Tim McGrath - President and CEO Joe Driscoll - CFO.

Prabh Gowrisankaran - Canaccord Adam Tindle - Raymond James Anthony Lebiedzinski - Sidoti & Company.

Good afternoon, ladies and gentlemen and welcome to the Third Quarter 2015 PC Connection Incorporated Earnings Conference Call. My name is Roland, 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 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, 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 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 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 like to now turn the call over to Tim McGrath. Please proceed sir..

Well, good afternoon, everyone and thank you for joining us today to review the company's third quarter financial results. We are pleased with our strong third quarter performance as we delivered the highest quarterly sales and net income in company history.

Our sales grew by 6.4% as we’ve been focused on taking market share in a consolidating industry. As a reminder in 2015, our growth is being compared to our strong performance in Q3 of 2014 where we grew revenue by 10% and net income by 15%. These prior-year results were significantly above industry growth rates.

As we review our results, please note that unless otherwise stated, all of our third quarter 2015 comparisons are being made against third quarter 2014. Consolidated net sales increased year-over-year by $42 million or 6.4% to $681 million, led by 20% growth in our Large Account segments.

In all of our segments, we continue to help our customers navigate through an increasingly complex IT landscape. We've made significant investments in security, cloud services, data center, virtualization and converged infrastructure solutions, which are the categories that our customers are also investing in to solve their business challenges.

Gross profit dollars in the quarter increased by 5.9% to $89 million. Consolidated gross margin was basically unchanged at 13.01%. SG&A as a percent of sales improved this quarter to 9.8% as we continue to leverage our fixed cost structure.

We incurred $459,000 in start-up costs for the new state-of-the-art advanced configuration in the distribution center that opened in Q3. There will be an additional transition cost of approximately 300,000 to 400,000 for the fourth quarter of 2015.

The new facility will significantly increase our capacity to deliver mission-critical advanced configurations, which is a cornerstone for delivering business outcomes. Net income for the quarter increased to $13 million and diluted earnings per share increased from $0.46 to $0.49.

And now I’ll turn the call over to Joe Driscoll to discuss the results of our business segments and financial highlight.

Joe?.

Thanks, Tim. Sales for our SMB segment, which serves small to medium-sized businesses increased by 5.6% to $269 million, with increases noted in networking, mobility and services. Gross margins increased by 18 basis points to 15.1% led by solid performance in advanced solution categories.

Sales by our large account segment increased by 20% to $243 million. We experienced double-digit percentage sales growth in a number of product categories and growth also came from a balanced mix of customers, industries and verticals. This represents the highest quarterly sales in the history of our Large Account segment.

Sales in the Public Sector segment, which includes sales to government and education customers decreased by 7.6% to $169 million. Sales to state and local governments and K-12 customers declined, partially offset by increases in higher education. Sales to the federal government decreased due to the timing of large project rollouts.

The Public Sector segment had a very challenging comparison to 2014. In Q3 of last year, sales in this segment, grew by over 20% including a 30% increase in SLED. In Q4 of 2014, our Public Sector business grew 19%, so the challenging comparisons will continue for the balance of 2015.

Gross margin for the Public Sector segment increased significantly to 11.2% from 10.4%, which resulted in gross profit dollars remaining consistent with the prior year despite the decline in top line revenue. Our healthcare vertical which includes customers in all three of our business segments had a very strong quarter with 37% growth in revenues.

We continue to focus on connecting to healthcare customers with customized solutions in this specialized vertical, which is projected to be a growth area for IT spending for the foreseeable future. Overall, our bottom line performance exceeded our expectations.

EPS increased to $0.49 per share on a GAAP basis and was $0.50 a share excluding DC transition costs. Trailing 12-month adjusted EBITDA increased to $85.4 million. Our balance sheet is in very good shape as well. The Q3 2015 cash balance of $77 million is well above the year ago amount of $66 million.

Our goal with excess cash is to maximize shareholder value while maintaining financial flexibility. So we continue to assess M&A opportunities and other capital allocations such as dividends and stock buybacks. As a reminder, we still have $17.8 million remaining in previously authorized share repurchases.

I'll 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 the balance of 2015 will continue to be a moderate growth environment for the industry, especially given the overall decline in desktop PCs and the related categories.

We will have one more quarter of somewhat challenging comparisons in Q4 of 2014 we had a strong top line growth of 9%. Looking ahead to next year, current industry growth projections for 2016 are consistent with 2015, in the 3% range. Our goal is to grow faster than the market.

We are highly focused on the company’s mission connecting customers with technology solutions. In addition, we are focused on continuing to grow the bottom line faster than the top line. To accomplish this, we must take market share, increase gross margins and control costs.

We want to deliver strong and predictable 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're investing in complex 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.

Examples of our solution capabilities that range from design through deployment include helping the customer with a contact center outsourcing industry, we provided a comprehensive solution including virtualization, software defined storage and converged networking that completed their VDI implementation.

In another case, for a branch of the federal government, we performed a large virtual desktop infrastructure integration which involved multiple elements of hyper-converged environment that improved their productivity.

And finally, for a large media company, we provided hardware and services for the expansion of their existing unified computing environment as part of their converged data center solution that enable them to improve their networking speed and efficiency. These are a few examples of the business outcomes that we helped deliver.

As changes in the market continue to unfold, we feel it’s 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] Our first question comes from the line of Prabh Gowrisankaran with Canaccord. Your line is open. Your question please..

Hi. Thanks for taking my question and congrats on the really strong quarter. So a couple of questions. One on the strength in the large account. You talked about enterprise customers, solutions-based projects for them. Maybe if you can add more color in terms of the verticals and the type of projects.

