Timothy McGrath - President and CEO Joseph Driscoll - SVP, Treasurer, and CFO.

Prabhakar Gowrisankaran - Canaccord Genuity Inc Unidentified Analyst - ROTH Capital Partners Anthony Lebiedzinski - Sidoti & Company Adam Tindle - Raymond James Scott Tilghman - B. Riley & Co..

Good afternoon, ladies and gentlemen and welcome to the Second Quarter 2015 PC Connection, Inc Earnings Conference Call. My name is Valerie, and I’ll 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-session.

As a reminder, this conference call is the property of PC Connection and may not be recorded or rebroadcasted without specific permission from the company. On the call today is Tim McGrath, President and Chief Executive Officer; and Joe Driscoll, Chief Financial Officer.

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 31, 2014, 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 represents 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 of any date subsequent to today. Today's call is being webcast, and will be available on PC Connection’s website. The earnings release is also available on the website. I’ll now turn the call over to Tim McGrath. Please proceed sir..

Good afternoon and thank you for joining us today to review the company’s second quarter financial results. We had solid second quarter performance in a challenging IT environment.

Although we experienced a slight decline in revenues on a year-over-year basis in Q2 of this year, we were able to increase net income and diluted earnings per share due to cost controls while still making important investments in sales and technical resources. As a reminder in 2015 our growth has been compared to our strong sales in Q2 of 2014.

We grew revenue by almost 14% and net income by 25% in Q2 of last year significantly above industry growth rates. As we review our results please note that unless otherwise stated all of our second quarter 2015 comparisons are being made against second quarter of 2014. Consolidated net sales decreased year-over-year by 6 million or 1% to 628 million.

April was a slow month for our business units but we ended the quarter with great momentum as June was the largest revenue month in company history. Gross profit dollars in the quarter decreased by 1% to $83 million. Consolidated gross margin was basically unchanged at 13.22%. SG&A decreased by $1.2 million in the quarter.

We knew that quarter would be challenging from a revenue perspective, so we continued hiring in critical areas but we implemented strong cost controls throughout the organization in order to deliver an increase in net income.

We incurred $271,000 in startup cost for the new advanced configuration and distribution center that we will be opening later this year. There will be additional startup cost of approximately 900,000 for the remaining two quarters in 2015, as we transition out of the other DCs.

The new facility will significantly increase our capacity to deliver advanced configurations which is the cornerstone for delivering business outcomes. Net income for the quarter increased by 2% to 11.6 million and diluted earnings per share increased from $0.43 to $0.44.

Year-to-date net income increased by 9% to 20.2 million compared to the prior year and now I’ll turn the call over to Joe Driscoll to discuss the results of our business segments and financial highlights.

Joe?.

Thanks Tim, sales for our SMB segment which serves small to medium size businesses decreased by 3.3% to 259 million with a double digit percentage decrease in the desktop category partially offset by increases in the storage, software, and notebook categories.

The decrease in desktop sales is consistent with recent news releases from manufacturers and industry research firms. Gross margin increased by 11 basis points to 15.4% led by solid performance in advanced solution categories. Sales by our large account segment increased by 4.3% to 232 million.

We experienced double-digit percentage sales growth in servers, software, and networking. Gross margin also increased to 12.4%, a 12 basis point improvement. Sales in the public sector segment which includes sales to government and education customers decreased by 5% to 136 million.

Sales to State or Local Governments and education customers decreased by 6%, whereas sales to the Federal Government increased 1%. The public sector segment had a very challenging comparison to 2014. In Q2 of last year, sales in this segment grew by over a 20%. In Q3 and Q4 of 2014, our public sector business grew 21% and 19% respectively.

So these challenging comparisons will continue for the balance of 2015. Gross margin for the public sector segment decreased from 10.8% to 10.5%. Our healthcare vertical which includes customers in all three of our business segments had a strong quarter with 11% growth in revenues and 16% growth in gross profit dollars.

Several healthcare customers had large project rollouts this quarter, which has resulted in significant IT investments in datacenter products and other product categories in this highly specialized market. Overall our bottom line performance was in line with our expectations.

In addition to increasing diluted EPS to $0.44 per share, we increased our trailing 12 month adjusted EBITDA to 84 million. Also our operating income as a percent of sales increased from 3.03% to 3.13%. Our balance sheet is in very good shape as well. The Q2 2015 cash balance of 72.5 million is well above the year ago amount of 60 million.

We regularly assessed how to best deploy our excess cash and our goal is to maximize shareholder value while maintaining financial flexibility. I will now turn the call back over to Tim to discuss current market trends. .

Thanks Joe. Consistent with the outlook provided by many companies in the IT supply chain, we believe that 2015 will continue to be a relatively low growth environment especially given the decline in desktop PCs and related categories.

