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spk08: Good afternoon and welcome to the first quarter 2023 Connection Earnings Conference Call. 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 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.
spk07: I will now turn the call over to the company.
spk02: Thanks, operator, and good afternoon, everyone. I will now read our cautionary note regarding forward-looking 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 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 factor section of the company's annual report on Form 10-K for the year ended December 31, 2022, which is on file with the Securities and Exchange Commission, as well as in other documents that the company filed with the commission from time to time. In addition, any forward-looking statements represent management's views 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 other than as required by law, even if estimates change. And therefore, you should not rely on these forward-looking statements as representing management's views as of any date subsequent to today. During this call, non-GAAP financial measures will be discussed. A reconciliation between any non-GAAP financial measures discussed and its most directly comparable GAAP measure 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 first quarter 2023 comparisons are being made against the first quarter of 2022. 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?
spk04: Thank you, Samantha. Good afternoon, everyone, and thank you for joining us today for Connections Q1 2023 conference call. I'll begin this afternoon with an overview of our first quarter results and highlights of our performance. Tom will then walk us through a more detailed look at our Q1 financials. Over the last several weeks, You've seen the earnings announcements in our industry, along with our preliminary results we released two weeks ago. We experienced the continuation of a weak economic backdrop in the first quarter, leading our customers to exercise greater caution and selectivity with their short-term IT investment plans. Sales of endpoint devices were lower than anticipated across most of our customer base. While we saw good overall growth in our solutions business, including software, cloud, security, and networking, it was not enough to offset the contraction in demand in endpoint devices. This resulted in our first quarter performance being below our expectations. Endpoint devices, which include notebooks, desktop displays, and accessories, were down 16.6%. The first quarter is historically our lowest quarter of the year, and this quarter's results are being compared to a record first quarter for us a year ago. We believe that our overall performance should improve sequentially, and demand for endpoint devices will gradually improve in the back half of the year. advanced technologies, which include servers, storage, networking, software, and services grew 15.6% as our customers prioritized their investments in projects that improved productivity, reduced cost, and that were essential to their ongoing business needs. While growth rates for the US IT market are expected to be challenging in the near term, we believe that we can outperform the market and continue to take market share. due in part to the strength of our long-term customer relationships. Our customer base has remained loyal. In fact, our retention rate for managed accounts remains over 98% for the trailing 12 months. We're focused on increasing our share of customer IT spend with our existing customers, and we're aggressively pursuing the acquisition of new customers. Our customers know they can count on connection to help them standardize, simplify, and optimize their IT environments. Customers still need and want help improving their infrastructure and supporting their digital transformation. The technology solutions that we offer are designed to deliver productivity improvements and enable our customers to operate their businesses more efficiently. In addition, the hybrid work environment continues to drive demand for better remote collaboration capabilities and tools. Finally, security and cloud solutions remain mission critical across all the markets that we serve. In response to these technology trends, we've been investing in our technical resources and tools to enable our customers to better make these transformations and successfully navigate this economic environment and plan for the future. Some of these investments and their results will be brought to the forefront