Q3 2020 PC Connection Inc Earnings Call
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Ladies and gentlemen, this conference is scheduled to begin shortly please continue to stand by I think you pay patients.
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Good afternoon, and welcome to the third quarter 2020 connections earnings conference call.
My name is still well and I'll be the coordinator for today.
I'm all participants I know listen only mode. Following their prepared remarks, there will be a question and answer session.
My Dad. 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, I, Tim Mcgrath, President and Chief Executive Officer, and Tom Baker, Senior Vice President and Chief Financial Officer, I will now turn the call over to the company.
Thanks, I will now read our safe Harbor statement any statements or references made during the conference call that are not statements of historical fact, maybe deemed to be forward looking statements. Various remarks that the management may make about the company's future expectations plans and prospects constitute forward looking statements for purposes of the.
Safe Harbor provision under the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors, including those discussed in the risk factor section of the Companys annual report on form 10-K for the year ended December 31st 2019, as I stated in the form 10-Q for the period ending September 30.
Yes, 2020, Egypt.
Each of which are 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 of any subsequent date, while the company may elect to update forward looking statements at some point in the future. The company specifically disclaims any obligation to do so even if estimates change and therefore, you should not rely on these four.
Looking statements as representing views as of any date subsequent to today.
During this call GAAP and non-GAAP financial measures will be discussed.
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 third quarter 2020 comparisons are being made against the third quarter 2019.
Today's call is being webcast will be available on connections website. The earnings release will be available on the FCC website at www Dot DC Dot Gov and in the Investor Relations section of our website at Www Dot connections Dot com I would like to now turn the call over to our host Tim Mcgrath President.
In CEO Tim.
Thank you Samantha good afternoon, everyone and thank you for joining us today for connections third quarter 2020 conference call as you've seen from our press release, our third quarter improved substantially over the second quarter well.
Well clearly not back to pre corporate levels business activity is increasing.
I've been picked up in late June as I mentioned on our second quarter call. It continued through July and August as our teams stepped up to help customers further define their work from home and remote work strategies.
Through September and October we saw a continuation of this improvement with an acceleration of our public cloud adoption growing demand for digital ecommerce platforms digital health technology software subscriptions managed services and security.
The increased activity, which has continued through this fall helped us deliver third quarter revenue of 652.8 million and gross profit of 107.8 million.
These results were down, 10.5% and 9.3% respectively compared to a record Q3 in 2019.
Gross margin of 60.5% were up 22 basis points compared to Q3 of 2019.
Operating income was 21.1 million, a decrease of 35.4% or 3.2% of net sales compared to 32.6 million or 4.5% of net sales in the prior year quarter. In Q3 2020 diluted earnings per share were 64.
Four cents a decrease of 28.3% from Q3 2019.
We ended Q3 with 108 million of cash and cash equivalents, representing an increase of 18 million from December 30, Onest 2019.
Let me provide a more detailed discussion of our performance by segment I want to update you on our enterprise resource planning or ERP implementation, which began in the second quarter as discussed on our call in August.
I said the implementation was essentially complete in Q2 and it was but it's been more costly than anticipated in Q3. Some adjustments in process improvements are continuing in Q4, but at lower levels than in Q3.
To remind you the new system will serve as the foundation for our path forward supporting growth greater collaboration visibility and efficiency across the entire organization, helping with solution sales cloud CRM common catalog and financially it will also enable better customers.
Service and give us an improved foundation for evaluating and integrating future acquisitions, but as I said last quarter that transition has not been without pain. During Q3, we determined that due to switch over processing errors. The company recorded a certain out of period adjustments related primarily to the business solutions segment.
Second quarter net sales gross profit and net income were understated by 945000 4.2 million and 3 million respectively.
Accordingly, these adjustments are reflected in our Q3 results.
In consultation with our professional advisors, we determined that these out of period adjustments were not material to our prior and current financial statements ERP implementations are a bear as anyone who lived through that will tell you, but I'm optimistic that we're at the point, where the significant long term benefits of having done it will be.
A clear over the year ahead.