I know you talked about the media company and the other -- the contact center use case.

How many customers were there that drove the upside and the size of these projects would be helpful?.

Sure. So Prabh, first off, thanks for your comments and I will start with kind of a macro review and I'll try to bring it down to a micro-level here, but as I mentioned, the large account segment was up over 20%, certainly an exciting quarter for the team and we really saw growth across the board.

There were several vertical markets that grew in several key areas. We had new projects with new customers and we also had some existing project rollouts with existing customers, but at the end of the day, clearly, what’s driving that is solutions and large rollouts.

So the projects that we are seeing are significant and as a result, we saw a really good growth in notebooks, we saw good growth in storage and overall, continue to see nice growth in the gross profit dollars for enterprise. So the team did a great job..

Yeah. And then the second question I had was in terms of SMB, it continues to be strong, so it’s up 6%.

And you talked about notebook and mobility, is that mostly tablet side on the mobility or you’re starting to diversify into other areas too?.

Yes. Really, the notebook category is growing due to a lot of tablets, other notebooks, surface devices, things like that. That's really become a core strategy for many of our customers, both small and medium as well as large accounts. They want their workforce to be mobile. They want them to be able to log into the network from wherever they are.

So we've seen mobility growth going on several years now. So it appears to be a key component of many of our customer strategies..

That's right. Prabh, you mentioned SMB specifically in the mobility, they were up 22%. We did see a little bit of lift from Windows 10. We saw a lift from surface and we also saw a lift from Apple, but across-the-board, all of the major notebook vendors were up, so they all grew significantly and I think that's consistent with our business model..

And the last question I had was just in terms of backlog and what you see for large accounts, is that a kind of a turns business, so do you see in terms of December quarter, do you continue to see strength or where some of the projects pulled into Q3?.

So I think we’re pretty solid. We saw kind of a normal calendarization going through the quarter with the September being our largest month. We did enter Q4 with a very significant backlog, in particular, in our public sector business. We had the large backlog we've seen.

So clearly the projects continued and we expect that will continue into Q4 and we have a solid backlog..

Yes. I mean it’s still early to call the quarter at this point, but we are pleased with the backlog that we have right now, but there is still plenty of work to do..

Okay, great. Thanks for taking my question..

Thank you. Our next question comes from the line of Adam Tindle with Raymond James. Your line is now open. Your question please..

All right. Thanks guys. Just wanted to ask a little bit more on the linearity of revenue intra quarter, I think you kind of alluded to it a little bit in that answers, but noticed your DSOs increased 4 days year-over-year.

Many legacy vendors have called out very late quarters, is this something that you're seeing impact you?.

September was the largest month in our quarter. So that will have the impact of bumping up the receivables balance.

You alluded to DSO, but the DSO is still 40 days for the quarter, which is pretty good and especially given the strength we have in large accounts, the large accounts generally are not the fastest payers but really nothing really unusual in the receivables balance other than a lot of revenue came in September..

The strong performance in the enterprise side was combined with weak gross margins year-over-year, I think we’re down about 120 basis points.

Just wanted to see if there is maybe any commentary on that, it is product specific, is there anything that you can give us on that dynamic?.

Yeah absolutely.

Last year was unusually high, it was over 13% in Q3 for our large account segments and really that was a function of sort of the last bit of large EA fees that we get from some of our software providers were a lot of those programs have now changed, where you’re not getting those big EA fees anymore that's kind of an industry wide thing going on right now.

So really that's what happened last year as we had a couple of big pops which really helped the gross margin line. And that isn’t really available to us anymore, so this year was I guess a more normal quarter in terms of gross margin performance..

And I guess lastly on kind of industry level M&A with Dell, EMC and HP splitting, anything that you can point that as far as the impacts on your business from those two aspects, how are customers responding to those two things?.

Well thanks Adam. Really we can't -- there is nothing that we’re overly concerned about, we’ve had long-standing partnerships with the companies involved.

Hewlett-Packard has been a significant partner there, they’ve been well out in front of us, the split that really has already happened that is official November 1, but we've always had separate teams and we are very close to both companies and we have not missed a beat.

So no issues there and they also have a strong partnership with Dell and EMC and we’re optimistic about what can happen there but that’s pretty far out at this point, little soon to call that one..

Okay, thanks guys..

Thank you.

[Operator Instructions] Our next question comes from the line of Anthony Lebiedzinski with Sidoti & Company.

Your line is open, your question please?.

Yes, good afternoon and thanks for taking the questions. So in the press release you stated that you experienced sales growth in advanced solutions including networking and storage. I was wondering if you could quantify how much of the sales growth was exactly in advanced solutions please..

High-single digit growth in advanced solutions overall and that's a mix of many categories that’s server, storage, software services..

Okay, this sounds good. And also as far as the distribution center cost beyond 4Q, should we expect any additional expenses associated with that..

Very minimal, we're not going to break them out in 2016, just a small amount in the first month or so of 2016 but where basically it’s all done as of the end of 2015..

Got it, okay. Thanks very much..

Thank you. I'm showing no further questions at this time. I'd like to turn the call over to Mr. Tim McGrath for any additional remarks..

Well, thank you operator. I’d like to thank all of our customers, our vendor partners and shareholders for the continued support and our dedicated co-workers for their efforts. I'd also like to thank those of who listening to our call his afternoon. Your time and interest in PC Connection are appreciated, have a great evening..

Ladies and gentlemen, thank you very much for your participation in today's program. This does conclude the program, you may now disconnect. Everyone have a wonderful day..