Q1 2020 Earnings Call

Good afternoon to walk into the first quarter 2020 conduction earnings Conference call. My name is cabin and I'll be your coordinator for today, that's just hardball participant try to listen only mode. Following the prepared remarks, there will be a question answer session. As a reminder, this conference call. This property of connection it may not be.

Okay. So if the commission from a company on the call today, our Tumorgrafts President Chief Executive Officer, Tom Baker, Senior Vice President Chief Financial Officer, I will now turn the call over to the company.

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You may begin or.

Any statements are references made during the conference call that are not statements of historical fact, maybe deemed to be forward looking statement.

During his remarks that management may make about the company's future expectations plans and prospects constitute forward looking statement for purposes of the safe Harbor provisions under the private Securities Litigation Reform Act of 1995.

Actual results may differ materially from there was indicated by these forward looking statement.

As a result, I'm very important factors, including those discussed in the risk factor section of the company's annual report on form 10-K for the year ended December 31st 2019, which is on filed with Securities and Exchange Commission as well as another document that the company files with the commission from time to time in addition, any.

Weren't looking statements represent management's view as of today should not be relied upon as representing views as of any such claims paid by the company me I'd like to update forward looking statements.

In the future the company's specifically disclaims any obligation to do so.

No that's going to change and therefore, you should not rely on these forward looking statement as representing views is it any date subsequent to today.

In this call GAAP and non-GAAP financial measures will be just got a reconciliation between the two is available in todays earnings release and on the company's website at Www Dot connection Dotcom. Please note that unless otherwise stated all references to first quarter 2020 comparisons are being made against the Hearst border <unk> Jude.

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Today's call is being webcast will be available in connection with my side. The earnings release will be available on the FTC website at www Dot and he see dotcom and any Investor Relations section of our website at Www Dot connection Dotcom I would now like to turn the call over to our house.

Tim Mcgrath President and CEO. Please proceed sir.

Good afternoon, everyone and thank you for joining us today for Conexus Q1, 2020 conference call.

I'll be sharing a brief update on our business, including our strategic initiative and talk Baker, Our Chief Financial Officer will join me to provide a review of the company first quarter financial results.

This quarter's earnings call finds that's an unprecedented times.

We're all facing one of the grade health threat.

World with experience in recent history.

That's it a central business in the fight against covert 19, we are currently operating with the majority of our employees working remotely.

Transition, we made rapidly it's a day successfully.

As you can imagine the needs of our customers have evolved significantly over the past two months.

During this time, the depth and frequency of our communication with our employees customers and partners has intensified.

This pandemic is top of mind for all of US the challenges that we are facing together continue to unfold naturally we cannot predict the precise impact to our bid.

Our confident that are committed and resilient teams employees combined with our scalable business model will enable us to adapt and respond appropriately to the future economic conditions.

We will do everything in our power to serve our customers and the communities, where we live in work.

I'm pleased to announce that we had the best Q1 results in our history and I thought this would be a good opportunity to start our call with a review of our strength that a few connection success.

It actually has agreed to stick sales subsidiaries deliver a level of service in a deep understanding of our customers environment when combined with the expertise of our industry solutions group connections vertical market focus team, we're able to deliver technology solution customized to specific needs of our public sector organizations.

Small and medium sized businesses and large enterprises.

Specialization goes beyond a different department name or unique sales rep title, it's baked into the training the culture and the focus of our teams.

We understand our customers need it can collaborate with our customers to deliver specific solutions based on their needs.

This level of service would not be possible without the Specialisation I, just mentioned and it really grows out of our understanding of the customers environment, there team and their business.

For all could actually is a purpose driven organization and our sales and sales support teams have done an exceptional job of living our mission.

We built the committed team around our mission of enhancing growth elevating productivity and empowering innovation for our customers.

I'd also like to highlight the great work is being done in our technology solutions group for T.S.G., either technology integration and distribution center. Our T.S.G. team continues to drive the sales at advanced technology solution is delivering the technical expertise and outstanding follow through our sales team.

