PC Connection, Inc.

Good afternoon, and welcome to the second quarter 2020 Connection Earnings Conference Call. My name is Michelle, and I'll 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 a 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.

Thanks, Operator. I will now read our Safe Harbor Statement. 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 provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors. including those discussed in the risk factor section of the company's annual report on Form 10-K for the year ended December 31, 2019 as updated in the Form 10-Q for the period ending June 30, 2020, each of which are 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 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, even if estimates change, and therefore you should not rely on these forward-looking statements as representing views as of any date subsequent to today. During this call, GAAP and non-GAAP financial measures will be discussed. A reconciliation between the two 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 second quarter 2020 comparisons are being made against the second quarter of 2019. 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.

Thank you. Good afternoon, everyone, and thank you for joining us today for Connection's second quarter 2020 conference call. Let me start by stating the obvious. It was a tough quarter. After a strong first quarter... Thank you very much. Thank you. Thank you. Thank you for joining us. Integration teething pains unfortunately required significant focus by key employees and management, as well as extra efforts by members of our sales team, which, while important to protecting our customers, proved to be distracting in certain circumstances. Our customer-facing work on the system is essentially complete, and some back-office work has continued into the current quarter. You can be sure I am very focused on this, and I believe that our most significant difficulties on the ERP execution front are now mostly behind us. I am confident that with this system, we are better positioned than ever to continue to assist our customers in adopting the technology they need to drive business continuity, strengthen security, reimagine the workplace and transform their businesses to meet the challenges of the future. I want to give a special shout-out to our incredible team, which, under unprecedented circumstances because of the pandemic, worked tirelessly to mitigate the impact on customer service as we made the transition. I'm very grateful for their hard work and dedication. Turning to the financials for the second quarter, revenue was $550 million, a decrease of 25.8%. while gross profit was $89 million, a decrease of 23.9% compared to Q2 of 2019. We achieved gross margins of 16.2%, which represented a growth of 40 basis points compared to Q2 of 2019. Overall, we saw strong performance in software subscriptions, and we expect demand to be strong for remote work, cloud, business continuity, and security going forward. Operating income was $10.6 million, a decrease of 67.2% or 1.9% of net sales, compared to $32.3 million or 4.4% of net sales in the prior year quarter. In Q2 2020, diluted earnings per share were $0.29, a decrease by 67.4% from Q2 2019. We ended Q2 with $165.9 million of cash and cash equivalents, representing an increase of $75.9 million from December 31st. Now I would like to provide a more detailed discussion on our performance by segment. In our business solution segment, Q2 net sales were $191.1 million, a decrease of 29.5%, compared to $271.1 million a year ago. Gross profit in the business solution segment was $37.2 million, a decrease of 29.7% from a year ago. And gross margin for this segment remained flat at 19.5% in the quarter. Our business solution segment was the segment most affected by the COVID-19 pandemic. Many business solution customers were forced to shut down in the March and April timeframe, sharply curtailing their purchases of equipment. In other cases, certain larger projects were deferred until later in the year. Margins remained strong at 19.5% in the quarter as more than half of the business solutions revenue was derived from advanced technologies. In our public sector solutions segment, Q2 net sales were $112.2 million, a decrease of 26.2% compared to $152 million a year ago. Sales to the federal government were $26.3 million, a decrease of 40.9% compared to the prior year. Q2 of 2019 benefited from the timing of several large federal project rollouts that did not repeat in Q2 2020. Sales to state and local government and educational institutions was $85.9 million, a decrease of 20.1% compared to the prior year. The decrease of the fled business was largely the result of lower sales to higher ed institutions that were closed for most of the quarter. However, it is notable that we ended the quarter with a backlog double that of the prior year. Gross profit for the public sector segment was $14.4 million, a decrease of 20.6%, compared to Q2 2019. However, gross margins grew by 90 basis points, to 12.9% as software as a service became a larger component of our product mix. In our enterprise solution segment, Q2 net sales were 246.8 million, a 22.4% decrease compared to 318 million a year ago. Gross profit to the enterprise segment was 37.3 million, a decrease of 18.5% in the quarter. Gross margin for the enterprise segment increased by 72 basis points to 15.1%. Enterprise saw a drop in demand for data center planning and related projects. Demand shifted to more work from home projects and software subscriptions. We are beginning to see industry leading customers take this opportunity to invest in their transformational technologies. Having covered our sales and gross margin performance, I'll now turn the call over to Tom to discuss additional financial highlights from our income statement, balance sheet, and cash flow statement.