Q3 2022 PC Connection Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Okay.
Good afternoon, and welcome to <unk> third quarter 2022 connection earnings Conference call.
My name is Justin and I'll be the coordinator for today 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 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'll now turn the call over to the company.
Thanks, operator, and good afternoon, everyone I will now read our cautionary note regarding forward looking statements.
These statements are references made during the conference call that are not statements of historical fact may be deemed to be forward looking statements.
There is 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, there is 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 the company may elect to update forward looking statements at some point in future. The company specifically disclaims any obligation to do so other than required by law, even if estimates change and therefore.
You should not rely on these forward looking statements as representing management's view as of any date subsequent to today.
During this call non-GAAP financial measures will be discussed a reconciliation between any non-GAAP financial measure discussed and its most directly comparable GAAP measure 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 third quarter 2022 comparisons are being made against the third quarter of 2021.
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.
<unk> Dot Gov and in the Investor Relations section of our website at Www Dot connection Dot com.
<unk> our financials.
We delivered another strong quarter as we continue to execute well against our strategic objectives.
During the quarter, our customer focus starting to shift from Rollouts of endpoint devices and related technology to digital transformation data center modernization cloud optimization and security solutions.
More than ever before customers looked a connection to solve their complex technology needs and guide them through their technology initiatives without broad based capabilities.
Gross profit grew 13.2% year over year as a result of these shifts in customer demand, while net sales grew 3.2% over a previous record revenue performance in the third quarter of 2021.
Our gross margins grew 155 basis points to a record 17.6% in the quarter compared to 16.1% in the prior year.
These results demonstrate the continued execution of our business strategy to connect our customers with technology that enhances their growth elevates their productivity and empowers their innovation.
The technology and solutions that we provide are highly valued by our customers as we look forward. We believe that these products and services will continue to be essential in helping our customers to achieve their business objectives with technology and automation.
The business solutions segment through 12.2%, while the enterprise and public sector segment declined, 1.4% and 3.7% respectively.
Our enterprise in public sector segments experienced an increased level of sales of software and services recognized as revenue on a net basis, which place downward pressure on net sales as.
As we pointed out in the past we believe gross profit is the best indicator of our true growth.
Gross profit improve 13, 2% on a consolidated basis compared to the prior year quarter.
When you choose a record gross margin rate in a quarter of 17.6% compared to 16.1% in the prior year quarter.
Our focus on the ability to execute our plans to drive more advanced technology solutions contributed to this 155 basis point margin improvement.
As customers complete their build out of endpoints solutions budgets are now being allocated more heavily toward data center software and services.
We continue to invest in our managed service capabilities and we are experiencing strong growth for our solutions as customers are focused on the need to improve security increased productivity manage costs and modernise their infrastructure.
We also experienced strong growth in our vertical market and we delivered strong double digit revenue growth in our finance and healthcare markets and growth rate of 40% and 14% respectively.
During the quarter, we saw improvements in our supply chain, which resulted in a decrease in our backlog compared to last year as well as sequentially. However, a backlog remains elevated we expect some challenges will remain through at least the balance of the year and into 2023.
Now, let's discuss R Q3 performance in a little greater detail.
Operating income in Q3 with $31.7 million, an increase of 16.1% or 4.1% of net sales compared to $27.3 million or 3.6% of net sales in the prior year quarter.
In Q3 2022 are diluted earnings per share was 88 cents, an increase of 15.4% from 76 cents in Q3 2021.
We ended Q3 with $116.2 million in cash and cash equivalents.
Now I will look a little deeper into segment performance.
No business solutions segment, our queue three net sales of $315.8 million, an increase of 12.2% compared to $281.4 million a year ago.
Most profit in the business solutions segment was $63.3 million, an increase of 15.7% from a year ago.
Gross margin increased 60 basis points to 20 per cent in the quarter compared to the prior year, primarily due to an increase in demand for software and services recognized as revenue on a net basis.
We saw an increase in demand for software networking and data center products.
The increase in software and services demand as a result of more customers shifting their business. The subscription services cyber security an off premise cloud solutions, along with other cost saving technologies.