We need to exceed our customers' expectations.

Technology integration a distribution center team continues to enhance our capabilities, while remaining focused on the customer experience. We achieved records in our first quarter revenue gross profit gross margin net income and earnings per share.

During the first quarter revenue increased by 12.5% to 711.9 million in gross profit increased by 13.9% compared to Q1 of 2019.

We achieved gross margins of 50.9%, which represented growth of 19 basis points.

Operating income increased by 18.6% to 20.7 million or 2.9% of net sales compared to 17.4 million were 2.8% of net sales in the prior year quarter.

In Q1 2020 diluted earnings per share increased by 18% from Q1 2019, we experienced strong growth in both our enterprise solutions and business solutions operating segments.

The enterprise solutions segment achieved 21% revenue growth in the quarter compared to Q1 2019, followed by the business solutions segment, which experienced growth of 10%.

The growth in these segments was partially offset by a 5% decrease in our public sector segment.

We believe that growth in gross profit as a better indicator of our success, serving our customers than using revenue alone as a growth metric.

Gross profit in the quarter increased by 17% in business solutions 12 person in enterprise solutions and 10% in public sector solution compared to Q1 2019 in March we benefited from the work from home initiative and a higher demand from healthcare customers due to the.

Global pandemic.

Increase in both revenue and gross profit was enhanced by strong growth in all of our vertical markets. We also saw strong growth in mobility accessories and networking categories.

We remain committed to helping our customers efficiently and intelligently buildout solutions that help our customers. So I see.

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

In our business solutions segment Q1, net sales increased by 10.2% to 278.8 million compared to 252.9 billion a year ago.

Gross profit in the business solutions segment increased 16.7% from a year ago and gross margin for this segment increased by 105 basis points to 18.8% in the quarter.

Our biggest solutions segment margin benefited from an increase in volume and a change in customer mix.

They just 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 Q1, net sales decreased by 4.5% to 99.6 million compared to 104 million in a year ago.

Sales to the federal government decreased by 42.2% compared to the prior year.

If you want to 2019 benefited from the timing of several large project rollouts that did not repeat in Q1 2020.

Sales to state local governments in educational institutions increased by 15.6%.

This increase was driven by mobility and Netcomm product.

Gross profit for the public sector segment increased by 9.7% in the quarter and gross margin grew by 187 basis points to 14, a half percent due to changes in customer mix, along with increased sales of cloud based software.

Our enterprise solutions segment Q1, net sales were 333.4 million.

Hey, 21% increase compared to 275.6 million a year ago.

Gross profit for the enterprise segment increased by 12.1% in the quarter gross margin for the enterprise segment decreased by 110 basis points to 13.9%.

The decrease in gross margin was related to the changes in customer hardware and product mix.

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.

After you any increased this quarter to 92.5 million from 81.2 million a year ago.

The increase in F. G and I was driven impart by an increase in head count and variable compensation due to a higher level of sales and gross profit of cheap compared to the prior year quarter.

Additionally, we recognize bad debt expense of 2.8 million, an increase of 2.6 million compared to the prior year.

We anticipate watching challengers from certain customers, who have been significantly impacted by the Kogan 19 pandemic.

After DNA as a percentage of net sales increased by 15 basis points year over year. The increase in bad debt expense had the effect of increase from Ftn I as a percentage of net sales by 37 basis point.

Looking forward a large portion of our cost structure is variable and will scale with the business, we're committed to optimizing our cost structure to scale with the demands of our business that's necessary.

Our operating income increased 18.6% before to 20.7 million from 17.4 million a year ago.

Our Q1 effective tax rate was 28.2% up from 27.7 per site in the same period a year ago.

Net income for the quarter increased 17%.

14.9 million from 12.7 million a year ago.

Diluted earnings per share was 56 cents, an increase of 18% from the prior year period.

