Q3 2024 PC Connection Inc Earnings Call
Okay.
Antoine: Good afternoon, and welcome to the third quarter 2024 can mixing earnings conference call. My name is Antoine and I will be your coordinator for today.
At this time, all participants are in listen only mode.
Following their 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, we have Tim Mcgrath, President and Chief Executive Officer.
Tom Baker: Tom Baker.
Tom Baker: And your Vice President and Chief Financial Officer, I will 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.
Speaker Change: These statements are 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 provisions under the prior.
But securities Litigation Reform Act of 1995.
Speaker Change: 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 factors section of the company's annual report on Form 10-K for the year ended December 31 2023.
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.
Speaker Change: In addition.
Speaker Change: 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 the future. The company specifically disclaims any obligation to do so other than as required by law, even if the este.
Speaker Change: <unk> 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 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 2024 comparisons are being made against the third quarter of 2023 today.
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 SEC Dot Gov and in the Investor Relations section of our website at Www Dot IR Doc connection Dot com.
I would now like to turn the call over to our host Tim Mcgrath President and CEO.
Speaker Change: Tim.
Tim Mcgrath: Thank you Samantha good afternoon, everyone and thank you for joining us today for Connection's Q3, 2024 conference call.
Tim Mcgrath: Ill 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 are in a period of rapid innovation technology advancements are happening at an unprecedented pace.
Tim Mcgrath: The promise of digital transformation enabled by hybrid AI has never been greater.
We're confident that as demand recovers, we have the right strategy to help our customers navigate through this challenging environment.
<unk> achieved record net income and earnings per share of $1 <unk> for the third quarter of 2024.
In addition, we experienced moderate growth and gross profit in each of our business segments, while making strategic investments to better position ourselves for the evolving technology landscape and what lies ahead for our industry.
Tim Mcgrath: We saw some evidence of a recovery year over year in select areas of our business in Q3, we experienced notebook mobility and desktop revenue growth of 17% driven by PC refresh initiatives by our customers.
Approximately 25% of those PC, where AI enabled.
Tim Mcgrath: However demand for our advanced technologies has been negatively affected by our customers' ongoing struggle with their IP roadmaps in the face of AI uncertainty.
This resulted in a recovery that has been delayed longer than we anticipated. We believe our customers may continue to maintain this conservative approach for their it spending for the balance of the year.
Tim Mcgrath: In terms of advanced technology or software category, which includes cloud and cyber security had strong growth of 11%. This increase was offset by a 32% decline in networking solutions.
This decrease in networking was in part the result of a tough compare against the results in the prior year, which benefited from the resolution of supply chain issues.
Tim Mcgrath: Impacting networking equipment that had been backlogged.
This contributed to an 11% decline in overall advanced technology revenue compared to the prior year quarter.
Now, let's discuss our Q3 performance.
Consolidated net sales were $724 7 million, an increase of four 6% compared to last year gross profit increased two 7% to $135 4 million gross margins were down 30 basis points to 18, 7% in Q3.
Tim Mcgrath: Compared to the prior year quarter.
Operating income in Q3 was $30 million a decrease of six 2% compared to Q3 2023 operating income as a percentage of sales was four 1% compared to four 6% of net sales in the prior year quarter.
Net income in Q3 was a record $27 1 million, an increase of five 7% compared to $25 6 million in the prior year quarter.
In Q3 2024, our diluted earnings per share was a record $1 <unk>.
An increase of five 4% from 97 in Q3 2023.
We will now look a little deeper into our segment performance.
Our business solutions segment, our Q3 net sales were $252 6 million six 1% lower than a year ago as we experienced a 20% decrease in sales of advanced technology products, partially offset by an increase of 4% and endpoint device sales.
Gross profit for the business solutions segment was $63 1 million an increase of <unk>, 7% gross margin increased 170 basis points compared to the prior year quarter to a record 25%.
Our net sales and gross margins were favorably affected by customer mix and increase in cyber security and software sales.
And our public sector solutions business Q3, net sales were $175 1 million 18, 7% higher than a year ago sales.
Tim Mcgrath: Sales to federal government increased by $25 6 million, while sales to state and local government and education institutions increased by $2 million.
Gross profit for the public sector segment was $26 1 million, an increase of four 4% compared to Q3 'twenty three.
Tim Mcgrath: Gross margin decreased by 200 basis points to 14, 9% for the quarter compared to the prior year. The revenue increase and margin decline resulted from a few large project Rollouts in Q3 2024, there were at lower margins.
Tim Mcgrath: Yes.
In our enterprise solutions segment Q3, net sales were 297 million seven 4% higher than a year ago as we experienced a 14% increase in sales of endpoint devices.
Gross profit for the Enterprise segment was $46 2 million four 4% higher than the prior year quarter gross margin decreased by 40 basis points to 15, 6% for the quarter.
The margin decrease was a result of lower software license fees and product mix.
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.
