Tim McGrath - President and CEO Bill Schulze - Interim Treasurer and CFO.

William Gibson - ROTH Capital Partners Anthony Lebiedzinski - Sidoti & Company.

Good afternoon, ladies and gentlemen, and welcome to the Third Quarter 2017 Connection's Earnings Conference Call. My name is Kevin, and I will be your 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 property of Connection and may not be recorded or rebroadcast without specific permission from the company. On the call today is Tim McGrath, President and Chief Executive Officer; and Bill Schulze, Interim Treasurer and Chief Financial Officer.

Any statements or references made during the conference call that are not statements of historical facts, may be deemed forward-looking statements.

Various remarks that management may make about the company's future expectations, plans, and prospects, constitute forward-looking statements for the 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, 2016, which is on file with the Securities and Exchange Commission, as well as other documents that the company files with the Commission from time to time.

In addition, any forward-looking statements represent management's view of today and should not be relied upon as representing views 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.

Today's call is being webcast and will be available on Connection's Web site. The earnings release is also available on the Web site. I would now like to turn the call over to Tim McGrath. Please go ahead, sir..

Thank you. Good afternoon everyone and thank you for joining us today to review the company's third quarter financial results. Net sales grew by 3% in Q3 led by growth of 5% in Enterprise Solutions and 3% in Business Solutions, our SMB segment.

Our consolidated revenue growth in Q3 '17 was affected by hurricanes Harvey and Irma, which led to delays in product deliveries from suppliers and to customers, which in turn negatively impacted revenue by approximately 3%.

Our growth in revenue in Enterprise Solutions was the result of growth in data center products, including servers, storage and software. In addition, we had strong sales in mobility products. Sales for Business Solutions grew 3% in the quarter, desktops grew 29% and mobility grew 11% in this segment.

We’re seeing strong growth in endpoint security devices. Sales for Public Sector Solutions decreased by 1% to 171 million. Our overall federal business grew by 3%. Growth in federal spending was offset by a slight deficit in our SLED business.

As we review our results, please note that unless otherwise stated, all of our third quarter 2017 comparisons are being made against third quarter 2016. In Q3, consolidated net sales increased year-over-year by 20.7 million or 2.9% to 729.2 million. Gross profit dollars in the quarter decreased by 1% to 96.1 million.

Consolidated gross margin decreased to 13.2% from 13.7% in Q3 2016. This was due in part to increased sales by our Enterprise segment which generally have lower margins. In addition, we saw a decline in the availability of vendor programs that provide backend funding for both our SMB and our public sector segments.

SG&A increased slightly this quarter to 74.4 million from 73.5 million last year. This increase was due to three months of GlobalServe SG&A which we acquired in Q4 of last year. You may recall we introduced additional operating expense disciplines in Q2. We’ll continue to monitor cost in this mixed IT spending environment.

This discipline will enable us to continue to invest in the mission-critical growth areas of our business. Net income for the quarter was 13.1 million compared to 13.6 million last year. Diluted earnings per share were $0.49 compared to $0.51 last year.

Now I’ll turn the call over to Bill Schulze to discuss the results of our business segments and our financial highlights.

Bill?.

Thank you, Tim. Sales for our Business Solutions segment which serves small to medium-sized businesses increased by 3% to 291 million. Sales of mobility and desktops to SMB customers were strong. Both increased at double-digit rates in the quarter. Gross margin for Business Solutions was 14.9% compared to 15.5% last year.

This was due to product mix as well as changes in vendor channel programs discussed earlier. Sales for Enterprise Solutions increased by 5% to 268 million and will continue to be a competitive demand environment.

Gross profit dollars were consistent with the prior year; however, due to a record rate in Q3 last year, selling margins decreased by 70 basis points to 12.7%, a more normalized rate for Enterprise. Sales in Public Sector Solutions, which includes our government and education customers, decreased by 1% to 171 million.

Sales to state and local governments and education decreased by 2%, while sales to the federal government increased by 3%. Spending by the federal government after September year-end was customarily strong.

