Q2 2021 PC Connection Inc Earnings Call
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Ladies and gentlemen, this is theopathy on today's conference is scheduled to begin momentarily until that time your lines will again be placed on hold and thank you for your patience.
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on hold and thank you for your patience.
And.
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[music].
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on hold and thank you for a basin.
Yeah.
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on hold thank you for your patience.
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Okay.
[music].
Good afternoon, and welcome to the second quarter 2021 connection earnings Conference call. My name is Abigail and I will be the arginine and are far today at this time all participants are in listen only mode.
During the prepared remarks, there will be a question and answer session.
As a reminder, this conference call is the property gifts connection and may not be recorded or rebroadcast without specific permission from the company on.
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.
Operator, and good afternoon, everyone I will now read our safe Harbor statements and.
These statements are references made during the conference call there and not Stevens on 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 of the safe Harbor provision under the private Securities Litigation Reform Act of 1095 actual results may differ materially from those indicated by these forward looking statements.
And the result of various important factors, including those discussed and the risk factors section of the company's annual report on form 10-K for the year ended December 31, and 2020, which is on file with the Securities and Exchange Commission as well as another 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 as of any subsequent date, while the company may elect to update forward looking statements at some point and 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 representing David and any date subsequent to today.
During this call GAAP and non-GAAP financial measures will be discussed a reconciliation between the 2 is available in today's earnings release and on the company's website.
Www dot connection Dot com.
Please note that unless otherwise stated all references to second quarter 2021 comparisons are being made against the second quarter of 2020.
Today's 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 FCC dot Gov, and and 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.
Tim.
Samantha good afternoon, everyone and thank you for joining us today for Connection's Q2, 2021 conference call.
And I'm pleased to reported double digit growth across all 3 of our business segments.
And we expect to benefit from positive momentum throughout the rest of this year.
Overall revenue in Q2 grew 28% compared to last year's second quarter.
Business solutions segment grew 39, 9%.
On the Enterprise segment grew 24, 5% and public sector grew 15, 7% Inc.
Rewarding to see that our strategic investments and helping our customers transform their businesses are delivering value for them and us.
Our strong results are also a tribute to our team and the extraordinary execution day deliver on behalf of our loyal customers during this challenging supply environment.
Our focus on aligning our sales strategy combined with expertise and vertical market continues to drive positive results for the company and.
In fact, our manufacturing vertical grew 15, 9% year over year as a result of delivering solutions, including industrial infrastructure security cloud and workplace productivity.
In addition, our healthcare vertical grew 30% year over year and 19% sequentially.
And was driven by our customers' need to improve operational efficiencies the patient experience and long term care.
We're also seeing continued growth and telehealth and non contact patient monitoring.
Our retail vertical also saw a 25% growth year over year, and 10% sequentially as customers are focusing on solutions that enable smart stores digital media and point of sale technologies, which are all helping to transform and improve the retail experience.
As you know our industry is experiencing supply chain issues as a result, our backlog once again increased to a record level we.
We anticipate some of these challenges will persist for the balance of the year and into 2022.
And we're working with our partners and customers on a daily basis to manage these issues.
Additionally, we're able to leverage our scale and our expertise to help our customers navigate through the supply chain challenges.
We are collaborating with a number of our customers to secure and store product and an effort to support rollout planned for later this year, which is driving higher inventory levels than usual on cost.
But as you know they can rely on us and we're seeing strong demand for digital transformation hybrid cloud cloud and security.
Now, let's discuss our Q2 performance and a little greater detail.
Second quarter revenue was up 28% to $704.2 million from 2020, while gross profit was up 37% to $116.3 million.
Margins were 16, 5% up 34 basis points from Q2.2020.
Operating income in Q2 was $23.8 million and an increase of 124, 5% or 3.4 percentage of net sales compared to $10.6 million or 1.9% of net sales and the prior year quarter.
And Q2.2021 diluted earnings per share was <unk> 66, and.
And increase of 125, 6% from 29.
In Q2.2020.
We ended Q2 with $115.7 million of cash and cash equivalents now.
And I will look a little deeper at the segment performance.
And our business solutions segment, our Q2 net sales were $267.3 million and increase of 39, 9% compared to $191.1 million a year ago.
