode. Following the prepared remarks there'll be a question and answer session. As a reminder, this conference call is the property of connection and May not be recorded or rebroadcast without specific permission from the company.

On the call today, our 10, Mcgrath, President and Chief Executive Officer, and Tom Baker, Senior Vice President and Chief Financial Officer, I would now turn the call over to the company.

Thank you I will now read the safe Harbor statement.

Any statements are references made during the conference call that are not statements of historical fact, maybe deemed to be forward looking statement various remarks that management may make 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 1995.

Actual results may differ materially from those indicated by these forward looking statements as result of various important factors, including those discussed in the risks factors section of the company's annual report on Form 10-K for the year ended December 31st too.

Thousand 18, which is on file with the Securities Exchange Commission as well as in other documents the company files with the commission from time to time. In addition, any forward looking statements represent management's views as of today and should not be relied upon as representing views as.

Any subsequent date.

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.

Two today.

During this call GAAP and non-GAAP financial measures will be discussed a reconciliation between the two is available in todays earnings release and on the company's website at Www Dot connections Dot com. Please note that unless otherwise stated all references to third quarter 2019.

Comparisons are being made against the third quarter 2018.

Today's call is being webcast and will be available on connection to website.

Earnings release, and the Form 10-K are both available on the S. Easy website at Www Dot ASCII Si dot com and in the Investor Relations section of our website at Www Dot connection Dot com.

I would now like to turn the call over to our house can Mcgrath President and CEO . Please proceed sir.

Good afternoon, everyone and thank you for joining us today to review the Companys third quarter financial results.

It's our pleasure to announce another quarter of strong performance, including a 75% increase in diluted earnings per share from Q3 2018.

We experienced growth in all three operating segments. The public sector segment achieved 20% revenue growth in the quarter, followed by the business solutions segment, which experienced growth of 12% and the enterprise solutions segment, which grew by 5%.

Our success in the quarter was partially attributed to the timing of large solution based project Rollouts and strong growth in the mobility in desktop categories. The growth in these categories, where the due to the PC refresh driven by the anticipated end of support for Windows, seven and technological advances in hardware.

Were they enable modern workplace solutions.

In addition, we continue to see growth in our software cloud based security businesses.

We remain committed to helping our customers intelligently and efficiently build out solutions that include our focus on software defined data center hybrid cloud and the digital workplace during the third quarter. The company achieved record gross profit record gross margin and a record earnings per share.

Gross profit grew by 18.3% year over year, and we achieved gross margin of 16.3%, which represented growth of 104 basis points.

The increase in both gross profit and gross margins was driven by our continued focus on our business initiative.

Well in all three of our sales cycles perform at these levels versus the prior year period, we experienced significant operating leverage we also saw double digit growth and three of our vertical markets.

Net sales for the three months ended September 32019 increased by 10.8% to $729.4 million compared to 658.5 million in Q3, a year ago.

Increase cloud based and security software sales continue to require us to net down more revenue, which in effect puts downward pressure on net sales while benefiting gross margin.

Gross profit increased by 18.3% to a record $118.9 million compared to 100 point Fourmillion a year ago.

Gross margin was a record 16.3% compared to 15.3% in the prior year quarter.

Operating income increased by 72.2% to 32.6 million or 4.5% of net sales compared to 19 million or 2.9% of net sales in the prior year quarter.

Now I'd like to provide a more detailed discussion over performance by segment.

And our business solution segment Q3, net sales increased by 11.8% to $273.8 million compared to 244.9 billion a year ago gross margin for this segment increased by 83 basis points to 90% in the quarter.

Our business solutions segment benefited from an increase in volume and a change in customer mix based solutions continue to focus on advanced technologies that have higher margins and represented a larger percentage of our revenue this quarter.

In our public sector solutions business Q3, net sales increased by 19.7% to 177.4 million compared to 148.2 million a year ago.

Sales to the federal government increased by 88.2 per cent compared to the prior year as it was all the large project wins, while sales to state local government and educational institutions increased by 1.5%.

Gross margin for the public sector increased by 175 basis points to 13.9% due to double digit growth in desktops mobility server storage and netcomm categories.

In the Enterprise solutions segment Q3, net sales were 278.3 million, a 4.8% increase compared to 265.5 million a year ago.

Gross margin for that segment increased by 86 basis points to 15.1%.

Sales of cloud based security software had a greater financial impact on gross margin for the enterprise segment this quarter than in the same quarter last year.

Having covered our sales and gross margin performance I will now turn the call over to Tom to discuss additional financial highlights from our income statement balance sheet and cash flow statement Tom.

Thanks, Tim.

Afternoon, a increased this quarter to $86.2 million from 81.5 million a year ago.

The increase in F G and H was driven in part by an uptick in variable compensation due to higher level of sales on gross profit achieved compared to the prior year quarter.

