CNXN - NASDAQ

Good afternoon, everyone, and welcome to the First Quarter 2025 Connection's Earnings Conference Call. My name is Deedee, and I will 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 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.

Thank you, 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 facts 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 31st, 2024, 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 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 measure 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 2025 comparisons are being made against the first quarter of 2024. 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.ir.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 Q1 2025 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 financials. Our team remains focused on delivering extraordinary value through integrated IT solutions and customer service. This resulted in consolidated net sales of $701 million, an increase of 10.9% in the first quarter. We delivered a solid start to 2025 in a dynamic macroeconomic environment. The quarter was characterized by some customers accelerating purchases in an attempt to minimize the impact of tariffs, while others elected to delay purchases due to uncertainty with respect to the near-term economic environment. Gross profit increased by nearly 8% to $127.3 million, while gross margins were down slightly to 18.2%, 50 basis points below last year. As predicted, our mix shifted towards notebooks and desktops as customers executed on their device refresh initiatives. We continued our focus on driving internal efficiencies and reducing costs, resulting in operating income of $14.5 million in Q1, an increase of 7.9% compared to Q1 2024. Operating income as a percentage of sales remained flat at 2.1% year-over-year, although operating income, excluding severance expense was $17.5 million, an increase of 29.6% Operating income, excluding severance expenses as a percentage of sales was 2.5%, an increase of 40 basis points. Net income was $13.5 million, an increase of 2.5% compared to $13.2 million in the prior year quarter. In Q1 2025, our diluted earnings per share was $0.51, an increase of 2% from $0.50 in Q1 2024. However, adjusted diluted earnings per share was $0.60, an increase of 20%. In Q1, notebooks and desktops net sales increased 21% year-over-year and were up 7% on a sequential basis as a result of customers moving forward with their device refresh initiatives. Revenue for Advanced Technologies and Integrated Solutions increased by 7%, propelled by sales of software and server storage solutions. Customer priorities around data center refresh, server consolidation and edge computing are gaining momentum. We'll now look a little deeper into our segment performance. In our Business Solutions segment, our Q1 net sales were $258.4 million, an increase of 1% compared to the prior year. Our gross profit, which we believe is a better indicator of our performance, increased by 8.4% to $65.4 million compared to the prior year. Gross margin increased 170 basis points compared to the prior year quarter to 25.3%. Gross margins were favorably affected by both customer and product mix. In our Public Sector Solutions business, Q1 net sales were $144.6 million, 54.7% higher than a year ago. Sales to the federal government increased by $40 million, while sales to state and local government and educational institutions increased by $11 million. Gross profit for the Public Sector segment was $19.6 million, an increase of 30.9% compared to Q1 2024. Gross margin decreased by 240 basis points to 13.6% for the quarter compared to the prior year. The revenue increase and margin decline resulted from a few large project rollouts in Q1 2025 that are at lower-than-average margins. In our Enterprise Solutions segment, Q1 net sales grew 5.4% to $298 million compared to last year. Our strategy to deliver enterprise solutions is taking hold as we drove an increase of 8% in Advanced Technologies. Gross profit for the Enterprise segment was $42.3 million, 1% lower than the prior year. Gross margin decreased by 90 basis points to 14.2% for the quarter. The margin decrease was a result of the expected lower license fees from enterprise agreements. 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?