And our public sector solutions business two three net sales were $154.4 million, a decrease of 3.7% compared to 168.2 billion a year ago.
The state and local government and education institutions or $133 million, a decrease of 2.6% compared to the prior year, while sales to the federal government decreased 91% year over year gross profit for the public sector segment was $25.1 million an inquiry.
Twenty-three, 3% compared to Q3 21.
Gross margin increased by 356 basis points to $16 three per cent in the quarter as our customers transition from on premise solutions to off premise and cloud solutions.
The recognition of revenue on a net basis puts downward pressure on revenue while January increased gross margins.
And our enterprise solutions segment, two three net sales were 305.5 million a decrease of 1.4% compared to $309.7 million a year ago.
Gross profit for the enterprise segment was $48.3 million, an increase of 5.7% compared to the prior year quarter.
Most margin increased by 106 basis points to a record 15.8%.
Primarily driven by enterprise customers business, driven need for cloud and data centres solutions.
I will now I'll turn the call over to Tom to discuss additional financial highlights from our income statement balance sheet and cash flow statement Tom.
Thanks, Tim SG&A increased 110 basis points to 13.5% of net sales in the corner compared to 12.4% in the prior year quarter.
Approximately 75% of the increase mixed breed is solely due to the increase in sales of products, which are recognized as revenue on that basis.
On a dollar bags SG&A increased $11.5 million compared to the prior year quarter and.
In addition to the impact inflation continues to have on wages. There was also incremental increase in SG&A, resulting from increased variable compensation due to higher levels of gross profit.
We have also continued to make investments and incremental head count focused on building, our technical and sales organizations.
As long as you increase marketing spend Q.
Q3, operating income was $31.7 million up 16.1% this quarter from $27.3 million a year ago.
Are effective tax rate was 27.6% up from 26.6% in the same period a year ago now.
Net income for the quarter was $23.2 million, an increase from 15.8% from $20 million a year ago.
Diluted earnings per share was 88 cents, an increase of $15, 4% from the prior year period.
Are trailing 12 month adjusted earnings before income taxes, depreciation and amortization or adjusted EBITDA was $145.5 million compared to $102.4 million a year ago, an increase of 42%.
Cash flow generated from operations for the first nine months of 2022 was $15.7 million compared to $8.8 million in the same period a year ago.
The increasing cash flow from operations reflect higher levels of earnings offset by increases in both accounts receivable and inventory as well as a decrease in accounts payable.
I'd like to take a moment to discuss a few components of our working capital crimes in the past quarter.
DSO increased to 69 days from 64 days at the end of 2021.
The increasing as a function of net and products recorded in accounts receivable on a gross basis, while the revenue is recorded on a Netflix.
Inventories increased by $3.1 million versus the end of 2021 this.
This increase was driven by our enterprise segment, which was purchased inventory in advance of large project rollouts offset by our ongoing inventory reduction plan.
Our accounts payable balance declined 23.3 million for the first nine months of 2022.
Net cash used in investing activities of $7 million for the first nine months of 2022.
Primarily the result of equipment purchases and initiatives that will drive future efficiencies.
I will now turn the call back over to attempt to discuss current market trends.
Thanks, Tom I wanted to take a few moments to review some of the highlights in our business.
Growth in Q3 is largely attributable to the customize icke solutions that we integrate and deliver on behalf of our customers as they continue to work through their digital transformation and efforts to gain competitive advantage with technology.
Customers looked a connection to integrate and deliver these innovative solutions towards that and we continue to leverage our manage services capability as customers turned their attention toward data center infrastructure and digital transformation initiatives.
Our years of experience with supply chain optimization, and our ability to deliver custom integrated solutions continued to be an important component of our growth and a competitive differentiator for us.
Both of those also attributed to our expertise in delivering customized solutions to our vertical markets.
For example, in the finance vertical legal revenue, 40% year over year, and 12% sequentially as our customers, we're upgrading legacy hardware and focusing on securing their environments.
Manufacturing revenue grew 3% year over year as client focused on increasing automation and process integration.
