CNXN - Earnings call transcript Q3 2018

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Operator

Good afternoon, ladies and gentlemen, and welcome to the Third Quarter 2018 Connection Earnings Conference Call. My name is Shannon, and I will be the coordinator for today. 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 rebroadcasted without specific permission from the company.

are Sarno, President Chief today Officer; Chief call Steve and Financial the Tim and McGrath, Executive On Officer. I’ll to now Steve over Sarno. turn the call

Stephen Sarno

statement call. is Thank today’s being of presented I will part read slides Safe you. of as our now the webcast call, on also Harbor which today Page X our for

conference of at Investor of our the website Our for Risk slides Actual XX-K Securities also that those will made and section Form call call Annual of to statements the be XX, other made as references the statements Relations call www.connection.com. not for historical Various for fact plans make result of company’s Report differ today’s forward-looking Safe from available as Any Securities well may materially the Act these be files statements is those Commission Reform including or Factors documents commission in with the in statements which the of factors, may deemed with under expectations, the are of purposes December after XXXX. discussed to about remarks be as statements. on provisions and from forward-looking future time results in section the file Exchange forward-looking Private company various on a Harbor by indicated company’s Litigation year may that constitute the time. prospects ended management the the the that XXXX, important during

relied In subsequent of as as as today representing any any of and should addition, statements upon not be represent forward-looking view management’s date. views

to so, And in the date subsequent update forward-looking disclaims even to if any should at as today. of future, any rely therefore, views may these not you point specifically change. company on forward-looking representing some the elect to While estimates the company do statements obligation statements

Today’s connection.com. Please comparisons third Connection’s being are call, the with A quarter webcast unless today’s and note XXXX on being in between at website. XXXX. also be the and release and supplemental company’s to on all two are against will earnings The references on release website. financial discussed. earnings the measures be along third otherwise call is reconciliation stated, this will quarter is presented website During slides available non-GAAP made GAAP the available that available

earlier in addition, The our the Commission. Form Form filed today, quarter website the website we both SEC the In Securities available, section Relations on our is third Investor of Exchange www.sec.gov at XX-Q and the XX-Q at with and for connection.com.

of spend QX the we impacts few our operating Before minutes a our and standard to to results. QX the of reporting like results, revenue remind adoption today’s review of it begin I’d how of new you the recognition company’s

revenue new revenue for prior reviewing we would to as results our the the well. the retrospective standard. impact to standard, be as some recognition cloud-based As In amounts we bill-and-hold quarter main over presented, recognition such new provide QX addition licenses the arrangements, a impact the prior releases In conference results words, $XXX.X the results. standard our on that standards. the as release, referencing recognition transactions. $XXX.X the new between recognition full impact comparative standard, will comparability of the $X.X turn less was of today, reported revenue under QX as the as net Tim? reflects We new financial this recognition security, our treating certain than recognition million and that plan well and software while reported information retrospective new standard prior for January revenue In which revenue provided to a million I’ll on other to adopted to maintenance in revenue was the X, earnings the now comparison of adopting XXXX standard revenue for provide accounting related current modified basis. stated of term, revenue, have This to opposed Tim against call operating this today’s related is prior implementation under approach million we we revenue years of to next historical in under to color our the as as stated QX the standard. the standard are the new QX The our Connection of have allow to and calls of results timing XXXX our results. earnings prior are using XXXX, the recognition recognition, approach. under

Timothy McGrath

Thanks, results July our and forecast. our and expectations August with Steve. were line in

supplier the business towards some end customer delays with medium small the constraints along some to of However, September, space. in experienced we

of their trend, project-based them roll healthcare of addition, sector and customers testament greater growth. make three help we These Consistent of across results. outs and reasons a ebb more sales flow project expected. all and roll saw variability component some In our a in levels segment our improve productivity, ability our subsidiaries. federal and at created outs vertical secure significant our our number our a we’re in to performed project in our roll QX are public for These their various to enhance seeing this In solutions than quarter, the and software. cloud security with outs lower increase

our we’re while customers and share, focus business, acquiring operational gaining transforming However, new on efficiencies. market we improving

to to ago. million, Slide $XXX.X XX, months the million. in revenue to presented, the to recognition sales, prior $XXX.X standard Net ended of XXXX the year by three million Moving a X. impact were new increased for September sales $XXX.X Net compared QX as X.X%

presented, $XXX.X year a the XX.X%, year compared X. profit, to Gross was ago. margin, increased to by as presented, to X.X% to XX.X% as million, $XX.X quarter. Slide in compared Gross million Moving prior

record standard, detailed QX sales million. our Moving revenue In presented, group, ago. of sales, new this for margin as net presented, a by impact our for of million, represents $XXX.X segment segment. Solutions discussion the $XXX.X of on X.X%, to margin, the XXX Slide which Gross an Prior in this more the as by increased was performance X XX.X% points increase a to representing Business our for compared basis year million net to were segment. $XXX.X to highest quarter,

segment growth strong Solutions security in services. net/com had and and cloud Business software, hardware Our

across seeing stack and in technologies. robust growth selling the solution advanced We’re