Tom Baker: SG&A increased by five 6% compared to the prior year quarter. The increase in SG&A was primarily due to an increase in investments and resources to strengthen our sales technical sales and service capabilities.
In addition, we spent an incremental $1 $5 million on targeted technical marketing on batch for our customers.
Tim Mcgrath: On a percentage of sales basis, SG&A increased 14 basis points to 14, 5% of net sales in the quarter compared to 14, 4% in the prior year quarter.
Tim Mcgrath: Interest income for Q3 amounted to $4 9 million.
Tim Mcgrath: Compared to $2 7 million last year, an increase of $2 2 million.
Tim Mcgrath: Included in other income is $1 7 million of income from a legal settlement received during the quarter.
Our effective tax rate was 26% down from 26, 3%.
Net income for the quarter was $27 1 million an increase of five 7% from $25 6 million last year and diluted earnings per share was $1 two.
Tim Mcgrath: An increase of five 4%.
Tim Mcgrath: Adjusted diluted earnings per share remained flat at 97.
Tim Mcgrath: Yeah.
Tim Mcgrath: Our trailing 12 month adjusted earnings before interest income taxes, depreciation and amortization or adjusted EBITDA was $123 6 million compared to $121 3 million a year ago, an increase of 2%.
In terms of returning cash to shareholders, we paid a <unk> <unk> per share quarterly dividend in August and we repurchase shares having an aggregate purchase price of $3 9 million in the quarter at an average price of $66.
Tim Mcgrath: <unk> per share.
Tim Mcgrath: Yes.
Tim Mcgrath: As of September 32024, we had $64 6 million remaining for stock repurchases under our existing stock repurchase program.
Today, we announced that our board of directors has declared a quarterly dividend of <unk> 10 per share.
Dividend is payable to shareholders of record on November 12, 2024, and payable on November 29 2024.
Cash flow generated from operations from our first nine months of 2024 was $148 6 million our accounts receivable balance decreased $20 9 million for the first nine months of 2024, our DSO decreased to 67 days from 71 days from the same period a year ago.
Our inventory balance decreased $10 5 million for the first nine months of 2024.
Our accounts payable balance increased $29 1 million for the first nine months of 2024, largely due to the timing of payments at the end of the quarter.
Tim Mcgrath: Cash used in investing activities of $109 7 million was a result of $255 $1 million of investment purchases offset by a $156 million of investment maturities.
Tim Mcgrath: We used $16 4 million of cash in financing activities. During the first nine months of 2024, consisting primarily of payments of dividends to shareholders of $7 9 million in aggregate stock repurchases from $7 7 million.
Tim Mcgrath: We ended Q3 with $429 1 million of cash cash equivalents and short term investments in terms of capital allocation, we remain committed to growing the business and have an ongoing program focused on investing in both organic and inorganic opportunities. Furthermore, as announced above we have continued.
To return cash to shareholders in the form of a quarterly dividend and plan to continue to repurchase stock in a disciplined manner.
I will now turn the call back over to him to discuss current market trends.
Tim Mcgrath: Thanks, Tom.
Speaker Change: We have customized our go to market approach for each of our verticals, resulting in consistent growth across our key market sectors.
Speaker Change: Large deals continue to contribute to accelerating this momentum we attribute our continued success to the strength of our vertical focus which underpins our sustained performance and strong execution throughout all levels of the business.
Healthcare revenue increased 20% year over year as our health care customers continue to prioritize software and system upgrades.
Speaker Change: So we did have success with large client electronic health record system refreshes.
Speaker Change: Retail revenue increased 23% year over year as a number of our large retail customers began their device refresh.
This strong revenue growth in retail in both our business solutions and Enterprise solutions Group was the result of multiple large customer deployments of endpoint solutions.
Manufacturing revenue increased 1% year over year software endpoint device networking and cyber security continue to be a heavy focus for manufacturers as they look for productivity gains while keeping their businesses secure.
We believe that many of our manufacturing customers are facing the need to modernize their facilities and technology infrastructure in support of the integration of intelligent digital technologies and manufacturing and in industrial processes.
And many manufacturers continued to be targets of cyber security threats.
Financial services increased 5% year over year in part to address cyber security flexibility and interoperability between systems.
We expect the device demand will improve in 2025 overall.
Demand may continue to be impacted by deal scrutiny and cautious investments in infrastructure due to the macroeconomic backdrop in terms of profitability device refresh and the assumed change in product mix will continue to produce downward pressure on gross margins.
Speaker Change: As a result for the remainder of 2024, we anticipate demand to remain somewhat muted. We are confident that we can outperform the market growth by 200 basis points.
We remain committed to stay at the forefront of the technology curve, ensuring that our integrated solutions effectively meet the evolving needs of our customers.
We believe our focus on business strategy remain well aligned with the shifting dynamics of how customers deploy utilized and consumed technology. We continue to connect our customers with technology that enhances growth elevate productivity and empowers innovation, we help our customers expertly NAV.
