Q4 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to stand by and thanks for your patience.
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Good afternoon.
Due to the fourth quarter two dozen in 19 connection earnings conference call.
Yes, Chris and I'll be the coordinator for today.
At this time all participants are in listen only mode. Following the prepared remarks, there will be a question the next recession.
This conference call is the property of connection and May not be recorded or rebroadcast without specific permission from the company.
Well go to their 10, Mcgrath President Chief Executive Officer, Tom Baker, Senior Vice President and Chief Financial Officer.
I'd now turn the call <unk> company.
Thank you I will now read the Safe Harbor Act.
Any statements or reference has made during the conference call that are not statements of historical fact, maybe 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 known as indicated by these forward looking statements as result of various important factors, including those discussed in the risk factor section of the company's annual report on form 10-K. The year ended December 31st 2018.
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.
The company May elect to update forward looking statement at some point in the future. The company specifically disclaims any obligation to do so even if estimates change. Therefore, you should not rely on these forward looking statement as representing views as of any date subsequent to today.
During this call GAAP and non-GAAP financial measures will be discussed a reconciliation between the two is available in today's earnings release and on the company's website at Www Dot connection Dot Com. Please know that unless otherwise stated all references to fourth quarter two.
It was 19 comparisons are being made against the fourth quarter of 2018.
Today's call is being webcast and will be available on connections website <unk> earnings release will be available on the FCC website at www Dot FCC dot Gov 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 host Tim Mcgrath President and CEO. Please proceed sir.
Good afternoon, everyone and thank you for joining us today for connections fourth quarter 2019 conference call.
I'll be sharing a brief update on our business, including our strategic initiative and Tom Baker, Our Chief Financial Officer will join me to provide a review of the company's fourth quarter and full year financial result.
With the start of a new decade in the beginning of our 38 year in business.
This would be a great opportunity to kick off our call where the review the item that a fuel connections outstanding success.
Good actually is three distinct sales subsidiaries deliver a level of service and a deep understanding of our customers environments.
When combined with the expertise of our industry solutions group connections vertical market focused team.
We are able to deliver technology solutions customized to the specific needs of public sector organizations small and medium sized businesses and large enterprises.
They specialization goes beyond a different department name or unique sales rep tidal it's baked into the training the culture and the focus of our teams.
We understand our customers need and can collaborate with our customers to deliver specific solutions based on their needs.
At this level of service would not be possible without the Specialisation I just mentioned.
And it really grows out of our interest in the customers environment, there team and their business. After all connection is a purpose driven organization and our sales and sales support teams have done an exceptional job of living our mission.
We built a great team around our core goals of enhancing growth elevating productivity and empowering innovation for our customers.
In addition to our public sector, there's a solutions in enterprise groups I'd like to try to spotlight on the great work, that's being done by our technology solutions group and our technology integration in distribution Center.
Our T.S.G. team continues to drive the sales at advanced technology solutions, delivering a technical expertise and outstanding follow through our sales teams need to exceed our customers' expectations.
The technology integration a distribution center team continues to enhance our capabilities, while remaining focused on the customer experience.
Just to give you a frame of reference the T.I.D.C. team completed over 400000 custom configurations last year, that's almost twice as many as we're able to do just a few years ago.
Both teams have done a great work and I look forward to see the innovation so continue to bring to the company.
It's my pleasure to announce the strongest year in our company's history on an annual basis, we achieved record gross profit and earnings with diluted earnings per share of $3.10 or 29% higher than 2018.
During our fourth quarter revenue increased to 716.6 million and gross profit increased by 9% compared to Q4 2018.
During the fourth quarter gross profit grew by 8.7% year over year, and we achieved gross margin of 16.2%, which represented growth of 150 basis points.
Operating income increased by 12.5% to 29.6 million or 4.1% of net sales compared to 26.3 million or 3.7% of net sales in the prior year quarter.
In Q4 2019 diluted earnings per share increased by 4% from Q4 2018, excluding restructuring charges and the favorable settlement of a contract dispute in Q4 of 2018 adjusted diluted earnings per share increased 9% from Q4 2018.
