Q3 2023 PC Connection Inc Earnings Call
[music].
Yeah.
Good afternoon, and welcome to the third quarter connections earnings Conference call. My name is James and I will 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 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 will now turn the call over to the company.
Thank you operator, and good afternoon, everyone I will now read our cautionary note regarding forward looking statements.
Any statements Blah blah blah.
<unk> made during the conference call and are not statements of historical facts.
Maybe 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 into.
Kitted 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 31st 2022, 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 and it doesn't any forward looking statements represent management's view as of today and should not be relied upon as representing views as of any M. D.
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 probably to start a reconciliation between non-GAAP financial measure to the most directly comparable GAAP measure is available in today's earnings release and on the company's website at Www dot connections Dot com.
Please note that unless otherwise stated all references to third quarter 2023 comparisons are being made against the third quarter of 2022.
This call is being webcast will be available on connections website.
Earnings release will be available on the website at www Dot SEC Gov and in the Investor Relations section of our website at Www Dot I R Dot collection Dot com.
I would now like to turn the call over to our host Tim Mcgrath President and CEO.
Tim.
Thank you Samantha.
Afternoon, everyone and thank you for joining us today for connection here 320, 23 conference call I'll begin this afternoon with an overview of our third quarter results and highlights of our performance. Tom will then walk us through a more detailed look at our Q3 financials.
We executed well against our strategic priorities, while improving our mix of advanced technologies and integrated solutions.
Record gross margin and cash flow.
Combined with our improved operational efficiencies enabled us to deliver record earnings per share of Ninety-seventh back during the third quarter and.
In broad terms, what we are experiencing is a continued shift in the mix of our product is end point devices continue to be a lower priority for our customers in fact sales of endpoint devices.
Clients in the mid teens in the quarter.
This shift in customer demand aligned to our strategic initiatives to drive growth and integrated technology solutions and services across each of our segments.
Advanced technologies, which includes server storage networking software and services.
6% compared to the prior year and resulted in meaningful margin expansion in the quarter.
We continue to believe that gross profit is a better measurement of our performance for this reason.
The impact of these factors resulted in a decline of our gross profit by three 5%, while our net revenue declined by 10, 6%.
Now, let's discuss our Q3 performance.
Consolidated net sales declined by 10, 6% to $693 1 million in Q3 compared to Q3 2022.
Our customers continue to prioritize investments in advanced technologies.
Not enough to offset the decrease in demand for endpoint devices.
Gross profit declined three 5%.
131, 9 million. However, gross margins were up 142 basis points to a record 90% in Q3 compared to Q3 2022.
This increase in gross margin reflects the growth and the shift in mix of our advanced technology solutions, which generally have higher margins than our endpoint devices.
Operating income in Q3 was $32 million an increase of 300000 operating income as a percentage of sales was a record 4.6% compared to four 1% of net sales in the prior year quarter.
Net income in Q3 was a record $25 6 million, an increase of 10, 3% compared to $23 2 million in the prior year quarter.
In Q3 2023, our diluted earnings per share was a record 97 cents.
An increase of 10, 4% from 88 cents.
Q3 2022.
We'll now take a little deeper look at our segment performance.
And our business solutions segment. Our Q3 net sales were 269 million a decrease of 14, 8% compared to 315.8 million a year ago.
Decline in revenue was largely a result of the reduction in demand for endpoint device.
Gross profit for the business solutions segment was $62 7 million a decrease of 1% from a year ago gross margin increased 326 basis points to 23, 3% in the quarter compared to the prior year.
The increase was the result of our successful execution and growing sales of integrated solutions and advanced technology, which include services and software that are recorded on a net basis.
And our public sector solutions business Q3, net sales were $147 5 million a decrease of four 4% compared to $154 4 million a year ago.
At that point devices were down 15% offset by an increase of 31% and sales of advanced technology solutions category.
And then by networking software and services.
Sales to the federal government increased by nine 5% compared to the prior year quarter.