In addition to the overall industry outlook, PC Connection will continue to compare against the growth that we experienced in 2014. Q3 and Q4 2014 were strong quarters we experienced 10% and 9% growth respectively in those periods.

Based on our current estimates we feel that Q3 of 2015 should be a solid quarter as we are seeing improvements in the demand environment. Looking ahead to next year, current industry growth projections for 2016 are consistent with 2015 in the low single-digit range. We are highly focused on continuing to grow the bottom line faster than the top line.

To accomplish this we must continue to take market share, increase gross margins, and control costs. We want to deliver strong financial performance while making the investments we need in order to remain one of the leading national solution providers in the country.

We are focused on advanced technologies and we are investing in conflict areas in order to help our customers drive their business outcomes through IT investments. Our business model is more relevant than ever as technology is more complex and more disruptive.

For example some of our recent successes include at professional sports arena, we designed and implemented best in class wireless and digital experience.

This included a complex networking project which provided high density WiFi throughout the arena including hot spot antennas embedded in the dasher boards to improve wireless and streaming capabilities. That was an industry first.

At a primary conference [ph] company we implemented a world class data center putting together all the major components that has enabled the company to split into two separate companies. The solution included server, storage, services, and software. It was truly a mission critical implementation.

As changes in the market continued to unfold, we feel it is critical that we manage our growth appropriately with the focus on expanding margins, investing in solution capabilities, and keeping our balance sheet strong. We also believe that our balanced portfolio of customers, suppliers, products, and solutions has helped us to deliver solid results.

Our goal is to continue to deliver sustained and consistent performance. We will now entertain your questions. Operator. .

Thank you. [Operator Instructions]. And our first question comes from the line Prabhakar Gowrisankaran from Canaccord. Your line is open. Please go ahead. .

Hi, thanks for taking my question. Couple of questions, one on the positive side, the large accounts saw good strength.

If you can add more color, you talked about server software networking were all up, with this did you benefit from the 2003 expiry and how sustainable is this growth at large accounts?.

Well thanks Prabhakar, it is Tim and we are excited that we are really starting to see that the project business come back into the large account space. It is true a year ago we had large system roll out that were based on the XP expiration and the refresh. We are continuing to drive large roll outs and really deliver that end-to-end solution.

Notebooks were strong, growth categories. Software was very strong growth category and so were servers. So overall we are pretty bullish on the enterprise segment and think our team is doing a great job there..

Then switching over to the SMB weakness, you talked about desktops drying that segment down, right if you take out the desktop side was the rest to your expectations, how should we think about Q3 and Q4?.

If we look at the SMB category, the value proposition is strong. The margins and the ability to sell across the solution stack have been very consistent. In fact their margin is actually up this quarter.

But no doubt about it, we can't hide from the fact that the desktop business had an industry wide decline but again in this segment we did grow the notebook business and Q2 was our toughest compare. So, frankly we have turned that corner. .

Okay, do you expect -- is it too early to tell or do you expect growth in this segment to return in September?.

Yes, last year the segment grew 8%, the SMB segment so that's a little -- it is still a very strong compare that we are going up against. But it is a little bit easier than the Q2 compare we had in SMB from last year. So, I don’t think you will see huge growth but we are expecting growth to come back.

The SMB space is where our manufacturing partners really need and want our help to really reach that sort of sub 1000 seat business. So we are confident that SMB is going to bounce back. .

Great, thanks for taking my questions. .

Thank you. .

And our next question comes from the line of Jeff Martin with Roth Capital. Your line is open. .

Hi, there Tim and Joe this is Roland for Jeff.

Just a couple of questions one, your stated goal is to get to 50% of revenue from advanced technology solutions, could you review the past 12 months on the partners you’ve made towards striding to that goal and once you achieve that goal whether its shorter in immediate term, what does the margin profile of the company look like at that point?.

So there is a lot to cover there. I’ll take a stab at it then I’ll let Joe hit the margin area. So internally we have a companywide focus on that goal and that means that we measure, we score card it, and we look at it very closely. And yet we have seen good growth in the quarter in categories like servers.

In legacy storage we actually saw a little decline which doesn’t delay or change our goal in any way. It’s just sort of the market conditions that we are in right now. Overall we have seen a slight improvement since we began this initiative.

However, Q2 overall was a tough quarter and that we continued to drive growth in some key areas and as you know it’s the end of Microsoft’s year so we focused a lot on software for the quarter and certainly had great growth there. So, we are not at that goal but we are not going to let up until we get there and beyond. .

Legacy storage, I think if you look across the board you will see many companies sort of struggling in that area and that is one of the areas that is in our, what we are calling our advanced solutions. So if that overall category is sort of bumping along, that’s going to hinder our efforts.

