Q2 2020 PC Connection Inc Earnings Call

He is a standby.

Second quarter 2020 connection earnings conference call will begin momentarily. Thank you for your patience and please potatoes, but.

[music].

My name is Michelle and I'll be the coordinator for today.

At this time, all participants are in listen only mode.

Following the prepared remarks I'll be your question answer session.

I am honored this conference call as the property of connection it may not be recorded or rebroadcast without specific information for motion and the company.

On the call today, or Tim Mcgrath, President and Chief Executive Officer, and Tom Baker, Senior Vice President and Chief Financial Officer.

Ill now turn the call over to the company.

Thanks, Operator, I will now read our safe Harbor statement.

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

Various remarks, <unk> 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 as 1995.

Actual results may differ materially from those indicated by those forward looking statements as a result on various important factors, including those discounts and the risk factor section of the company annual report on form 10-K for the year ended December 31st 2019, and updated in the form 10-Q, but it carried ending June 30.

Yes, 2020, each of which are on file with the Securities and Exchange Commission as well as another documents the company filed with the commission from time to time. In addition, any forward looking statements represent management's views as of today it should not be relied upon as representing views as of any subsequent date, while the company may elect to update for.

Looking statements at some point in the future the company's specifically disclaims any obligation to do so even if that's going to change and therefore, you should not rely on these forward looking statements as representing views as of any date subsequent to today.

During 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 Dot com.

Please note that unless otherwise stated all references to second quarter 2020 comparisons are being made against the second quarter of 2019.

Let's call it being broadcast will be available on connection to watch site. The earnings release will be available on the FCC website at Www Dot FCC Dot Gov, and any Investor Relations section of our website at Www Dot connection Dot com.

I'd now like to turn the call over to our house, Tim Mcgrath President and CEO.

Thank you good afternoon, everyone and thank you for joining us today for connection second quarter 2020 conference call.

Let me start by stating the obvious it was a tough quarter.

After a strong first quarter driven in part by urgent demand in March from customers transitioning their people to working from home the pandemics impact on our customer base and demand was significant.

Well, we entered Q2 with good momentum in early April demand decline later in the month and dropped significantly in may to a low point.

It began to recover somewhat in June, but not enough to make up for me.

Fortunately I can say at this point that July improved over June.

Noted in our press release, the second quarter was also impacted by the long planned deployment of our new ERP system.

Oh, the new system was much needed and frankly overdue.

The deployment over the last 80 days or so it was difficult to say the lead but I strongly believe the pain will be worth.

The new system will serve as the foundation for our path forward.

Supporting growth.

Greater collaboration.

Visibility in efficiency across our entire organization.

Helping with solution sales cloud.

Around common catalog and financials. It will also enable better customer service and give us an improved foundation for evaluating and integrating future acquisitions.

Well the implementation, but substantially complete by the end of the second quarter integration teething pains. Unfortunately required significant focus by key employees and management.

As well as extra effort by members of our sales team, which well important to protecting our customers proved to be distracting in certain circumstances.

Customer facing work on the system is essentially complete and some back office work has continued into the current quarter you can be sure I'm very focused on this and I believe that our most significant difficulties on the ERP execution from our now mostly behind us I am confident.

With this system, we're better positioned than ever to continue to assist our customers in adopting the technology they need to drive business continuity strengthened security reimagine, the workplace and transform their businesses to meet the challenges of the future.

I want to give especially shout out to our incredible team, which under unprecedented circumstances, because it a pandemic worked tirelessly to mitigate the impact on customer service as we made the transition.

Very grateful for their hard work and dedication.

Turning to the financials for the second quarter revenue was 550 million a decrease of 25.8%. While gross profit was 89 million a decrease of 23.9% compared to Q2 2019.

We achieved gross margin of 16.2%, which represented growth of 40 basis points compared to Q2 2019.

Overall, we saw strong performance in software subscription and we expect demand to be strong for remote work cloud business continuity and security going forward.

Operating income was 10.6 million a decrease of 67.2% for 1.9% of net sales compared to 32.3 million or 4.4% of net sales in the prior year quarter.

In Q2 2020 diluted earnings per share were 29 cents a decreased by 67.4% from Q2 2019.

We ended Q2 was 165.9 million of cash and cash equivalents, representing an increase of 75.9 million from December 31st.

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

In our business solutions segment Q2, net sales were 191.1 million a decrease of 29.5 per cent compared to 271.1 million a year ago.

Gross profit in the business solutions segment was 37.2 million a decrease of 29.7% from a year ago and gross margin for this segment remained flat at 19.5% in the quarter.

Our business solutions segment was the segment most affected by the Cobot 19 pandemic.

Many business solution customers were forced to shut down into March and April timeframe sharply curtailing their purchases of equipment and other cases certain larger projects were deferred until later in the year margins remained strong at 19.5% in the quarter as more than half of the business solutions.