Thanks, Tim. In the first quarter, SG&A increased by 5% over the prior year. The increase in SG&A was primarily due to an increase in variable compensation due to higher levels of gross profit in the quarter. On a percentage of sales basis, SG&A decreased 88 basis points to 15.7% of net sales in the quarter compared to 16.6% in the prior year quarter. In the first quarter of 2025, we continued our initiative to reduce our cost structure. As a result, we recorded a charge of $2.9 million for severance expenses associated with internal cost reduction activities. Currently, we expect these actions to result in approximately $5 million of net annualized savings split evenly between SG&A and cost of goods sold. Interest income for Q1 amounted to $3.9 million compared to $4.6 million last year, a decrease of $664,000. Our effective tax rate was 27.1%, up from 27%. Net income for the quarter was $13.5 million, an increase of 2.5% from $13.2 million in the prior year quarter. In Q1 2025, diluted earnings per share was $0.51, an increase of 2%. Adjusted diluted earnings per share was $0.60, an increase of 20%. Our trailing 12-month adjusted earnings before interest, income taxes, depreciation and amortization or adjusted EBITDA was $123.1 million compared to $120.3 million a year ago. In the first quarter, we paid a $0.15 per share quarterly dividend. In addition, we significantly increased the activity under our share buyback program. We purchased 697,000 shares at an average price of $64.22 per share for a total cost of $44.8 million. This represented 2.7% of shares outstanding at December 31, 2024. At the end of the quarter, we had $14.9 million remaining for share repurchases under our existing stock repurchase program. As we announced earlier today, our Board of Directors authorized an additional $50 million to be added to our existing share repurchase program as we consume virtually all of the buybacks previously authorized in the month of April. As of today, we have 25.4 million shares outstanding, a decrease of 3.4% from December 31, 2024. Today, we also announced that our Board of Directors declared a quarterly dividend of $0.15 per share. The dividend is payable to shareholders of record on May 13, 2025 and payable on May 30, 2025. Cash flow used in operations for the first quarter of 2025 was $52.4 million, primarily driven by an increase in inventory of $56.7 million and a decrease in accounts payable of $27 million. These outflows were partially offset by $13.5 million in net income and an increase in accrued expenses and other liabilities of $7.8 million and a decrease in accounts receivable of $7.1 million. The increase in inventory was a result of our decision to stage inventory for both daily customer needs and rollouts in advance of anticipated price increases resulting from tariffs. Our accounts payable balance decreased $27 million for the first quarter of 2025, largely due to the timing of payments. Cash generated from investing activities of $104.7 million was a result of $108.8 million of proceeds from the sale of investments and $50 million of investment maturities offset by $52.4 million of investment purchases. We used $48.2 million of cash for financing activities during the first quarter of 2025, primarily for repurchases of $43.7 million of stock and payment of $3.9 million of dividends to shareholders. We ended Q1 with $340.3 million of cash, cash equivalents and short-term investments. When we are thinking about capital allocation, we remain committed to growing the business and have an ongoing program focused on investing in inorganic opportunities and organic growth programs. I will now turn the call back over to Tim to discuss current market trends.

Thanks, Tom. Reflecting on the quarter, we executed well against our strategic plans as evidenced by our Q1 results. In fact, our performance has been recognized by our partner community as we've been the recipient of several awards including Intel's AIPC Partner of the Year, HP's US Print National Solution Provider of the Year, HPI's US Commercial Supplies Partner of the Year; and finally, Samsung's Display Partner of the Year. Shifting to our vertical market performance. Financial Services net sales increased 32% and gross profit 31% year-over-year. Our healthcare team grew net sales by 13% and gross profit 10% year-over-year. As we look across the evolving technology landscape, we are seeing strong momentum in the AI PC space, entire application layers are being built around AI-capable PCs, creating tailwinds for refresh cycles across enterprise and commercial markets. This transformation is driving two consistent themes. AI trust and AI return on investment. They are now at the forefront in decision-making for every AI deployment. Trusted AI systems around security and compliance, is a gating factor. Similarly, the ability to measure and defend or return on investment is shaping AI adoption curve. Both areas are core focus points for our Connection Helix organization, and we're investing in building frameworks, playbooks and advisory capabilities to lead these conversations. Looking to the future, there is much speculation about near-term economic conditions. We remain confident in our ability to outperform the market and take market share. We're encouraged by several emerging trends that reinforce our positive outlook, including continued momentum around device refresh, compelling business cases for data center modernization, customer initiatives to implement AI technology to drive return on investment. Momentum in edge computing and AI PC as data becomes increasingly distributed. Our pipeline of opportunities continues to grow. Finally, our backlog at the end of Q1 was at its highest level in nearly two years. We anticipate that 2025 will outperform the results we saw in 2024. Because of this confidence in our business, we continue to invest in key projects and programs to enhance our sales, services delivery and systems. At the same time, we took additional steps this quarter to reduce costs, allowing us to allocate more resources towards driving long-term growth and strengthening the foundation of our business. We are optimistic about the prospects for the balance of the year and believe that we can outperform the US IT market growth by 200 basis points. We believe our focus and business strategy remains 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 help calm the confusion of IT for our customers. We know that in this complex world of technology, change happens and expertise wins. On that note, I'd like to take a moment to thank our extremely dedicated and valued employees for their continued and extraordinary efforts during this rapidly changing environment. We'll now entertain your questions. Operator?