So right now we are sort of in the low 40% range in terms of advanced solutions as a mix of our total business. As that profile changes, you could see easily see a 50 basis point improvement in gross margin, maybe more.

Some of our competitors that only sell datacenter products have overall gross margins in the high teens or low 20s compared to our 13 plus percent.

So the upside is there and so as we continue this journey every year, we are hoping to do more and more in the advanced technologies and we are trying to get that gross margin bumping up every year another 20 basis points a year, something like that. So we are confident that we are going to get there.

We think we have a good strategy in place to get there. .

Great and then couple of follow ups, do acquisitions play a role in achieving that 50% of the business to advanced technology and overall could you provide an update on the current acquisition strategy and any potential for other planned uses of excess cash?.

Sure, so acquisition that strategy is not dependent upon acquisitions. Overall we think we’ve got a really solid strategy plan and we got the right team wrapped around that. So we don’t feel a need to do an acquisition.

However, if you look at the consolidating market, we are always evaluating what the best use of our capital is and towards that end if we did see an acquisition that would help us round out a solution area and that would be accretive we’d look at that. But at this time we have no plans for an acquisition. .

And just in terms all the uses of cash then so, I guess acquisitions would be number one on the list if we have excess cash. If there is nothing really eminent on that front but what we have done in the past is we’ve done special dividends four years in a row. We’ve done stock buybacks. So I guess everything is on the table.

Acquisitions will be our first plan but if there is nothing really hot then we would look at some of these other ways to deploy some of our excess cash. .

Alright, great. Thanks guys and good luck in the back half of the year. .

Thank you. .

Thank you. Our next question comes from the line of Anthony Lebiedzinski from Sidoti & Company. Your line is open. Please go ahead. .

Good afternoon gentlemen. Thank you for taking the questions.

So with the pending opening of your new distribution center, how should we think about the inventory and also what do you expect as far as benefits from this new facility?.

Yes, good questions let me start with the benefits and we’ll come back around to the inventory. The benefits are going to be in a lot of different areas. One is we are going to be able to handle just on a capacity basis way more in terms of advanced configurations than what we have today.

We are going to be tripling the size of our advanced configuration area. We really believe that is a true value add that our customers look to us to provide.

And just by having all of the activity in one building right now we are in two buildings so there is a lot of built in inefficiencies there just from moving product back and forth and things like that. So having it all under one roof is going to be tremendously efficient for us.

There is a number of cost savings throughout the building just in terms of things like security only need one set of security staff instead of two. The hundreds of thousands of cost savings there. So the benefits are going to be tremendous we believe when this is up and running.

And then from an inventory perspective we don’t see a dramatic change in our inventory level. So I guess right now we have about 70% of our business going through distribution, about 30% coming out of our own facility. You might see that number or the inventory number pick up a little bit but I don’t think there will be a dramatic change there. .

Anthony, think about our overall value proposition as national solution provider.

The ability to do advanced configurations and the ability to deliver that end-to-end solution is dependent upon our ability to really build it out, to burn it in, to get all the configurations done ahead of time and this facility will enable us to do that in a much more efficient way with much more capacity.

So it really is perfect timing to be opening the new facility. .

Got it, thanks for that detailed explanation. And as far as you’re SG&A expenses it is certainly a good job there in the quarter.

Now can you comment on the sustainability of this, was there perhaps any big changes to incentive compensation, how should we think about that for the balance of the year?.

So, really what we are trying to do is we want to continue to invest in mission critical areas, things like sales people and technical people that are really going to help us move the needle on the top line and really help our customers solve their most complex issues. We are going to continue to do that.

What we have done throughout the rest of the organization is really try to hold the line on hiring and all other expenses.

We are renegotiating telephone contracts, renegotiating internet connectivity contracts, everything we can lay our hands on we’re trying to reduce cost so that we can afford to invest in the areas that are really critical to the future of the business.

So, I think you are going to see some quarters we are going to invest a little bit more, and in some quarters we will scale back. It is sort of dependent upon what we perceive the sort of the revenue profile of each quarter. As we size up each quarter we can sort of make our investment decisions at that time. .

Okay, thank you very much. .

Thank you. .

Thank you, our next question comes from the line of Adam Tindle with Raymond James. Your line is open. Please go ahead..

Alright, thanks guys. Just had a question on the networking space specifically, kind of surprisingly down 14% year-over-year and wasn’t really difficult comp, I think up 2% last year.

Also had some weakness in the public sector and you specifically cited state local education with a lot of the dollars for education specifically, budget dollars going to networking were these two things tied together and what kind of competitive environment are you seeing in that space?.