In Enterprise as The new offset QX an representing had million Sector $X.X standard, to net/com addition, $XXX.X we new presented, finance growth presented, in as XX%, and to business the basis XX.X%, strong increased fueled been mobility at year growth In growth by products. by presented, education. large million, ago. Gross in business, state, Prior Gross a million. margin, year this increased quarter very continue segment in sales, this the $XXX segment points XX.X%. net $XXX.X have Public products sled strong This respectively. refreshes, In presented the solutions XX.X%. in in in of compared sales, drove million, and decrease was space. XX% The Enterprise as by many million. growth $XXX.X products, our segment, for vertical sales and which The to increase strong mobility, local project to partially for manufacturing as XXX from which of retail as ago. were the server/storage XX%, margin, a benefit of during growth combination grew markets. decline by to net segment the sales million, a in QX to were $XXX.X were $XXX.X and our Prior points standard, presented, and was were Solutions Net/com XXX compared federal to million basis

realize addition, to financial that In flow Windows Having benefit balance cloud we migrations. statement, now income and continue additional covered enables these technology Steve? competitive advantage. over cash I security will to to and our discuss statement. margin from and sales in sheet Steve call from highlights the markets gross XX, turn Customers our performance,

Stephen Sarno

Jim. Thanks,

Page slides, our X have net this presented, XXX of SG&A along presented, to primarily a This Under of revenue of For SG&A, a million the percentage revenue our net would as SG&A, points. of ago. $XX.X the to on as XX.X% prior from of the revenue XX.X%. as added webcast which was standard, standard, million increase been quarter expense year recognition in those basis new increased and percentage our XX.X% sales due presentation. following and on $XX.X sales we’re

the In QX, solutions. we sales have solutions quarters, with in our investing data operational four focused will and areas. addition, capabilities last in be center been cloud we on non-strategic In an reducing over emphasis investments and on efficiencies

Under to prior the Our million $XX.X standard, operating our ago. would have presented, revenue decreased million income, a been this recognition operating as year $XX.X income from million. quarter $XX

This The year. XX.X%, Connection of became and average state approximately rate apportionment. rate XX.X% our tax rate was that an XX%. in tax a result in federal Jobs of in effective to was period ago income a which Our same individual year in for the tax act decrease the decrease effective from federal of the in from a QX Tax this changes to to Cut by partially the as Act, X% was state offset XX% X.X% down from impact due rose rate

during the basic for income presented, or X% and Prior the X% net to Prior to have per and $XX.X standard, million for share, be a X.X% of $X.XX. the to to increased would increased income, in year $X.X ago. the year tax $X.XX per diluted the from basic XXXX. QX per $XX.X accounting rate the share earnings $X.XX range to as XX% presented, our million, $X.XX, million. of increased accounting and impact a of to approximately share XX%. new X% would X% Earnings lower to year expect standard, diluted We $X.XX contributed $XX.X and new respectably, compared increased have to as rate million the The of quarter Net to ago. impact

Slide depreciation or of and to presented. amortization income before as X Moving presentation, taxes, EBITDA, earnings today’s

our a X% XX-month Our $XX.X new X% the impact to EBITDA Prior year trailing of adjusted million EBITDA $XX.X would revenue to increased ago. $XX.X have standard, million XX-month increased adjusted trailing from the million. to

Turning December generated of on million $XX.X of our operations, in with period increase for $XX.X shown the activities the to X. nine million sheet from of an the of $XX.X million were million result million system versus purchases and of cash XX, cash Investing of the Cash from XXXX. of primarily and year that’s equivalents, a QX an capitalization same Slide for progress. representing $XX.X increase ended We ago, flow generated. of cash Slide currently in upgrade cash representing XXXX X, on equipment months $XXX.X balance million $XX.X

nine of as of to price have months buy September Our XX, cash financing for back and an $X.X stock share first due payment Please million our $XX.XX of repurchases $X.X at was of to used programs. million stock dividend our on average XX our QX stock plans. used of per under activities authorized special $XX.X for of repurchase million previously remaining shares the declared common under that we note of during million XXXX, XXXX existing which XXX,XXX the repurchase our $XX.X Slide previously stock cash,

to Moving accounts receivable.