Thank you [Operator Instructions] And our first question comes from Adam Tindle of Raymond James. Your line is open.

Okay. Thanks. Good afternoon. Tim, I want to start in your opening comments that you talked about how some customers in the quarter were accelerating purchases. Some customers were delaying purchases, so kind of two different camps. Is there more of a pattern to the type of customer or vertical that was accelerating versus maybe holding off? And similar question on product category, any particular product category that's sort of being sweated in terms of sweating assets versus maybe accelerating purchases?

So thanks, Adam. I'll start with kind of the customer perspective, and it really has been a mixed bag. We're talking with many customers who are very concerned with cost containment, expense reduction and doing everything they can do to prepare for this economic backdrop and sort of the tariff waves that are certainly affecting their future outlook. So a lot of concern around expense optimization and productivity gains. There are other customers who are realizing that many of these projects, some enabled by AIs, are driving productivity and technology is the right path forward. So it really is a mixed bag. And as you know, it continues to be an evolving situation as the threat of tariffs kind of moves up and down. That said, we did see really good growth in the quarter in a couple of our vertical markets to begin with, we consider federal part of our GovConnection subsidiary. But that said, federal was very strong. That is large project driven. We also had good growth in finance and healthcare vertical markets again, that's based on business driven projects that were kind of in the queue. Our BSG and small mid-market teams have been very consistent, but their forecasted growth is a little lower than what we're expecting in large enterprise just based on our enterprise funnel. But we do need customers to have a clear view of the future and obviously, if they're concerned about their customer end markets and their share price, it does affect their spending.

Got it. Okay. And then…

Left that endpoint -- sorry, Adam. And we are seeing now we hit about 21% growth in our endpoint business. About 40% of that was AI-enabled customers, we think, are placed those orders for investment protection, but also to prepare for their AI projects and projects at the edge.

That's helpful. And as we look forward, your comment there at the end talking about how backlog is at the highest level in nearly two years is very encouraging. I guess, would you maybe try to put a little bit finer point on expected growth for the year? I know IT market plus 200 basis points. But I mean, here we are in Q1 with gross profit dollar growth in the high single-digit range. I'm just wondering, as you think on a forward basis, where reasonable gross profit dollar growth might be given that backlog? And Tom, I imagine you might weigh in on that. If you could also maybe just double click on OpEx in general. Obviously, we saw the leverage come through the SG&A initiatives. Is that fully reflected? Is there more in the future, how can we think about OpEx growth for the year as well? Thanks.

Yes. So I think, Adam, in terms of overall growth, I think we're probably looking at maybe mid to high single-digits on the year. We came out of the shoot at 10%. You know, looking here in April, I'd say I think there's still a little bit of uneasiness in the market. And it's -- we're still in the early innings of Q2. But I think mid to high-single digits is probably about where we're going to be on the top-line. In terms of SG&A growth, in the quarter, in Q3, none of the cost savings were really realized in Q1. I mean those will start to come through in Q2. And like I said in my remarks, kind of split evenly between G&A and cost of goods sold. And I think as we go through the quarter, we're probably looking at, I'd say, mid single-digit growth in SG&A year-over-year. So we're definitely absolutely trying to keep it below the revenue growth.

Okay. Thank you.

I can add about the markets. And I clearly say that our large enterprise business has a pretty robust funnel of projects to roll out. Of course, we need customers to agree to move forward on those projects. But our funnel and our forecast is solid with the caveat being the economic backdrop.

Very understandable. Thanks, guys.

Thank you.

Thank you. Our next question comes from Anthony Lebiedzinski of Sidoti. Your line is open.

Good afternoon and thank you for taking my questions. You know, certainly nice to see the better-than-expected Q1 results. So just curious to get, first of all, your take on how the quarter progressed. I mean, it sounds like there was some pre-tariff buying, but maybe just kind of maybe walk us through as far as January through March, how the quarter progressed?

Thank you.

Thanks, Anthony.

Thank you. This concludes our question-and-answer session. I'd like to turn it back to Tim McGrath for closing remarks.

Thanks, Deedee. 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 in Connection are appreciated. Have a great evening.