Revenue was derived from advanced technologies.

In our public sector solution segment Q2, net sales for 112.2 million a decrease of 26.2% compared to 152 million a year ago.

Sales to the federal government were 26.3 million, a decrease of 40.9% compared to the prior year.

Q2, 2019 benefited from the timing of several large federal project Rollouts that did not repeat in Q2 2020.

Sales to fade local government and educational institutions was 85.9 million and a decrease of 20.1% compared to the prior year the decrease or the sled business was largely the result of lower sales to higher Ed institution that would close for most of the quarter.

However, it is notable that we ended the quarter with a backlog double that of the prior year.

Gross profit for the public sector segment was 14.4 million a decrease of 20.6% compared to Q2 2019. However, gross margins grew by 90 basis points to 12.9% as software as a service became a larger component of our product.

Thanks.

And our enterprise solutions segment Q2, net sales were 246.8 million, a 22.4% decrease compared to 318 million a year ago.

Gross profit for the Enterprise segment was 37.3 million a decrease of 18.5% in the quarter.

Gross margin for the enterprise segment increased by 72 basis points to 15.1%.

Enterprise saw a drop in demand for data center planning and related projects demand shifted to more work from home projects and software subscriptions.

We are beginning to see industry, leading customers take this opportunity to invest in their transformational technologies.

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.

Huh.

Thanks, Tim.

Your name was 77.4 million this quarter decreased from 8.4% from 84.7 million here in Dallas.

The decrease in after your name was driven impart by a decrease from park marketing costs and variable compensation due to a lower level of sales and gross profit of cheap compared to the prior year for.

Additionally, we incurred costs associated with the rollout of our new ERP system of 2.8 million and we incurred one way or bad debt expense in the quarter first as a credit of 600000 in the prior year for X gene as a percentage net sales increased by 267 basis points year over year, largely as a result in lower revenue.

A large portion of our cost structure is variable and will scale with the person if business conditions continue to improve we do expect after renasant percentage of revenue to moderate despite from continued investment in our ERP system.

We remain committed to optimizing our cost structure to scale with the demand for our business is necessary in.

In Q2, we incurred $1 million of restructuring costs associated with production of some of our internal resources. These charges are presented separately on our income statement. Our operating income was 10.6 million decreased from 67.2% this quarter from 32.3 million a year ago.

Our effective tax rate was 27.9% up from 27.2% and the same period a year ago.

That haven't come from before was 7.6 million decreased from 67.7% from 23.7 billion a year ago.

Diluted earnings per share was 29 cents decreased from 67% from the prior year period.

Earnings per share adjusted for restructuring and other charges were 32 cents compared to 89 cents last year.

Our trailing 12 month adjusted earnings before income taxes, depreciation and amortization for adjusted EBITDA decreased 5% to 110 million from 115.7 billion a year ago.

We have 12.7 million remaining for stock repurchases I'm or existing stock repurchase program.

Cash flow from operations for the first six months of 2020 was a record 102.4 million versus 3.3 million for the same period a year ago. The change was driven primarily by a reduction in accounts receivable and an increase in accounts payable partially offset by increases in inventory.

Our net cash used in investing activity from 8.2 million and the first half of 2020 was primarily the result of equipment purchases and IP initiative.

The company was 18 point threemillion of cash from financing activities. During the first half of 2020, consisting primarily of the Q1 payment of 8.4 million for our previously declared 20 banking special dividend and 10.2 million of stock repurchases.

Well, it's impossible to predict how long or how severe the economic impact of the cobot 19 pandemic will be.

At the end of June through July starting to experience from rebound in order activity, which we believe will continue.

I will now turn the call back over time to discuss current market trends. Thanks, Tom for the second half of 2020, we expect to see an acceleration of public cloud adoption growth in collaboration tools and demand for digital ecommerce platform and digital health technology.

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

For example, we continue to help our customers define their work from home and remote work strategies.

We're also helping customers stabilize and secure their businesses with infrastructure support and cloud optimization. In addition, our lifecycle services team is assisting customers with managing expenses by helping them maximize their existing I T assets through warranty contract and managed services.

Yes.

As our customers needs grow in change, we will be here to help them enhance growth elevate productivity and in power innovation with technology.

As stated earlier, it's not possible to predict what impact the gold pandemic will have on our business, but as Tom said, we do believe that revenues will continue to be adversely affected in the near term. However, we did see a significant improvement in July. We also believe that disruptions, resulting from the deployment of our new ERP.

He system are largely behind us.

During the pandemic, we invested in our business and strengthening our management team with the addition of several key leaders our financial strength that position in the market will permit us to make further opportunistic investments in our business.

As Weve navigated these challenging times, our highest priorities event to ensure the safety and well be of connections workforce and to support the immediate business needs of our customers.

