雅虎香港財經 PC Connection, Inc. (NASDAQ:CNXN) Q1 2023 Earnings Call Transcript
PC Connection, Inc. (NASDAQ:CNXN) Q1 2023 Earnings Call Transcript May 7, 2023
Operator: Good afternoon and welcome to the First Quarter 2023 Connection Earnings Conference Call. At this time, all participants are in listen-only mode. Following the prepared remarks, there will be a question-and-answer session. As a reminder, this conference call is the property of Connection and may not be recorded or rebroadcast 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.
Unidentified Company Representative: 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 Factors section of the company's Annual Report on Form 10-K for the year ended December 31, 2022, 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 views 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 estimates change. And therefore, you should not rely on these forward-looking statements as representing management's views as of any date subsequent to today. During this call, non-GAAP financial measures will be discussed. A reconciliation between any non-GAAP financial measures discussed and its most directly comparable GAAP measure is available in today's earnings release and on the company's website at www.connection.com.
Please note that unless otherwise stated, all references to first quarter 2023 comparisons are being made against the first quarter of 2022. 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.sec.gov and in the Investor Relations section of our website at www.connection.com. I would now like to turn the call over to our host, Tim McGrath, President and CEO. Tim?
Timothy McGrath: Thank you, Samantha. Good afternoon, everyone, and thank you for joining us today for Connection's Q1 2023 Conference Call. I'll begin this afternoon with an overview of our first quarter results and highlights of our performance. Tom will then walk us through a more detailed look at our Q1 financials. Over the last several weeks, you've seen the earnings announcement in our industry, along with our preliminary results we released two weeks ago. We experienced a continuation of a weak economic backdrop in the first quarter, leading our customers to exercise greater caution and selectivity with their short-term IT investment plans. Sales of endpoint devices were lower than anticipated across most of our customer base.
While we saw good overall growth in our Solutions business, including software, cloud, security and networking, it was not enough to offset the contraction in demand in endpoint devices. This resulted in our first quarter performance being below our expectations. Endpoint devices, which include notebooks, desktop, displays and accessories were down 16.6%. The first quarter is historically our lowest quarter of the year, and this quarter's results are being compared to a record first quarter for us a year-ago. We believe that our overall performance should improve sequentially and demand for endpoint devices will gradually improve in the back half of the year. Advanced technologies, which include servers, storage, networking, software and services grew 15.6% as our customers prioritize our investments in projects that improve productivity, reduce costs and that were essential to their ongoing business needs.
While growth rates for the U.S. IT market are expected to be challenging in the near-term, we believe that we can outperform the market and continue to take market share. Due in part to the strength of our long-term customer relationships. Our customer base has remained loyal. In fact, our retention rate for managed accounts remains over 98% for the trailing 12 months. We're focused on increasing our share of customer IT spend with our existing customers, and we're aggressively pursuing the acquisition of new customers. Our customers know they can count on Connection to help them standardize, simplify and optimize their IT environments. Customers still need and want help improving their infrastructure and supporting their digital transformation.
The technology solutions that we offer are designed to deliver productivity improvements and enable our customers to operate their businesses more efficiently. In addition, the hybrid work environment continues to drive demand for better remote collaboration capabilities and tools. Finally, security and cloud solutions remain mission-critical across all the markets that we serve. In response to these technology trends, we've been investing in our technical resources and tools to enable our customers to better make these transformations and successfully navigate this economic environment and plan for the future. Some of these investments and their results will be brought to the forefront in the coming months and quarters. One specific area for call out is our investment in our e-commerce engine, specifically related to cloud subscriptions.
We believe that we're bringing to market a leading cloud e-commerce transaction engine that over the quarters, will be a cornerstone of our subscription and software transaction base. Such organic investments are intended to be a growth engine for Connection. We believe our focus and our business strategy remain 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, elevate productivity and empower innovation. We help our customers expertly navigate through our complex set of choices within the technology landscape. We do this with dynamic and constantly evolving technology choices around core infrastructure, on-prem and off-prem cloud, security and software.
Photo by KOBU Agency on Unsplash
We calm the confusion for IT for our customers. Now let's discuss our Q1 performance. Consolidated net sales declined by 7.7% to $727.5 million in Q1 compared to Q1 '22, which was a record first quarter for us. Gross profit declined 4.7% to $122.3 million. However, gross margins were up 53 basis points to 16.8% in Q1 compared to Q1 2022. This increase in gross margin reflects the shift in product mix to advanced technologies that we saw during the quarter. Operating income in Q1 was $18.1 million, a decrease of 39.9% or 2.5% of net sales, compared to $30.1 million or 3.8% of net sales in the prior year quarter. Net income for Q1 was $14.2 million, a decrease of 34.8% compared to $21.8 million in the prior year quarter. In Q1 2023, our diluted earnings per share was $0.54, a decrease of 34.9%, while diluted earnings per share adjusted for restructuring and other charges was $0.56, a decrease of 31.9% from $0.83 in Q1 2022.
We'll now look a little deeper into our segment performance. In our Business Solutions segment, our Q1 net sales were $273.1 million, a decrease of 14.8%, compared to $320.4 million a year-ago. Gross profit for the Business Solutions segment was $59.9 million, a decrease of 3.6% from a year-ago. Gross margin increased 255 basis points to a record 21.9% in the quarter compared to the prior year. This increase was driven by a shift in product mix from endpoint devices to higher-margin sales of data center products, including software, networking and servers during the first quarter of 2023. In our Public Sector Solutions business, Q1 net sales were $140.5 million, an increase of 6% compared to $132.5 million a year-ago. Sales to the federal government increased $26.4 million year-over-year as a result of the success we've had securing new contracts.
