PC Connection, Inc.

Good afternoon and welcome to the third quarter 2020 Connection earnings conference call. My name is Joelle and I will be the coordinator for today. At this time, all participants are in a 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.

Thanks. I will now read our Safe Harbor 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 the 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 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, 2019, as updated in the Form 10-Q for the period ending September 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 should not be relied upon as representing views 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 third quarter 2020 comparisons are being made against the third 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 like to now turn the call over to our host, Tim McGrath, President and CEO. Tim?

Thank you, Samantha. Good afternoon, everyone, and thank you for joining us today for Connection's third quarter 2020 conference call. As you see from our press release, our third quarter improved substantially over the second quarter. While clearly not back to pre-COVID levels, business activity is increasing. Momentum picked up in late June, as I mentioned on our second quarter call, and continued through July and August as our team stepped up to help customers further define their work-from-home and remote work strategies. Through September and October, we saw a continuation of this improvement with an acceleration of our public cloud adoption, growing demand for digital e-commerce platforms, digital health technology, software subscriptions, Managed Services, and Security. The increased activity, which has continued through this fall, helped us deliver third quarter revenue of $652.8 million and gross profit of $107.8 million. These results were down 10.5% and 9.3% respectively compared to a record Q3 in 2019. Gross margins of 16.5% were up 22 basis points compared to Q3 of 2019. Operating income was $21.1 million, a decrease of 35.4% or 3.2% of net sales compared to $32.6 million or 4.5% of net sales in the prior year quarter. In Q3 of 2020, diluted earnings per share were 64 cents. A decrease of 28.3% from Q3 2019. We ended Q3 with $108 million of cash and cash equivalents, representing an increase of $18 million from December 31, 2019. Before I provide a more detailed discussion of our performance by segment, I want to update you on our Enterprise Resource Planning or ERP implementation, which began in the second quarter as discussed on our call in August. I said the implementation was essentially complete in Q2, and it was. But it's been more costly than anticipated in Q3. Some adjustments and process improvements are continuing in Q4, but at lower levels than in Q3. To remind you, the new system will serve as the foundation for our path forward, supporting growth, greater collaboration, visibility, and efficiency across the entire organization. Helping with pollution sales, cloud, CRM, common catalog, and financials. It will also enable better customer service and give us an improved foundation for evaluating and integrating future acquisitions. But as I said last quarter, the transition has not been without pain. During Q3, we determined that due to switchover processing errors, the company recorded certain out-of-period adjustments related primarily to the business solution segments. Second quarter net sales, gross profit, and net income were understated by $945,000, $4.2 million, and $3 million, respectively. Accordingly, these adjustments are reflected in our Q3 results. In consultation with our professional advisors, we determined that these out-of-period adjustments were not material to our prior and current financial statements. ERP implementations are bare, as anyone who's lived through them will tell you, but I'm optimistic that we are at the point where the significant long-term benefits of having done it will be clear over the year ahead. Now let me go through our performance by segment. In our business solution segment, Q3 net sales were $231 million, a decrease of 15.6% compared to $273.8 million a year ago. Gross profit in the business solutions segment was $46.6 million, a decrease of 10.7% from a year ago. And gross margin for the segment increased by 112 basis points to 20.2% in the quarter, compared to 19% in the prior year. The increase is partially due to an increase in sales in cloud-based security software, which are recognized on a net basis. and the impact of the out-of-period adjustment just discussed. We are experiencing improvement in our business solution segment. However, this continues to be the segment most affected by the COVID-19 pandemic as many of our customers have not yet returned to previous levels of business activities. In our public sector solution segment, Q3 net sales were $162 million, a decrease of 8.7%, compared to $177.4 million a year ago. Sales to state and local government and educational institutions was $130.5 million, Thank you for joining us. Q3 of 2019 benefited from the timing of several large federal project rollouts that did not repeat in Q3 2020. Gross profit for the public sector segment was $22.8 million, a decrease of 7.4% compared to Q3 2019. However, gross margin grew by 20 basis points to 14.1% as software as a service became a larger component of our product mix. In our enterprise solution segment, Q3 net sales were $259.8 million, a 6.7% decrease compared to $278.3 million a year ago. Gross profit for the enterprise segment was $38.4 million, a decrease of 8.7% in the quarter. Gross margin for the enterprise segment decreased by 33 basis points to 14.8%. The enterprise segment continued to see strong demand for endpoint devices and for software in continued support of a remote workforce. Having covered our sales and gross market 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. Tom?