Q4 2020 PC Connection Inc Earnings Call
Ladies and gentlemen, please stand by your fourth quarter 2020 connection earnings call will begin momentarily.
Thank you for your patience and please standby.
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Good afternoon, and welcome to the fourth quarter 2020 connection earnings Conference call. My name is Josh and I'll be the coordinator for today at this time all participants are in a listen only mode. Following the prepared remarks there'll be a question and answer session. As a reminder, this conference call is the property of connection and May not be recorded.
Or rebroadcast without specific permission from the company on the call today are 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.
So operator, I will now read the safe Harbor statement.
Any statements or references made during the conference call that are not statements of historical fact may be 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 on the safe Harbor provision under the private Securities Litigation Reform Act of 1995.
<unk> results may differ materially from those indicated by these forward looking statements.
Arizona on various important factors, including those discussed on the risk factors section on the company's annual report on form 10-K for the year ended December 31st 2019 and updated in our form 10-Q for the period ended September 32020, each of which is on file for the Securities and Exchange Commission as well.
And other documents for 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 day, 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 forward looking statements and your preference any views on any date subsequent to today.
During this call GAAP and non-GAAP financial measures will be discussed a reconciliation between the two is available on today's earnings release and on the company's website at Www Dot connection Dot com.
Please note that unless otherwise stated all references to fourth quarter 2020 comparisons are being made against the fourth quarter of 2019.
Today's call is being webcast and will be available on connection website. The earnings release will be available on the SEC website at Www dot.
<unk> Dot Gov, and any Investor Relations section on our website at Www Dot connection Dot com.
Now I'd like to turn the call over to our host Tim Mcgrath, President and CEO Tim.
Thank you Samantha good afternoon, everyone and thank you for joining us today for connection Q for 2020 conference call.
We're pleased to announce that our Q4 results reflect continued sequential improvement in our business consistent with the recovery trend we've seen since late in the second quarter.
In Q4, we experienced year over year revenue growth in two of our three sales segments.
This solution and public sector.
Our year over year growth in these two segments was offset by a decline in enterprise solutions, which had a strong Q4 in 2019.
Fourth quarter revenue was $675 7 million down five 7% from 2019.
Gross profit of $108 9 million was down six 2%.
Average daily sales decreased by four 2%.
Gross margins of 61% were essentially flat year over year.
Operating income was $19 8 million a decrease of 33, 3% or two 9% of net sales compared to $29 6 million or for 1% of net sales in the prior year quarter.
In Q4 2020 diluted earnings per share was <unk> 62.
A decrease of 25, 3% from Q4 2019.
We ended Q4 with $95 7 million of cash and cash equivalents, representing an increase of $5 6 million from December 31 2019.
The net income and earnings per share dropped from 2019, obviously disappointing, reflecting a challenging 2020, a tough comparison from a strong year for our enterprise business in Q4 2019.
Lingering declining ERP transition costs.
Unusual one time legal costs related to a commercial dispute.
And expenses related to introducing a new technical sales force, which we believe will drive revenue this year and beyond.
Looking at our segment performance.
Despite pandemic related headwinds our business solutions segment achieved organic growth in the quarter for the first time since Q1.
Two for net sales were $265 2 million, an increase of one 1% compared to $262 3 million a year ago for average daily sales increased by two 7% in the quarter.
Gross profit in the business solutions segment was $50 7 million a decrease of three 7% from a year ago.
Gross margin decreased by 95 basis points to 19, 1% in the quarter compared to 21% in the prior year as a result of changes in product mix.
And our public sector solutions business Q4, net sales were $134 9 million, an increase of one 8% compared to $132 5 million a year ago sales on an average daily basis grew three 5% in the quarter.
Sales for state and local government and education institutions was $95 million, an increase of 23% compared to the prior year.
An increase in our sled business was largely the result of increased sales across higher Ed K 12, and state and local governments.
After experiencing growth 25, 4% from Q4 2019 sales for the federal government declined as we experienced fewer large project rollouts in the quarter.
Revenues were $39 9 million 27, 8% lower than Q4 2019.
Gross profit for the public sector was $18 5 million a decrease of 11, 6% compared to Q4 19.
<unk> margin decreased by 209 basis points to 13, 7% due to changes in product mix and vendor incentives.
We expect margins to normalize in the months ahead.
Our revenue recovers we.
We are focused on returning the federal business to historical levels of performance.
