CNXN - Earnings call transcript Q2 2019

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Operator

Good afternoon, and welcome to the Second Quarter 2019 Connection Earnings Conference Call. My name is Sara, and I will be the coordinator for today. [Operator instructions] 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

you. Thank read statement. now safe the will harbor I Any that fact are references made maybe conference call during the not to forward-looking statements be or deemed statements. statements of historical management statements for of future that Various Private the under harbor purposes make Act Securities prospects forward-looking and Litigation the company’s Reform remarks constitute expectations, may provisions plans the safe about XXXX. of

XX-K for with Exchange files which with documents the Commission, Risk year on Securities result those company differ XXXX, by the company’s the on these as the ended commission a other December indicated discussed the the in materially including forward-looking that factors, those is XX, of section from from may as time important annual results as well Form Actual time. various of Factors in statements report file to

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

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

quarter note discussed. Please GAAP that financial call, website and unless comparisons release and quarter available stated being During XXXX this of in earnings are the www.connection.com. second between measures otherwise A references will non-GAAP the be reconciliation today’s is made company’s second XXXX. to two on at against all the

the www.sec.gov Relations Form XX-K website the available website. will section available at Connection’s the of earnings being Investor SEC and The our release on and is and both webcast in be call website at www.connection.com. Today’s are on

host, the call like Please now sir. Tim proceed, to our would I and President CEO. McGrath, to over turn

Tim McGrath

joining for you thank company’s financial review and the today us everyone, afternoon, second quarter to results. Good

by increase was a our per result of in pleased our record execution performance share strong are all the areas the XXXX. of QX XX% This to company. earnings team announce across We from

and software-defined strategic and out cloud data success is Our on the help intelligently quarter solutions workplace. in to build our plans our continued digital that focus include center, hyper our focus the and customers attributable to efficiently

profit, company second and per the quarter, record the record gross income achieved gross share. record net margin, record earnings During

increased profit was for in $XXX.X and ago. three sales we gross mobility million, driven million X.X% software, months by Gross to grew compared gross Net achieved a and XX, of and subscriptions year-over-year, margins including growth margins X.X% strong The QX the gross XXXX, and ended by by XX.X%. profit to both $XXX.X increase cloud in security, year desktops. June in

our that QX To of at on this the quarter, same and than pressure our proportion you remind accounted are sales and performance a growth. for margins on creating increase are last a fully time our service cloud-based greater net year, causing basis. software I’ll warranties products These downward appreciate security in to recognized sales while

prior-year X.X% balance a of margins profit margin quarter. $XXX.X to XX.X% increased sales selling on Gross million, and Gross portfolio. of to a record to software was the XX.X%, $XXX improved by and improved record to increased year million in compared the Gross our due margin security primarily a compared product cloud-based ago.

XX.X% million to increased in segment, margin segment this Gross to quarter. more would our detailed segment. a QX $XXX.X record $XXX to Solutions our I In compared by XXX a basis like Business sales a points million, ago. net the year Now provide discussion of increased to performance by slightly for

segment Our category. Business mix the margins server/storage from Solutions in of software sold and benefited our growth strong

margin sales a compared by year government $XXX.X to XX.X%, to while Gross of decreased this prior to space. net wins million state and federal segment X.X%. XX%, the primarily for were QX increased by large to million, by local to sales In in the increased due government and compared some basis the year, our Public Sector educational points XX Sales Solutions ago. business, institutions $XXX federal

Enterprise a increase, margin million basis ago. by $XXX.X for to segment, million, were segment X this X.X% our net to year a $XXX sales compared Solutions In increased Gross QX XX.X%. points

desktops retail Enterprise in segment both experienced saw manufacturing the growth The in double-digit product we good markets. category growth and a From vertical perspective, accessories. mobility, and

from we benefit and continue software addition, to sales. security In cloud-based

Tom margin Baker balance sheet highlights sales our performance, turn additional flow Tom? our financial over call cash covered I and will and from gross income to Having now statement, the discuss to statement.

Tom Baker

year to a ago. $XX.X $XX.X million Tim. from increased quarter Thanks, million this SG&A

SG&A year-over-year a to driving managing basis decreased expenses. operational and efficiencies commitment net of sales However, by points XX percentage as demonstrating our

Our operating a year to ago. $XX.X $XX.X quarter income million increased million from XX.X% this

Our down ago. XX.X% from the year effective XX.X%, same was period tax in rate a

Net income $XX.X an was share $X.XX, increased Earnings XX.X% for quarter XX%. from year million million a to the diluted per $XX.X ago. of increase