Gross profit and the business solutions segment was $51.3 million and increase of 37, 9% from a year ago gross margin decreased by 28 basis points to 19, 2% in the quarter compared to 19, 5% and the prior year.
Result of changes and product mix.
Throughout the past year the business solutions segment has been the most affected by the pandemic and since Q2 last year, we've seen strong recovery, despite supply issues and sequentially the business experienced 8.5% growth and the periods.
And our public sector solutions business Q2, net sales were $129.7 million and increase of 15, 7% compared to $112.2 million a year ago.
Sales to state and local government and educational institutions were $105.1 million and increase of 22, 4% compared to the prior year cash.
And the 12 and higher Ed customers were largely responsible for the increase and the sled business.
Sales to federal government were $24.6 million a decrease of 6.3% compared to the prior year gross profit for the public sector segment was $18 million and increase of 24, 6% compared to Q2.2020.
Gross margin increased by 99 basis points to 13, 9%, primarily due to a change and customer mix and an increase and cloud based and security software.
And our enterprise solutions segment Q2, net sales were $307.2 million, a 24, 5% increase compared to $246.8 million a year ago.
Gross profit for the Enterprise segment was 47 million and increase of 25, 9% in the quarter gross margin for the quarter increased by 17 basis points to 15, 3%.
We've continued to see strong demand and the enterprise segment, especially in the manufacturing and healthcare vertical both of which exceeded 30% growth. It's also nice to see data center refresh projects coming back into the enterprise space.
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.
G&A was $92.6 million this quarter and increased to 19, 6% from $77.4 million a year ago.
A percentage of net sales. This represented a decrease of 93 basis points year over year.
The year over year Q2 increase in SG&A was primarily driven by an increase from variable compensation and increases and healthcare costs.
Q2, operating income was $23.8 million up 124, 5% this quarter from $10.6 million a year ago.
Our Q2 effective tax rate was 27, 3% down from 27, 9% and the same period a year ago.
Net income for the quarter was $17.3 million and increase of 126, 3% from $7.6 million a year ago.
Diluted earnings per share was <unk> 66 cents, an increase of 125, 6% from the prior year period.
Our trailing 12 month adjusted earnings before income taxes, depreciation and amortization or adjusted EBITDA was $96.7 million compared to $110 million a year ago.
We have $12.7 million remaining for stock repurchases under our existing stock repurchase program.
Cash flow from operations from the first 6 months of 2021 was $31.8 million versus $102.4 million and the same period, a year ago and a year ago quarter, we generated significant cash as business activity dropped off and partners extended terms and cash flow from the first 6 months was driven by a decrease.
And from accounts receivable DSO improved by 5 days since December and.
And increase in inventory of $26.2 million negatively affected cash flow as customers are ordering in advance of need and requesting that we staging inventory for future rollouts.
In addition, a decrease from payables and $9.1 million also negatively impacted cash flow from the first half from 2021.
Our net cash used in investing activities from $3.1 million and the first 6 months of 2021 was primarily the result of equipment purchases and it initiatives offset by proceeds from life insurance and the.
The company used $8.7 million of cash from financing activities during the first 6 months.
<unk> primarily of the Q1 payment of our 2020 and special dividend.
I'll 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 and our business.
In Q2 connection and experienced significant demand and products and solutions that enable our customers to be productive from anywhere not just from their offices and we expect to see these trends continue to drive growth as the world experiences new levels of demand and work from anywhere and learned from anywhere solutions.
In addition, cloud and in particular Hyperscale cloud is a central tenet of our multiyear growth strategy towards that and we're making additional investments and all of our cloud initiatives.
Customers are continuing to make security a top priority and addition to securing their environment. They also need help to manage more devices remotely. These trends are driving double digit growth and security and and managed services.
And we look forward environmental social and governance initiatives are providing another growth opportunity for us and in fact, we're supporting all of our suppliers initiatives toward that and and expect that this activity will increase.
In addition, we are continuing to invest and connection cares our company's social responsibility program building on connections inclusive culture. This initiative formalizes, the company's community engagement sustainability and diversity and inclusion efforts into 1 cohesive program.
Looking at the balance of 2021, and assuming the supply chain constraints on further deteriorate.
We believe that we can deliver growth rates that are 4% to 500 basis points above the industry. We're 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.