sales to increase is a lower our of from days year net the or at ago QX. revenue sales the of entire the The Our X-day DSO impact which days XX outstanding, resulted XX days in use standard, increased a calculation. DSO, to new end due the of in denominator

Moving to expenditures. capitalized

we During that mainly million, to upgrade our was capitalized in ERP progress. QX, currently is $X.X due system which

Tim call project We of trends. I expect XX back the will over million the our discuss $X to to capitalizable this now turn million for and remaining to range $X the over months. be both current nine market in next to to spend, expensable

Timothy McGrath

also our technology evolve with I’m SLED using in growth good execution and and execution growth Thanks, on and manufacturing technology customers and customers secure We products markets. Steve. drive to success to their IT in to pleased solutions as for financial solutions. with and businesses. helping the transform It’s see continue and our businesses. their Demand the focused enterprise continued retail, vertical remain are improved

order We’ll and goal IT and this innovation. Our market advanced growth complex than faster to invest customers in help in ways go to market enabled is technologies. to empower areas continue of productivity, enhancing environment. in measured share by business improve our by many taking in our Customer evolving the is success

Our software including cloud, business continues virtualization and to security. grow,

strong In mobility, in operating our addition, with we’re servers, seeing also strong and cash net/com. storage We flows. growth were pleased

opportunities management continue is maintaining dividends remain flexibility, our strategic help focused business goal now improvements, stock and gross We other value, to our to maximize buybacks. as We’ll and assess questions. which entertain plan solve challenges us shareholder allocations Our customers capital their with your M&A expense while margin operating on technology Operator? such allows solutions. to financial to and

Operator

comes question from Our James. Raymond first with Instructions] Adam [Operator you. Tindle Thank

Your line is open.

Adam Tindle

start commentary. to demand talk any reps wanted like to growth, on where commentary is seeing the environment you’re moving you budgets just your IT just I Tim, hearing vendor would about what ground overall and up in and helpful? kind sales moderation growth afternoon. look just Could good from of and Thanks Okay. forward? the you’re indications maybe reps be Are the listening sales you from of hearing XXXX, customer what vendor and in

Timothy McGrath

thanks, Adam. Oh,

on we a happen think business. I slightly subsidiary. seeing transformation each But the for mentioned are we in overall, different as call, the

other those business We can enable are security. to And seeing sort ebb said, know, in roll out. of type as that or we’re several upgrades, as components I also mentioned, transformation. seeing cloud With really the gravitate looking you in growth you’re solution-based that project good of when toward and roll and at involved those out flow. you’re And

continues that happen. trend a to that’s think, I So

outs. more drive seeing on their they’re ever improvements before more upgrades, with their looking look are And roll investment return project in those productivity. We to towards than or customers

down. have date happened of So some in either. see Wall some in on haven’t really but – effect of and environment, QX demand They our note us. – like jitters do some have – with had there we sort macroeconomic there we nothing don’t may again, effect, that are everybody challenges the not in to a significant the effect they’ve we’re what significant. may sure have tariffs minimal out else the Street environment, slowing slight But nothing a The like the questions still and

enterprise very SMB, Business strong, very be and up, perform. we’re are Fed. in Public Sector, pretty see then bit, the We a beyond. to it there sum but and will on And little moderating has a we we’re cautious QX confident to still funnel – enterprise full did So but this confident that we growth with in continue see good will sled, Solutions

their know, slight pullback a is the government there. the administration, Trump federal As you under cutting see we’ll budgets so

QX. So, we’re to on

in and don’t front we major confident anything We’re in out where see we’re of us. headed

Adam Tindle

as solutions of that, business Okay, or should solutions margin see that’s more expect and this stuff change, towards we or level, move you the would maintain as And towards the mid-XX% we move at to area? helpful. shifts more – would gross the it up we like kind

Timothy McGrath

a it’s question. So great

tend Steve out. planned kind of be to kind months margin that likely, in fairly by to maintain. tend We ask These to think segment. advance I and we’ll they give going competitive. large I’m projects do quick of be us them review But to gross beat a on our

Stephen Sarno

we’re enterprise, Adam, group. seeing in Business lower have challenge a – on public also And a then what than has we’ve the in more it this, I the space. bit margins think, a good which depends seen we little sector slightly growth in Solutions gross

amongst it what amongst not on only but the can we depending So, influence segments mix see product, also slightly.

Adam Tindle

Understood.

Okay, very thank you much.