in the coming months and quarters. One specific area for call-out is our investment in our e-commerce engine, specifically related to cloud subscriptions. We believe that we're bringing to market a leading cloud e-commerce transaction engine that over the quarters will be a cornerstone of our subscription and software transaction base. Such organic investments are intended to be a growth engine for connection. We believe our focus and our business strategy remain well aligned with the shifting dynamics of how customers deploy, utilize, and consume technology. We continue to connect our customers with technology that enhances growth, elevates productivity, and empowers innovation. We help our customers expertly navigate through our complex set of choices within the technology landscape. We do this with dynamic and constantly evolving technology choices around core infrastructure, on-prem and off-prem cloud, security, and software. We calm the confusion for IT for our customers. Now let's discuss our Q1 performance. Consolidated net sales declined by 7.7% to $727.5 million in Q1 compared to Q1 2022, which was a record first quarter for us. Gross profit declined 4.7% to $122.3 million. However, gross margins were up 53 basis points to 16.8% in Q1 compared to Q1 2022. This increase in gross margin reflects the shift in product mix to advanced technologies that we saw during the quarter. Operating income in Q1 was $18.1 million, a decrease of 39.9% or 2.5% of net sales, compared to $30.1 million or 3.8% of net sales in the prior year quarter. That income for Q1 was $14.2 million, a decrease of 34.8% compared to $21.8 million in the prior year quarter. In Q1 2023, our diluted earnings per share was $0.54, a decrease of 34.9%. While diluted earnings per share adjusted for restructuring and other charges was $0.56, a decrease of 31.9% from 83 cents in Q1 2022. We'll now look a little deeper into our segment performance. In our business solution segment, our Q1 net sales were 273.1 million, a decrease of 14.8% compared to 320.4 million a year ago. Gross profit for the business solution segment was $59.9 million, a decrease of 3.6% from a year ago. Gross margin increased 255 basis points to a record 21.9% in the quarter compared to the prior year. This increase was driven by a shift in product mix from endpoint devices to higher margin sales of data center products, including software, networking, and servers during the first quarter of 2023. In our public sector solutions business, Q1 net sales were 140.5 million, an increase of 6% compared to 132.5 million a year ago. Sales to the federal government increased 26.4 million year over year as a result of the success we've had securing new contracts. Sales to state and local government and educational institutions decreased 18.4 million compared to the prior year. In 2022, we experienced record Q1 revenues as we fulfilled many orders driven by the emergency connectivity funded projects. Gross profit for the public sector segment was $20.3 million, an increase of 17.5% compared to Q1-22. Gross margin increased by 141 basis points to 14.5% in the quarter compared to the prior year. The increase in both gross profit and gross margin percentage simultaneously was due to higher sales of software, security, services, and networking solutions during the first quarter of 2023. In our enterprise solution segment, Q1 sales were $313.9 million, a decrease of 6.4% compared to $335.4 million a year ago. As a result of the current economic backdrop, our enterprise customers exercised significant restraint with respect to IT spending in Q1. Gross profit for the enterprise segment was $42.1 million, a decrease of 13.9% compared to the prior year quarter. Gross margin decreased by 117 basis points to 13.4%, primarily driven by a few large lower margin projects that we believe will enable us to secure additional higher margin solutions of business in the future. Our vertical market focus continues to deliver customer value. Manufacturing revenue grew 10% year-over-year as customers focused on investment in cloud, security, and services, to reduce costs and prepare for future growth. In our retail vertical market, revenue grew 25% year-over-year as customers deployed technology to enable automation and improve the retail experience. I'm pleased to announce in the first quarter that Connection was named HP US Print Hardware National Solution Provider of the Year and named to Newsweek's Most Trustworthy Companies in America 2023 list. 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?