Sure, ladies and gentlemen to ask a question you will need to press star 1 on your telephone.
And all your question and that's good bad or leased.
And that will compile the Q&A roster.
Again to ask a question you will need to press star 1 on your telephone.
Our first question comes from the line of Anthony and advance EBIT.
And company your line is now open.
Thank you and good afternoon.
Thanks for taking the question so.
So.
First regarding the backlog and how much of that is related to Pcs. If you could just kind of give us some more details about the record backlog that youre seeing.
Well, thanks, Anthony So certainly a significant part of that is in <unk>.
Mobility and PC arena.
Ability well ahead of desktop.
In addition, we're seeing some backlog in our net com and security products on.
The hardware side of that business.
Those are the primary areas along with <unk>.
Accessories monitors and devices that support the kind of work from anywhere learned from anywhere initiatives.
Got it okay that makes sense so.
And just wondering now with <unk>.
Some of the latest news and regards to the.
From Delta variance.
Affecting.
And I think that's something.
And the company and some major companies have announced delays as far as when they think they'll get their employees back into the offices, how should we think about.
The impact on your business.
And more companies.
And go with that strategy.
So.
It's a great question.
Obviously spent a lot of time trying to forecast and predict that the toward that and.
Interestingly enough it's companies do send more people back out there still are a number of reasons.
To upgrade technology itself is a significant driver as the PC is much more essential in this environment, there and collaboration.
Issues and opportunities and overall, while a lot of that surge has already happened and we're optimistic that that will continue at least through the balance of this year.
In addition to that we are seeing the infrastructure projects come back into the data center and so we don't expect that that will be interrupted either however.
Obviously safety is a primary concern for all of our people and we're working very carefully to ensure that everyone remains safe and to help our customers toward that and that's really the best information that we have right now.
Alright.
Great to hear on that thanks, Tim for that explanation and then last question from me.
As far as margins on them.
And obviously, a very nice improvement from a year ago here and the second quarter.
How should we think about the gross and operating margins from the back half of the year and sort of high level thoughts that you may have would be very helpful. Thank you.
Yeah.
So obviously Anthony.
Q2 is typically a pretty good software quarter, which.
General and it gives us a tailwind on the on the margin standpoint.
And I think as we look forward to the balance of the year I think we'll probably stay right about where we are there may be on.
And a little bit up or down, but I think largely the tables.
For that in terms of the operating margins.
G&A was obviously up a fair amount year on year last year and the quarter, we didn't really have any bonuses and variable comp was close to zero excluding commissions.
Obviously this year has improved so a lot of that is coming back and then we did see some health care costs come through is there a fair amount higher than them.
Typically experiencing.
And if we look into next quarter.
I think you know.
Dollar for dollar we could see a little bit of a decrement next quarter.
Even if business is up a little bit.
So that kind of hopefully gives you enough.
Enough info to kind of model this out.
Got it yes, yes, that's very helpful.
Thank you and best of luck.
Thanks, and thanks Cathy.
And there are no further questions I will now turn the call over back to the company.
Thanks, Abigail and I'd like to thank all of our customers vendor partners and shareholders for their continued support and once again, our dedicated co workers for their efforts and extraordinary dedication throughout this time.
Also like to thank those of you listening to our call. This afternoon, your time and interest and 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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Yeah.
And.
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Yes.
Yes.
[music].
The operator and good afternoon, everyone I will now read our safe Harbor statement any statements are references made during the conference call there and not Stevens of historical fact may be deemed to be forward looking statements various remarks that management and they 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 of 1995.
Actual results may differ materially from those indicated by these forward looking statements and.
As a result of various important factors, including those discussed and 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 another document that the company filed with the commission from time to time.
In addition, any forward looking statements represent managements view as of today and should not be relied upon as representing views as of any subsequent date, while the company may elect to update forward looking statements at some point and the future to accompany specifically disclaims any obligation to do so even if estimates change and therefore you should.
And not rely on these forward looking statements as representing views and any day subsequent to today.
During this call gap and non-GAAP financial measures will be discussed a reconciliation between the 2 is available and today's earnings release and on the company's website at Www Dot connection Dot com.
Please note that unless otherwise stated all of Offences to second quarter 2021 comparisons are being made against the second quarter of 2020.
And non contact patient monitoring.