We experienced strong growth in both our business solutions and public sector solutions operating segments.
The public sector segment achieved 12% revenue growth in the quarter compared to Q4 2018, followed by the business solutions segment, which experienced growth, 5% offset partially by 6% decrease in our enterprise solutions segment.
Due to our continued growth in selling cloud based and security software for which revenue was recorded on a net basis. We believe the growth in gross profit is a better indicator of our success than revenue.
Gross profit in the fourth quarter increased by 13% in business solutions, 29% in public sector and decreased by 3% in the enterprise group compared to Q4 2018.
We continued to benefit from a shift toward everything as a service hybrid cloud and the PC refresh this led to strong growth in the mobility desktop and software category.
We remain committed to helping our customers efficiently and intelligently buildout solutions that help solve I T.
Now I'd like to provide a more detailed discussion of our performance by segment.
In our business solutions segment Q4, net sales increased by 5% to 262 point threemillion compared to 249.7 billion a year ago.
Gross profit in the business solutions segment increased 12.5% from a year ago and gross margin for this segment increased by 133 basis points to 20.1% in the quarter.
Our business solutions segment margins benefited from an increase in volume and in a change in customer mix.
There's a solutions continue to focus on advanced technologies that have had higher margins and represented a larger percentage of revenue this quarter.
In our public sector solutions segment Q4, net sales increased by 11.8% to 132.5 million compared to 118.4 billion a year ago.
So the federal government increased by 25.4% compared to the prior year as a result of large project wins, while sales to state local government and educational institution increased by 3.8%.
Gross profit for the public sector segment increased by 28.5% in the quarter and gross margin grew by 205 basis points to 15.8% due to the double digit growth in the modern workplace, which includes mobility and desktop solutions.
We also experienced strength in software sales and our enterprise segment Q4, net sales were 321.9 million, a 5.7% decrease compared to 341.4 million a year ago.
Gross profit in the quarter declined by 2.7%.
As you May recall, the enterprise group experienced 21% gross profit growth in Q4 of 2018, resulting from the timing of several large project rollouts that did not repeat in Q4 2019 gross.
Gross margin for the enterprise segment increased by 41 basis points to 13.2%.
Sales of cloud based and 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'll 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.
Jamie increased this quarter to 86.5 million from 79.5 billion a year ago.
The increase in F. G and I was driven impart by an increase from variable compensation due to higher level of sales and gross profit achieve compared to the prior year for.
After DNA as a percentage of net sales increased by 86 basis points year over year.
Our operating income increased 12, and a half the strength. This quarter took 29.6 million from 26.3 million a year ago.
Our Q4 effective tax rate was 26, and a half or sign up from 26.3 person in the same period a year ago.
Net income for the quarter increased 3.1% to 22 million from 21.3 million a year ago.
Diluted earnings per share was 83 cents an increase from 4%.
Excluding the effect of restructuring charges in the favorable contract settlement in Q4 2018 net income in earnings per share grew by 7.9% 8.9% respectively.
Our trailing 12 month adjusted earnings before income taxes, depreciation and amortization or adjusted EBITDA increased 25% to 128.7 million from 102.6 million a year ago.
In Q4, we declared a 32 cents per share special dividend, which was paid in January of this year, returning $8.4 million to shareholders.
In addition, during 2019, we repurchased 134000 shares for $4.5 billion at an average price of $33.36 per share.
Between the special dividends and stock repurchased a total of 12.9 billion of cash was returned to shareholders.
We ended Q4 was 90.1 million of cash and cash equivalents.
Cash flow from operations for the year ended 2019 was 36.6 million first was 86.8 million for their same period a year ago.
During the quarter, our cash flow used in operations was $3.4 million.
Cash flow from operations was affected by the timing of product deliveries in the fourth quarter.
Specifically in the enterprise segment, 46% of quarterly revenue was delivered in December.