Now let me go through our performance by segment and our business solutions segment Q3, net sales were 231 million a decrease of 50.6% compared to 273.8 million a year ago gross profit in the business solutions segment was 46.6 million a deep.
Crease of 10.7% from a year ago and gross margin for the segment increased by 112 basis points to 20.2% in the quarter compared to 90% in the prior year. The increase is partially due to an increase in sales in cloud based security software, which are recognized on it.
Net basis and the impact of the out of period adjustment, Jeff discussed we're experiencing improvement in our business solutions segment. However, this continues to be the segment most affected by the cold with 19 pandemic as many of our customers have not yet returned to previous levels of business activity.
In our public sector solutions segment, two three net sales were 162 million a decrease of 8.7% compared to 177.4 million a year ago sales to state and local government and educational institutions was 130.5 million an increase of 9.9 per se.
When compared to the prior year the increase in the sled business was largely the result of increased sales to higher Ed institutions that were purchasing devices for remote learning after experiencing record growth of 88% in 2019 sales to the federal government were 31.5 million, 46.3% lower.
More than the prior year Q.
Q3 of 2019 benefited from the timing of several large federal project Rollouts that did not repeat in Q3 2020 gross profit for the public sector segment was $22.8 million a decrease of 7.4% compared to Q3 19. However, gross margin grew by 20 basis.
This points to 14.1% as software as a service became a larger component of our product mix.
In our enterprise solutions segment Q3, net sales were 259.8 million, a 6.7% decrease compared to 278.3 million a year ago gross profit for the enterprise segment was 38.4 million a decrease of 8.7% in the quarter gross.
Margins for the enterprise segment decreased by 33 basis points to 14.8%.
The enterprise segment continued to see strong demand for endpoint devices and for software and continued support of a remote workforce have.
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.
DNA was 86.8 million this quarter, an increase of 26% from 86.2 million a year ago. The.
The increase in ASP DNA was driven primarily due to an increase of $2.7 million in professional fees associated with the rollout of our new ERP.
Offset by a decrease in advertising spending and variable compensation due to the lower level of sales and gross profit achieved compared to the prior year quarter.
F. DNA as a percentage of net sales increased by 147 basis points year over year, largely as a result of lower revenue. However sequentially X gene as a percentage of revenue declined by 79 basis points.
A large portion of our cost structure is variable and we'll start with the business.
Business conditions continue to improve we do expect to ask Jamie It's a percentage of revenue to moderate. Despite some continued investment in our ERP system, we remain committed to optimizing our cost structure to scale with the demands of our business as necessary.
Our operating income was 21.1 million a decrease of 35.4% this quarter from 32.6 million a year ago.
Our effective tax rate was 19.6% down from 27.4% in the same period a year ago.
Included in the current quarter's tax expense is a one time discrete tax credit of 1.7 million related to recognize from R&D tax credit for the first time net income for the quarter was 16.9 million a decrease of 28.7% from $23.7 million a year ago.
Diluted earnings per share was 64 cents a decrease from 28% from the prior year period.
Our trailing 12 month adjusted earnings before income taxes, depreciation and amortization or adjusted EBITDA decreased 23% to $99.3 million from $129 million a year ago.
We have 12.7 million remaining for stock repurchases under our existing stock repurchase program.
Cash flow from operations for the first nine months of 2014 was $46.4 million versus $40 million for the same period a year ago.
The change was driven primarily by an increase in accounts payable offset by an increase in accounts receivable and inventories are.
Our net cash used in investing activities of 9.6 million in the first nine months of 2020 was primarily the result of equipment purchases and IP initiatives. The company used 18.8 million of cash from financing activities. During the first nine months of 2020, consisting primarily of the Q1 payment of 8.4.
1 million for our previously declared 2019 special dividend and 10.2 million of stock repurchases.
I will now turn the call back over to Tim to discuss current market trends.
Thanks, Tom as I said earlier I am optimistic about continued improvement in our business I am proud of how our team has helped our customers continue to adjust to the challenges brought about by the COVID-19 pandemic.
We remain confident that we are very well positioned to meet their needs going forward Rick.
