Q4 2022 PC Connection Inc Earnings Call
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Vince will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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Afternoon, and welcome to the fourth quarter 2022 connection earnings Conference call. My name is Sherry 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.
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 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 factor 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 files with the commission from time to time.
In addition, any forward looking statements represent management's view as of today, you 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 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 views 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 fourth quarter of 2022 comparisons are being made against the fourth 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 S. E C Dot Gov, and any 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 .
Kim.
Thank you Samantha good.
Afternoon, everyone and thank you for joining us today for Connection's Q4, 2022 conference call.
I will begin this afternoon with an overview of our fourth quarter results highlights of our performance.
There are thoughts on business in 2023.
Tom will then walk us through a more detailed look at our Q4 financials.
We're seeing increased demand for advanced technology solutions, including data center modernization cloud software optimization and security solutions.
The shift away from endpoint devices. These are customer it has to be aligned with the partner they can trust to deliver on more complex integrated solutions.
Services.
Our strategic initiatives were developed to support the evolution in customer priorities around advanced technology and integrated solutions.
We've continued to make investments in tools resources and training in order to further expand and align our offerings with the needs of our customers as we enable their digital transformation.
We believe our business strategy remains well aligned to the shifting dynamics of how customers deploy utilized in consumer technology.
We continue to connect our customers with technology that enhances growth elevates productivity powers their innovation.
We help our customers expertly navigated through a complex set of choices within the technology landscape with dynamic and constantly evolving technology choices around core infrastructure on Prem and off Prem cloud security and software.
We help turn the confusion.
For our customers.
Now, let's discuss our Q4 performance.
We have had great success since the pandemic began helping our customers to navigate through hybrid work in hybrid learning solution.
During Q4, the endpoint device category experienced nearly a 50% decline in revenue as customers have shifted their priorities and become more cautious with their overall it spending.
Certain economic environment as a result, net sales declined by eight 5% to $732 5 million compared to Q4 2021.
Gross profit declined two 1% to $124 3 million. However, gross margins were up 110 basis points to 17% in Q4 compared to Q4 2021.
<unk> gross margin is a reflection of a shift in product mix, including more solutions recognized on a net basis.
Operating income in Q4 was $23 9 million a decrease of 23, 6% or three 3% of net sales compared to $31 3 million or three 9% of net sales in the prior year quarter.
Net income in Q4 was $18 8 million a decrease of 15, 9% compared to $22 4 million in the prior year quarter.
In Q4 2022, our diluted earnings per share was <unk> 71.
A decrease of 16, 2% from 85 in Q4 2021.
During the quarter, we saw continued improvement in our supply chain, although pockets of concern still exist with a few suppliers for the full year, we delivered record results, including an 8% increase in net sales to $3 1 billion.
33% growth in gross profit to $526 2 million and diluted earnings per share of $3 37.
Which represents a 27, 2% increase compared to 2021 full year results.
I will now look a little deeper into our performance.
In our business solutions segment, our Q4 net sales were $280 7 million a decrease of seven 5% compared to a record and a tough compare of $303 5 million a year ago. In spite of this decrease in net sales our gross profit in the business solutions segment was <unk> <unk>.
60 million, an increase of three 6% from a year ago.
Gross margin decreased 229 basis points to 21, 4% in the quarter.
This increase was driven by strong demand for higher margin data center products, including software networking and servers during the fourth quarter of 2022.
This is in line with our expectation of the shifting technology mix in customer spend.
And our public sector solutions business Q4, net sales were $117 3 million a decrease of nine 4% compared to $129 4 million a year ago.
After the federal government increased 46% year over year compared to the prior year, while sales to state and local government and educational institutions were $79 6 million a decrease of 23, 2% compared to the prior year.
Gross profit for the public sector segment was $17 million a decrease of eight 8% compared to Q4 'twenty. One gross margin increased by 10 basis points to 14, 5% in the quarter.
In our enterprise solutions segment Q4, net sales were $334 5 million a decrease of eight 9% compared to $367 3 billion a year ago.
Gross profit for the Enterprise segment was $47 3 million a decrease of six 2% compared to the prior year quarter.
Gross margin increased by 41 basis points to 14, 1%, primarily driven by an increase in sales of servers and services during the fourth quarter of 2022.
Our vertical market focus continues to deliver customer value and our finance vertical market revenue grew 13% year over year as customers modernize their environment with a focus on security and software and Additionally, gross profit increased 22% year over year.
Retail revenue grew 11% year over year as customers relied on technology to enable automation and improve the retail experience.
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.
SG&A increased 175 basis points to 13, 7% of net sales in the quarter compared to 12% in the prior year quarter, primarily driven by lower revenues.
On a dollar basis SG&A increased by $4 7 million compared to the prior year quarter. As a result of an increase in the cost of labor and ongoing investment and resources to strengthen our sales technical sales and services organization looking forward, we intend to continue to invest in tactical resources.
