Q1 2021 PC Connection Inc Earnings Call
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Operator, please continue to standby your conference will begin momentarily. Once again. This is your conference operator, please standby your conference will begin momentarily.
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Good afternoon, and welcome to the first quarter 2021 connection earnings Conference call. My name is Jackie and I will be your operator for today's call. At this time all participants are in a listen only mode. Following the prepared remarks, there will be a question and answer session. As a reminder, this conference call.
Is the property of connection and May not be recorded or broadcasted 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.
Okay.
And good afternoon, everyone I will now read our safe Harbor statement any statements of references made during the conference call that are not statements of historical fact may be deemed to be of forward looking statements. Various remarks that management may make about the company's future expectations plans and prospects constitute forward looking statements for purposes of the safe.
Harbor 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 factors section of the company's annual report on form 10-K for the year ended December 31 2020.
Which is on file with the Securities and Exchange Commission as well as in the 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 the views as of any subsequent date, while the company may elect to update forward looking statements at some point in the future the company specifically.
<unk> disclaims any obligation to do so even if the estimates 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 discussed a reconciliation between the two is available in today's earnings release and on the company's website at Www Dot connection Dot Com. Please note that unless otherwise stated all references to first quarter 2021 comparisons are being made against the first quarter of 2020 today.
The call is being webcast and will be available on Connection's website. The earnings release will be available on the SEC website at Www Dot SEC Dot Gov and in the Investor Relations section of our website at Www Dot connection Dot Com I would now like to turn the call over to our host Tim Mcgrath, President and CEO Tim.
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Thank you Samantha good afternoon, everyone and thank you for joining us today for connection Q1 2021 conference call.
As you saw from the press release Q1 revenues were down kind of 5% year over year. However, the overall level of business activity and customer opportunities accelerated throughout the first quarter and into April.
The economic recovery combined with the federal stimulus program is giving our customers both the confidence and the funding to invest in their businesses in fact, our ending backlog for Q1 in both enterprise and business solutions segments grew over 20% from the end of last year.
Our consolidated backlog grew over 15% for March to April reflecting the increased demand.
As business momentum continues we remain optimistic that we will show year over year improvements in Q2 and for the calendar year 2021.
Our main headwind right now is the supply chain.
Order to delivery time has stretched out longer than we've ever experienced and we expect this condition to persist for at least the balance of the year.
As you know the supply chain dynamic is playing out in many industries not just ours let.
Let me now turn to the Q1 numbers.
First quarter revenue was $636 9 million down 10, 5% from 2020 gross profit of $100 5 million was down 11, 1% and average daily sales decreased by nine 1%.
If you recall, we experienced a record first quarter in 2020, mainly due to the work from home buying rush created by the pandemic gross margin of 15, 8% were down 11 basis points from Q1 in 2020, primarily due to public sector, representing a larger percentage.
Revenue in the quarter of public sector business runs at a slightly lower margin than our other segment, particularly with the mix of mobility products, we sold in the quarter.
SG&A was in line with expectations as an absolute number it was lower than Q1 2020, because of the decrease in variable compensation and the reduction in bad debt expense as a percentage of sales SG&A was 13, 6% in the first quarter compared.
With 13% in Q1 of 2020.
We are managing expenses closely and expect improvement as the year progresses.
Operating income in Q1 was $14 1 million a decrease of 31, 6% or two 2% of net sales compared to $20 7 million of two 9% of net sales in the prior year quarter. In Q1 2021 diluted earnings per share was 39.
A decrease from 56 in Q1 2020.
We ended Q1 with $92 3 million of cash and cash equivalents.
We will now look a little deeper at segment performance.
In our business solutions segment, our Q1 net sales were $246 3 million a decrease of 11, 6% compared to $278 8 million a year ago, while average daily sales decreased by 10, 2% in the quarter gross profit in the business solutions segment.
