Connection (CNXN) Reports Second Quarter 2020 Results

Connection (PC Connection, Inc.; NASDAQ: CNXN), a leading technology solutions provider to business, government, and education markets, today announced results for the second quarter ended June 30, 2020. Net sales for the quarter ended June 30, 2020 decreased by 25.8% to $550.0 million, compared to $741.1 million for the prior year quarter. The reduction in revenue year on year is primarily due to the impact of the COVID-19 pandemic, which resulted in lower demand from customers and had a material adverse impact on our business. Net income for the second quarter ended June 30, 2020 decreased by 67.7% to $7.6 million, or $0.29 per diluted share, compared to net income of $23.7 million, or $0.89 per diluted share, for the prior year quarter.

In the second quarter of 2020, the Company deployed a new Enterprise Resource Planning ("ERP”) system, which was the result of a multi-year planning and implementation process. The deployment adversely affected our second quarter execution and sales, and it required significant effort by our key employees, sales personnel, and management.

Net sales for the six months ended June 30, 2020 decreased by 8.2% to $1,261.9 million, compared to $1,374.0 million for the six months ended June 30, 2019. Net income for the six months ended June 30, 2020 decreased by 38.1% to $22.5 million, or $0.86 per diluted share, compared to net income of $36.4 million, or $1.37 per diluted share for the six months ended June 30, 2019.

Earnings before interest, taxes, depreciation and amortization, adjusted for stock-based compensation expense and restructuring and other charges ("Adjusted EBITDA”) totaled $110.0 million for the twelve months ended June 30, 2020, compared to $115.7 million for the twelve months ended June 30, 2019. ¹

"After a strong first quarter -- driven in part by urgent demand from customers transitioning their people to working from home, the pandemic’s impact on our customer base was significant and this adversely affected second quarter results,” said Tim McGrath, President and CEO of Connection. "The impact on our second quarter was also, unfortunately, amplified by the long-planned deployment of our new ERP system, which is now essentially complete, and which we believe will support better customer service, increased efficiency and growth going forward.”

McGrath continued, "We have been focused first and foremost on the safety of our employees while supporting the business continuity needs of our customers. The reality of a post-COVID-19 world is still unclear, but we believe Connection is exceptionally well positioned to continue to assist our customers in adopting the technologies they need to drive business continuity, strengthen security, reimagine the workplace, and transform their businesses to meet the challenges of the future.”

He concluded: "We are financially strong —and thanks to the efforts of our entire team --confident that we will emerge from this pandemic better, stronger and more relevant to our customers than ever before.”

Quarterly Highlights

• Healthcare, our largest vertical market, saw strong demand for telemedicine and remote access solutions across all segments. We are proud of our work directly supporting healthcare providers around the country who are on the frontlines in the battle against COVID-19.
• Lifecycle Services, part of our Technology Solutions Group (TSG), had a strong quarter as customers continue to manage their IT expenses and optimize the use of existing assets. The TSG is a key component of our strategy to deliver comprehensive technology solutions to our customers.
• Our relentless pursuit of innovation—both internally and on behalf of our customers—was the key driver in our deployment of an ERP system in the second quarter of 2020. The rollout will continue in the second half of 2020. This new system will serve as the foundation for Connection’s growth, enabling greater collaboration, visibility, and efficiency across our organization.
• Connection quickly adapted to support the changing needs of our customers. We seamlessly transitioned our sales and marketing strategy toward a digital model. This includes a complete shift to online customer education, demonstrations and events, an expanded ecommerce environment, and fully virtual sales and partner engagement and training.

Quarterly Performance by Segment:

• Net sales for the Business Solutions segment decreased by 29.5% to $191.1 million in the second quarter of 2020, compared to $271.1 million in the prior year quarter. Gross profit decreased by 29.7% to $37.2 million in the second quarter of 2020, compared to $53.0 million in the prior year quarter. Gross margin remained relatively flat at 19.5%.
• Net sales for the Public Sector Solutions segment decreased by 26.2% to $112.2 million in the second quarter of 2020, compared to $152.0 million in the prior year quarter. Sales to the federal government decreased by 40.9%, compared to the prior year quarter, while sales to state and local government and educational institutions decreased by 20.1%. Gross profit decreased by 20.6% to $14.5 million in the second quarter of 2020, compared to $18.2 million in the prior year quarter. Gross margin increased by 90 basis points to 12.9% primarily due to changes in customer and hardware product mix.
• Net sales for the Enterprise Solutions segment decreased by 22.4% to $246.8 million in the second quarter of 2020, compared to $318.0 million in the prior year quarter. Gross profit decreased by 18.5% to $37.3 million in the second quarter of 2020, compared to $45.8 million in the prior year quarter. Gross margin increased by 72 basis points to 15.1% primarily due to changes in customer and hardware product mix.