So actually for us that space is very strong. It’s an important part of our business. We had some large projects and those projects as you know can be -- they have been slow and there are a number of factors driving those. But I think what you really saw in Q2 was simply the result of some large networking projects not rolling in the quarter.

That was the main driver of the decline. .

Just to expand on that, in the public sector there are some big pops that we received last year but it didn’t always come every quarter. So if you look at growth in networking in the public sector last year, 59% growth in Q1 2014, 23% growth in Q2, flat in Q3.

So, it’s very lumpy in terms of the public sector and the networking projects that we have been able to win. .

Okay, and I guess circling back to kind of the dynamic between SMB and large enterprise, we’ve kind of heard similar commentary from a competitor last night that SMB seems to be a bit weaker and large enterprises are much strong.

You also had mentioned that you had a record month in June, so maybe a big pickup in enterprise towards the end of the quarter.

But could you give us a little bit more commentary specifically on the SMB space demand there, demand environment, is it a function of that or is it a function of maybe losing share?.

Thanks, I really don’t think it’s a function of losing share. In fact if you at the SMB space I think we are very strong and have been for over 30 years. It’s a core competency for us and we do it real well, really proud of what that team has accomplished. But that said we do not think we are going to see a sustained slow down in SMB.

We feel like right now are orders are very strong. Our backlog is very strong and we are pretty optimistic as we go into Q3 with our SMB team. .

Okay, thanks guys. .

You’re welcome..

Thank you. [Operator Instructions]. Our next question comes from the line of Scott Tilghman with B. Riley. Your line is open. Please go ahead..

Thanks, its B. Riley.

I wanted to follow up on a few of the questions that have already been asked just with a little bit more detail and starting with the balance sheet, is there a cash level where you think you are just overweight and need to pair back, it seems like the cash balance even with some of the special dividends just keeps building?.

Great question, our cash balance is actually pretty volatile during the course of a quarter. It kind of goes up and down. It’s not like there is 70 million in cash just sitting in the bank everyday in the quarter. So when have we got big inventory purchases and buy-ins, there the cash flow is way down.

It means it can go down by $40 million within a quarter. So the end of quarter balance can be a little misleading at times. Our working capital does fluctuate pretty significantly during the quarter. It ended up at a good place at the end of the quarter but as I said it does fluctuate pretty significantly on a weekly basis. .

So given those types of swings probably something in the $60 million to $70 million range is where you want to maintain them?.

Yes, I think that’s a reasonable.

We obviously wanted to go up but some of the interesting pieces of our world is that as customers want more and more project roll outs which require configuration of product where it takes a little bit longer to actually bring in inventory, have the work done in our DC, and then ship it out the door, and then obviously collect the money.

So there is going to be a little bit more of a working capital build in our balance sheet I think as this configuration continues to grow. .

Makes sense.

Second, just following up on the conversation regarding desktops, I was wondering if you could provide some color around units and pricing as it pertains to the decline?.

So they were both down. I mean if you want to -– I guess the first place to start would be how did we do in the prior year. So desktops as a category on a consolidated basis were up 15% in Q1, 14% in Q2, 11% in Q3. So very solid performance there. This year what we are seeing is that both the units and the pricing has gone down, right.

Units are probably down 10% and pricing is down a little bit too. So I guess it is a combination of both those factors. .

That's helpful. .

We are pleased with the notebook growth that we’ve achieved in this environment and also the Chromebook growth that we are seeing in the KT12 [ph] and the SLED environment. .

Right, next just again following up on some of the questions around G&A, it sounds like there is some absolute savings and some deferral of spending and I was wondering if maybe you could give us an idea how that played into this quarter, is it roughly 50-50 or is it more just deferred spending that will come back when we have a higher revenue quarter, absent the other investments that you plan on making?.

Yes, so it is not a tremendous deferral of spending. I guess what we have challenged all of our internal departments with is to really take a hard look at each of their businesses and not just hold off on hiring today but really look at that sort of reorganizing what they have today to make it more efficient.

So, we are hopeful that it is not just a deferral of spending, it is a permanent saving in some of our functional areas. So, I think we are continuing to as we said hire sales people, hire technical people and we are going to continue to do that. And really we have to hold the line on everything else, that is the reality.

In order to deliver a meaningful bottom line you have got to make some hard choices..

I will leave it at that and jump back in queue. Thank you. .

Thank you. .

Thank you. I am showing no further questions at this time. I would now like to turn the call back to Tim McGrath for any further remarks. .

Well, thank you operator. I would like to thank all of our customers, vendor partners, and shareholders for their continued support and our dedicated co-workers for their efforts. I would also like to thank those of you listening to our call this afternoon, your time and interest in PC Connection are appreciated. Have a great evening. .

Ladies and gentlemen thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day..