It was $47 4 million a decrease of nine 8% from a year ago gross margin increased by 40 basis points to 19, 2% in the quarter compared to 18, 8% in the prior year as a result of changes in product mix.
We're excited to say, we're seeing a steady increase in the number of buying accounts and our business solutions segment. As you know the small business sector was among the hardest hit in 2020.
And our public sector solutions business Q1, net sales were $125 3 million, an increase of 25, 7% compared to the $99 6 million a year ago sales on an average daily basis grew 27, 7% in the quarter sales.
Sales for state and local government and educational institutions was $89 million, an increase of 13, 2% compared to the prior year K 12 customers were largely responsible for the increase in the sled business.
Sales for the federal government were $36 3 million, an increase of 72, 6% compared to the prior year the.
The increase in federal business was due to the large project rollouts in the quarter.
Gross profit for the public sector segment was $15 6 million, an increase of eight 6% compared to Q1 'twenty.
Gross margin decreased by 197 basis points to 12, 5% as mobility solutions represented a larger portion of the product mix.
We expect our margins to normalize in the months ahead, we anticipate our customer spend will continue to be strong in the sector in.
In our enterprise solutions segment Q1, net sales were $265 3 million, a 24 per cent decrease compared to $333 4 million a year ago.
Or a 19, 2% decrease on an average daily sales basis gross profit for the enterprise segment was $37 5 million a decrease of 18, 8% in the quarter gross margin for the quarter increased by 28 basis points to 14, 1% in Q1.
On the enterprise space experienced challenges with product availability with a number of our suppliers.
As you know enterprise customers predominantly order custom configurations that are currently experiencing longer lead times due to supply chain constraints. Consequently, our enterprise segment exited the quarter with a record backlog.
I'll now turn the call over to Tom to discuss the additional financial highlights from our income statement balance sheet and cash flow statement Tom.
Thanks, Tim SG&A was $86 4 million in this quarter, a decrease of six 6% from $92 5 million a year ago.
As a percentage of net sales. This represented an increase of 58 basis points year over year and significantly down from Q4.
If we strip out the impact of software netting our SG&A in the quarter was 11 basis points for up from the prior year looking forward to Q2, our SG&A as a percentage of sales is expected to decline around 50 basis points from Q1 of the.
The year over year Q1 decrease in SG&A was driven by a decrease from variable compensation and a reduction in bad debt expense.
Q1, operating income was $14 1 million down 31, 6% this quarter from $20 7 million a year ago.
Our Q1 effective tax rate was 27, 8% down from 28 two percentage in the same period a year ago net income for the quarter was $10 2 million a decrease of 31, 6% from $14 9 million a year ago.
Diluted earnings per share was 39 a.
A decrease of 31% from the prior year period.
Our trailing 12 month adjusted earnings before income taxes, depreciation and amortization or adjusted EBITDA was $84 4 million compared to $130 9 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 quarter was $6 million versus $44 6 million for the same period a year ago. The change was driven primarily by a decrease in accounts receivable offset by a decrease in accounts payable.
Our net cash used in investing activities of 903000 in the first quarter was primarily the result of equipment purchases of 90 initiatives offset by proceeds from life insurance.
The company used $8 5 million of cash for financing activities. During the first quarter, consisting primarily of the payment of our 2020 special dividend I will now turn the call back over to Tim to discuss current market trends.
Thanks, Tom I wanted to take a few moments to review some of the highlights in our business.
Vertical markets continue to be important part of our strategic focus in fact, our manufacturing vertical market had solid growth of 35% year over year.
We're seeing an increased demand for advanced technologies security Iot cloud data and AI as well as a tailwind from the continued demand for notebooks and other mobility solutions as customers continued to advance the workplace transformation strategies.
Overall services revenue grew double digits year over year, and we achieved Microsoft the advanced specialization of the Windows and SQL server migration to Azure, we accelerated our investment in connection cares our company's social responsibility program building on connections inclusive culture and launched.