Gross margins decreased year-over-year by 18 basis points due to changes in vendor funding programs as selling margins actually improved in the quarter. Earnings per share decreased to $0.49 down from $0.51 last year and trailing 12-month adjusted EBITDA was 92.4 million. Our balance sheet continues to be strong.

We ended the quarter with 62 million in cash. Days sales outstanding was 43 days and inventory turns was 22. On a year-to-date basis, we have generated positive cash flow from operations of 28 million. 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. As a reminder, we still have approximately 18 million in previously authorized share repurchases. I will now turn the call back over to Tim to discuss current market trends..

Thanks, Bill. In the third quarter, we continued to see a hypercompetitive demand environment. We’re shifting our approach to make real-time adjustments with our supplier community and our customer base, and we believe this will enable us to better leverage the strength of our business model.

We’re also focused on advanced technologies and we’re investing in complex areas of our business in order to help our customers drive their business outcomes. Our software business continues to grow including cloud, virtualization, security and security assessments.

We believe our business model is more relevant than ever as we help our customers navigate through technology that’s more complex and more disruptive. We’ve expanded our capabilities and enhanced our automated sales tools. We believe that our balance portfolio of customers, suppliers, products and solutions have positioned us well for the future.

Our goal is to continue to deliver sustained and consistent performance. We’re encouraged by the growth in vertical markets, manufacturing, retail and finance and in addition we saw strong growth in software and workforce productivity.

We believe our team and the strategies that we have in place position Connection well to gain market share and increase shareholder value. We’ll now entertain your questions.

Kevin?.

[Operator Instructions]. Our first question comes from Adam Tindle with Raymond James. Adam, your line is open. You can ask your question. If your phone is muted, could you please un-mute the line..

Hi.

Can you hear me?.

Yes, we can hear you now..

This is Joe filling in for Adam. Sorry about that. What’s your outlook on vendor incentives, that is when do you think we’ll see an improvement? A lot of your competitors have been talking about it as well.

So when do you think that shift will be and what’s a vendor program environment looking like going forward?.

Thanks, Joe. So it’s a little difficult to predict but what we’re seeing is that I think our supplier base knows that our value proposition is strong, our customer relationships are strong and pretty much across the board they are working with us to help us improve this environment.

And in some cases those programs shifted and we have to shift toward that newer technology or that newer model. In other cases it’s really more about cloud-based subscriptions, et cetera. But I think together we are working through it and I’d say we’re confident and optimistic that we’re going to return to regular seasonal backend rates..

Okay, great. Thanks for the clarity. Do you believe vendors are embracing the channel more? For example, Dell came out and said that they’re going to be working with the channel exclusively and other vendors have said similar things.

More specifically, do you think that there’s an increase in transactional products if they are embracing the channel more, or is it purely transactional and what’s your feel about that?.

Joe, there’s a lot there so I’ll start and Bill you can certainly chime in and help out. But to begin with, I think the vendors realize that the customer relationship often is about the channel and that we are a very efficient growth engine for them.

So clearly we think the vendor interest is strong in our channel and we think our value proposition is pretty strong for our vendor community. And so together, we are optimistic about the future. There’s a lot of consolidation, a lot of changes happening. I think that presents an opportunity as well.

So overall, we’re confident that our vendor and supplier community will be investing and growing with the channel. So certainly would agree with that assessment. In terms of the velocity or device products, we are seeing really good momentum in desktops, in mobility, the notebook family and as I mentioned in endpoint security.

But I think that also has to do with the value proposition and the offering. The combinations of Windows, Windows 10, Intel combined with some of the newer hardware technologies is a strong value and I think there’s pent-up demand for that workforce productivity upgrade. Many customers are going through upgrades.

So all that is strong for our demand and our value proposition. On the same token, we’re very interested in the advanced technology side. Some of our segments had server growth. Overall, we’re very focused on NetCom and software and services and solutions. So we do see that as a growth engine for the future.

I think what we’re dealing with right now is a little bit up and down as the market flows with its puts and takes..

Thanks. That was very thorough. I appreciate that. Thank you for your time..

Thank you..

Our next question comes from William Gibson with ROTH Capital Partners..