Sales to state and local government and education institutions decreased by 7% compared to the prior year.
Increases in higher Ed and state and local were offset decreases in the K through 12 market.
Gross profit for the public sector segment was $25 million, which was consistent with the prior year gross margin increased by 67 basis points to a record 15, 9% in the quarter the.
The increase in gross margin per tonnage was due to a higher mix of software and services, which are recorded on a net basis. In addition to growth in sales of networking software Herbert and services.
In our enterprise solutions segment Q3, net sales of $276 6 million a decrease of nine 5% compared to $305 5 million a year ago. The decline in revenues was due primarily to a decrease in endpoint device sale compared to the prior year gross profit for the enterprise segment.
$44 2 million a decrease of eight 3% compared to the prior year quarter gross margin increased by 21 basis points to a record 16% our enterprise customers continue to prioritize software services recorded on a net basis.
I will now turn the call over to Tom to discuss additional financial highlights from our income statement balance sheet and cash flow statement.
Uh huh.
Thanks, Tim.
SG&A decreased $5 1 million compared to the prior year quarter.
The decrease in SG&A was them apart it results from the reorganization of the ongoing cost reduction initiatives, we have undertaken this year on.
On a percentage of sales basis, SG&A increased 89 basis points to 14, 4% of net sales in the quarter compared to 13, 5% in the prior year quarter, primarily driven by lower revenues.
Q3, operating income was $32 million, an increase of <unk>, 9% this quarter from $31 7 million a year ago.
Our effective tax rate was 26, 3% down from 27, 7% due to changes in state tax rate.
Net income for the quarter was a record $25 6 million an increase of 10, 3% from $23 2 million last year.
Diluted earnings per share them with a record 97, an increase of 10, 4% from the prior year period.
Our crown and called for adjusted earnings before income taxes, depreciation and amortization or adjusted EBITDA was $127 9 million compared to $145 5 million a year ago, a decrease of 12%.
Returning cash to shareholders, we paid an eight cents per share quarterly impact in September.
As of September 32023, we have $32 3 million remaining for stock repurchases under our existing stock repurchase program today.
Today, we announced that our board of directors has declared a quarterly dividend of 80 pence per share payable to shareholders of record on November 14th 2023 and payable on December four 2023.
Cash flow generated from operations for the first nine months of 2023 was $185 7 million an improvement of $170 million from the same period a year ago.
The increase in cash flow from operations reflect a decrease in accounts receivable inventory and an increase in accounts payable.
Our accounts receivable balance increased $20 9 million on the FERC nine months of 2023, our DSO increased to 71 days from 70 days for the same period, a year ago, primarily a function of met and product sales.
Our inventory balance decreased.
$6 4 million for the first nine months of 2023, improving our supply chain has enabled us to complete and deliver orders for which we were holding a portion of the inventory at yearend.
Our accounts payable increased $31 6 million from the first nine months of 2023 or.
Net cash used in investing activities of $57 1 million for the first nine months of 2023 was primarily the result of $48 7 million of investment Parkinson's and $7 4 million of bikes and equipment purchases. The company was 12 laying a path for financing activities. During the first nine months of 2023.
Consisting primarily of payments of $6 3 million of dividends to shareholders and $5 4 million of stock repurchases.
We ended Q3 with $240 5 million of cash and tax equivalent.
I will now turn the call back over to come from the current market climate.
Thanks, Tom we expect that the trends in demand that we have seen year to date will continue in Q4 with this challenging economic backdrop.
Looking forward to 2024, there are a number of secular factors that should drive significant growth in several of our IP solutions and product categories.
It's a genuine improvement in productivity and efficiencies driven by artificial intelligence will positively impact the demand in several areas of our business.
AI solution, who require additional infrastructure storage and compute and security. We are confident that solution developed for AI will require investment across the spectrum.
We also should experience an endpoint device research and this will be driven by a number of factors, including the need to upgrade operating system. The demands of AI, which will require more powerful P. C. The evolution of collaboration tool.