We've employed rigorous safety protocols at our technology integration and distribution center, which remains staff and fully operational.

Well the reality of a world post covert 19 remains unclear. One thing is certain technology offers the innovation is safety, we need to move forward.

I want to thank our team for their passion and extraordinary efforts through the most difficult quarter in recent history.

We are confident that our financial strength.

Dedicated workforce constant pursuit of innovation and strong customer relationships will drive our growth.

Well now entertain your questions operator.

Ladies and gentlemen to ask a question you will need to press Star then one telephone to withdraw your question press the pound key.

Our first question comes from Anthony Lebiedzinski of Sidoti and company. Your line is open.

Hi, good afternoon, and thank you for taking the questions.

So first I just wanted to start off with as far as the new ERP system implementation you have an estimate as to how much. Your revenue was impacted and also which areas of the business that the ERP system implementation has the most.

Well hi, everybody. Thanks so.

To begin with lot of moving pieces to the quarter, obviously with the pandemic and obviously a rough quarter.

There's no doubt about it oh.

Our ERP implementation was bumpy.

As I said a in the prepared remarks, we think it's the right path forward for US we see a lot of benefits to the new ERP system, but it was really distracting in the quarter. Because there's also the backdrop. The pandemic, we felt like that might be a good time to to make this.

Limitation into completed because we felt that would be the best time to.

Have the least impact on our customer base.

So with that it's really hard to to break out those dollars succinctly, but we think are a good estimate and this only is an estimate we don't know with certainty, but would be sort of look at what the competitive landscape has been doing around declined because of the pandemic and you see that we're oh.

Little south of that and that Delta. We think is the result of our people being distracted focusing on our customers and.

Making sure we've got them squared away in the quarter. So no doubt it hurt us we don't have an exact percentage, but I'd say that delta between the you know the average in the market and where we're at is a good surrogate.

Okay got it okay. That's very helpful and then in terms of the.

As it just the.

Second part of my last question loves this one is the.

Which areas of business I mean would do you think goes across the board or did you see perhaps more of a pick up because of this let's say an enterprise versus the business solution. The let us just wanted to get a little bit more color about the impact.

I think anyway, you slice it our business solutions team our SMB group was the hardest hit they have the large number are we at the largest number of buying customers. There and also the largest number of cuts there customers who were impacted by the pandemic. So that combination was top and certainly mag.

Depuy by our ERP implementation and behind that would be job in particular, our federal business.

Had a very tough quarter, our enterprise is probably the least affected simply because of our marketplace technology and our go to market.

Strategy there so I'd say clearly there's a solutions was the most affected Tom Yes, I think thats <unk> point, there just because of the way the businesses operate.

Enterprise dependent on ERP.

Got it Okay and you also talked about.

The.

Right. So you're seeing in July we sell your in July that they were better than June.

What about versus a year ago, how how would you say those trends were in July.

Yes. So we are we did start to see a recovery in July.

We take a benchmark probably year over year for.

July would be probably still low single digit declines in July Tom How would you think yep yep somewhere in that range.

Okay, No that's very helpful. Okay.

Okay and then.

You talked about a belief that Tim you mentioned about the higher backlog being double for from last year. So could you perhaps quantify that.

Yeah, <unk> and we don't typically disclose our backlog of using <unk> I think that backlog was really a function of two things in the basket. We were talking about there was specifically for flat.

And I I think we're seeing there.

One a little bit a resurgence in some of the higher education institutions, starting to buy so that business is coming back there was a few product shortages that affected part of the government business.

And then three we probably a little bit behind processing, some orders because of the ERP.

But you know to act as a pretty healthy pretty healthy pretty healthy backlog in that business.

Got it okay.

And then last question for me as far as bad debt expense affecting you mentioned, there was 1 million dollar impact.

In the quarter or how should we think about that but the rest of the year.

I honestly believe that.

You know assuming nothing really bad happens in the macro environment between now and then you know that salaries pandemic I think we're pretty well covered and I think we probably shouldn't have to experience those levels of charges going forward.

Got it alright, thank you at best of luck.

Thanks Debbie.

Our next question comes from Adam Tindle, Raymond James Your line is open.

Okay. Thanks, Good afternoon, Tim I, just want to start on some of that demand commentary I.

I think he just said that the month of July just had low single digit decline and that's a pretty significant uptick versus down over 20% for the full June quarter, maybe if you could give us a little bit of color on where you're seeing that uptick or and then secondly, God you sit here you know well look a little bit of time under you in the month.

August have you seen that trend continue to where we might even see year over year growth than in the month of August just some color on the trajectory going that July uptick would be helpful.

Well thanks, Adam So first off you know I'd love to focus on where we're going back to where we then but but as I said Q2 is tough and so for Q3.

As you know we have a seasoned team.