And the history of employee volunteerism. This initiative formalizes, the company's community engagement sustainability and diversity and inclusion efforts into one cohesive program looking at the balance of 2021 and assuming the supply chain constraints don't further deteriorate we believe.
We can deliver growth rates, there are 300 basis points above the industry.
We are focused on helping our customers enable their post COVID-19 hybrid workforce accelerate their digital transformation and empower their innovation, we will now entertain your questions operator.
Thank you we will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone if you wish to be the move from the queue. Please press the pound sign or the husky have youre using a speakerphone you may need to pick up the handset first before pressing the numbers once again, if you have a <unk>.
Please press Star then one on your Touchtone phone.
Okay.
And our first question comes from Anthony low beer.
Ski with Sidoti.
Siddhartha <unk> company.
Yes. Good afternoon. Thank you for taking the questions. So.
You gave some numbers about the backlogs as far as the percentage increases I was just wondering if it would be possible for you guys to share.
Details as far as the dollar amounts of those backlogs.
Good afternoon Anthony.
We are not publishing the dollar amounts of the inventory backlog as you know the they move daily.
At this time, we don't share that information.
Okay, that's kind of it.
So.
We're trying to do Anthony is just give some sense of the magnitude of what's going on in it.
The pretty big numbers.
Okay right.
So as far as the supply chain constraints that are out there so.
No.
As you look at those constraints now for.
At the end of the quarter have they gotten worse or whether the.
Same or better I'm, just trying to get a sense of that.
Well, thanks, Anthony I think the way that we should look at that is really.
With each of our individual segments, let's start with our large account segment the enterprise team to the.
That team.
As you know Anthony is really dependent on large project rollouts in those rollouts ebb and flow for more than that the.
Team is is largely dependent on configure to order types of solutions.
So those CTO solutions are the ones that have been the most challenged for our suppliers to deliver and we do expect that the supply chain to get gradually better and we are looking at a number of options in dealing with all of our suppliers.
That said.
We still think supply chain disruption will continue throughout Q2 debt gradually a little better in the summer, but still working its way all of the way through year end sales for the enterprise team in particular and those large projects. They are the ones that really felt the.
Challenge from the constraint the most of.
Sure.
In our public sector group, we are seeing very significant growth as the industry is on our public sector customers.
Seem to have lots of opportunity lots of funding and it is really a good time to be in that business and.
Toward that end.
We've had some good success getting products, but many of the products that we're looking at in the future will be constrained the more of those velocity and notebook type products or the products that I'm referencing there. So we've had good success, we're going to watch that carefully and then finally with our SMB business.
There are a lot of positive drivers happening there as our SMB customers are coming back.
That said.
They were hit the hardest in 2020 and now that return is happening will be scrambling to make sure. We can get their products. So overall, let's say enterprise hit hardest followed by SMB and then we're watching Gulf of carefully we do expect it will get gradually better Tom.
Thing to add.
Sure.
Thanks Anthony.
Yes, thanks for that color I guess, one last kind of question for me is just overall.
How should we think about the vendor rebates and incentives.
One of kind of tie that out as to how you expect the gross margins for the balance of the thank you.
Yeah.
So far we haven't seen really a lot of pressure there yeah. The Anthony.
Hi.
Thank you.
As time goes out we are hearing about price increases from some of our offers from some of our vendors.
And.
Do our best to make sure we don't get trapped in the middle of their but we haven't we actually performed pretty well on the on the.
Vendor consideration of this quarter and we can always.
We'll expect to keep that moving.
So I don't see a lot of a lot of gross margin compression in the in the near future.
Got it okay, well, thank you and the best of luck.
Thanks Anthony.
Yeah.
Thank you. Our next question comes from Adam Tindle with Raymond James. Please go ahead.