Our trailing 12 month adjusted earnings before income taxes, depreciation and amortization or adjusted EBITDA increased 21% to 130.9 billion from 108.1 million a year ago.

During Q1, we repurchased 247000 shares for 10.2 million at an average price of 40 134 per share.

As of March 31st 2020, we had 12.7 million remaining for stock repurchases under our existing stock repurchase program.

Cash flow from operations for the first quarter was 44.6 million versus 18.1 billion for the same period a year ago.

The change was driven primarily by a reduction in accounts receivable.

Our net cash used in investing activities, a 4.6 million in the first quarter was primarily the result of equipment purchases and IP initiatives.

The company was 18.7 million of cash from financing activities during the quarter, consisting primarily of the payment.

8.1 million for previously declared 2019, a special dividend and 10.2 million of stock repurchases.

Our balance sheet continues to be strong. We ended Q1 with 111.3 billion of cash and cash equivalents, representing an increase of 21.3 million from December 31st.

The cobot 19, well past that Mike has greater financial uncertainty and a number of customers across affected industry have requested various confessions.

We have worked with our partners to mitigate the impact east concessions would have on the company.

We expect to be situations will be ongoing as we navigate through this crisis in the near term, we believe revenue will be adversely affecting.

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

Thanks, Tom.

As discussed we continue to see solid performance across our organization in particular, our enterprise solution and business solutions segments, demonstrating the importance of specialization and customer segmentation.

As our customers are adjusting to the challenge is brought about by the Cobot 19 pandemic, we're focused on helping them through this difficult time with technological solutions and services.

For example, many customers need our support in their work from home initiatives. They also need related services, including asset management asset recovery and deployment. In addition, many companies need our help redeploying existing assets and augmenting their I T staff.

Finally, the strength of our E Commerce, and you enables our customers to seamlessly transact with us remotely.

Our customers' needs grow and change will be here to help them enhance the growth.

Elevate their productivity and empower their innovation with technology, we will continue to invest in systems in subject matter experts that enable us to deliver the exceptional quality and service for which we are known.

Stated earlier, it's not possible to predict what impact the global pandemic will have on our business.

But as Tom said, we do believe that revenues will be adversely affected in the near term.

We have to be flexible and resilient to navigate what is ahead of us. We believe we're experiencing a fundamental shift and the way many businesses will operate in the future.

We are confident whatever the future bring technology will be critical to this business transformation. We believe that we can continue to win market share in this rapidly changing I'd see environment.

In any market condition technology is an enabler of customer growth.

We will continue to do everything in our power to help our customers move forward on the path to recovery.

We believe that our team had a strategy that we haven't played position us well to gain market share and increased long term shareholder value.

We will now entertain your questions operator.

Ladies and gentlemen, you have a question or comment at this time. Please press star than the one key on your Touchtone telephone. If your question has been answered you wish them, we're still from the Q. Please press the pound G.

Our first question comes from Adam Tindle with Raymond James.

We thought was good afternoon.

I just wanted to touch on some of the rather be commentary. Obviously, you had very strong results in the March quarter, but the.

Both you and Tom mentioned expecting to be adversely affect people moving forward, which is understandable could you maybe just give us an upbeat view of what you saw in maybe late March and what you're now it closes.

Adversely affected impact yet how large that those declines Dan and are they getting better or worse.

So Adam thanks.

Yeah, I think he did commentary that you written about it is really on target meeting that.

We saw a real growth in March in anything that enable dot work from home.

So those types of products and services and we saw real growth in the health care Arena.

As we work through this this pandemic so that's probably not a surprise to you. So clearly march was up for us.

Moving forward, there's a that uncertainty that we referenced in it truly is that really don't know.

Exactly where this will then we are expecting like everyone else a U shaped recovery, we do think that.

There'll be opportunities for us our help for us to help our customers navigate through this but in terms of specific growth numbers. We don't really have anything that we can share for the quarter yet just because.