We continue to work closely with our customers as their technology needs evolve during the pandemic education continues to be a strong market as we support institution is managing a hybrid environment of classroom and online learning.
In healthcare, we are working with our customers to optimize their infrastructure. Following the first and second waves. These efforts support our customer to ongoing investments in telemedicine virtual care and workflow solutions for home based knowledge workers in fact, our healthcare revenue this quarter matched.
Last year's levels, we saw strong demand for software as a service and we expect continued growth in this area for workplace transformation cloud security business resiliency solutions through our technology solutions group TSG TSG delivers comprehensive technology solutions to our customers.
Through a combination of advanced consulting and industry, leading brands among other things.
Our industry expertise and industry specific solutions have become strong differentiators in our core vertical markets healthcare retail and manufacturing our largest vertical markets showed continued sequential growth. We also saw a double digit year over year growth in the retail market.
Moving forward and for the balance of 2020, as our customers needs grow and change we will be here to help them enhance growth elevate productivity and in power innovation with technology.
I want to thank our team for their continued passion and extraordinary efforts through this unprecedented time and I want to say to you our shareholders that we are confident that our financial strength.
Dedicated workforce relentless pursuit of innovation and strong customer relationships will propel us forward for many years to come we'll now entertain your questions operator.
Thank you to ask a question you will need to press star one on your telephone to lift your question press the pound key.
Please stand by.
Kennedy roster.
First question comes from Adam Tindle with Raymond James Your line is now open.
Okay. Thanks, Good afternoon, Tim I, just wanted to start on the notion of continuous improvement.
And if it was possible to put a finer point on what you're seeing from a growth perspective in the month of October and November are you to a point now where your your total company seem positive year over year growth.
And also maybe secondly, how how do you expect this to trend in the month of December based on the pipeline. You are seeing just curious if there's you know customer budget left for lunch or has that been funds exhausted. So just fine.
Finer point on month of October and November and early indications on some things.
Well, thanks and appreciate the question. So if we think about Q4, obviously there are a lot of macroeconomic factors not the least of which is the vaccine and a pandemic. What we're really seeing is as I mentioned, we saw continuous improvement throughout the quarter in Q4, though.
I think similar to what our competitors have been modeling we're still.
He about.
Being slightly down year over year for the balance for Q4 I think.
You know sort of a square root as you pointed out it might be a good graphical representation of what we see so we are.
Continually improving but we want to be very cautious about that outlook as there still are a lot of unknown.
Regarding a budget flush there.
There are.
Some large projects rolling out in the quarter, we do see some strong companies investing by the same token. We also see other companies that are holding back because of their challenges and so we really do not see the traditional budget flush happening.
Some of the dad.
Okay and in Q4 last year, we saw a real.
A real.
There was there was a lot of software purchasing in the last two weeks for the quarter and I think jury's still out on whether that happens again.
Yeah. That's that's understandable that's helpful. Though thank you.
I also wanted to ask Tim you.
Talk about obviously notebook is your biggest category and just kind of a two parter on both supply and demand.
I guess first on supply you know just talk to us about how constrained supply is right. Now are you missing opportunities in that category and then secondly on demand obviously the stock market today things work from home is going to moderate and this is a category that typically is associated with that but curious what you're seeing in terms of the key.
He'd answer demand for notebooks as it is the beginning to soften yet.
So we haven't seen begin to soften yet.
So as you know.
Notebooks or been incredibly resilient.
Right now we're seeing in the education space very high demand for Chromebooks and as you know supply there's been constrained we're see spotty could strength really across our supplier base I would.
Several of the models being constrained that said Oh.
Overall, we don't see a big pullback in demand happening, although logically it could a moderate sometime soon just based on what's happening in the economic environment.
Understood maybe just one last clarification on Tom on cash flow and it's been healthy year to date, but it use this quarter and a or was it was an issue in the quarter I'm guessing that some of that's probably related to software sales, but maybe just an opportunity for you to talk about the health the risk of the receivables portfolio.
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So.
So if you go back and two quarters and we assume that's normal there are three things that are really affecting.
That receivable balance.