[noise] after DNA as a percentage of net sales decreased by 55 basis points year over year, demonstrating our commitment to driving operational efficiencies and managing expenses.

Our operating income increased 72.2% this corner.

$32.6 million from 19 million a year ago [noise].

Of the 18.4 million dollar increase from gross profit 13.7 million or 74% of that increase was recognized in operating income highlighting the leverage in the business [noise].

Our effective tax rate was 27.4% down from 27.8% and the same parity year ago.

Net income for the quarter increased 72.5% to $23.7 million from 13.8 billion a year ago.

Diluted earnings per share was 90 cents an increase of 75%.

Our trailing 12 month adjusted earnings before income taxes, depreciation and amortization or adjusted EBITDA increased 30% to $129 million from 99.1 billion a year ago.

We repurchased 23000 shares during the quarter for 862000 at an average cost of 30 673 per share.

We ended Q3 was 98.5 my of cash and cash equivalents.

Cash flow from operations for the first nine months of 29 pain was $40 million versus 81 point Threemillion for the same period a year ago.

The changes on par result of the strong business environment, we enjoyed in the third quarter compared to last year.

Luckily receivables and inventories going supportive increased levels of business and accounted for most of the change in operating cash flows.

Turning a corner our cash flow from operations was 36.7 million, which slightly exceeded our EBITDA for the corner as a result of an improvement in days sales outstanding in inventory turns.

Our net cash used in investing activities of 20.6 million for the first nine months of the year was primarily the result of equipment purchases and capitalization of our ERP system upgrade that there's some process [noise].

The company used $12.6 million of cash from financing activities for the first nine months of 29 team consisting primarily of the Q1 payment of 8.5 million for our previously declared 2018 special dividend and 4.4 million of stock repurchases.

As of September Thirtyth, 2019 were $23 million remaining for stock repurchases under our existing stock repurchase program.

We'll now turn the call back over to Tim to discuss current market trends.

Thanks, Tom we had another quarter of solid performance across all of our business segments, resulting in strong operating leverage and demonstrating the importance of specialization and customer segmentation.

We're also pleased with our double digit growth in our healthcare finance and manufacturing vertical markets as we continue to deliver solution for our customers in these vertical markets that enhance productivity improve efficiency and strength in security.

Customer success as measured in many ways and enabled by advanced technologies that are tailored to the unique needs of our diverse customers and their environments.

As our customers needs and the industry continue to evolve we will need to accelerate our investments in certain critical areas, which will likely result in our SGN a as a percentage of revenue migrating back closer to historical level.

Well continue to invest in systems and subject matter experts in order to help our customers improve productivity enhanced growth and power innovation across their organizations.

Looking ahead current industry growth expectations are in a low single digits and approximate GDP growth.

Our plants continue to grow twice as fast as the overall market.

We believe that our team in the strategies that we have in place.

Yes, well to gain market share and increased long term shareholder value well now entertain your questions operator.

As a reminder to ask a question you need to press star one when your telephone to withdraw your question.

The pound team, please standby well be compiled acuity roster.

My first question comes from Adam Tindle with Raymond James Your line is now open.

Okay. Thanks, and good afternoon, I just wanted to double click on the operational aspect, obviously very impressive here close to 20% gross profit dollar growth, but opex only growing mid single digits. So Tim if you can maybe just double click on what you're doing operationally and Tom I think you guys alluded to December .

Prepared remarks, but what ratios can we think about on the forward basis, whether its opex as a percent of revenue were operating margin is kind of a more sustainable level.

Well Adam Thanks.

So.

We think about our go forward strategy. So there are a lot of changes in our customer base require additional investments more cloud engineers more security engineers more technical folks in general So we look at our go forward plan, we're making some investments in systems and in personnel and Tom.

I'll, let you cover that little more detail.

So I'm trying to help you quantify what I think is happening here a little bit Adam.

If you look kind of Q3 versus Q3 year on year.

As.

Some of your revenue has gone down I think 55 basis points, you know my expectation as we hit you would those be step functions and investment that you probably need to claw back third to a half of that amount.

You invest in the business and systems.

These volumes continue to increase.

Okay. That's helpful and is there kind of an operating margin target that you're shooting for in 2020 and beyond is there something that you're kind of aspiring to.

[laughter], we're always aspiring to more [laughter], but no. We haven't specific we outline what we think that is why this is gonna be revolving around one our mark what our Rob revenues.

And that because as you saw this quarter you know when the revenue start walking started and higher volumes.

Margins tend to accelerate a little bit disproportionately lot of just the depending on how we perform year over year.

Got it okay and Tim.