Quarterly Sales by Product Mix:

• Notebook/mobility sales, the Company’s largest product category, decreased by 9% year over year and accounted for 35% of net sales in the second quarter of 2020, compared to 29% of net sales in the second quarter of 2019.
• Accessories sales decreased by 31% year over year and accounted for 12% of net sales in the second quarter of 2020, compared to 13% of net sales in the second quarter of 2019.
• Desktop sales decreased by 45% year over year and accounted for 9% of net sales in the second quarter of 2020, compared to 13% of net sales in the second quarter of 2019.
• Software sales decreased by 40% year over year and accounted for 10% of net sales in the second quarter of 2020, compared to 13% of net sales in the second quarter of 2019. Software revenue recognized on a net basis, such as, cloud-based software offerings, continues to grow rapidly.

Selling, general and administrative ("SG&A”) expenses decreased in the second quarter of 2020 to $77.4 million from $84.7 million in the prior year quarter. SG&A as a percentage of net sales, was 14.1%, compared to 11.4% in the prior year quarter. The decrease in SG&A was primarily due to a decrease in variable compensation due to the lower levels of gross profit and a decrease in product marketing expense partially offset by costs associated with our new ERP system that went live mid-quarter.

In addition, the second quarter of 2020 results include $1.0 million of restructuring and other related costs associated with severance related to internal restructuring activities.

Cash and cash equivalents were $165.9 million at June 30, 2020, compared to $90.1 million at December 31, 2019.

Conference Call and Webcast

Connection will host a conference call and live web cast today, August 10, 2020 at 4:30 p.m. ET to discuss its second quarter financial results. To access the conference call (audio only), please dial 877-776-4016 (US) or 973-638-3231 (International). A web-cast of the conference call, which will be broadcast live via the Internet, and a copy of this press release, can be accessed on Connection’s website at ir.connection.com. For those unable to participate in the live call, a replay of the webcast will be available at ir.connection.com approximately 90 minutes after the completion of the call and will be accessible on the site for approximately one year.

Non-GAAP Financial Information

Adjusted EBITDA, Adjusted EPS and Adjusted Net Income are non-GAAP financial measures. These measures are included to provide additional information with respect to the Company’s operating performance and earnings. Non-GAAP measures are not a substitute for GAAP measures and should be considered together with the GAAP financial measures. Our non-GAAP financial measures may not be comparable to other similarly titled measures of other companies. A reconciliation to the most directly comparable GAAP measure is available in the tables at the end of this release.

¹ Adjusted EBITDA is a non-GAAP measure. See page 10 for the definition and reconciliation.

About Connection

PC Connection, Inc. and its subsidiaries, dba Connection, (www.connection.com; NASDAQ: CNXN) is a Fortune 1000 company headquartered in Merrimack, NH. With offices throughout the United States, Connection delivers custom-configured computer systems overnight from its ISO 9001:2015 certified technical configuration lab at its distribution center in Wilmington, OH. In addition, the Company has over 2,500 technical certifications to ensure that it can solve the most complex issues of its customers. Connection also services international customers through its GlobalServe subsidiary, a global IT procurement and service management company. Investors and media can find more information about Connection at http://ir.pcconnection.com.

Connection–Business Solutions (800.800.5555) is a rapid-response provider of IT products and services serving primarily the small-and medium-sized business sector. It offers more than 425,000 brand-name products through its staff of technically trained sales account managers, publications, and its website at www.connection.com.

Connection–Enterprise Solutions (561.237.3300), www.connection.com/enterprise, provides corporate technology buyers with best-in-class IT solutions, in-depth IT supply-chain expertise, and access to over 425,000 products and 1,600 vendors through TRAXX™, a proprietary cloud-based eProcurement system. The team’s engineers, software licensing specialists, and project managers help reduce the cost and complexity of buying hardware, software, and services throughout the entire IT lifecycle.

Connection–Public Sector Solutions (800.800.0019), is a rapid-response provider of IT products and services to federal, state, and local government agencies and educational institutions through specialized account managers, publications, and online at www.connection.com/publicsector.

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"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995: This release contains forward-looking statements that are based on currently available information, operating plans, and projections about future events and trends. Terms such as "believe," "expect," "intend," "plan," "estimate," "anticipate," "may," "should," "will," or similar statements or variations of such terms are intended to identify forward-looking statements, although not all forward-looking statements include such terms. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted in such forward-looking statements. Such risks and uncertainties include, but are not limited to, the continuation of the COVID-19 pandemic and responses to it, the impact of changes in market demand and the overall level of economic activity and environment, or in the level of business investment in information technology products, product availability and market acceptance, new products, continuation of key vendor and customer relationships and support programs, the ability to realize market demand for and competitive pricing pressures on the products and services marketed by the Company, fluctuations in operating results and the ability of the Company to manage personnel levels in response to fluctuations in revenue, the ability of the Company to hire and retain qualified sales representatives and other essential personnel, the impact of changes in accounting requirements, successful integration of the new ERP system, and other risks detailed in the Company's filings with the Securities and Exchange Commission, including under the caption "Risk Factors" in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC”) for the year ended December 31, 2019 as updated in the Company’s Quarterly Report on Form 10-Q filed with the SEC for the quarterly period ended June 30, 2020. The Company assumes no obligation to update the information in this press release or revise any forward-looking statements, whether as a result of any new information, future events, or otherwise, except as required by law.

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