Timothy McGrath

you. Thank

Operator

Thank you.

with Gibson comes next ROTH William Capital from question Our Partners.

open. line Your is

William Gibson

from guys Is are or Thank getting the from small these you. big anything taking areas. as the in still well? mainly you that Tim. you you’re share complex mentioned competitors, regional

Timothy McGrath

mainly, small the is it think competitors. I

to segment. have do look You by

XX% And players and that from Our enterprise head-to-head grew quarter. with we’re share in Board, is market across it the faster the industry. that in bars. think, the of the segment, But over we I are team clearly, our the smaller taking lot a larger growing than IT more

William Gibson

color positive remain be on companies? the there you do But And due little environment you for thank as is just think could changing mentioned – know are Okay, you the that there you. smaller something to segment. there a I more to SMB

Timothy McGrath

be not looking end what will we drive And happen orders saw But as we companies I And And that group and we recaptured if business strong in roll to pullback you Business will those advantage complexity QX. into know we happening project them during some our will outs, quarter, then are of look August. the with SMB in saw real technology we what QX. competitive do the for see the majority or Solutions, detailed of particular, we We happening. that. does don’t the But a orders, us as to because in push. environment maintain. and help end and on think in many really on a know, No, don’t, of September, July of analysis based the help mentioned, the towards

William Gibson

you. Thank

Timothy McGrath

Thank you.

Operator

you. Thank

comes with from Our Lebiedzinski Anthony next question & Sidoti Company.

Your line is open.

Anthony Lebiedzinski

afternoon, Good Yes. questions. taking and thank the you for

as Can of in your guys you those as timing two – the your supply far that So now and timing as situation performance. as transferred the far XXth shortages, whether QX? – supply third the shipments October quantify also shipments? quarter guys already and the press impact and and release, the well talked as perhaps about shortages far Has to the over as you what’s affecting of of as

Timothy McGrath

help did that projects. constraint. QX Well, limited of start It It I’ll it the in and to be forward. dollars. just thanks. issue see Steve, and hold us caused is out. product will going couple you Tim. that This that can up to we and We that But specifically, some think million itself a space, think not was really in do resolved an some has we do net/com was

large shortages. networking but much about was we’re held really more itself. has too miss project, not it Steve, hearing supply up I did resolved And that anything? So a that

Stephen Sarno

product, shortages that have that it add that. to QX in No, two – and did worth One QX. can within I ship that, I pieces million would – any a significant couple a networking we date the yes, not seen is, to couple just confirm was to pieces of of and

And end other of part the portion question I go to and of that was shipped hit we think in delays a the right your and to quarter, just that regards gone of this in was of happened QX. none to the something has and the is to, small QX was, course. a else have of regards we it seen at within then, already then us I that to experienced, Everything think, that there piece in QX expected away. moved happen

Anthony Lebiedzinski

Got it.

it’s impact Okay, about I know on well, or early should XXX thanks guys that. but also, the give how quarter, guidance, QX perhaps still And sales? the for you think we some in could of fourth

Stephen Sarno

Sure.

the as impact mix much on particularly is cloud-based as XXX whatever very predicting is, the security-based, maintenance. of due software, that’s So, and to well

I predicting lot But not news. difficulty is a And some had of And more good we cloud – for think expected others actually we saw growth kind we we’ve obviously, movement think than profit to started We of to I we think, this that’s of is products. we’re that that as XXX, we a see look within security and no QX. So, quarter. gross to from gross profit susceptible to – the at do like the fourth difference which material in perspective, there. more actually

Anthony Lebiedzinski

it. Got

quarter Okay. have noise? Well, you through only to one XXX more the go

Timothy McGrath

are. we than [indiscernible]

Anthony Lebiedzinski

Right.

wrapping kind Okay. And then of up.

So, the of with you quarter million ended cash. over $XXX

didn’t of you when going You any forward? like that kind back allocation, at looking quarter, are you’re stock thinking about guys the capital buy in

Timothy McGrath

Thanks, Anthony.

a dry. as know, you powder So, we’re

we have at always looking – are dividends. in looking share as evaluate we’ll So we at well possible as are marketplace. But clearly out buybacks, the we – and opportunities

assessing and the are buybacks end But options are all in say, I’d at our So agenda. dividends the clearly on of play. day,

Anthony Lebiedzinski

right. All Thank you.

Timothy McGrath

you. Thank

Operator

this Tim to I’d for remarks. you. the time. questions back no currently further call turn showing at to McGrath Thank like over I’m And closing

Timothy McGrath

our all you our coworkers to all I’d and to – thank thank like thank partners are like me, efforts. dedicated customers, like this operator. also and like – of shareholders listening excuse who our afternoon. you, their I’d thank call those support those vendor of their to Well, continued for for of to I’d

appreciated. a time interest Your evening. Connection are Have in great and

Operator

Have conference. this concludes Thanks for a wonderful participation. and day. Ladies gentlemen, your today’s

PC Connection (CNXN) 3 Nov 182018 Q3 Earnings call transcript