Okay. Good afternoon. Thanks, So I just wanted to start with the two part question high level of hunting products notebooks were up almost 20% year over year. Just wondering if you of any visibility into how long you expect that category to remain strong I think of lot of investors are trying to think about the back half of 2021, and then Conversely other areas like net.
The server storage are down just wondering your expectations for the rest of the year on those areas are there any indications of projects resuming.
Hello, Thanks, Adam.
Let's start with the first part of your question clear.
Clearly theres been a lot published at a lot of discussion about the length of the tailwind and how long the.
Notebook refresh will continue and.
Well I think it will continue it will continue at a decreased rate as the year goes on however, we are seeing some pretty big areas of opportunity.
Just to begin with as we think about the distributor work force and you think about the trends driving notebooks Wi Fi six five G. Other connectivity and of course, all of the virtualization and the one device per person the trend all of that.
It's pretty well for us.
Of the velocity products. So I do expect that will continue when we think about our public sector business. We've got.
Clearly sled going into the busy season and.
A lot of chrome opportunity in chrome units, becoming more available. So again I think there's pretty good opportunity there.
Good opportunity with E rate and then finally with our SMB business. When you think about what's happening with the American rescue plan funding think about retail revitalization in and some of the small business administration funding as well as just those businesses of coming back I think demand is.
Going to remain the supply is more of a question Mark.
It kind of to the server storage networking strategic outlook.
Obviously, we're.
When our customers were not in their buildings, the data center type projects refresh and and other.
Other projects.
Put on hold and we are now starting to see the funnel still up lots of project work coming back and we're much more optimistic in the networking server arena for the back half of 2021. So we do think growth is going to return there.
Okay. That's helpful and maybe I know you had mentioned planning.
Planning to go grow 300 basis points above it spending for the remainder of the year can you just maybe help us shape that out a little bit more like Q2 coming up is what's really difficult quarter of year ago and should be an easy comparison should see significant growth in that quarter I would imagine so are we talking 20.
Per cent growth in Q2, and then the back half of the year is going to be.
Half of that level or just the way the kind of shape out expectations on top line.
Yes.
I think Adam because if we look at this year typically will do.
48 in the half of 49% of our revenue in the first half and then the balance of the second half I think that's going to be a little bit skewed. This year I think we'll probably be closer to the 47, 5% of 48 in the first half with the balance in the second half.
So.
Kind of that can kind of triangulate them on where we think next next quarter in spending.
In the fall.
Yes, the next quarter is going to be.
Obviously, a pretty easy compare.
But.
The thing that I do worry about there is you know as we've kind of been talking about.
The demand isn't really the issue with the supply and I'm not sure I can get real precise on how thats been the resolve itself.
I don't think anybody can and that's understandable, but helpful. Appreciate the maybe just one last one for me Tim I'm wondering from a customer metrics standpoint are you seeing any aspect of customer churn as they potentially go to bars, who do have supply right now I know, it's kind of few and far between.
But are you seeing any any indications of customer churn our near term.
Yeah.
Actually we're not seeing that customer churn, we are seeing some switching some of our large customers who can find availability through us from a different supplier.
So we have seen some large projects move from one of our suppliers to another based strictly on availability the <unk>.
Other the only other churn that we're seeing.
I mentioned, great growth in manufacturing lots of promise in retail and health care of Theres, a lot of M&A happening and.
In fact, theres been hundreds of merger and acquisition opportunities in healthcare, which overall is good for us but that movement of does provide some churn, but overall, we're not seeing customer defections.
There are some switching to different manufacturers got.
Got it that's helpful. Thanks for the details appreciate it.
Thank you.
And at this time, we have no further questions turning the call back for some final remarks.
Well, thanks, Jackie I'd like to thank all of our customers our vendor partners and our shareholders for their continued support and once again, our dedicated co workers for their efforts and extraordinary dedication through this time.
I'd also like the thank those of the listening to our call. This afternoon. Your time and interest in connection are appreciated have a great evening.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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