PC Connection, Inc.

Good afternoon, and welcome to the fourth quarter 2020 Connection Earnings Conference Call. My name is Josh, 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, operator. I will now read the 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 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 ended September 30, 2020, each of 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 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 fourth quarter 2020 comparisons are being made against the fourth 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. Tim?

Thank you, Samantha. Good afternoon, everyone, and thank you for joining us today for Connection's Q4 2020 conference call. We're pleased to announce that our Q4 results reflect continued sequential improvement in our business, consistent with the recovery trend we've seen since late in the second quarter. In Q4, we experienced year-over-year revenue growth in two of our three sales segments, business solutions and public sector. Our year-over-year growth in these two segments was offset by a decline in enterprise solutions, which had a strong Q4 in 2019. Fourth quarter revenue was 675.7 million, down 5.7 percent from 2019. Gross profit of 108.9 million was down 6.2 percent, and average daily sales decreased by 4.2 percent. Gross margins of 16.1 percent were essentially flat year over year. Operating income was 19.8 million, a decrease of 33.3% or 2.9% of net sales, compared to $29.6 million or 4.1% of net sales in the prior year quarter. In Q4 2020, diluted earnings per share was $0.62, a decrease of 25.3% from Q4 2019. We ended Q4 with $95.7 million of cash and cash equivalents representing an increase of $5.6 million from December 31, 2019. The net income and earnings per share drop from 2019 is obviously disappointing, reflecting a challenging 2020, a tough comparison from a strong year for our enterprise business in Q4 2019, lingering but declining ERP transition costs, unusual one-time legal costs related to a commercial dispute, and expenses related to introducing a new technical sales force, which we believe will drive revenues this year and beyond. Looking at our segment performance, despite pandemic-related headwinds, our business solution segment achieved organic growth in the quarter for the first time since Q1. Q4 net sales were $265.2 million, an increase of 1.1 percent compared to 262.3 million a year ago, while average daily sales increased by 2.7 percent in the quarter. Gross profit in the business solution segment was 50.7 million, a decrease of 3.7 percent from a year ago. Gross margin decreased by 95 basis points to 19.1 percent in the quarter, compared to 20.1 percent in the prior year, as a result of changes in product mix. In our public sector solutions business, Q4 net sales were 134.9 million, an increase of 1.8% compared to 132.5 million a year ago. Sales on an average daily basis grew 3.5% in the quarter. Sales to state and local, government, and education institutions was 95 million, an increase of 23%. compared to the prior year. An increase in the sled business was largely the result of increased sales across higher ed, K-12, and state and local governments. After experiencing growth of 25.4 percent in Q4 2019, sales to the federal government declined as we experienced fewer large project rollouts in the quarter. Revenues were 39.9 million, 27.8 percent lower than Q4 2019. Gross profit for the public sector was $18.5 million, a decrease of 11.6% compared to Q4-19. Gross margins decreased by 209 basis points to 13.7% due to changes in product mix and vendor incentives. We expect margins to normalize in the months ahead as our revenue recovers. We are focused on returning the federal business to historical levels of performance. In our enterprise solution segment, Q4 sales were 275.6 million, a 14.4 percent decrease compared to 321.9 million a year ago, or a 13 percent decrease on an average daily sales basis. Gross profit for the enterprise segment was 39.7 million, a decrease of 6.7 percent in the quarter, which helped drive an increase in gross margin for the quarter of 118 basis points to 14.4%. In addition to a difficult year-over-year comparison, during the quarter, the enterprise sales space experienced challenges with product availability issues with a few of our large suppliers. Perhaps the silver lining, the enterprise solution segment has experienced continuous growth since Q2 and actually ended the quarter with the highest backlog in their history. We expect it will take a couple of quarters for this backlog to normalize. Let me turn the call over to Tom to discuss additional financial highlights from our income statement, balance sheet, and cash flow statement. Tom?