Q2 2022 PC Connection Inc Earnings Call
You.
The conference will begin shortly. To raise your hand during Q&A, you can dial star 11.
Good afternoon and welcome to the second quarter 2022 connection earnings conference call. My name is CalMode and I will be the coordinator for today at this time. All participants are in 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 rebroadcast specific permission from the company.
On the call today are Timographs, President and Chief Executive Officer, and Tom Baker, Senior Vice President and Chief Financial Officer.
Please note that to ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. And now I will send the call over to the company.
operator and good afternoon everyone. I will now read our cautionary note regarding forward-looking statements.
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 of the safe, proper provisions under the private securities litigation reform act of 1995. Actual results made different 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, 2021, which is on file with the Securities and Exchange Commission as well as in other documents that the company filed 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 a company may elect to update forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so, other than as required by law, even if estimates change. And therefore, you should not rely on these forward-looking statements as representing management's 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.connection.com. Please note that unless otherwise stated, all references to second quarter 2022 comparisons are being made against the second quarter of 2021.
Today's call is the webcast and will be available on Connections website. The earnings release will be available on the SEC website at www.sec.gov and in the Investor Relations section of our website at www.connections.com. I would now like to turn the call over to our host, Tim McGrath, President and CEO . Tim, please.
Thank you, Samantha. Good afternoon, everyone. And thank you for joining us today for Connections Q2 2022 Conference Call.
I'll begin this afternoon with an overview of our second corner results.
Highlights of our performance and then share our updated thoughts on our business and the remainder of the year.
Tom will lock us through a more detailed look at our financials.
We had an outstanding second quarter. Our team continued to execute well against our strategic objectives across each of our business segments, with all-time record quarterly results for revenue, growth profit, and net income.
We experience double-digit growth across all three of our business segments.
These exceptional results demonstrate the continued execution of our business strategy to connect our customers with technology that enhances growth, elevates productivity, and empowers innovation.
The technology and solutions that we provide are highly valued by our customers. As we look forward, we believe that our products and services will become even more essential in helping our customers to achieve their business objectives with technology. And their business objectives with technology.
On a consolidated basis, Q2 revenue grew by 17.7% compared to last year's second quarter.
The business solution segment grew 22.9%, while the enterprise segment grew 13.6%, and the public sector grew 16.5%.
In addition, we continue to see our customers' business environments evolve as a adaptive supporting modes remote and inoffice words.
Customers are focusing on the need to improve security, increased productivity, manage costs, and modernize their businesses.
Our vertical markets teams delivered strong double digit revenue growth in our finance, manufacturing, and retail markets with growth rates of 40%, 16%, and 10% respectively.
Our healthcare vertical, which is our largest vertical, grew revenue 5% year over year, following a growth rate of 30% in Q2 of 2021.
During the quarter, we saw pockets of improvement in the supply chain, which resulted in slight decrease in our backlogs to planterly, although still significantly higher than a year ago.
The overall supply chain remained challenged and we expected to continue through at least the balance of the year.
Our team has continued to leverage our partner relationships, scale, technology, integration and distribution center and logistical capabilities, as well as our strong balance sheet to navigate the ongoing supply constraints on behalf of our customers.
Now let's discuss our Q2 performance in a little greater detail.
As I stated earlier, second quarter revenue was up 17.7% to $828.5 million from 2021.
Well, Gross Profit was up 17.7% to 136.9 million, both all-time records.
Gross margins were 16.5% of four basis points from Q2 2021.
Operating incoming Q2 was 34.8 million and increased to 46.3% or 4.2% of net sales compared to 23.8 million or 3.4% of net sales in the prior year quarter. or 3.4% of net sales in the prior year quarter.
In Q2 2022, our diluted earnings per share was 96 cents, an increase of 46.5% from 66 cents in Q2 2021.
We ended Q2 with $94.9 million of cash and cash equivalents.
We'll now look a little deeper into segment performance.
In our business solution segment, our Q2 net sales hit an all-time record of 328.4 million, an increase of 22.9%, compared to 267.3 million a year ago.