Or retail vertical also saw 25% growth year over year, and 10% sequentially as customers are focusing on solutions that enables smart stores digital media and point of sale technologies, which are all helping to transform and improve the retail experience.
As you know our industry is experiencing supply chain issues as a result, our backlog once again increased to a record level. We anticipate some of these challenges will persist for the balance of the year and into 2022.
We're working with our partners and customers on a daily basis to manage these issues. Fortunately, we are able to leverage our scale and our expertise to help our customers navigate through the supply chain challenges.
We are collaborating with a number of our customers to secure and store product and and an effort to support rollout planned for later this year, which is driving higher inventory levels than usual cuss.
Customers and all of that can rely on us and we are seeing strong demand for digital transformation hybrid cloud cloud and security.
Now, let's discuss our queue to performance and a little greater detail sex.
Second quarter revenue was up 28% to $704.2 million from 2020, while and gross profit was up 37% to $116 and 3 million gross margins, where $16 and 5% up 34 basis points from Q2.2020.
Operating income and Q2 was $23.8 million and increase of 124.5% or 3.4% of net sales compared to 10.6 million or 1.9% of net sales and the prior year quarter.
And Q2.2021 diluted earnings per share was 66 cents and increase of 125, 6% from 29 and.
And Q2.2020.
We ended Q2 with $157 million of cash and cash equivalents.
Now will look a little deeper at the segment performance.
And our business solutions segments are Q2, net sales or $267.3 million and increase of $39 and 9% compared to $191.1 million a year ago gross profit and the business solutions segment was $51.3 million and increase of 37.9%.
And from a year ago gross margin decreased by 28 basis points to $19 and 2% in the quarter compared to $19 and 5% and the prior year as a result of changes and product mix.
Throughout the past year the business solutions segment has been the most effected by the pandemic and since Q2 last year, we've seen strong recovery despite supply issues sequentially the business experienced 8.5% growth and the period.
And our public sector solutions business Q2, net sales for $129.7 million and increase of $15 and 7% compared to $112 and $2 million a year ago sales to state and local governments and educational institutions, where $105.1 million and increase of 22.
4% compared to the prior year, K 12, and higher Ed customers were largely responsible for the increase in the sled business.
Sales to federal government, where $24 and $6 million a decrease of 6.3% compared to the prior year gross profit from the public sector segment was $18 million and increase of $24 and 6% compared to Q2.2020.
Gross margin and increased by 99 basis points to $13 and 9%, primarily due to a change and customer mix and an increase of cloud based and security software.
And our enterprise solutions segment Q2, net sales were 307.2 million, a 24.5% increase compared to $246.8 million a year ago gross profit for the enterprise segment was $47 million and increase of $25 and 9% and the quarter.
Gross margin for the quarter increased by 17 basis points to $15 and 3%.
We've continued to see strong demand and the enterprise segment, especially in the manufacturing and healthcare vertical both of which exceeded 30% growth and it's also nice to see data center refresh project coming back into the enterprise space.
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, Kim and.
<unk> was 92.6 million this quarter and increased to $19 and 6% from 77 form and a year ago and.
As a percentage of net sales describe from senator decrease of 93 basis points year over year.
The year over year queue to increase and SG&A was primarily driven by and increase from variable compensation and increases and health care costs.
Q2, operating income was $23.8 million up 124.5% this quarter from 10.6 million a year ago.
R Q2 effective tax rate was 27.3% down from 27.9% and the same period a year ago.
Net income for the quarter was $17 and $3 million and increase of 126.3% from $7.6 million a year ago.
Diluted earnings per share with 66 cents and increase of 125, 6% from the prior year period.
Are trailing 12 month adjusted earnings before income taxes, depreciation and amortization or adjusted EBITDA was $96 and $7 million compared to $110 million a year ago.
We have $12 and $7 million remaining for stock repurchases under our existing stock repurchase program.
Cash flow from operations from the first 6 months of 2021 was 31.8 million versus $102 and $4 million and the same period, a year ago, and and a year ago quarter, we generated significant cash as business activity dropped off and partners extended terms cash flow from the first 6 months was driven by a deeper.
From accounts receivable at DFL improved by 5 day since December.
And increase in inventory of $26 and 2 million negatively affected cash flow as customers are ordering in advance of need and requesting that we stage and inventory for future Rollouts.