In our enterprise solutions segment, Q4 sales were $275 6 million a $14 four per cent decrease compared to $321 9 million a year ago or a 13% decrease on an average daily sales basis.
Profit for the Enterprise segment was $39 7 million a decrease of six 7% in the quarter, which helped drive an increase in gross margin for the quarter of 118 basis points to 14, 4%.
In addition to a difficult year over year comparison during the quarter the enterprise sales space experienced challenges with product availability issues with a few of our large suppliers.
Perhaps the silver lining the enterprise solutions segment has experienced continuous growth as Q2 and actually ended the quarter with the highest backlog in their history.
We expect on let's say a couple of quarters for us backlog to normalize.
Let me turn on the call over to Tom to discuss additional financial highlights from our income statement balance sheet and cash flow statement Tom.
Tom.
Thanks, Tim SG&A was $89 1 million this quarter, an increase of 3% from $86 5 million a year ago.
As a percentage of net sales. This represented an increase of 112 basis points year over year and slightly down from Q3.
The year over year Q4 increase in SG&A amounting to about 10 cents per share was driven by continuing professional fees.
He added with the ERP rollout onetime legal fees related to a commercial dispute.
Costs associated with establishing a new technical sales force.
Sequentially, the ERP spend declined as planned and we will reduce the ERP spend by over 50% in Q1, So we're trending in the right direction here.
Q4, operating income was $19 8 million down 33, 3% this quarter from $29 6 million a year ago.
Our effective tax rate was 21, 7%.
From 2006, 5% in the same period, a year ago, Inc.
So other than the current quarters tax expense favorability from certain tax exempt insurance proceeds and a benefit from the R&D tax credit.
Going forward, we expect the tax rate to revert back to the 28% range.
Net income for the quarter was $16 3 million a decrease of 25, 8% from $22 million a year ago.
Diluted earnings per share was <unk> 62.
A decrease of 25% from the prior year period.
Our trailing 12 month adjusted earnings before income taxes, depreciation and amortization or adjusted EBITDA decreased 30% to $90 6 million from $128 7 million a year ago.
In Q4, we declared a <unk> 32 cents per share special dividend, which was paid in January of this year.
Returning $8 $4 million for shareholders.
In addition, during 2020, we repurchased 247000 shares for $10 $2 million.
Between the special dividend on the stock repurchase a total of $18 6 million of cash was returned to shareholders in 2020.
$12 7 million remaining for stock repurchases under our existing stock repurchase program.
Cash flow from operations for the year ended 2020 was $36 1 million versus $36 6 million for the same period a year ago.
<unk> was driven primarily by an increase in accounts payable offset by an increase in accounts receivable and inventory.
DSO for the quarter improved sequentially for both the business solutions group and public sector group by 7%. However, this was offset by an increase on the DSO in the enterprise group.
The increase in the Enterprise group DSO was almost entirely due to increased software sales for which revenue is recognized on a net basis.
Our net cash used in investing activities of $11 million was primarily the result of equipment purchases and <unk> initiatives.
The company used $19 5 million of cash for financing activities during the year.
<unk>, primarily on for Q1 payment of $8 4 million for on previously declared 2019 special dividend and $10 2 million on stock repurchases.
I will now turn on the call back over to Tim to discuss current market trends.
Thanks, Tom.
As we move into 2021, we are optimistic about our future building upon the efforts we've made during a challenging 2020 to position us for success. There are a number of notable accomplishments I'd like to take a minute to review some of these.
We believe we had industry leading growth in healthcare during 2020 on.
Our manufacturing vertical grew by 31% for the quarter.
The sled business grew by 23% in Q4.
We grew our technical solutions group and lifecycle services business by 27, and a half per cent for 2020.
And we received several awards from our partners, including HP is national solution PC partner of the year.
Intel innovation partner of the year.
And Microsoft U S partner of the year for surface PC.
In addition, we added a record number of new customers during the pandemic.
Moving forward, we expect that we can grow revenue two to 300 basis points in excess of the market rate of growth.
In terms of our operating expenses, we continue to focus on driving costs out of the business and improving our operations.
We remain confident that we are very well positioned to meet customer needs going forward.
Demand over the past year for software as a service was strong and we expect continued growth in workplace transformation cloud security and managed services through our technology solutions group.