Gross profit in the business solutions segment was $65.5 million, an increase of 27.7% from a year ago.building addition.
Gross margin increased 75 basis points to 19.9% in the quarter compared to the prior year.
primarily due to changes in product maintenance.
We saw an increase in demand for data center products with strong growth in the storage and server categories, cloud, security, and software also experience good growth. In addition, demand for workplace transformation products remained strong. Our customers continued to invest in technology to gain a competitive advantage, and they turned us to calm the confusion and guide them through their transformations.
in our public sector solutions business.
Q2 net sales were 151.2 million.
An increase of 16.5%.
compared to 129.7 million a year ago.
Failed to state and local government and educational institutions were 131.2 million increase of 24.8% compared to the prior year. Failed to state and local government and educational institutions were 131.2 million Failed to state and local government and educational institutions were 131.2 million
partially offset by a decrease in sales to the federal government year over year.
The Emergency Connectivity Fund continues to be a driver of demand in the K-12 market, and that will extend through December of 2023.
Furthermore, the infrastructure stimulus bill allocates funds for technology purchases.
that should continue to create opportunities for our SLED business.
Gross profit for the public sector was $20.8 million, an increase of 15.5%, compared to Q2 of 21. Gross margin decreased by 12 basis points to 13.8%, primarily due to changes in both product and customer mix.
In our enterprise solution segment, Q2 net sales with 348.9 million, an increase of 13.6%, compared to 307.2 million a year ago.
Gross profit for the enterprise segment was 50.6 million and increase the 7.6% compared to the prior year quarter.
Gross margin for the quarter decreased to 14.5%.
While the growth margin of this quarter is in line with historical rates, they are 80 basis points lower than the prior year. As you may recall in Q221, the enterprise segment benefited from multiple data center rollouts that did not repeat in the current quarter.
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. SGNA decreased 82 basis points to 12.3% of net sales in this quarter due to improved efficiencies on higher revenue. On a dollar basis, SGNA increased 9.6 million compared to the prior year quarter. The increase in SGNA was primarily due to an increase in personnel cost associated with an investment in incremental headcount focused on building stronger marketing and technical organizations.
and an increase in variable compensation due to higher levels of gross profit. Q2 operating income was $34.8 million, up 46.3% this quarter from $23.8 million a year ago.
Our effective tax rate was 27%, down from 27.3% in the same period a year ago.
Net income for the quarter was 25.4 million, an increase of 46.9% from 17.3 million a year ago. An increase of 46.9% from 17.3 million a year ago.
Diluted earnings per share was 96 cents and increased to 46.5% from the prior year period.
Our training 12 month adjusted earnings before income taxes, depreciation and amortization, or adjusted EBITDAB, was 140.5 million compared to 96.7 million a year ago, an increase of 45%.
Cash flow use and operations for the first six months of 2022 was 8.4 million versus cash flow generated from operations of 3.8 million for the same period a year ago. The decrease in cash flow from operations reflects higher levels of business activity and consequently, both accounts receivable and inventory increased in the first six months of the year. and inventory increased in the first six months of the year.
In the quarter, we generated $29.9 million in operating cash flow as our DSO improved by three days and our inventory balance decreased by $11.4 million. Our net cash used in investing activities of $4.6 million in the first six months of 2002 was primarily the result of equipment purchases and IT initiatives.
We also have $12.7 million for stock repurchases under our existing stock purchase program. I will now turn the call back over to Tim to discuss current market primes.
Thanks, Tom. I want to take a few minutes to review some of the highlights in our business.
Our growth in Q2, again, is largely attributable to the customized IT solutions that we deliver on behalf of our customers as they continue to work through their digital transformation and efforts to gain competitive advantage with technology. And efforts to gain competitive advantage with technology.
Our customers look to connection to deliver these innovative solutions.
Towards that end, we continued to leverage our managed services capability, and we're excited about the performance and the volume of activity that we experience during the second quarter at our Technology Integration and Distribution Center.
Our customers trust us with their mission critical solution deployments, and in fact, we achieved a record volume of custom configurations in the quarter.
Our years of experience with supply chain optimization and our ability to deliver custom solutions continue to be important components of our growth and a competitive differentiator for us.