EBITDA, adjusted $XX.XX million Our to QX average year We earnings XX-month $XXX.X XX,XXX share. income an trailing a depreciation per million $XXX.X $X.X increased and repurchased shares taxes, during adjusted of from cost for amortization, ago. at XX% or million before

the in QX in ago. change offset $X.X representing inventory, by period primarily driven $X.X million cash a versus increase operations prior the accounts $XX.X with same accounts flow The an of ended from partially increase cash of an million year. from an receivable increase payable. Cash was was million We and year equivalents in $XX.X million by flow cash for

of our center. to distribution customer increase state-of-the-art in largely integration technology, purchases is rollouts a and support function through The inventory

We configuration are utilizing complex lab integration center and help large our manage advanced to rollouts. customers increasingly this and

the during volume configuration our fact, In XX% quarter. increased

of million previously for Investing declared $X.X system for The financing million activities ERP is that activities company stock six months yields for $XX.X million cash of equipment our $XX.X of upgrade our of of of capitalization payment in and repurchases. the the purchases result and process. the special of XXXX consisting first primarily million XXXX for dividend the year $X.X QX were of

$XX.X remaining had existing repurchase million we for stock XXXX, program. our under XX, June of repurchases As stock

to call Tim to the I discuss over will trends. market current now turn back

Tim McGrath

We excellent the business and all Tom. across had Thanks, of specialization customer demonstrating of segments performance our importance segmentation.

markets in deliver in growth solutions and improve vertical with retail productivity, as efficiency pleased also strengthen these customers vertical to enhance manufacturing our and double-digit security. markets our for that continue are our we We

Customer and growth our success empower are help by advanced to technologies the continue many enabled our improve and to in across organizations. their innovation ways unique that measured is order and productivity, systems of in tailored We’ll environments. users experts invest enhance diverse and in to subject customers matter needs

we businesses. optimistic are opportunities their have We to the our in transforming about customers assist

by that place we create the share believe increase and well position to team strategies have and strong customers gain our long-term We growth competitive us technology. We see in continue helping our to value. advantages that market shareholder with

entertain your now questions. We’ll Operator?

Operator

first from the with James. question Adam Our you. Thank Raymond [Operator line Tindle comes of instructions]

line now open. Your is

Adam Tindle

Okay. growth Thanks quarter for and pretty you for your Obviously, afternoon. year. We’ve stable. on that fairly good here. trends healthy of outlook rest just are of competitors Tim, had some heard the I to maybe the wanted start a from

Your the clearly for conversations just with of on maybe suggesting are outlook terms But remainder going the as well. that customers year? in results the touch are of how your

Tim McGrath

Well, thanks, Adam.

year quarter, our is outlook saying, of is the to market rate and XXX we the the strong XXX is of which been rest for points start growth. we’ve with think, above to really what basis consistent our I think the So

execution. take We’re can confident market through still share pretty we

hasn’t I’d year And outlook the say, so our changed. really for

XXX some of project heard to we’ve see pockets stick you, solutions-based we rollouts lumpiness, for to to and basis above-market softness. most that Like going large can estimate cause our of points part, But growth. we’re some of our the rollouts but XXX

Adam Tindle

where are business And Okay. on pretty things maybe that’s more specifically interesting. performance the

You’ve and showing healthy pretty some got operating business. dollar profit some growth in leverage the

and of margins dollar and go where leverage, So those of on aspect you can touch the maybe path the the kind for just of think trends business? ultimately, profit growth

Tom Baker

is Yes. Adam, this Tom.

rate of has of leverage I of a think the the the the due just software places two-thirds increase software to model rate, think is increase sales. business products from business, in on the growth I this when bit come the the is seeing in when growth One I in third little I margin profit. of margin of at would look other of increase than due gross roughly really say, and gross the we’re is about software And couple improvement kind you look of that a netting. quarter. our And the more that kind in to a at

The other just happening, tightly. operating continuing we’re things to manage expenses really our

SG&A as drop. percentage our to continues So a of revenues

it’s that’s coming So really where from.

be probably to of margin outlook, trajectory will where it’s be we’re I – going think terms the In been. probably the about

Adam Tindle

in earlier? meaning the Or Meaning QX? where – it’s Okay. been slightly

Tom Baker

Yes.