As well as long term investment in new technologies to support cyber security risk reduction and growth opportunities.
Revenue in healthcare grew 14% year over year, driven by post pandemic technology, refreshes and new investments in traditional and new patient care delivery model.
Looking forward to the remainder of 2022, we believe customers will want to manage caused while leveraging technology for greater efficiency and as an enabler for competitive advantage. We expect our customers will continue to focus on data centers security and cloud transformation. We anticipate this trend will continue.
In the near term and we will put pressure on top line revenue growth as it did this quarter.
Last four we indicated that year over year growth rates would be moderating, which they did we expect that trend to continue for the near term. These.
These expectations are in part due to record results recorded in the prior year periods.
Additionally, our customers are telling us that they are being more deliberate and Sundays ended up being more restrictive on budgets in the face of increasing economic uncertainty that being said, we believe will end the year with growth, that's 3% to 5% above the I T industry growth rate and we will 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 uncertain economic environment.
I would like to take a moment to think our valued employees for their continued efforts and extraordinary dedication during this rapidly changing environment.
We will now entertain your questions operator. Thank you as a reminder to ask a question you'll need to press star one one on your telephone.
One moment first.
Question.
And our first question comes from Adam Tingle from Raymond James Your line is now open.
Okay. Thanks, good afternoon.
And they just talk with the last comment that you were making now that that was very helpful. When you say three to five per cent above the I T industry for 20 twenty-two could you help us with what you're thinking of as the I T industry crawler Crane.
I think it's gonna apply that to for revenue.
Down here over here I, just Wanna make sure that we're getting the bottle right based on the commentary making.
Yes and.
Well thanks Adam.
Yeah, I think that's right I, you know I think that.
Obviously, if you look at our growth rate year to date, we've had a pretty good year, we do see that moderating a little bit in queue for and we think we can take some market share. So.
I think exiting the year at 3% to 5% above market. It is still well within our reach.
We may find that I think you're only thinking.
Freedom.
3% to 4% growth rate, so you kind of looking at.
You know.
Eight 9% for the whole year.
Got it Okay, that's helpful and Tom.
The experience maybe some of this swelling here I'm I'm I'm wondering what how we think about margins moving forward, particularly as we can try to model 20 twenty-three sounds like we might have some continued challenges on top line. He's on a roll into something really difficult comparisons in Q1, and Q2 and would imagine topline might even be.
Flat or down and you wanted to do too.
So you know feel free to clarify if that's not the case, but if so you know how we think about the mortgage trajectory nothing for it as well.
[laughter], there's a few holes in pieces in there right.
In the Bronx and.
Services and cloud.
Certainly haven't.
Material impact on our margins this corner rights. So the class on question. One is <unk>, how does that continue going forward.
Martin emphasizes that's why we continue to stay focused on what's our gross profit growth rate because.
That's.
The <unk> the important thing.
Now that being said if you take the mix out of it.
I think we should be able to hold our historical margins on on hardware.
You know as you can see from the numbers.
The endpoints spending was was it goes down a little this corner compared to last year and and I think we kind of expect that to continue at least into Q4 and as we roll into next year.
I'm thinking we can probably hold our historical margin rates.
On a on the end point equipment and the data storage.
Oh, what kind of what's really going to be a wildcard in terms of report margins how are those services and cloud in that 100% margin product rolled through the piano.
[noise] and we're pretty optimistic on that we're seeing.
Incredibly strong growth rates and our cloud our CSP in our software business in general and as you know that that's.
Recorded on a net basis, which does drive that margin right up.
Got it just one more more for me.
And as you look at your pipeline and in here from your sales force since we're sitting here in November we've got that month of December coming up it typically tends to be the corporate budget flush month and I'm, just wondering what you're hearing qualitatively or anything that you could support with the metrics that you look at on what the budget flush my ultimately look like in 2020.
Thank you Bob.
So that is a great question Adam.
Little concern on that we've talked to a number of customers who and.
In some cases are still waiting for data center equipment and some of the advanced technology.
Solution. So you know to the extent that that is still constrained a lot of that could be pushed into 2023 and as you know endpoints are slowing down but generally speaking many of the projects that were involved in now.