Our growth was also attributed to our expertise in delivering custom solutions to our vertical markets. Group skeptics.
For example, in the retail vertical, we grew revenue 10% year-over year as a result of retailers investing in employee productivity, the customer experience and inventory management systems.
Residents of the manufacturing vertical grew 16% year over year, as manufacturers focused on productivity, cost reduction, and improved quality through the use of innovative technologies as a means to meet business objectives and gain long-term competitive advantages.
These changes are driving investments in networking, security, hybrid data center, and end user devices.
Looking forward to the remainder of 2022. Customers will want to manage costs while leveraging technology for greater efficiency and as an enabler for competitive advantage. We expect our customers to continue to focus on data center, security, and cloud transformation.
As discussed, we believe that supply chain constraints will continue to plague the industry, although the worst is behind us, headwinds will continue into 2023.
We expect our quarter on quarter growth rate to be lower in the second half than the first half. The next step is to be lower in the second half than the first half.
These expectations are a result of a tougher comparison from the prior year and our customers serving global markets becoming more deliberate in their technology investments.
We believe we can still deliver organic growth rates that are 200 to 300 basis points above the IT industry and continue to take market share.
We remain focused on helping our customers achieve their productivity and efficiency goals while keeping them secure and connected in this evolving hybrid work environment.
I'd like to take a moment to thank our valued employees for their continued effort and extraordinary dedication starting this rapidly changing environment.
We will now entertain your questions.
Operator.
Thank you. At this time, we'll conduct the question and answer session. Please wait for your name to be announced. We will stand by. We compile the Q&A roster.
we'll conduct the question and answer session. Please wait for your name to be announced. We will stand by while we compile the Q&A roster.
Our first question comes from Anthony Lability.
Yes. All right. Okay. Go ahead. Thank you.
Good afternoon. Thank you for taking the questions.
So I'll get the first, the tibiotie talked about the customers now being more deliberate and
Certainly recognizing that you do face tougher comparisons now in the back half of the year. You know, so are you seeing that kind of across the board and each of your three main segments or is one of the, are there any other segments that are you're sitting put, you know, bit more modest growth? Just just how should we think about that?
Well, thanks, Anthony. So clearly in the second half...
And look at the macroeconomic backdrop. The customers that we think are going to be most effective, those customers that are large and perhaps have a global presence. Some of our large customers are slowing down for the second half. But again, we're pretty confident overall. We've got an extraordinary backlog heading into the back half of the year. And overall, we're bullish on the business. I would say SMB has been resilient and remain very strong.
We're going into the busy season for public sector. As you know, September is the busy month for federal. And so I'd say enterprise is probably the most under pressure. But that I think is consistent with what you're seeing out there in the competitive landscape. I think we're in great company. You saw our competition announced over the last couple of days and they too had extraordinary results. For more information visit www. transcript favourites.
That's correct. So as far as your backlog, I mean, so you mentioned that it was down sequentially but still up over your – can you give us a little bit more color as far as the components of the backlog? Has that changed much? And if you just talk about that, that'd be great.
So I think the part that eased up a little bit was certainly in the device area. When we look at the server storage networking type things, that continues to be pretty challenged. So the drop in our backlog wasn't gigantic, but it was...
I'd say moderate, you know?
Okay, got it. Okay. Thanks for that color and a couple more questions here. So inventory was down sequentially. How should we think about. Where you think you'll end up the year at the with inventory.
So, as you know, Anthony, last quarter I think was an all-time high. We worked really hard to bring it down. We do, as things start to ease up a little bit in the supply chain, we can ship more and more of what we have in inventory.
So I think as we go through the year, I think it will kind of gently moderate back towards, you know, kind of our normal levels, we're sure in the, you don't call it 130 to 150 range.
I don't know if we'll get all the way here by the end of the year, but certainly that's where we're headed direction.
Got it, okay, so that would be some nice progress from here. And then lastly, so in light of everything that's going on in the world, as far as just Michael concerns that are out there, have you made any changes to your own hiring plans?