Obviously, the pandemic had a significant impact on our business and our customers in 2020, we're optimistic about 2021 and look forward to continuing to deliver the service and performance our customers expect and the financial performance our shareholders deserve well now entertain your.
Operator.
Thank you.
That's great question, you're on each press star one on your telephone line.
Question on principal balance sheet.
And above all the Q&A roster.
Our first question comes from Anthony leaving <unk> with Sidoti <unk> Company. You May proceed in your question.
Hi, good afternoon, thanks for taking the questions.
So firstly I just wanted to see if you guys could perhaps maybe quantify what you thought the impacts from supply chain constraints.
On your business in terms of revenue.
Okay.
Anthony Thanks for the question you blanked out a little bit could you repeat that.
Sure Yeah, So I was asking about the.
Supply chain constraints is there any way that you guys could quantify perhaps how much of an impact other than that that had on revenue.
Yeah, we don't have that specifically broken out as it ebbs and flows but as you know Anthony D. The work from home.
The growth that we're seeing across the entire industry is really exacerbated demand for mobility.
Displays Cpus and I see us across the industry and where we had a large project rollouts towards the end of the quarter. Some of them were delayed specifically for that reason. So I do not think it's unique to us I think it's industry wide and I'm pretty optimistic that while it will take us a couple of quarters.
A result resumed to normal that.
We will be right back on track.
Got it okay. Thank you for that Tim.
So as far as the SG&A you called out the some of the increases Tom as far as the ERP system is concerned you also for this new technical sales organization of which I would love to get a little bit more details on that as far as that.
Onetime legal fees. So is there a way for you guys for you to kind of break down basically I wanted to get a sense as to what's <unk>.
Recurring type of normal expenses versus.
Moving forward. So obviously some on some of this was kind of a.
One off but is there any way you guys could quantify some of these.
SG&A expense pressures.
Let me let me.
Let me give you a couple of data points cancer, Nate just to start out with so if I look at our G&A rate is a percentage of revenue from Q4 last year for Q4. This year I think it's up 110 basis points.
That increase is a function of two components.
Component number one which accounts for about 50 to 55 basis points is simply the software net right. We've got a lower revenue base. So if you strip that out our actual G&A rate is up about.
60 basis points on the year and that is.
Entirely due to these one time costs, which were roughly.
That's what I'll say most of them on one time cost, let's say, it's $2 8 million of ERP, you know 800 grant on the other legal stuff and you know 500 grant for for.
800 Gram to believe for the commercial legal dispute on 500 Grand of kind of other lingering things.
That's kind of.
Quantify you know what what the increase is now next quarter not all of that ERP stuff is going to go away and you know that 2.7, I'm I mentioned, it's probably going to be.
You know sub $1 3 million would be my guess is my current forecast. So hopefully I gave you a little more specificity than usual just because it is a little bit low.
A lot a few moving parts here.
Okay. Yeah. Thank you Tom for that and then.
You expect additional ERP system expenses beyond Q1.
Yeah.
I think beyond Q1 that kind of is gonna be it the noise level and you know what kind of being the norm that you know more of the normal maintenance mode that we've been in historically, so I don't think for me anything of significance, but I'm going to need to have further conversations about.
Got it okay. Thank you and then you know.
The last question on he is.
Tim You mentioned that you are optimistic about 2021 can you go three main domains as to how we should stay about the progression of your business through the year.
You would expect.
I would just be curious to get your thoughts on that.
Well. Thanks, Thanks, Anthony when you think about 2020 as a base. The abnormality. There was simply this Q1 in 2020 for our industry was the largest quarter of the year and of course that that's completely out of alignment with what we're used to and so as we start to.
Moving through the pandemic and as the vaccine is more available and people start to return to work, albeit on a hybrid basis, we think that we're going to see continued recovery starting in Q1, but then moving through Q4, so Q.
Three really Q4 should be our best quarter of the year.
And we returned to more of a normalization in.
In our quarters.
I think Anthony on the thing I'm struggling with.
You know what don't you want and then it looks like right now.
And whereas last year was kind of an abnormality.
There's a little bit higher than normal.
When you go back in time, and you look at that Q4 to Q1 transition.
It's typically in the high single digits.
Down you know this or not.
Eight 9% I kind of thing.
Non white, if you would be much different from that.
It's just gonna be hard demand a lot for Q1 last year, because we didn't have that surge in March.
Got it okay.
And would you expect.
Those gains.
After you get past the Q1 <unk>.