Adam Tindle

Okay. one… Got Maybe it. just

Tom Baker

dealing just now out the with. of – hard accounting now that to some It’s figure with rules are that really we’re

Adam Tindle

Understood.

gross of at think of neutralize for regardless for also I operating the trends where one profit dollar and healthy kind it. looking to growth profit that are the of just dollar is netting aspect quite business way maybe

Tom Baker

that. we said, completely I As with agree

Adam Tindle

One final one maybe for Tim.

of kind PCM level. high space acquisition purchase a quarter. There was, major of in this obviously, Insights’ the with Just

Just net remind touch position? then us given of landscape, it strategy And on this cash your maybe the how all? you. competitive if changes your acquisition Thank

Tim McGrath

Well, thanks.

go feel year. as our of us, enterprise, plans looking we’re obviously, position stay our what on had into we and segments, business aware and So at balance very acquisition, the the the cetera, right for et SMB, is to We the of given think acquisition I focused for our market company. interesting confident we in our it’s

side We strategies would place. specific remain in tuck-in enhance in right to in us our continue adding and acquisitions overall improvement open solutions the have capabilities business. that and also we solutions said, That the our of areas

And don’t as move time, burning to desperation selective. should or do So any in you we’ll need sense of arise. pretty good we’re we’re opportunity we know, But that. to this the at open but that to right very feel be position

Operator

you. Thank

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

Your now line is open.

Anthony Lebiedzinski

questions, you much. the gentlemen. for taking Great. Thank very Thanks

could that so a start. quarter to So wondering just just are off look at this certainly three segments. hear encouraging down good you far of to the the I’m if drill in separate kind trends

a three on of, at far? are each of your what wins, kind of you if seeing, what the board? so modeled here but seeing was look we Or of some what you Federal large Are for segments, you specifically you example, had that better seeing across touched I than more the for Sector the know kind just quarter? Public are kind are you��ve quite there – bit at

Tim McGrath

Well, thanks, Anthony.

we’ll with you So it. Public mentioned start Sector, since

public to good we have the it’s see business. that in momentum So our sector

team doing job think a executing is there. nice the I

the And that. Federal We help on business. that I really very SLED our of are will strong drive think authorizations We’ve the that side growth new is project-dependent. got saw some side good and also on we

confident the carry will the pretty that that public sector to we’re in some year. through momentum of now So we’ve got rest

really is margin there to our the execution comes a good team, again, it what seeing very When solutions profile. in good stack selling business across you’re solution

I there think the strong. outlook remained

pretty We’re confident in team. that

As netting, growth earlier, pressure that with sometimes software the it Tom mentioned puts on line.

a pullback, been starting think outlook Account little some for very rest pockets year. above-industry with rest that year. know the there’s be business executing of and of growth, it hear in overall, in rest the confident Enterprise, very affected lumpy, And Large good strong, forecast solutions the year while I But rollout-dependent our we’ve but we’re is to pause, out bright well. has of well a as the of enterprise is for landscape that the outlook I the team, really you us. hasn’t we’re for which got And finally, extraordinarily competitive and the that can have a some the think,

Anthony Lebiedzinski

Okay. wondering has far as that generally that meaningful been uncertainty the far quarter. tariffs, as just impact the – was second to I with some I’m sound as all in speaking tariffs, as doesn’t And the the it anything hear. the noise the in of as just there as That’s far great know there marketplace.

afternoon newly of this the the I by Would President at announced wondering, company? your all on on, X. XX% with think, Just any tariffs List impact that have just

Tim McGrath

the of the and Yes. our we That’s day, a are customers, tariffs if suppliers great end question. have. At could is, the And our affect it the answer impacted.

We’ll were the in that the watch prior say, negative have to have, I’d closely. we to have – didn’t was on guarded effect a this remain but little that There thought we overblown. maybe point. We concerns the might we demand

So a I don’t tariffs. outlook have regarding specific

Anthony Lebiedzinski

on Tom, your of But you should this how And lastly, know touched year? by inventory, the in about as inventory the think about we remarks far as it. prepared the end I

Tom Baker

backed inventories this fact, quarter. the in is All in of integration our next we specific increase firm $XX go backed the to know, increase at million for POs, is technology scheduled you staged of Well, inventory on quarter that rollouts over by all a to where seeing did is – there. inventory and What we speculating and a products center, the record so. – anything are related four by the we’re did about number not or you’re advanced configurations in the

is So more that to through my distribution have levels, that center down going to back historically. we continue balance to unless historical a go than and expectation lot we the is technology around do

down it in over So time this business my expectation spike continues. drifts is unless

Anthony Lebiedzinski

much, and very of best Thanks luck. Okay.

Tom Baker

you. Thank

Operator

no Thank you. [Operator queue further closing call would for time. now at instructions] There to McGrath back turn in I remarks. are questions like this the to Tim the

Tim McGrath

afternoon. of support of operator. you you, to thank like their their of our and the coworkers I’d call like for I’d listening this our for customers, efforts. also all partners all shareholders to all continued Thank vendor to thank and dedicated

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

Operator

Ladies program. participating This and for in you conclude thank today’s conference. gentlemen, today’s does

disconnect. have great You a day. Everyone all may

PC Connection (CNXN) 2 Aug 192019 Q2 Earnings call transcript