Prove security as well as in pending refresh cycle or devices.
Security continues to be a high priority as our customers need to protect their it environment. This will continue to drive demand for hardware software and services that will be required to properly secure environment for the foreseeable future.
Unknown Executive: Good afternoon and welcome to the third quarter connections earning conference call. My name is James and I will be the coordinator for today. At this time, all participants on our in a listen only mode.
To address these trends we are taking the following actions.
Unknown Executive: Following the prepared remarks, there will be a question and answer session. As a reminder, this conference is the property of connection and may not be recorded or rebroadcast without specific permission from the company.
Although not a current driver of revenue we have developed a modern infrastructure et cetera have excellent.
This will help us focus on.
Unknown Executive: On the call today are Tim McGrath, President and Chief Executive Officer and Tom Baker, Senior Vice President and Chief Financial Officer and will now turn the call over to the company. Thank you, operator. Good afternoon, everyone.
On go to market and sales enablement solutions.
Specific focus on integrated system to support the growth driven by AI machine learning data analytics high performance computing and edge computing.
Unknown Executive: I will now read our cautionary note regarding forward looking statement. Any statements or references made during the conference call that are not statements of historical facts may be deemed to be forward looking statement. Various remarks that management may make both the company's future expectations, plans and process constitute forward looking statement, the purposes of the state harbor provisions under the private security litigation reform act of 1995. Actual results made just a materially promote indicated by the forward looking statement as a result of very simple factors, including those discussed in the risk factor section of the company's annual report on form 10 pay for the year ended December 31st, 2022, which is on file with the security exchange commission, as well as an other document that the company filed with the commission from time to time.
We recognize the transformative potential of artificial intelligence and its pivotal role in shaping the future of industries and customer experiences.
To realize that potential we have a team dedicated to working with our partners focused on driving their AI solutions and developing complementary value added services.
By making this commitment we aim to bridge the existing gaps within the market and create offerings, ensuring that our customers receive unparalleled AI driven solutions that will harness its power for successful customer innovation.
Her endpoint device, we're working with our customers to assess their current environment and identify upgrade opportunities and take advantage of new hardware and software that will facilitate improved security enhanced collaboration and a platform to run AI applications.
Unknown Executive: In addition, any forward looking statement represents management 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 statement at some point in the future, the company specifically disclains any obligation to do so other than it required by law, even if estimates change. Therefore, you should not rely on the forward looking statement as representing management views as of any date subsequent to today.
We have service offerings to assess design deploy and secure system and the operating system, which will promote adoption for customers.
Unknown Executive: During the call, non-gap financial measures will be discussed. A reconciliation between any non-gap financial measure discussed and its most directly comparable gap measure is available in today's earnings release and on the company's website at www.connections.com. Please note that unless otherwise stated, all references to third quarter 2020's comparison are being made against the third quarter of 2022. Today's call is being broadcast and will be available on connection's website. The earnings release will be available on the SAC website at www.sac.gov and in the investor relations section of our website at www.ir.connections.com.
Samantha Smith: I would now like to turn the call over to our host, Tim McGrath, President and CEO Tim. Thank you, Samantha.
Hello, Tom the confusion of iced tea for our customers.
Timothy McGrath: Good afternoon, everyone, and thank you for joining us today for Connections Q3 2023 conference calls. I'll begin this afternoon with an overview of our third quarter results and highlights of our performance.
Our growth rate for the U S market continued to be challenging in the near term. We're encouraged by the number of new customers were requiring and we believe we can outperform the market and take market share.
Timothy McGrath: Tom will then walk us through a more detailed look at our Q3 financials. We execute well against our strategic priorities while improving our mix of advanced technologies and integrated solutions. Record growth margins and cash flow combined with our improved operational efficiencies enable us to deliver record earnings per share of 97 cents during the third quarter.
On that note I would like to take a moment to think are extremely dedicated and valued employees for their continued an extraordinary efforts during this rapidly changing environment.
Well now understand your question operator.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you need to press start one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again, please stand by while I compiled a Q and a roster.