Sales to state and local government, and educational institutions decreased $18.4 million compared to the prior year. In 2022, we experienced record Q1 revenues as we fulfilled many orders driven by the emergency connectivity funded projects. Gross profit for the Public Sector segment was $20.3 million, an increase of 17.5% compared to Q1 '22. Gross margin increased by 141 basis points to 14.5% in the quarter compared to the prior year. The increase in both gross profit and gross margin percentage simultaneously was due to higher sales of software, security, services and networking solutions during the first quarter of 2023. In our Enterprise Solutions segment, Q1 sales were $313.9 million, a decrease of 6.4% compared to $335.4 million a year-ago.
As a result of the current economic backdrop, our enterprise customers exercised significant restraint with respect to IT spending in Q1. Gross profit for the Enterprise segment was $42.1 million, a decrease of 13.9% compared to the prior year quarter. Gross margin decreased by 117 basis points to 13.4%, primarily driven by a few large lower-margin projects that we believe will enable us to secure additional higher-margin solutions business in the future. Our vertical market focus continues to deliver customer value. Manufacturing revenue grew 10% year-over-year as customers focused on investment in cloud, security and services to reduce cost and prepare for future growth. In our retail vertical market, revenue grew 25% year-over-year as customers deploy technology to enable automation and improve the retail experience.
I'm pleased to announce in the first quarter that Connection was named HP U.S. Print Hardware National Solution Provider of the Year and named to Newsweek's Most Trustworthy Companies in America 2023 list. 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?
Thomas Baker: Thanks, Tim. SG&A increased 174 basis points to 14.2% of net sales in the quarter compared to 12.5% in the prior year quarter, primarily driven by lower revenues. On a dollar basis, SG&A increased $5.1 million compared to the prior year quarter. Investment in resources to strengthen our sales, technical sales, information technology and service organizations were up slightly over 10% year-over-year. We reduced the spending in general and administrative functions by over 10%. Looking forward, we intend to continue to invest in technical resources while focusing on improving our efficiency in light of what we perceive to be a softer near-term business environment. For Q2, we anticipate a reduction in our SG&A as a percentage of sales by approximately 100 basis points.
The first quarter of 2023 results included $897,000 of restructuring and other related costs associated with internal cost reduction activities. In the first quarter of 2023, we launched an initiative intended to reduce our cost structure by $8 million to $10 million annually. The inflammation of these cost reduction initiatives are on track. We are planning to take additional cost reduction measures to further reduce our operating expenses for the remainder of 2023. Q1 operating income was $18.1 million, down 39.9% this quarter from $30.1 million a year-ago. Our effective tax rate was 26.8%, down from 27.7% in the same period a year-ago. Net income for the quarter was $14.2 million, a decrease of 34.8% from $21.8 million a year-ago. Diluted earnings per share was $0.54, a decrease of 34.9% from the prior year period.
Diluted earnings per share adjusted for restructuring and other charges was $0.56, a decrease of 31.9%, from the prior year period. Our trailing 12-month adjusted earnings before income taxes, depreciation and amortization or adjusted EBITDA was $130 million compared to $129.1 million a year ago, an increase of 1%. In terms of returning cash to shareholders, we paid an $0.08 per share quarterly dividend in March and repurchased 79,000 shares for $3.4 million at an average price of $43.22 per share. As of March 31, 2023, we had $34.3 million remaining for stock repurchases under our existing stock repurchase program. We are pleased to announce that our Board of Directors has declared a quarterly dividend of $0.08 per share payable to shareholders of record on May 16, 2023, and payable on June 2, 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. Cash flow generated from operations for the first quarter of 2023 was $19.5 million, an improvement of $57.8 million from the same period a year ago. The increase in cash flow from operations reflects a decrease in inventory and an increase in accounts payable and accrued expenses, offset by an increase in accounts receivable. Our accounts receivable balance increased $11.5 million for the first quarter of 2023. Our DSO increased to 71 days from 69 days for the same period a year ago, primarily a function of netted products recorded in accounts receivable on a gross basis, while the revenue was recorded on a net basis.
Our inventory balance has decreased $9.4 million from the first quarter of 2023. Our accounts payable increased $5.9 million for the first quarter of 2023, while accrued expenses and other liabilities increased $2.5 million. Our net cash used in investing activities of $1.9 million for the first quarter of 2023 was primarily the result of equipment purchases and IT initiatives that we believe will drive future efficiencies. The company used $5.7 million of cash for financing activities during the first quarter of 2023, consisting primarily of the Q1 payment of $2.1 million of dividends to shareholders and $3.4 million of stock repurchases. We ended Q1 with $134.8 million of cash and cash equivalents. I will now turn the call back over to Tim to discuss current market trends.
Timothy McGrath: Thanks, Tom. As we move forward through the balance of 2023, you can be confident that our focus is where it has always been on our customers. In our experience, market inflections driven by economic uncertainty tend to create a rich environment to not only win new accounts but also increase our share with our existing customer base. We have aligned our sales and marketing strategies accordingly. We believe that demand for endpoint devices will continue to be challenged as they were in Q1. Our customers continue to tell us that they are not canceling projects. However, their spending decisions are more targeted and tightly managed. We do expect our customers will continue to shift their priorities toward hybrid data center, cybersecurity and cloud transformation, which should partially offset the weakness we expect to see in the endpoint market.
Services and advanced technology should be a growth driver for Connection as clients will look to us to help supplement their continued needs for technical resources and solutions. As we navigate through the remainder of 2023, we'll remain focused on improving our operational efficiencies, managing our costs and scaling our expenses appropriately. Remember that great companies can take market share in any economic environment. I'd like to take a moment to thank our valued employees for their continued effort and extraordinary dedication in this rapidly changing environment. We'll now entertain your questions. Operator?
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