Focusing on improving our efficiency in light of what we perceive to be continued economic headwinds in 2023.
In the first quarter of 2023, we launched initiatives intended to reduce our current cost structure by $8 million to $10 million and.
Implementation of these cost reduction initiatives started this month and will be fully implemented by Q4.
Q4, operating income was $23 9 million down 23, 6% this quarter from $31 3 million a year ago.
Our Q4 effective tax rate was 23, 7% down from 28, 5% in the same period, a year ago due to a reduction of state income tax expense.
Net income for the quarter was $18 8 million decrease of 15, 9% from $2 4 million a year ago.
Diluted earnings per share was <unk> 71, a.
A decrease of 16, 2% from the prior year period.
Our trailing 12 month adjusted earnings before income taxes, depreciation and amortization or adjusted EBITDA was $139 3 million compared to $113 million a year ago, an increase of 23%.
In terms of returning cash to shareholders, we announced an increase in our stock repurchase program of $25 million. In Q4. In addition to a <unk> 34 per share special annual dividend paid in December .
Additionally, we are pleased to announce that our board of directors has declared a quarterly dividend of <unk> per share payable to shareholders of record on February 21, 23, and payable on March 10th of 2023.
Our goal is to maximize shareholder value, while maintaining financial flexibility, we continue to assess M&A opportunities and other capital allocations, such as dividends and stock buybacks, we have approximately $37 million in previously authorized share repurchases.
Cash flow generated from operations for the year ended 2022 was $34 9 million compared to $57 8 million for the same period a year ago.
The decrease in cash flow from operations reflects an increase in accounts receivable as our DSO increased to 70 days from 65 days at the end of 2021. This increase in DSO was primarily a function of netting products recorded in accounts receivable on a gross basis, while the revenue is recorded on a net basis.
Our accounts payable balance declined $49 1 million for the year, ending 2022, while accrued expenses and other liabilities declined $14 7 million due to the timing of product receipts and associated payments.
Our net cash used in investing activities of $9 1 million in 2022 was primarily the result of equipment purchases and it initiatives that we believe will drive future efficiencies.
The company used $11 2 million of cash for financing activities. During the year ended 2022 of which $8 9 million was returned to shareholders in the form of dividends.
We ended Q4 with $122 9 million of cash and cash equivalents.
I will now turn the call back over time to discuss current market trends.
Thanks, Tom I wanted to take a few moments to update you on our strategic plans.
As stated earlier, we're seeing increased demand in advanced technologies, and we're focused on keeping our customers secure productive and competitive with technology now.
Now we're in a 41 year, we remain committed to our three main pillars of growth.
Cloud and data center transformation.
Workplace transformation and supply chain optimization.
To help us accomplish these initiatives, we've made enhancements to our business plan and have hired several world class leaders in sales.
Nickel sales and services.
As our customers continue to transform their businesses, they look towards connection to integrate and deliver on more complex and innovative solutions.
Looking at the first half of 2023, we believe that demand for endpoint devices will continue to be challenged as they were in Q4. Additionally, our customers continue to tell us that theyre more delivered in spending and are being more restrictive on budget in the face of economic uncertainty.
We do expect our customers will continue to shift their priority toward hybrid data center, cyber security and cloud transformation, which should partially offset weakness in the endpoint market. In addition, we expect our customers to extend the life of their technology assets more than they normally.
Would this be that services and advanced technology should be a growth driver for connection as clients will look to help offset their continued need for technical resources and solutions.
As we navigate through 2023.
We will remain very focused on improving our operational efficiency, managing our costs and scaling our expenses appropriately.
Consistent with analyst predictions for the second half of 2023, we believe that the overall it market should recover as the macroeconomic environment improves.
Great companies can take market share in any economic environment, and we expect to end the year with the growth that is 2% above the.
Industry growth rate.
I'd like to take a moment to thank our valued employees for their continued effort and extraordinary dedication during this rapidly changing environment.
We will now entertain your questions operator.
Thank you as a reminder, if you would like to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment, while we compile the Q&A roster.
First question will come from Anthony <unk> with Sidoti. Please go ahead.
Okay.
Good afternoon, guys how are you.
Great. Thanks, Anthony how are you.
This is Stefan actually this is Stefan handful Anthony let me ladies Inscape I apologize.
My first question is given the slower economy are you seeing any meaningful customer cancellations.
That's for certain R&D projects.
Yeah.
Sure. Thanks, So currently.
The economy, the economic backdrop does have an effect on many of our customers.
Seeing it probably the most in our enterprise space right now, but overall.
We continue to add customers.
Overall, our acquisition engine is working very well and our current customers. Some that have taken a pause it's largely as I mentioned on the call in the device arena when you're thinking about that if you think about Q4 'twenty one versus Q4 'twenty two.