Timothy McGrath: In broad terms, what we are experiencing is a continued shift in the mixed-up product as endpoint devices continue to be a lower priority for our customers. In fact, sales of endpoint devices declines in the mid-teens in the quarter. This shift in customer demand aligns with our strategic initiatives to drive growth and integrated technology solutions and services across each of our segments. Advanced technology, which includes service storage, networking, software and services, who is 6% compared to the prior year and resulted in meaningful margin expansion in the quarter.
Our first question comes from Anthony Libicki from Sidoti.
Good afternoon, gentlemen, thank you for taking the questions.
So.
Yeah.
So so I'm a nice job with the gross margin expansion here, so you'll give them what you're seeing right now in the business assuming no major changes to the mix of products and services would you say that you would expect that at least near Tran.
Timothy McGrath: We continue to believe that growth profit is a better measurement of our performance for this reason. The impact of these factors resulted in a decline of a growth profit by 3.5%, while our net revenue declined by 10.6%.
Gross margins to be kind of sustainable from here.
I would say Anthony.
A couple of things.
Bridge last year to this year on our gross margins.
Timothy McGrath: Now let's discuss our Q3 performance. Consolidated net sales declined by 10.6% to 693.1 million in Q3, compared to Q3 2022. Our customers continue to prioritize investments in advanced technologies that was not enough to offset the decrease in demand for endpoint devices. Ghost profit declined 3.5%. So 131.9 million, however, gross margins were up 142 basis points to a record 19% in Q3 compared to Q3 2022. This increase in gross margin reflects the growth and the shift in mix of our advanced technology solutions, which generally have higher margins than our endpoint devices.
About half of the improvement with just do this and that and products purchased broke park. The other half was driven by product mix into.
More profitable category.
I think all those pay an equal we can probably hold about where we are.
Things that I would think about putting forward.
Some points the device side of the business is gonna is gonna come back and when that happens I think you will see some some pressure on the market.
Uh-huh understood, Okay, Yeah, and I think the Tim you mentioned that you expect next year.
You'll see a uptick in and point devices.
Do you think it will be early in the year are kind of you know later, what's your best guess at this point.
Timothy McGrath: Operating incoming Q3 was 32 million and increased of 300,000. Operating income as a percentage of sales was a record 4.6%. Compared to 4.1% of net sales in the prior year quarter. That income in Q3 was a record 25.6 million and increase of 10.3% compared to 23.2 million in the prior year quarter. In Q3 2023, our diluted earnings per share was a record 97.10 and increase of 10.4% from 88.10 in Q3 2022.
Well, thanks to city there, there's a lot of promise around AI and technology in general for 2024 does that said, we don't know.
When that upgrade cycle that refresh Psycho really begins.
A lot of speculation that will be in the second half we are having more conversations with our customers relevant conversations about future projects Rfps.
Are up a number or technical engagements are up but we really don't know when that demand recovers and from our suppliers I think the consensus is the second half.
Timothy McGrath: We'll now take a little deeper look at our segment performance. In our business solution segment, our Q3 net sales were 269 million, a decrease of 14.8% compared to 315.8 million a year ago. The declining revenue is largely a result of the reduction in demand for endpoint devices. Ghost profits in business solution segment was 62.7 million, a decrease of 1% from a year ago. Ghost margin increased 326 basis points to 23.3% in the quarter compared to the prior year.
Okay that that's a very helpful color and then Tim I also wanted to follow up on one of the points that you've made towards the end of your prepared remarks. So you spoke about being encouraged by the number of new customers that you're saying can you give a little maybe a little bit more details on that.
Mmm <unk>, where are you gaining share from the kind of <unk> can you sure.
Anything else is that across the board or is it more on the on the business solution side or enterprise would love to hear some additional details on that.