Would you expect sales gains.
Kind of more even.
Across the different segments or did you say that you expect.
Or your revenue growth and.
Let's say you know public sector versus enterprise.
How should I think about that.
So I think the way to think about that really is is to as we look at the second half of 2021.
For the wildcard here is we need the recovery around the pandemic and we.
You need the supply chains to normalize and so clearly the second half of the year should be better than the first half from a revenue and a growth perspective.
In terms of enterprise growth, we are optimistic what we saw in 2020 with many many large enterprises focused on sending their people home in anything from home.
It was.
Was that uptick for 2020 and 21, we do think many of those are data center projects.
We'll return some of those were delayed in 2020, we'll see in 'twenty. One so we're pretty optimistic that the enterprise will recover but that is really a second half statement for us when it comes to our small and medium business. The business solutions team, we think that will be kind of a steady progression as.
Small business starts to come back and build their way back from the pandemic.
And then with the public sector, we expect enterprise K 12, higher Ed to be strong and the federal business.
It should come back as a matter of fact, we're already seeing a much higher backlog and a much higher order rate there, but that we think will progress through the year as well. So our best guess is that it really is a guess at this point, we will start to see normal seasonality, but we've got to say that one day pay.
Dynamic is behind us.
Got it alright, well thank you on best of luck.
Thank you thanks Anthony.
Thank you. Our next question comes from Adam Tindle with Raymond James You May proceed with your question.
Hi, This is Cathy Huntley on for Adam Thanks for taking our question. Our first question has to do with current trends. We've heard from other competitors that bookings are increasing year over year in one Q and have rebounded. So can you. Please talk about the trajectory that you've seen in your company for your bookings.
As we sit here in late February.
Yeah. So thanks Catherine.
We are clearly seeing an uptick in bookings when we look at our bookings.
Year over year. They are definitely trending up Q1, as Tom mentioned is a little bit of a tough compare because as you know we really start to see the work from home.
Products kick in in late February early March of 2020, so that those products are a little tougher to compare but clearly bookings are up across the board and we do anticipate a recovery coming in 'twenty, one, but we've modeled that out and we are.
Sticking with our motto, which is we think the market rate of growth plus two to 300 basis points is the appropriate way to build that into your model in terms of our overall growth Tom.
That's about spot on.
Yes.
Thank you for the color and as you look into the second half of 'twenty 'twenty. One how do you think about the potential decline in devices versus the increase in data center projects do you think that net neutral net positive negative.
That's a great question, let me provide what color I can the first is that.
We still believe the whole workplace transformation is going to be strong. We think there are great drivers of that.
For example, when you think about the work from home work from anywhere learn from home.
There are good reasons to continue to upgrade if you look at connectivity five G and Wi Fi six is going to be a driver. If you look at collaboration there will be better built in collaboration tools to enable our video conferencing. So all of those combined with the need to.
Have more data more video are still drivers for upgrading mobility. So we think that will be fairly strong throughout the year, but obviously will tail off towards the back half of the year and we do think that will be replaced with data center projects. Many of those were delayed and so we think.
There will be a little bit of a transition that happens in the second half of the year more toward datacenter and advanced technologies.
Okay Awesome and then just an update on ERP can you update us on the transition and benefits Youre seeing in the previous question. You mentioned that there are increases short term, but are there any elevated cost that may come longer term or when can we see those costs start to mitigate out.
So what I think what youre going to start to see here.
As you know.
Our transition costs are going on.
E.
You know pretty inconsequential Postop post Q1 as the plan.
I think.
After that standpoint, you know after that point, we'll get things normalize these will start to see some efficiencies come through and in terms of the increased costs.
You know there was some increase in some depreciation started last year, but thats not really I mean, that's currently on our current run rate. So I don't think there's a lot there.
You know obviously the goal here is to grow the business enough room on the overhead and.
Yes.
That's what we intend to leverage the system to help us too right. When you think about the benefit.
System is more more expandable so it opens up opportunities around acquisition.
It's more robust it's more secure and it offers more capabilities there will have to be fine tuning throughout the year, but clearly theres a lot of upside for on ERP transition like this one.
Okay. Thank you so much and congrats on the quarter.
Thank you.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Tim Mcgrath for any further remarks.
Well, thank you Josh 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 who are listening to the call. This afternoon your time and interest in.
<unk> are appreciated have a great evening.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Yes.
Yeah.
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