Actually, we've been full steam ahead there. We've seen a nice recovery in our ability to hire. There had been a little bit of a while when things were under pressure a couple of quarters back. So we're now getting back to a more normal cycle. We're starting sales classes in a much more usual and ordinary way. And we have no plans to light up on that.
and we are also investing in technical engineering and technical sales of the reading.
Yeah, I would also add to that, you know, in the last half last year, you know, we did make some adjustments, you know, to our compensation programs and our benefit programs, and we have been able to reduce the turnover of fair amount.
Thank you very much and best of luck.
Thank you for your time, Penny.
Thank you Anthony. Our next question comes from the line of Kathleen Huntley of Raymond James.
Can't swim in your life, you guys.
I can't leave.
Could you guys just talk a little bit about the managed service capabilities? Was that an incremental uptick quarter over quarter? And would you maybe attribute this to the stressed hiring environment that the customers are facing? So maybe they're turning to you guys and using your services instead.
Yeah, Kathleen, so that's a great observation. We see the demand picking up in a few areas. As I mentioned, it was a record quarter for us for advanced configurations. And certainly where employees are working remotely or in a hybrid fashion more than ever before, customers are asking us to completely outfit them to manage that image, that asset. And in some cases, that install and de-install.
And the managed service components will be wrapping a health death and emergency services around that. So all the support that goes around that hybrid worker has been a driver of demand. We're also seeing an uptick for companies who want us to outfit either their office or their location. And we are now able to do that in a very deliberate and precise way.
in our technology integration and distribution center. So in many cases, we can deliver an office or a location with one shipment, everything preloaded, pre-configured and ready to go. So that is really the uptick in our volume.
Okay, awesome. Thank you so much for all of that color. And could you maybe just give us a sense for how far customers are booking orders out? I know that it may have been elevated during COVID, but has that started to come back down? Or are you still seeing customers book orders really far out to get ahead of inventory? Thank you.
So we are, it does depend I think on the category. Some of our security and netcom products they're booking way out in advance because those have the longest lead times. So you have some other very long lead times and some data center products.
And that is probably manufacturer specific, but certainly very long lead times. The lead times around our device, our endpoint device business are getting much better. And so we're seeing a little easing of pressure there. So it's mostly the infrastructure, data center and security products that still have the extended lead times.
I would tell you, as a supply chain, you heard me talk a little bit about the inventory, and hopefully as the supply chain issues start to work their way through and lessen in severity, we're going to be able to convince our customers to get back to holding a month worth of inventory or a few weeks of inventory rather than months. So, thank you.
You know, I think we'll kind of pull this stuff together and we'll really work down on the capital we have invested in the company.
Awesome. Best of luck and great quarter.
Sonny, thank you all very much for watching. Bye.
to Catherine. I'd like to turn it back to the couple closing remarks.
Well, thanks, Cal. I want to thank our customers, their partners, shareholders for their continued support. And again, our dedicated co-workers for their efforts and extraordinary education this time.
Thanks, have a great evening.
Thank you gentlemen. Thank you for participating in today's conference. This does conclude the program, and we now disconnect. Thank you.
The conference will begin shortly. To raise your hand Q&A you can dial 1-1. Q&A will begin shortly.
I have.
Will.
you
I.
Good afternoon and welcome to the second quarter of the 22 Connections Earnings Conference. My name is Cal Mode and I will be the coordinator for today. This time all participants will listen only mode. Following the prepared remarks, there will be a question and answer session as this conference call is the property of Connections and may not be recorded or broadcast without assistance from the company. On the call today are Tim, President and Chief of Officer, and
Note that to ask a question, you will need to press 1 on your telephone. You will then hear a message advising you to raise. And now I will send the call over to the company.
Thanks, operator. Thank you to everyone. I will now read a cautionary note regarding forward-looking statements. Any statements or references made during the conference call that are not of historical fact may be deemed to be forward-looking. Fares that management may make to companies' future expectations, plans, and prospects constitute forward-looking statements for purposes of the safe homes under the Private Safety Litigation Reform Act of 1995. Actual results may differ from those indicated by these forward-looking statements as a result of the important factors.