Across all segments, we experienced strong software sales near the end of quarter, four which would be receivable is recorded on a gross basis and the revenue is reported net.
Our net cash used in investing activities of $25.7 million for the year was primarily the result of equipment purchases and capitalization of our ERP system upgrade that there's some process.
The company used to 12.6 million of cash from financing activities for the year ended 2019, consisting primarily of the Q1 payment of 8.5 million for our previously declared 20 paying special dividend and 4.5 million of stock repurchases.
As of December 31st 29, King, we had $22.9 million remaining for stock repurchases under our existing stock repurchase program.
Ill now turn the call back over to attempt to discuss current market trends.
Thanks, Tom we had another quarter of solid performance in our business solutions in public sector segments, demonstrating the importance of specialization and customer segmentation.
Super success is measured in many ways and enabled by advanced technologies that are tailored to the unique needs of diverse users and environments.
As the industry continues to evolve well need to accelerate our investments in certain critical areas as our customers needs grow and change will be there to help them enhance their growth elevate their productivity and empower innovation with technology.
We will continue to invest in systems and subject matter experts that enable us to deliver the exceptional quality and service for which we are known.
Looking ahead current industry growth expectation for I.T. are in a low single digits, an approximate the GDP growth. Our plan is continue to grow twice as fast as the overall market.
We believe that our team and the strategies that we haven't place position us well to gain market share and increase long term shareholder value.
Well now entertain your questions operator.
Thank you.
And as a reminder to ask a question.
The star one telephone.
I would draw your question. Please proceed to pound key.
Please stand by one compiled acuity roster.
And our first question comes in a lot of Adam Tindle with Raymond James Your line is now open.
Okay. Thanks, and good afternoon, Tim I, just wanted to start kinda dovetailing into that last comment that you made about growth expectations. Moving forward. You know, we've just passed the expiration of Microsoft support I think at the end of January here and there was some fear that post this we would see some slowing and old.
Overall, I T spending as that Pcs life cycle may slow just curious I'm you know what are you seeing in terms of impact your backlog is there any evidence that we'll see some changing and I T spending growth.
And just talk about your confidence to come out and talk about two times, a low single digit growth expectation given that there really strong year that you're coming off of.
Well that them. Thanks so.
There's a lot there to cover from speaking about the start with this for the macroeconomic backdrop certainly there is more uncertainty than there has been when you look at all of the events that are happening out there are so we're very conscientious of that when you combine that with the.
Certainly the slowing of spending around the a windows 10 upgrades naturally were little concern, but we continue to believe that we can take market share it really in any market condition and that the target of.
Two times.
Gee growth rate or about two times GDP is still a reasonable target for us.
Okay, and you're thinking that based on talking with customers budget expectations. A into 2020 that that budgets are are likely going to be up and we're gonna see some growth the Nike spending in 2020.
Yes, definitely we're confident in is that there's no doubt that at some point the a PC refresh will tail off right. There's a number of opportunities around up everything as a service and hybrid cloud.
Okay, and then maybe one for Tom as we think about shaping up 2020, you know it's yes. The business mix is going to move probably away from PC and sounds like custom solutions are accelerating should we be expecting gross margin to be improving year over year in 2020.
[laughter], Yeah, that's not holding question.
I think typically what you'd see a little bit higher margins on that type of product but.
This year, we have really benefited from the level of some of the.
You know the volumes of point product that we have sold.
And that's a little bit hard to predict going forward. So I think generic we sit back and you say, yeah, which we should see margins drift up little.
You got pretty decent margins on some of the higher Boeing product this year.
Okay fair enough yeah. So maybe some of those volume rebates don't repeat I'm. So maybe we shouldn't get too far ahead of ourselves on gross margin maybe.
Touching on operating margin in really the investments that Tim mentioned that being said accelerating investments is there a way for us to think about <unk> operating margin target for the year or maybe opex expectations, whether in dollars or percent of revenue based on your investment plan for the year.
Well.
Thanks, Tom.
Q4, we saw a little bit higher SGN <unk> as a percentage of revenue them. You did last year got a couple of things going on in there.