Timothy McGrath: This increase was the result of our successful execution in growing sales of integrated solutions and advanced technology, which includes services and software that I recorded on a net page. In our public sector solutions business, 2-3 net sales were 147.5 million, a decrease of 4.4%, compared to 154.4 million a year ago. Sales event point devices were down 15% offset by an increase of 31% in sales of advanced technology solutions category, driven by networking software and services.
Hello. Thanks. So it is indeed across the board we have an acquisition engine for each of our three main sail subsidiary and we really are doing very well with that and on top of that we also are.
Doing well with acquisitions across each of our four vertical market. So we'll start with enterprise and a large account Ah sector, winning several key new logos, there that will convert into.
Legitimate revenue streams later on it takes some of the larger customers some time to ramp up when we look at our SMB business. We're also adding new customers SMB business has been under a little more pressure as you know from the competitive landscape, but.
Timothy McGrath: Sales to the federal government increased by 9.5%, compared to the prior year quarter. Sales to state and local government and education institutions decreased by 7%, compared to the prior year. Increases in higher ed and state and local will offset decreases in the K-12 market. Cost profit for the public sector segment was 25 million, which was consistent with the prior year. Growth margin increased by 67 basis points to a record 16.9% in the quarter.
Pretty excited about that and finally in the public sector space on the federal side, it's really about contract vehicles and on the state local K through 12, and higher Ed it's about winning those new customers as well so I I'd say across the board or acquisition engine are working really well.
What we what we need now is that I spend in that demand to return.
Uh-huh.
Timothy McGrath: The increase in growth margin percentage was due to a higher mix of software and services, which are recorded on a net basis. In addition to growth in sales of networking, software, servers and services. In our enterprise solution segment, 2-3 net sales were 276.6 million, a decrease of 9.5%, compared to 305.5 million a year ago. The decline in revenues was due primarily to a decrease in end points of ice sales compared to the prior year. Growth profit for the enterprise segment was 44.2 million, a decrease of 8.3% compared to the prior year quarter. Growth margin increased by 21 basis points to a record 16%.
Got it Okay and then my last question before I pass it on to others. So you have a very sizable cash in an investment position now approaching $300 million.
So what are your plans to do with all that cash.
So let me think about capital allocation and rewarding shareholders are we are doing quarterly devoted as you know we'll look at the appropriate level of share buybacks, we still have over $32 million approved by the board for share buyback and finally, probably most importantly, we continued to presume.
<unk> excuse me tuck in acquisitions in the solutions arena that would be.
Accretive that would have common culture, and most importantly that would augment or extend some of our solutions capabilities nothing immediate to announce but we do continue to look and we're very much committed toward that end.
Timothy McGrath: Our enterprise customers continue to prioritize software and services recorded on a net basis.
Thomas Baker: 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, Tom. FDNA decreased 5.1 million compared to the prior year quarter. The decrease in FDNA was, in part, it results from the realization of the ongoing cost reduction initiatives we have undertaken this year. On a percentage of sales basis, FDNA increased 89 basis points to 14.4% of net sales in the quarter compared to 13.5% in the prior year quarter, primarily driven by lower revenues.
Well, thank you very much and best of luck.
Thank you I appreciate the call.
[noise].
Thomas Baker: Choose the operating income was 32 million, an increase of 0.9% this quarter from 31.7 million a year ago. Our effective tax rate was 0.6.3% down from 27.7% due to changes in state tax rate. That income for the quarter was a record 25.6 million an increase of 10.3% from 23.2 million last year. Blue design for share was a record 97 cents an increase of 10.4% from the prior year period. Our current 12 month adjusted earnings before income taxes, depreciation, and amortization or adjusted EBITDA was 127.9 million compared to 145.5 million a year ago a decrease of 12%. In terms of attorney tax shareholders, As of September 30th, 2023, you had 32.3 million remaining for stock repurchases under our existing stock repurchase program.
Thank you for standby once at Glen Our next question comes from Jake Nordson from Raymond James.
Hello.
How do you get that.