Thank you. You talked about your strong verticals without mentioning healthcare, which I assume stays weak.

Is that due to political uncertainty or what’s behind that?.

Thanks, Bill. Good to hear from you. I wouldn’t say weak in that it is our largest vertical, excluding of course public sector. So as you know, public sector is its own subsidiary for us. But our healthcare vertical is our largest vertical. We did grow at about 1% in the quarter and that does reverse a trend from last year. But you are right.

The regulatory environment that changes with the Trump administration have caused many of our CIOs in this space to pause a little bit and reflect on exactly what that would mean for them in the future.

The meaningful use has been pushed out and I think also electronic medical records have also been delayed a little bit through the regulatory environment. So all of that has caused a pause. But we are bullish on this space and very positive on the vertical going forward..

Good. And then a follow up to that regarding security assessments.

Was that where the growth came from in healthcare? At least I believe they have IT budgets under what, say, a finance firm or government agency would have?.

I think when we were referencing – Bill, I’ll speak for us. When we were referencing security assessments, it’s really been across the board. We’ve been helping customers assess their security needs. And we have a proprietary offering there, a security optimization and a security assessment process that has been very popular and driving growth for us.

So that’s been across all of our markets..

Thank you..

Thank you, Bill..

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

Good afternoon and thank you for taking the questions.

Tim, could you perhaps go over the growth rates for the manufacturing, retail and finance verticals that you talked about?.

So we don’t disclose our actual growth rates in those areas but we can give you an idea as to dollar values of those verticals.

Would that be helpful for you, Anthony?.

Yes..

In general, our largest growth rate in the quarter was manufacturing and quarterly that is a pretty significant business for us. It’s somewhere between 90 million and 100 million, Anthony, really. And except for healthcare, all of these three rates were in the low-double digits we’ll go with that anyway on a year-over-year growth rate.

But financials are approximately $40 million and retail about the same..

Okay. That’s very helpful. And also as far as your earlier comment and this is also consistent with what you said in your prerelease as far as the sales lost because of the hurricanes.

Have you already been able to get that back so far in the fourth quarter?.

That’s a good question, Anthony. Thanks. So we’re driving hard to make sure we recover that. We didn’t lose any of those orders I’m proud to say. Many of our customers are still in the process of rebuilding or dealing with water damage. We’ve got a large hospital that’s been dealing with a lot of water damage.

And so as they get ready, we certainly are ready to shift and we’re pretty confident the majority of that will go in Q4. It’s tough to say with certainty just based on their recovery time for their infrastructure. But overall, we’re pretty confident that we will..

Okay, all right. And then just looking back, so since the start of the year, have you been more surprised by the level of competitiveness? You mentioned a few times that it’s hypercompetitive out there.

So between the competitive sales environment and changes in the vendor programs, which one have you been more surprised by so far this year or is it equally for both factors?.

So I think they are both connected. If you think sort of strategically and look out with a macroeconomic view, supply does sort of meet demand at equilibrium. And when you see consumption models shifting, there’s a real opportunity for us. But in that change, there’s often a pause.

So if you look at infrastructure growth, server storage, we’re likely helping our customers evaluate a hybrid solution, an off-prem or an on-prem solution. And all of that takes time. So there’s a lot of change and a lot of shifting there.

In addition to that, some of our delivery methods are changing and we’re offering customers new and innovative ways to receive product. And that also takes time.

When there is a slight pullback, we tend to see multiple bidders and that same pullback, that same sort of decrease not only causes a hypercompetitive environment from our competition but also if our suppliers are seeing a pullback, then they tend to want it belt tighten. So I think we sort of have both forces coming together.

But as I mentioned I’m optimistic that we’re going to work through that..

Okay. That’s very helpful. Thank you very much..

Thank you..

Thank you, Anthony..

And I’m not showing any further questions at this time. I’d like to turn the call back over to our host..

Thanks, Kevin. And I’d like to thank all of our customers, our vendor partners and our shareholders for their continued support and our dedicated coworkers for their efforts. I’d also like to thank everyone listening to the call this afternoon. Your time and interest in Connection are appreciated. Have a great evening..

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day..