Speaker Change: The gate through a complex set of choices within the technology landscape. We helped calm the confusion of IP for our customers. We know that in this complex world of technology change happens and expertise wins.
Speaker Change: On that note I'd like to take a moment to thank our extremely dedicated and valued employees for their continued and extraordinary efforts during this rapidly changing environment.
Now entertain your questions operator.
Thank you at.
Speaker Change: At this time, we will conduct a question and answer session.
To ask a question you will need to press star one on one of your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Please stand by while we compile the Q&A roster.
Speaker Change: Okay.
Our first question comes from Adam Tindle from Raymond James. Please go ahead.
Okay. Thank you and good afternoon, Tim I just wanted to start.
Note that gross margin was down 30 basis points and understand.
You know we've been investing we've had the opportunity to hire some people and we've been taking advantage of it.
We're trying to improve our our technical sales capabilities and those things just take a tiny little bit of time to manifest themselves into improve profit, but we're really trying to get set up for for next year.
Speaker Change: So.
I think thats kind of kind of where we're at.
Speaker Change: Got it Okay. One last one Tim just kind of near term as we think about Q4 trends I think.
Mentioned that the advanced Tech segment was knit has been negatively impacted by AI pausing and youre expecting the delayed recovery that's going to continue for 2024, I know that category tends to be important for budget flush in Q4.
Speaker Change: How youre thinking about.
Speaker Change: The trend in Q4 and expect expectations for a budget flush based on the pipeline that youre seeing and Tom any parameters that you might want to give us from a modeling standpoint for Q4, just so.
We're on the same page.
Speaker Change: Well thanks, so much.
That is a great question, there's been a lot of speculation around what might happen after November 5th in the election.
If we look at kind of where the quarter started.
It feels an awful lot like Q3.
Speaker Change: Phil.
Speaker Change: Domestic that.
In 2025 advanced technologies will be a real driver of growth, we believe that on Prem.
Technology edge technologies will be a driver of growth, but we're just not seeing that for Q4 Q4 everything has kind of remained in that.
Speaker Change: I think you used the term AI fog.
AI fog is out there in our customer environment.
Speaker Change: We do have as you know the drivers in 2025, including Windows 10 exploration.
But for the balance of the year, we think it's a lot like what we see.
Speaker Change: Yes.
Speaker Change: I think Ken.
Speaker Change: However, the the AI applications and the <unk>.
Speaker Change: <unk> concepts and a lot of the on Prem AI implementations, we think are pushed more to the back half of the year.
There are longer term engagements they require a lot of study a lot of proof of concept and customers are still cautious as they really look at what the rois will be.
Speaker Change: The irony is.
The greatest promise for technology in our industry that we've seen.
Speaker Change: Since.
The advent of the Internet yet the timing of that I think does remain a little delayed.
Speaker Change: Yes.
Thank you.
The investments we've made in technical sellers.
Speaker Change: Technical salespeople.
And just salespeople.
We've hired over the past year. Those are those are starting to take hold now I mean, we have a tremendous amount of activity going on in terms of trying to land new logos and <unk>.
Speaker Change: Expand our wallet share it just takes a little bit of time, so to answer your question directly.
Q2, we will start seeing some of the stuff come through Q1's, usually a pretty light quarter to begin with but I think thats probably.
Speaker Change: Q2, Q3 I think.
We will shift to income some tangible results.
Got you okay.
The good thing here as far as I mean, it's so so looking at the quarter, obviously, even with the tough macro environment.
<unk> sales were up in two out of the three segments in terms of just just the business solutions, which was down.
How should we think about the recovery.
Speaker Change: Segment.
Speaker Change: You think.
It will be delayed until next year like just what are your thoughts just on business solutions.
Speaker Change: I think.
Maybe make a little more headway with our receivables, although our DSO is probably as good as it's been in three or four years.
So that's part of the business is actually kind of clicking pretty well for us.
But I'll add Anthony that we go.
A big focus on operational efficiencies and we're using AI to drive efficiencies internally.
Speaker Change: Very focused on.
Are you getting better there so there should be some continuous improvement.
You would expect with our business.
Speaker Change: Got you Alright, and that's helpful to hear the comment about your so despite the uncertainties in the macro environment it sounds like.
Speaker Change: Generally speaking people are paying there.
Bills on time, so that's good to hear so.
Speaker Change: Thanks, very much and best of luck.
Speaker Change: Thank you Anthony.
Thank you.
Im showing no further questions at this time I will turn it over to Tim Mcgrath for closing remarks.
Well, thank you Antoine.
Thank all of our customers vendor partners and shareholders for their continued support and once again, our co workers for their efforts and extraordinary dedication.
Also like to thank those of you who are listening to our call. This afternoon.
And interest in connection are appreciated have a great evening.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Speaker Change: [music].
Speaker Change: [music].
Speaker Change: Yeah.