So can you guys just touch on the health of the pipeline and sentiment fingers Salesforce currently as December is typically the big corporate budget plus months, what are you anticipating there and further can you just touch on the real time update on S. M. B and enterprise Ah are you seeing any other green shoots there other than sort of on the quoting an inquiry side of the bed.
As you just touched on thanks.
Okay.
Yeah, So I'll start with comedy.
Join in so we think about.
The traditional Q for his plush.
Right now we're forecasting Q for to be perhaps slightly down from from Q3 to look a lot like Q3.
Perhaps some low single digit decline. So we continue to see our customers under pressure with this economic backdrop and all the.
Thomas Baker: Today, we announced that our Board of Directors has declared a quarterly dividend of eight cents per share, payable to shareholders of record on November 14th, 2023, and payable on December 1st of 2023. Cash flow generated from operations for the first nine months of 2023 was 185.7 million, and improved one of 170 million from the same period a year without. The increasing cash flow from operations reflected decrease in accounts to receive open inventory and an increase in accounts payable.
Reasons that you're aware of from inflation to interest rates to some geopolitical instability all that affecting customers. So they are very cautious in the near term that said, they're very optimistic over the long term as I said in disgust at my prepared remarks.
The promise with technology is very significant in terms of what it can do for our customers productivity and efficiencies.
Thomas Baker: Our accounts receivable balance decreased 20.9 million from the first nine months of 2023. Our DSO increased to 71 days from 70 days for the same period a year without primarily a function of netted product sales. Our inventory balance decreased 56.4 million for the first nine months of 2023. Improvement in the supply chain has enabled us to complete and deliver orders for which we were holding portions of the inventory at year end.
Tom.
Yeah, I mean, I think Tim hit the nail on the head.
247 o'clock.
Wherever fee.
Sparks were.
Customers are.
Boring crap.
Doing a little bit more next year.
It has gotten to the point, where you know we're gonna.
Highly having confidence that you know we're going to have it.
Thomas Baker: Our accounts payable increased 31.6 million for the first nine months of 2023. Our net cash is an investing activity of 56.1 million for the first nine months of 2023 with primarily the results of 48.7 million of investment purchases and 7.4 million of IT equipment purchases. The company used 12 million of cash for financing activities during the first nine months of 2023. Since 50 primarily of payments of 6.3 million of dividends to shareholders and 5.4 million of stockly purchases.
Double digit growth rates in the next year.
And then in conclusion on the Green shoots part of the question. We are seeing many of our customers evaluate new software operating systems and the potential of late Larry AI on top of that certainly with the Windows 11 and customers piloting co pirates.
It is encouraging part of their business and there is activity at a real movement, there, but nothing that we can point to as an absolute driver of demand at this point.
Thomas Baker: We ended two or three with 240.5 million of cash and cash equivalent.
Perfect. Thank you.
Thank you Jane.
Timothy McGrath: I will now turn the call back over to Tim to discuss current market climate. Thanks, Tom. We expect that the trends of demand that we have seen year-to-date will continue in Q4 with this challenging economic backdrop.
I'm showing no further questions at this time I would now like to turn it back to 10, the grass or closing remarks.
Thanks, James I'd like to thank all of our customers vendor partners and shareholders for their continued support and once again, our coworkers further efforts and for their extraordinary dedication.
Timothy McGrath: Looking forward to 2024, there are a number of secular factors that should drive significant growth in several of our IT solutions and product categories. The promise of genuine improvement in productivity and efficiencies driven by our official intelligence will positively impact the demand in several areas of our business. AI solutions will require additional infrastructure, storage, compute, and security. We are confident that solutions developed for AI will require investment across the IT spectrum.
I shall also like to thank those of you listening to the call. This afternoon.
Time, an interesting connection or appreciate it have a great evening.
Thank you for participation in today's conference. This does that conclude the program you may now disconnect.
[music].
Timothy McGrath: We also should experience an endpoint device resurgence. This will be driven by a number of factors, including the need to upgrade operating systems, the demands of AI which will require more powerful PCs, the evolution of collaboration tools, improve security, as well as impending reflex cycle for devices. Security continues to be a high priority as our customers need to protect their IT environment.