In addition, a decrease in payable to $9.1 million also negatively impacted cash flow for the first half of 2021.
And our net cash used and investing activities from $3 and $1 million and the first 6 months of 2021 was primarily the result of equipment purchases and initiatives offset by proceeds from life insurance.
The company is 8.7 million of cash for financing activities. During the first 6 months, consisting primarily of the Q1 payment of 2020 and special dividend.
I will now turn the call back over to him to discuss current market trends.
Thanks, Tom I wanted to take a few moments to review some of the highlights and our business.
And Q2 connection experienced significant demand and products and solutions that enable our customers to be productive from anywhere not just from their offices. We expect to see these trends continue to drive growth as the world experiences new levels of demand and work from anywhere and learn from anywhere solutions.
In addition, cloud and in particular Hyperscale class as a central tenet of our multiyear growth strategy towards that and we're making additional investments and all of our cloud initiatives.
Customers will continue to make security a top priority. In addition to securing their environment. They also need help to manage more devices remotely. These trends are driving double digit growth insecurity and and managed services.
And we look forward, environmental and social and governance initiatives and providing another growth opportunity for us and in fact, we're supporting all of our suppliers initiative toward that and and expect that this activity will increase and.
In addition, and will continue to invest and connection cares our company's social responsibility program building on connections inclusive culture. This initiative formalizes, the company's community engagement sustainability and diversity and inclusion efforts into 1 cohesive program.
Looking at the balance of 2021, and assuming that supply chain constraints on further deteriorate. We believe that we can deliver growth rates that are 4 to 500 basis points above the it industry, we're focused on helping our customers enable their post COVID-19 hybrid workforce accelerate their digital transformation.
And and power their innovation.
We will now entertained and your questions operator.
Sure, ladies and gentlemen to ask a question and you will need to pass style on guitar.
And we got your question and passed it back and Husky.
And how shall we think about the the impact on and your business if no more companies and go with that strategy.
So.
It is a great question. We obviously spent a lot of time trying to forecast and predict that the toward that and.
Interestingly and now it's companies do send more people back out there still are and number of reasons.
To upgrade technology itself is is a significant driver as a PC is much more essential and this environment, they're a collaboration issues.
Issues and opportunities and overall well a lot of that surge has already happened. We are optimistic that that will continue at least through the balance of this year.
And in addition to that we are seeing the infrastructure projects come back into the data center and so we don't expect that that will be interrupted either however.
Obviously safety is a primary concern for all of our people were working very carefully to ensure that everyone and remains safe and to help our customers toward that and that's really the best information that we have right now.
That's great to hear that that thanks to and for that explanation and then last question for me.
As far as margins.
Obviously very nice improvements from a year ago appeared and the second quarter.
How should we think about the gross and operating margins from the back half of the year and soda.
The level of thoughts that you may have would be very helpful. Thank you.
So obviously Anthony.
Q choose typically are pretty good software quarter, which.
Is generally gives us a talent and on the on the margin standpoint.
And I think as we look forward to the balance of the year I think we'll probably stay right about where we are and.
Maybe.
A little bit up or down, but I think largely.
Tables step for that in terms of the operating margins.
G&A was obviously.
A fair amount and year on year last year, and a quarter, we didn't really have any bonuses and the and the.
Variable compas hostess.
2 zero excluding commissions.
Obviously this year has improved so a lot of us coming back and then we did see from health care costs come through there and a fair amount higher than.
Typically experiencing.
And if we look into next quarter.
Inc.
Dollar for dollar we could see a little bit of a detriment next quarter.
Even if businesses up a little bit.
That kind of and hopefully gives enough.
And nothing photo kind of model and listen to sell.
Got it yes, that's very helpful and.
And thank you and best of luck.
Thank you and thanks Kathy.
And there are no further questions I will not tend to call them back total Campbell.
Thanks, Abigail I'd like to thank all of our customers vendor partners and shareholders for the continued support and once again, our dedicated co workers for their efforts and extraordinary dedication throughout this time and I'd also like to thank those of you listening to our call. This afternoon, and your time and interest and.
Connection or appreciate it have a great evening.
Ladies and gentlemen desk and today's conference call. Thank you for participating and you may now disconnect.