I know content the results here Pcs, obviously remained very strong I'm just curious on your view from either vendor partners your customer base on where we are in that cycle I think well known that support from Microsoft expires. In January do you think there's any maybe aspect of very strong Pcs that you're seeing in the business, that's being driven by that and if so.

It sounds like you're still talking about growth into 2020 do you think that's gonna be headwind as we get later in the year. Thanks.

That's a great question and when we spent a lot of time trying to answer and.

I suppose at the end of the day, it's anyone's guess, but if we kinda consolidate all the views. We think the desktop refresh is going to tail off but probably will go through Q1 of 2020.

That so so we're optimistic about that and as you mentioned is not only the at end of life support for Windows seven, but we are seeing a lot of technological advances in hardware and a lot of feature sets that are important to the solutions rollouts. So.

Both of those are really positive drivers that said I I'm sure you're hearing this too.

Across the industry, we're also getting warnings about potential shortages.

In processors from Intel and.

Although we have not experienced anything significant today clearly many of our suppliers are starting to point to that so that's a little bit of a headwind out there that.

You know going to make us feel a little bit cautious on restatements.

Okay makes sense and congrats on the very strong results.

Thank you.

And our next question comes from Anthony Lebiedzinski with Sidoti and company. Your line is now open.

Good afternoon gentlemen.

Thank you for taking the question so.

Other than the issue with Intel is there anything else that you can perhaps 0.2 as to why.

Fourth quarter may not may not be as good as your Q3.

Just wanted to get it.

So as to how you're thinking about the rest of the or.

Well actually thanks so.

When you think about Q3, we did have a large federal government business as we look at.

September being the end of the federal government buying season and so.

You know clearly that federal business, probably won't repeat in Q4 Big question remains well we see around.

Enterprise budget cycles in that traditional a budget flush and I think in the enterprise side, we're seeing a little more cautionary notes out there as well.

So.

Nothing definitive, but when we look at our funnels in our forecast the enterprise at all three segments. The one that probably has the most uncertainty.

The only other thing I'd ask that Anthony if.

If you go back and look at last quarter.

Our inventories and kind of spiked a little and we had talked about the fact that we had some rollouts that would roll into Q3. So we got kind of a bit of a tailwind from that Nick it's clear that to the same quarter last year I think we experienced some some supply chain issues, which kind of depressed revenues a little so year on year.

Got it if we got a little tailwind last year, we had a little bit of headwind.

Got it okay. Thanks for that clarification and.

Talked also about the changes in customer mix for your SMB and public sectors.

Impacting or helping your gross margin can you just maybe give us more detail about that.

Sure so in the.

The public sector space really had a strong growth in the federal arena and that was really a positive force in Q3 also in our.

Small to medium business, our business solutions group.

I didn't really good jobs, we did a good job selling across the solution stack selling a lot in advanced technologies to customers they tend to be higher margin and a.

Little stickier and so.

You know that was a 19% gross margin business. So that was very positive.

Attributing to that and another was the lack of a couple of a large projects that we had prior year in the quarter that didnt repeat so we didn't have as much margin pressure. There. So that ended up being a little bit of a benefit.

Got it Okay, and lastly, as far as your balance sheet.

You are sitting in.

Lot of cash.

At the moment.

Sure.

Quite some time, so as far as your priorities for cash flow usage and.

Updated thoughts some potential acquisitions.

Well I can't really talk about potential acquisitions, Anthony, but but I think you know as we kind of discuss in the past.

Opportunities to grow the business and invest in.

Asset.

That will accelerate our growth through our top priority and.

Absent that I think you'll see our capital deployed kind of in the same way we've done historically.

But I also want to add to it we really are confident in our business plan and our team and our strategy. So we don't feel any undue pressure to go do an acquisition, but will remain open to.

Anything that could round out our solution set or or be accretive to our company in our culture.

Got it.

Thank you very much and best of luck.

Thank you.

Our next question comes from William Gibson with Roth Capital Partners. Your line open.

Thank you.

Backlog or product they shipped it right in the corner I assume that side of your advanced configuration Center.

How about operating now is that still staying as a high level or was that about a one time flush.

Well bill thanks so.

You know, we really do feel that our advanced configuration center offers great value for our customer base. So we had been very busy it does vary.

Bring real value to our solutions rollout volumes continue to rise there and we expect that to continue in the future. So we're seeing really good growth in our advanced configuration business and that we think it's real value add.

Oh, good and then you mentioned double digit growth in three verticals. When you went over him, but I missed <unk> health care financing what was the third.

Thank you.

And at this time I'm showing no further questions I'd like to turn the call back over for any closing remarks, well. Thank you operator I'd like to thank all of our customers vendor partners and shareholders for their continued support and our dedicated coworkers for their efforts.

Also like to thank all of those listening to the call. This afternoon. Your time in interest in connection are appreciated have a great evening.

[noise], ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.