There is all that uncertainty it really depends on when we recovered and how quickly recover so I don't I don't have a specific a Q2 estimate we will say that April was lighter than March the start of April.

Okay. That's helpful and I think that's a little bit unusual because your shoot to coincides with the big vendor fiscal year and your Q.

Sequentially.

So as we think about the models I'm, assuming you know as of now based on what you're seeing in April being down sequentially. If things don't get any better that's kind of how we should potentially think about a june quarter revenue.

Yeah I.

[laughter] pretty early to tell but everything you said I think it's true.

Okay. That's fair and then on you know obviously work from home was very strong in in the March quarter have you seen like any evidence that the demand is kind of exhausting itself could you give the surge and now we're on the back end of it and secondly, you know I know there was a lot supply chain constraints inventory issues. There maybe just talk about lead times.

That you're seeing in work from home devices.

So.

Lead times are extended there's no doubt about that there has been or some new found continents and the supply chains that are you know supply will catch up to demand in late April early may but anyway, you slice it lead times have been extended their out.

Couple of weeks longer than normal and there are some specific categories. For example, chromebooks, where the demand is greatly outstripping supply. So there are still some spots, where where were little concerned about supply chain, but overall, we think it is going to get better in the quarter.

Especially as the quarter moves along.

Okay, and maybe one last one for me her you know the bad debt expense and commentary around that.

Recognize that you have a very healthy balance sheet capacity in that cash right now, but I just want you to expand on those comments a little bit talk about how you're looking at all or particularly on the SMB customer base. Do you think that you can be to reserve or just any sort of ballpark in helping us quantify how how large that could be acknowledging that a lot of uncertain.

But just walk us through how you're thinking about it.

Yeah. So a lot of this is based upon you know frankly direct discussions we've had some for our customers.

No. We do have customers from saw their revenues go to zero and they would tell US Hey, you know you're working on it we're going to pay it but obviously, there's a there's no doubt around the ability to pay some customers. So this gets back to really how long does this go and and what's the liquidity profile.

Many of these companies if we think things are going to open back up tomorrow.

You know that's nothing if it does schools onto the summer you're going to have pretty different.

Profile.

In terms of what we did I think you're pretty prudent we did a detailed analysis customer by customer of what we thought the exposures were and that's how we arrived in our numbers are too it was a it's a disciplined.

You know not precise but it's a richard process, we went through to get there and.

You know we did what we think it's appropriate and we've had no.

Reviews on it and that's kind of <unk>.

Okay. So the 2.8 million is kind of it.

<unk> Maxx impact that you're expecting are you thinking that it's essentially worse from there.

I think it's okay, but it's like everything else you know how long does this go on right 'cause it's gonna be much different if it goes on you know one month versus nine months.

And and that you know, we're making estimates for this just like every every other part of the business.

That makes sense I guess.

I said last when this will be less one, but just building off of that how does that change the competitive landscape. How are your suppliers and distributors responding to this maybe just a little bit more on you know this is a major potential structural change to the industry. So does that speak to what you're seeing there.

Oh, Okay, how would pay to nominate said in my prepared remarks.

No we haven't had customers come to us and say Hey can you work with us Andrew upfront.

In turn you know we have gone too far apartments, and said you know we can't do the following around you guys gonna pitching in health and that has been.

Quite a quite an effective process. So I think I used the term neutralized and I think you know that's kind of a we're right in terms of the competitiveness.

I'll give you my Bachman tempting.

Check in here.

I suspect that relative to some of the smaller competitors want to a better positioned to weather the storm and I think you know as we go through these things it should create opportunity for us.

Oh, Tim you know I totally agree is as you know or in a market like this there always is opportunity and we think that in particularly with our balance sheet well positioned well so.

Have partnered closely with our suppliers and it really is a partnership it in every sense of the word and they have a really stepped up and help oh.

With the extended terms and a cash discounts so that's been a big advantage.