Number one is we have created some some extended terms to customers as we go through the current economic environment.
Number two the software sales and if I look at the difference between computing ideas. So based on billings versus based on revenue.
That differential has nearly doubled in two quarters, so you've seen a real lift.
The real impact of software sales and then the third.
Second we spend a little extra money on our ERP system.
One of the things we do.
We are reasonably highly customized and how we deliver our invoices to our customers and what format, we deliver them and.
And.
One point in the quarter getting invoices to our customers in a format that they expect was that really muscling through and there were some delays in each one of those three items account for about a third of the growth in that balance.
Very helpful. Thank you guys.
Thank you.
Thank you. Our next question comes from Anthony Lebiedzinski with Sidoti and company. Your line is now open.
Thank you and good afternoon, and thanks for taking the questions.
So first just just to looking at the quarter you highlighted.
Retail vertical market strength, you also talked about.
TSG as well so first I guess, what's driving specifically some of the retail strength and can you give us a sense also is what percent of your sales of Europe or maybe your gross profit dollars is coming from the Tech solutions group.
Well actually thanks to the good to hear from you so yes.
Yeah, we're very pleased with our retail market and that segment's growth. We think there are a couple of large drivers for that.
One of them is our industry solutions group, that's done a lot of work in helping our sales force to liver specific really relevant expertise around retail solutions. The other ships those large retail project rollout. So that really is a combination of what's driving that growth we've not.
Specifically broken out.
The retail or the or the I.S.G., the virtual markets group or.
For the TFT password for the GFC so.
We don't have that at this time.
Got it okay. That's fine so you know as far as the ERP system. I mean, do you think that the by the end of Q4, you guys will be behind some of the issues that you called out.
Yeah, Anthony you called out specifically professional fees in our in our prepared remarks, there and you know there's probably two three $400000 of other costs that were incurred.
We so let's call it 3 million 3 million total.
Our expectation is we're going to cut that by at least a third this quarter and then I think rolling into Q2, it should come down.
I mean Q1, it's going to come down even more than that so we're getting I think were.
We're seeing the light at the end of the tunnel here.
Got it okay perfect. Okay, and then so so.
You pointed out I mean, there has been some positive news about a vaccine today so.
So how should we think about.
The impact on your business that you foresee given this lets say happens next year.
What are your broadly thinking about the the impact.
On the on the business.
Yes, so entity again, we've seen it kind of what the competitive landscape has model for those who have forecasted it and I think we're in that range. We're if you think about our commercial business our enterprise SMB business.
Our growth.
Well it was certainly in the range of the competitive landscape. So when we think about Q4.
We're thinking about that same range, we're really taking that.
There's too many uncertainties to really dramatically pull that forecast up and so I think we're in a continued forecast about the way we did in Q3 for Q4 in terms of revenue growth.
Okay got it okay, but then it was next year you would us.
I'd assume that.
Given the comparisons that you're going to be facing that that that should help.
I suppose so.
Okay, I guess, okay and then.
Last question I guess for Tom is it do you expect the tax rate to go back down to that 27, 28% range in the.
Fourth quarter.
Yes, so our normalized tax rates on that 27.5% to 2% range.
You know what you're seeing what you're seeing in this quarter. We expect we just filed.
Filed for the first time for the R&D tax credits and that gave us that discrete item of about $1.7 million. So if you if you add that to our current tax expenses.
Back to about the normalized rate.
Got it all right well, thank you and best of luck.
I did want to provide a little more color on that let's say do we think about 2021.
You know there are a lot of encouraging signals out there around growth and specifically, we think about our customer base and the efficiencies around our new ERP system.
There's a lot to look forward to so when it comes to 2021. In addition to a relatively easier compares we are thinking there will be a legitimate market growth.
Got it all right. Thank you and best of luck. Thank you.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to Tim look back for closing remarks. Thank.
Thank you I'd like to thank all of our customers vendor partners and shareholders for their continued support and once again, our dedicated coworkers for their efforts and extraordinary dedication through this time I'd also like to thank those of you listening to the call. This afternoon your time and interest in connection are appreciated have a.
Great evening.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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