Is it extraordinary difference in the overall device ecosystem for us too is over $75 million and so that really is the story for the quarter, we've got tremendous loyal.
Loyal long term customers continue to buy from US many of them have taken a pause in device devices, specifically, but that said, we're really excited about where we're headed where we are headed as a company. We've really made a transition to focus more on those advanced technologies have put it.
Number of plans in place around training initiatives, our leadership focus and especially the tools to drive all of that so we're pretty optimistic about where we're headed and don't think that.
Our customers are doing anything other than as you indicated we're trying to get through this uncertain economic time, we're here to help them through that and overall pretty bullish.
John .
Yes, I think.
To date, we haven't seen any meaningful cancellations of orders.
Orders have been placed.
There have been a few projects that are pushed out a bit but I wouldn't say I wouldn't say those are significant at this time.
Thanks, Alright.
My second question is also different.
Macro environment are you seeing or expecting any meaningful pricing pressure.
And if you've got across the board only in snowmobile vertical markets.
So I don't think.
Clearly there have been price increases from our suppliers over the pandemic.
Over the Hill.
Over the last 18 months, but nothing meaningful any price increases that we've had we have been able to successfully move along and we're not seeing any extraordinary pressure the other way from our customer base frankly, because I think they see the technology and the integrated solutions that we deliver.
Thats being mission critical and impactful to their business. So we've not had that pressure.
Thank you so much and Mcfarland answer do we think about right.
The PC cycle, playing out this year and if you could talk about that in terms of your expectations for the remaining segments that would be great. Please.
So clearly what we saw with the PC cycle.
As you know from following our industry is that.
From the pandemic through our late Q3 of 'twenty, two and certainly into Q4.
Sure.
Let me correct that during the pandemic of course, the PC was essentially all in purchases were accelerated in fact, we saw.
Great acceleration in the device market overall and as a result of that I think many of our customers did indeed accelerate purchases of endpoint device and all the related ecosystem and products that go along with that we did see a slowing of that that started late in Q3 as certain.
Continued into Q4, and we now expect that that slowness in device.
We'll be around at least for the first half of 2023.
There are meaningful drivers of growth coming I think after that and we think that three year upgrade cycle will return to normal and it really start to pick up in the second half of the year.
Does that answer your question.
Yes.
Great.
Yes.
Can you give more details about your backlog in nickel position backlog.
Yes, I would say.
This quarter our backlog.
He is down a little bit.
As we mentioned in the prepared remarks, there are still pockets in.
In the supply chain.
Supply is constrained so.
<unk> fills a little bit elevated.
It has been easing sort of turning the corner.
Yeah.
Thank you so much for taking my questions and I'll jump back in the queue.
Thank you.
And one moment our next question.
That will come from the line of Jake Nordson with Raymond James Your line is open.
Hey, guys. This is Jake on for Adam.
I was just hoping you guys could provide me with more color on sort of the demand trends youre seeing in SMB compared to enterprise, obviously discussed customers getting a little more cautious and scrutinizing. It budgets more but are you seeing that sort of index more towards SMB or enterprise can you just dive into that a little further please.
Hello, Thanks, Jay So really we have been seeing it across the board and there are some pockets of opportunity and I'll outline those picked up.
Clearly our large enterprise customers many of them are going through reductions and certainly our budget.
Reductions and as a result, the <unk>.
Enterprise has probably been hit the hardest we do believe that is temporary.
The hardest when it comes to the device, but they are investing in the advanced technology side of their business and so theres a great opportunity. There as you said the SMB business is forecasted to be down in device as we go through 2023, but again, our SMB customers have been.
<unk> resilient and do look to us to provide a lot of those solutions and so our enterprise and SMB have been down about the same and that is also true for the K to 12 and the slag business. However, there are some drivers on the horizon there.
As the ECF funding has been continue to the end of 2023, we do expect that will be a driver of demand and then finally with our federal business. We're seeing really strong growth right now that is large project dependent but but we have a good view of those large projects that we think they will last throughout <unk>.
23, so we're optimistic there so I'd say, we're kind of down in all three subsidiaries, we see some pockets of growth in fed we see a return to growth coming with our K through 12, a little later in the year as ECF works its way through and.
The enterprise and SMB, we think the first half will be infrastructure and advanced technology in the second half will feed at device start to kick in again.
Perfect. Thank you so much I appreciate your time.
Thank you Jackie.
Speakers I'm showing no further questions in the queue at this time I would now like to turn the call back over to Mr. Tim Mcgrath for any closing remarks.
Thank you Sri I'd.
I would like to thank all of our customers vendor partners and shareholders for their continued support and once again, our dedicated coworkers for their efforts and extraordinary dedication through these times I'd also like to thank all of those excuse me. Thank all of you for listening to the call. This afternoon your time and interest in.
<unk> are appreciated have a great night.
Thank you all for participating. This concludes today's program you may now disconnect.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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