Timothy McGrath: This will continue to drive demand for hardware, software, and services that will be required to properly secure IT environments for the foreseeable future, to address these trends, we are taking the following actions. For AI, although not a current driver of revenue, we have developed a modern infrastructure center of excellence. This will help us focus on go to market and sales enablement solutions with a specific focus on integrated systems to support the growth driven by AI, machine learning, data analytics, high performance computing, and edge computing.
Timothy McGrath: We recognize the transformative potential of artificial intelligence and its pivotal role in shaping the future of industries and customer experiences. To realize that potential, we have a team dedicated to working with our partners focused on driving their AI solutions and developing complementary value added services. By making this commitment, we need to bridge the existing gaps within the market and create offerings, ensuring that our customers receive unparalleled AI driven solutions that will harness its power for successful customer innovation.
Timothy McGrath: For endpoint device, we are working with our customers to assess their current environment and identify upgrade opportunities to take advantage of new hardware and software that will facilitate improved security, enhanced collaboration, and a platform to run AI applications. We have service offerings to assess, design, deploy and secure systems and operating systems which will promote adoption for customers. For security, we are continuing to develop our security catalog of offerings including four key areas, modern firewall with analytics and security integration, automated network fabric provisioning, network virtualization and managed network.
Timothy McGrath: We believe we are a well positioned to help our customers through these transformational changes when IT spending and the related demand improves. Our customers know they can count on connections, help them standardize, simplify and optimize their end-to-end IT environment and deliver their business outcomes through technology. We believe our focus in our business strategy remains well aligned with the shifting dynamics of how customers deploy, utilize and consume technology. We continue to connect our customers with technology that enhances growth, elevates productivity and empowers innovation. We help our customers expertly navigate through a complex set of choices within the technology landscape. We help calm the confusion of IT for our customers.
Timothy McGrath: While growth rates for the USIT market continue to be challenging in the near-term, we are encouraged by the number of new customers we are acquiring and we believe we can outperform the market and take market share. On that note, I would like to take a moment to thank our extremely dedicated and valued employees for their continued and extraordinary efforts during this rapidly changing environment.
Unknown Executive: Will now entertain your question, operator. Thank you. At this time, we will conduct the question and answer session. As a reminder to ask your question, you need to press star 11 on your telephone and wait for your name to be announced.
Unknown Executive: Our first question comes from Anthony Lebiedzinski from C.
Anthony Lebiedzinski: Dolly Good afternoon, gentlemen. Thank you for taking the questions So nice job with the gross margin expansion here. So, you know, given what you're seeing right now in the business and assuming, you know, no major changes to the mix of products and so on. Services that would you say that you would expect the least near term gross margins to be kind of sustainable from here. I would say Anthony, a couple of things.
Anthony Lebiedzinski: If we just bridge last year to this year on our gross margins. About half of the improvement was just due to the net and products versus gross product. The other half was driven by product mix into more possible categories. So I think all those being equal, we can probably hold about where we are. The thing that I would think about pulling forward, you know, at some point the device side of the business is going to come back.
Anthony Lebiedzinski: And when that happens, I think you will see some some pressure on the margins. And I think that Tim, you mentioned that you expect next year that you'll see a uptick in the end point devices. Do you think will be early in the year or kind of, you know, later, what's your best guess at this point? Well, thanks Anthony. There's a lot of promise around AI and technology in general for 2024.
Anthony Lebiedzinski: And that says we don't know when that upgrade cycle that refresh cycle really begins. A lot of speculation that will be in the second half. We are having more conversations with our customers relevant conversations about future projects. Our RFPs are up in number, our technical engagements are up, but we really don't know when that demand recovers. And from our suppliers, I think the consensus is the second half. Okay, that's a very helpful color.