Are truly mission critical and we feel pretty confident that we're going to meet our expectation and deliver our forecast.
Thank you.
Thank you and thank you.
And one moment for our next question.
And our next question comes from Anthony <unk> from Sidoti July and is now open.
Good afternoon, and thank you for taking the questions.
Alright, So first thing.
Of the imply the four.
Four Q sales projections that you have I mean.
How much of that is because of the mix of business shifting more towards software and just just normal impact of netting versus just just.
Impact from slower demand because of the macro environment.
Well, thanks, Anthony it's good to hear from you.
So Tom.
I would say I mean.
Clearly can a little bit of a pullback in some of the hardware categories, Anthony, especially junkie endpoint device. So there is some of that I think baked in there and we didn't have a really nice Q for our last year, but the vast majority of the pressures is coming from you know all of the software services coming through on on on a net basis.
So.
It's I think it's more of the accounting on the net software, but there is some underlying demand softness.
Okay Gotcha.
Mmm.
Oh and see what that looks like for us is.
Our mid market and commercial business has been very strong.
With our enterprise business, we are hearing as you're hearing out there in the industry that customers are some in some cases asking for an additional signature in some cases, they're delay but at the end of the day, we still feel very confident.
Got it okay. So so.
They're all I think to your point it sounds like you know.
Gross profit.
Certainly increase I guess in queue for even though the reports of revenue will be.
Maybe not not as good because of all this netting so.
To say that you would expect your gross profit gross profit dollars to be up in the in the fourth quarter.
Okay.
Oh, and they all started out little Tom jump, and but but but clearly we're seeing that mix shift into integrated solutions and we're seeing as part of that a lot of cloud a lot of cyber security and a lot of software and as you know all of that is.
Most of that is recorded on a net basis and that of course does drive gross margins up.
Yeah, I think to answer your question directly Anthony I think the jury's still out on that.
Going to be.
Nothing to talk I think.
And does that thank you.
Oh, okay.
Can you hear me guys.
Yeah, we can hear you now okay, sorry, yeah.
It was a long pause there okay and I guess my last question I guess is.
You made progress with your inventories versus your second quarter, some cash flow improved.
So.
What would you say is your reason.
Reasonable golf or Europe yearend inventory then if you could just also touch on your cash flow priorities that'd be great.
So I think I think on the inventory, it's Anthony allowed us to some independence.
How the supply chain for example, we did see.
We did see an improvement type this Florida and our goal is to continue to drive that number down.
Now that being said.
We do have a couple of very large projects that are coming up and I think a lot of estimate depend on how that how that inventory comes in right at the end of the year.
You can push it out to Q1 I think it's one thing if I were to.
30 $40 million in yourself.
It's going to depend on the timing of the supply chain, but all else being equal we should be able to drive down another 10 ish million dollars I think.
Yep.
And it also had to put that in perspective, Anthony R inventory levels are.
Lower than last year, as we mentioned, but compared to ordinary levels. They are significantly elevated.
Mhm.
Alright, and then in terms of your cash flow priorities.
Yeah, So we kind of sticking to our guns. There Anthony you know we are.
Have an approved share buyback in place and will be looking at that we also.
Have made some upgrades to our system. We've made some upgrades to our senior staff and as you know our balance sheet is up.
<unk> in our powder dry and we're also continually looking at additional opportunities that could tuck in and enhance our capabilities in specific solution areas.
Right now is that markets are up.
In pretty tough shape.
So it's probably nothing that's immediate but we remain open to the idea of Dewey tuck in acquisitions.
Okay. Thank you very much and best of luck.
Thank you, it's Anthony and thank you.
And I'm showing no further questions I would not like to turn the call back over to Tim Mcgrath for closing remarks.
Thanks, Jeff and I would 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 through this time.
I'd also like to thank those of you listening to our call. This afternoon, your time and interest in connection or appreciate it have a great evening.
This concludes today's conference call. Thank you participating you may now disconnect.
The conference will begin shortly.
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<unk> one one.
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