spk01: Thanks, Tim. SG&A increased 174 basis points to 14.2% on net sales in the quarter compared to 12.5% in the prior year quarter, primarily driven by lower revenues. On a dollar basis, SG&A increased $5.1 million compared to the prior year quarter. Investment in resources to strengthen our sales, technical sales, information technology, and service organizations were up slightly over 10% year over year. We reduced spending in general and administrative functions by over 10%. Looking forward, we intend to continue to invest in technical resources while focusing on improving our efficiency in light of what we perceive to be a softer near-term business environment. For Q2, we anticipate a reduction in our SG&A as a percentage of sales by approximately 100 basis points. The first quarter of 2023 results include $897,000 of restructuring and other related costs associated with internal cost reduction activities. In the first quarter of 2023, we launched an initiative intended to reduce our cost structure by $8 to $10 million annually. The implementation of these cost reduction initiatives are on track. We are planning to take additional cost reduction measures to further reduce our operating expenses for the remainder of 2023. Q1 operating income was $18.1 million, down 39.9% this quarter from $30.1 million a year ago. Our effective tax rate was 26.8%, down from 27.7% in the same period a year ago. Net income for the quarter was $14.2 million, a decrease of 34.8% from $21.8 million a year ago. Diluted earnings per share was $0.54, a decrease of 34.9% from the prior year period. Diluted earnings per share adjusted for restructuring and other charges was $0.56, a decrease of 31.9% from the prior year period. Our trailing 12-month adjusted earnings before income taxes, depreciation, and amortization, or adjusted EBITDA, was $130 million. compared to $129.1 million a year ago, an increase of 1%. In terms of returning cash to shareholders, we paid an $0.08 per share quarterly dividend in March and repurchased 79,000 shares for $3.4 million at an average price of $43.22 per share. As of March 31st, 2023, we had $34.3 million remaining for stock repurchases under our existing stock repurchase program. We are pleased to announce that our Board of Directors has declared a quarterly dividend of $0.08 per share payable to shareholders of record on May 16th, 2023 and payable on June 2nd, 2023. Our goal is to maximize shareholder value while maintaining financial flexibility. we continue to assess M&A opportunities and other capital allocations such as dividends and stock buybacks. Cash flow generated from operations for the first quarter of 2023 was $19.5 million, an improvement of $57.8 million from the same period a year ago. The increase in cash flow from operations reflects a decrease in inventory and an increase in accounts payable and accrued expenses offset by an increase in accounts receivable. Our accounts receivable balance increased $11.5 million for the first quarter of 2023. Our DSO increased 271 days from 69 days for the same period a year ago, primarily a function of netted products recorded in accounts receivable on a gross basis, while the revenue was recorded on a net basis. Our inventory balance has decreased $9.4 million from the first quarter of 2023. Our accounts payable increased $5.9 million for the first quarter of 2023, while accrued expenses and other liabilities increased $2.5 million. Our net cash used in investing activities of $1.9 million for the first quarter of 2023 was primarily the result of equipment purchases and IT initiatives that we believe will drive future efficiencies. The company used $5.7 million of cash for financing activities during the first quarter of 2023, consisting primarily of the Q1 payment of $2.1 million of dividends to shareholders and $3.4 million of stock repurchases. We ended Q1 with $134.8 million of cash in cash equivalents. I will now turn the call back over to Tim to discuss current market trends.
spk04: Thanks, Tom. As we move forward through the balance of 2023, you can be confident that our focus is where it has always been, on our customers. In our experience, market inflections driven by economic uncertainty tend to create a rich environment to not only win new accounts, but also increase our share with our existing customer base. We have aligned our sales and marketing strategies accordingly. We believe that demand for endpoint devices will continue to be challenged as they were in Q1. Our customers continue to tell us that they are not canceling projects. However, their spending decisions are more targeted and tightly managed. We do expect our customers will continue to shift their priorities toward hybrid data center, cybersecurity, and cloud transformation, which should partially offset the weakness we expect to see in the endpoint market. Services and advanced technology should be a growth driver for connection as clients will look to us to help supplement their continued needs for technical resources and solutions. As we navigate through the remainder of 2023, we'll remain focused on improving our operational efficiencies, managing our costs, and scaling our expenses appropriately. Remember, that great companies can take market share in any economic environment. I'd like to take a moment to thank our valued employees for their continued effort and extraordinary dedication in this rapidly changing environment. We'll now entertain your questions. Operator?
spk08: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster.
spk07: Our first question comes from Anthony Levinevzinski from Sedoti.
spk08: Your line is now open.
spk03: Good afternoon, and thank you for taking the questions. So first, in terms of your device sales, Do you have an expectation as to when this piece of the business bottoms out for you?
spk04: Well, Anthony, good to hear from you. Thanks for the question. You know, we've seen, much like yourself, we've seen all of the estimates, and I would, you know, we certainly hope that the worst is behind us. We did see In terms of linearity, we did have a better March than January or February. As I mentioned, devices were down 16.6% in the quarter, and we are hoping for sequential improvement throughout the year. That said, we really don't expect device to recover until Q3 or perhaps Q4.