Okay very helpful color. Thank you very much. Thank you. Thanks.

Our next question comes from Anthony Lebiedzinski with somebody and company.

Good afternoon. Thank you for taking the questions. So I was just just wondering if you could perhaps parse out the trends that you saw before and after the Cobra 19 outbreak I know you mentioned that the March was strong, but if you could just paid maybe just touch on.

How January February was so just high level kind of overview and then how March was the that'd be great.

Yeah, I think the Anthony you know winter, we had a pretty nice January.

Stopping them from the ended the year.

March was pretty light.

February was pretty light.

Then as people start migrating with these new initiatives work from home, we had a very strong March.

Got it okay. That's very helpful. So.

Most of the uncertainty related to cope with 19 I.

I guess, which areas of the business do you feel that there was most uncertainty whether it's if you want give me some color or whether it's by vertical markets will by segment or whatever.

Phil is most appropriate but I'm trying to just in terms of like where do you see the most concern and were.

Where are some potential opportunities trouble thanks entity.

We see really a lot of concern in a small very small business arena.

Clearly, there's a percentage of small businesses that are that are having a significant challenge.

When you get above a certain size <unk> acid appears to be much better. So we were in the medium to large in enterprise I think there's a lot more strength. There Oh. We also you know vertically speaking of course health care is very strong.

Many trends driving that Tele medicine for example, or the the de regulatory environment there.

Everything sort of opening up in health care has been very strong for US education of course is strong we think education will come on as the care that kicks in the stimulus our continues to drive growth, we think to be additional opportunity in education. So that's an area.

Strength.

And I think overall you know as customers work through this transformation, they're going to look at different business very differently that may mean, a different opportunities for example, it may mean.

For them to really reevaluate the way they consume and use technology and there's an opportunity for us and all of that.

Got it.

Helpful and you mentioned that you had an increase in your head count of just wondering if you could perhaps expand on on that.

Yes, so going into the quarter you know we have a.

No strong services business and a strong.

Demands in our T.I.D.C. and then we have been investing in some of our tech technology, a technological selling initiatives. So that's kind of where most of the headcount income came from and there was a little bit is enough sales net sales head count in SMB, Detroit, [laughter] and a lot lot of specialization added in the quarter.

And as Tom mentioned in our T.I.D.C. demand has surge.

I could imagine if you're a company that was forced to do a lay off or furlough, perhaps you're interested in re purposing technology, perhaps you're interested in outfitting technology and all of that requires lifecycle services. So that business for us we're seeing a spike in demand there.

Got it and lastly, as far as you just capital allocation you did repurchase some shares or how should we think about additional buybacks and what is your current appetite for.

Potential acquisitions, or maybe not near term, but you know something else weather like you said the this could present some opportunities or versus your competitors. Just just wondering if you could comment on that thank you. Yeah. So I'll talk about the buyback will maybe I'll, let Tim just.

On the acquisition front.

I think in terms of the buyback you know will continue to be optimistic I think but.

Well I suspect will there be a little more tempered until we see how we think all this plays out.

So I you know will be probably trying to do something we're gonna be cautious.

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Okay.

That overall, our capital allocation <unk> and the way that we view acquisitions or you know will be very measured we think clearly there'll be opportunities. We're open to opportunities in a consolidating market or the opportunities would really have to provide a solution a real benefit.

Or perhaps a tuck in opportunity that we don't currently have but could use.

<unk> open to that but given this environment, we are going to be very cautious.

Understood. Okay. Thank you very much best of luck. Thank you. Thanks Anthony.

And I'm not showing any further questions at this time I turn the call back over to Tim.

Thanks, Kevin So I'd like to thank all of our customers vendor partners and shareholders for their continued support and our dedicated coworkers for their efforts I'd also like to thank those of you listening to our total this afternoon. Your time an interesting connection are appreciated have a great evening.

Ladies and gentlemen. This concludes today's presentation. You may now disconnect have a wonderful day.