Our advertising was up and in some of that doesn't get reimbursement that goes into the gross profit.
That's a little bit of that are the variable cost was up to the gross profit you know commissions were up and then the variable comp was up just on the relative performance for the rest of the you know the employee.
And then also appeared in there there is some infrastructure that will be ongoing. So I you know we have to make some investments in from systems and.
Some other technical infrastructure going forward, so I think.
If you looked at this you're going into next year, you might feel a little bit of a drift up not not percentage.
Okay that makes sense, thanks, and congrats on a strong 2018.
Thanks, Thanks, Adam.
Thank you know last question comes from the line of Anthony Lebiedzinski would say Dougherty and company. Your line is no.
Yes, good afternoon, a gentleman. Thank you for taking my question. So I'm just just wondering as far as your performance of the different the vertical markets that you're in a Tim and perhaps if you could just comment on that then I have another question as well.
[laughter] so.
Interesting a quarter for vertical markets, we did really well in the healthcare vertical we were up double digits and I'm very pleased with that across the board. We also did very well the manufacturing vertical in our retail vertical a year ago in the quarter, we had a very significant a couple.
Very significant large retail roll out so we had a very tough compare there. So health care was up manufacturing was up and then a retail was just slightly down and the financial vertical is slightly down again, all based on the timing of large project role.
Okay.
Got it okay. That's certainly understandable, okay, and then I guess when I look at a different segments that you provided details for the gross margin in the.
Business solutions segment was so certainly I think of the most impressive up over a up to 20.1% kind of [laughter] <unk> I know that was driven some of that was a mix shift to software, but there was so you also called out the desktops, which is a lower margin. So I guess when I've.
How should we think about yeah, the performance of the different segments.
From a gross margin perspective, if you can.
Could provide any color that'd be helpful.
Certainly the I'll start and then I'll turn it over time for a little more.
Specific financial information.
As seen in particular will start with our business solutions segment is that team is executing really well salary across.
The advanced technology it across the solution stack. So as you mentioned, we aren't many more software cloud software security software down, which does push the margin rate up a little there's certainly some of that we continued to see good margin is in good growth in the group purely based on execute.
Question around our solutions capability. So we're pretty confident that we can sustain that just based on the services that we offer.
A little more difficult in enterprise you know the large projects tend to be very competitive and so oh, we certainly saw a lot of that in the quarter and we're also very pleased with the pickup that we've seen in our public sector business driven by a large frolic project Rollouts in our federal group and a actually good.
Margin associated with those.
That's kind of how I think about the margin of our three specific subsidiaries and Tom will give you a little more on the numbers yeah. So I don't mean, I'll add a little bit more I think I can tell ya.
We do benefit you know from as I called the Crazy software County.
But I can tell you and all of our segments you know absent that we're still up a little bit year on year. So I mean, we're executing.
On we'll stop you know not just the financials so <unk>.
And I think we can continue that as our product mix evolves going forward.
Okay got it rises so so even so excluding all the noise associated with the netting of the software your margins would still be up.
HM Okay.
Okay, great, Okay, and lastly from me as far as you know cashflow priorities.
Obviously, I know you guys pay to yet another special dividend.
Kind of.
You are looking forward I mean, what's your appetite also for potential acquisitions as a anything there change there. It's just wanted to get any updated thoughts on that that'd be great.
Well, Thanks, and say nothing specific has changed there as you know we think we have a great team in place a solid business plan and we don't so desperate to do anything by the same token we're always looking for opportunities that could.
You know enhances specific solution capability or a tuck in acquisition so.
Nothing has changed there's nothing to announce by same token <unk>, we remain open to all opportunities.
Okay great.
Thank you very much.
Thanks Anthony.
Thank you. This concludes today's question and answer session I would now like to turn the call back to Tim Mcgrath, President and Chief Executive Officer for any closing remarks.
Thank you Chris 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 all you listening to the call. This afternoon. Your time, an interesting connection are appreciated have a great evening.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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