spk03: That's helpful color. And as far as just overall, you know, demand environment, so you mentioned, thanks for giving me the color about the monthly progression of your demand now as we now get into early May. I mean, just curious as to how April was, you know, if you could comment on that. So,
spk04: April looks a lot like Q1. We don't, you know, it's early to give you a great outlook or to differentiate the quarter. We're still optimistic we will have sequential growth Q2 over Q1, but April, I'd say, was very consistent with what we saw in Q1 and in March.
spk03: Okay, yeah, thanks for that, Tim. And then, Just switching gears to the public sector, so within that the federal government was a nice bright spot for sure. Were there any one-off deals or just curious about the sustainability of business through the federal government?
spk04: Yes, we are confident that we'll continue to sustain the momentum we've had with the federal government. We have won a few large contracts and you know, we're going to continue to pursue those vigorously. And so obviously, we all have the same challenges in this economic backdrop. But again, I think Fed will continue to show nice progress for us and sequential growth.
spk03: Gotcha. Okay. All right. And then lastly for me, before I turn it over to the next caller, just as far as the share buyback How much do you guys have left on the share repurchase authorization?
spk01: I think we said it's like $34 million left, Anthony. And, you know, you can see from what we did in the quarter, you know, when the market pulled back a little, you know, we tried to be a little on the opportunistic side. And I expect that we'll probably continue to do that going forward.
spk03: All right. So, when I put it on.
spk01: Okay.
spk04: Thanks, Anthony. In terms of capital allocation, though, we're going to be diligent toward that end. You heard us announce the dividend, but we continue to believe buying back stock is a great opportunity in this environment.
spk03: Sounds good. Thank you, and best of luck. Thank you.
spk01: Thanks, Anthony.
spk08: Thank you. One moment as I prepare the queue. Our next question comes from Jake Norrison of Raymond James. Your line is now open.
spk05: Hey, thanks for taking my question. Just firstly, if you could go back and touch on this sort of public segment, can you just provide any color on how budgets are holding up at, you know, state and federal levels and what should we expect for sort of seasonality, you know, not at the federal level?
spk04: Thanks, Jake. It's a good question. Given this market environment, there's a little uncertainty around that. Clearly, the state, local, and education side of the business has been under more pressure. We do expect that the expiring ECF funds that expire in June of this year may give us a little more momentum for Q2. So we're working that actively. And as I mentioned, our federal contracts we expect will continue to roll out throughout Q2 and into Q3. So we're fairly confident there, but there is a lot of pressure on the sled side. Tom?
spk01: Yeah, I think kind of, you know, we were just talking about April a little bit. And just from a shipment perspective, you know, year over year, the sled business, did appear to hold up fairly well on a relative basis. So I'm a little hopeful going into, you know, their typical SLED busy season that, you know, things will continue to hold together.
spk06: Okay, perfect. And then last one for me, just want to double-click on capital allocation real quick. In terms of M&A, what are you looking for there? What sort of characteristics or technologies are you targeting? What color on that would be helpful?
spk04: So we are starting to see valuations come down, albeit it's a good start. But clearly when it comes to M&A, we remain very focused on tuck-in acquisitions that give us good solutions, additional capability. So areas would include, from our perspective, cloud, security, and, of course, that advanced technology infrastructure. focus space perfect thank you so much thank you jake thank you at this time i would like to turn it back to tim mcgrath president and chief executive officer for closing remarks thanks gerald i'd like to thank all of our customers vendor partners and shareholders for their continued support And once again, our coworkers for their efforts and extraordinary dedication. I'd also like to thank those of you listening to our call this afternoon. Your time and interest and connection are appreciated. Have a great evening.
spk08: Thank you for your participation in today's conference. This does conclude the program. You may now.
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