Anthony Lebiedzinski: And then Tim also wanted to follow up on one of the points that you made towards the end of your prepared remarks. So you spoke about being encouraged by the number of new customers that you're saying, can you give a little maybe a little bit more details on that. You know, maybe where are you gaining share from and kind of, you know, can you sure anything else is that across the board or is it more on the business solutions that are enterprise would love to hear some additional details on that.
Anthony Lebiedzinski: Hello, thanks Anthony. So it is indeed across the board. We have an acquisition engine for each of our three main sales subsidiaries. And we really are doing very well with that. And on top of that, we also are doing well with acquisitions across each of our four vertical markets. So we'll start with enterprise in a large account sector, winning several key new logos there that will convert into legitimate revenue streams later on.
Anthony Lebiedzinski: It takes some of the larger customers some time to ramp up when we look at our SMB business. We're also adding new customers. The SMB business has been under a little more pressure. As you know, from the competitive landscape, but pretty excited about that. And finally in the public sector space on the federal side, it's really about contract vehicles. And on the state local K through 12 and higher ed, it's about winning those new customers as well. I'd say across the board, our acquisition engines are working really well. What we need now is that IT spend and that demand to return. Thank you. Got it. Okay.
Anthony Lebiedzinski: And then my last question before I pass it on to others. So you have a very sizable cash and investment position now approaching $300 million. So what are your plans to do with all that cash? So when we think about capital allocation and rewarding shareholders, we are doing quarterly dividends. You know, we'll look at the appropriate level of share buybacks. We still have over 32 million approved by the board for share buybacks.
Anthony Lebiedzinski: And finally, probably most importantly, we continue to pursue excuse me, tucking acquisitions in the solutions arena, that would be a creative that would have common culture and most importantly that would augment or extend some of our solutions capabilities. Nothing immediate to announce, but we do continue to look and we're very much committed toward that end.
Anthony Lebiedzinski: Well, thank you very much and the best of luck. Thank you. Thanks. I appreciate the call. Thank you for standing by.
Unknown Executive: I want to go in our next question comes from Jake Norrison from Raymond James.
Timothy McGrath: So can you guys just touch on the health of the pipeline and sentiment from your sales force currently as December, typically the big corporate budget flush month. What are you anticipating there? And further, can you just touch on the real time update on SMB and enterprise? Are you seeing any other green shoots there other than sort of on the coding and inquiry side of the business as you just touched on? Thanks.
Timothy McGrath: Yeah, so I'll start with how maybe you can join in. So when we think about the traditional Q4 budget flush right now, we're forecasting Q4 to be perhaps slightly down from Q3. It looked a lot like Q3, but perhaps some low single digit declines. So we continue to see our customers under pressure with this economic backdrop and all the reasons that you're aware of from inflation to integrate to some geopolitical instability, all that affecting customers.
Timothy McGrath: So they are very cautious in the near term that said they're very optimistic over the long term. As I said in discussed in my prepared remarks, the promise of technology is very significant in terms of what it can do for our customers productivity and efficiencies. Tom? Yeah, I think Tim has hit the nail on the head in terms of how Q4... We're seeing spots where it looks like customers are exploring perhaps doing a little bit more next year, but it hasn't gotten to the point where we're going to be highly, highly confident that you know we're going to have a double-digit growth rate next year.
Timothy McGrath: And then the conclusion on the green shoots part of the question, we are seeing many of our customers evaluate new software operating systems and the potential of layering AI on top of that certainly with windows 11 and customers piloting co pirates. It is an encouraging part of the business and there is activity in real movement there, but nothing that we can point to as an absolute driver of demand at this point. Perfect. Thank you.
Unknown Executive: I'm sure I know further questions at this time.
Timothy McGrath: I would now like to turn it back to Tim McGrath for closing remarks. Thanks James. I'd like to thank all of our customers, vendor partners and shareholders for their continued support. And once again, our co-workers for their efforts and for their extraordinary dedication. I'd also like to thank those of you listening to the call this afternoon. Your time and interest in connection are appreciated.
Unknown Executive: Have a great evening. Thank you for participating in today's conference. This does conclude the program. You may now disconnect.