We had some extraordinary employees, who really know the business. We just had to get the system in place to support that and when it comes to the customer facing aspect, we are up there and so.

We now are really looking forward to getting back to business into driving growth that said you know the pandemic is still out there and so we think about Q3, you know maybe overall it and we don't have a great barometer, but maybe negative 10% for the quarter year over year.

Year being much better benchmark that where we were in Q2.

Tom what would yes, yeah, and I think you know.

I mean I look at the numbers every day, we have five business days in August so far.

Specifically at the August.

I think what we're seeing in July appears to be continuing.

So I I.

You know again for five days into it but it doesn't look like to wives an aberration.

Okay and do you think any of that is like an aspect of like backlog that you had entering Q3, you had an ERP issue. Obviously, we understand you know where they're like and fill orders that you're now filling in July and August or is this uptick what you're seeing pure actual end customer demand.

So I I guess extruder and more specific Adam when I was talking about numbers in July and August I was actually talking about net orders.

Net bookings.

So.

Because that's that's our best leading indicator.

Right.

I don't think it was I hang over or a carryover backlog yeah, what is different for each of our segments and again the hardest hit segment would be our business solutions are SMB team and we do need to see a tailwind it a little market recovery there as many of our customers will greatly effect.

Good.

Q3 is a big quarter from public sector. So we're also expecting that we'll see the seasonal picked up there, perhaps again year over year would be a tough compare but like we're certainly gaining momentum that also in our enterprise group is you know that is large project dependent but we have.

Momentum going into Q3 at the enterprise team as well, Okay, and Tim I guess, so it sounds like the ERP missed orders or just kind of lost to the competitive landscape in Q2, and not necessarily cannot be an uptick in tier three.

I guess the bigger question when you kind of look at those customers are you. How do you prevent losing customers two to that competitive landscape are you seeing customer defections or anything in the face of ERP or you just kind of onetime transactional device sales that got lost to the competitive landscape.

And the customers will still be retained.

Well thanks so.

We're not seeing customer defection. That's the good news, we did a lot of things to shore up customers in a lot of that was a took a lot of people in a lot of manual effort in Q2, but im pleased to say, we did not lose any customers. As you know we're not 38 years has got a very loyal customer base and that's a real tribune.

To our sales team that that a whole down those relationships. So for US you know going forward and we do have to make sure that we execute and as I said Q2 was rough but that is behind us and I.

I do not believe we'll see customer defections.

I think I think to be honest yeah.

No just getting orders will simply through the system from to be the Big challenge. So I think if anything we probably just to build a little backlog were built some backlog versus net losses.

Got it understood maybe last one from me Tom I wanted to clarify some that opex comments. So if I remember correctly entering this year and I know a lot is obviously change.

But you had thought that this would be your estimate of as a percent of revenue was going up the country drift up a little bit, but I think if I heard you right in the prepared remarks, you now said that you're expecting it to come down a little bit could you. Maybe just clarify that was that just because that you know about 3 million dollar expense on the ERP comes out in Q3 or is this like core.

Or.

As soon as a percent I'd rather have it is coming down for some reason.

Yes, so Adam.

So when I'm thinking about this something of a SJ as a percentage of revenue.

I think we were 14.1% this quarter on land.

And I think we were up 13% last quarter online I think going forward, what you're going to see I've gotten a lot of its dependent upon the revenues bouncing back some.

I think what we're going to see going forward, it's an SGN AE profile that might be a little bit further north of what it was last year. This because of some of the investments for doing but for instance, if you take our Q1 and you back out the $2.8 million of additional bad debt expense, we had I think you kind of.

Get to like 12, and a half ish percent and that's kind of near term right, where I would expect us to fallen.

Got it Okay. That's helpful. Anything notable on gross margin to think about that as we kind of think about modeling the rest of the year.

Yeah, I think I'm I'm actually very pleasantly surprised with the margins.

Just given the.

You know what happened with revenues.

And the thing I would tell you is our partner programs held up a little bit better than I thought.

I was expecting that.

Take a little bit more of a hit there I'm. So we did a really nice job executing on those on those programs.

Right and mix was out of your favorite because software decline more than anything else it was pretty.

Again, you're right suffered a decline, but remember you're you're also seeing a migration to.

Offers a service netted software as well so that actually does help margins a little bit too.

Got it okay. Thank you very much appreciate it thanks Adam.

There are no further questions like to turn the call back over to Tim Mcgrath for any closing remarks.

Thank you Michelle I like to take all of our customers vendor partners and shareholders for their continued support.

And our dedicated coworkers for their efforts in extraordinary dedication through this time I'd also like to thank those of you listening to our call. This afternoon. Your time in interest in connection are appreciated have a great evening.

Well, ladies and gentlemen. This concludes today's conference call. Thank you for participation you may now disconnect.