Connection (CNXN) Reports Third Quarter 2017 Results

Connection (PC Connection, Inc.; NASDAQ: CNXN), a leading technology solutions provider of a full range of information technology (IT) solutions to business, government, and education markets, today announced results for the quarter ended September 30, 2017. Net sales for the quarter ended September 30, 2017 increased by 2.9% to $729.2 million, compared to $708.5 million for the prior year quarter. Our revenue growth in the quarter ended September 30, 2017 was affected by Hurricanes Harvey and Irma. We experienced delays in shipments from key suppliers and affected customers were unable to receive products which negatively impacted revenue by approximately 3%. Net income for the quarter ended September 30, 2017 decreased by 3.5% to $13.1 million, or $0.49 per diluted share, compared to net income of $13.6 million, or $0.51 per diluted share for the prior year quarter.

Net sales for the nine months ended September 30, 2017 were $2,149.6 million, an increase of $192.6 million or 9.8%, compared to $1,957.0 million for the nine months ended September 30, 2016. Net income for the nine months ended September 30, 2017 was $34.1 million, or $1.27 per diluted share, compared to net income of $35.1 million, or $1.32 per diluted share, for the nine months ended September 30, 2016. Earnings before interest, taxes, depreciation and amortization, adjusted for stock-based compensation expense and rebranding, acquisition and restructuring costs ("Adjusted EBITDA”), a non-GAAP measure, totaled $92.4 million for the twelve months ended September 30, 2017, compared to $94.8 million for the twelve months ended September 30, 2016.

Quarterly Performance by Segment:

• Net sales for the Business Solutions (SMB) segment increased by 3.1% to $290.6 million in the third quarter of 2017, compared to the prior year quarter. Desktop and mobility products were strong in this segment with an increase of 29% and 11%, respectively. Gross margin decreased by 55 basis points due to product mix and changes in certain vendor channel programs.
• Net sales for the Enterprise Solutions (Large Account) segment increased by 5.4% to $268.0 million in the third quarter of 2017, compared to the prior year quarter. Server, storage, software, and mobility had solid growth during this quarter at 13%, 7%, 6%, and 6%, respectively. Gross margin decreased by 71 basis points due to a competitive sales environment.
• Net sales to the Public Sector Solutions segment decreased by 1.0% to $170.6 million in the third quarter of 2017, compared to the prior year quarter. Sales to state and local government and educational institutions decreased by 2.4%, compared to the prior year quarter, while sales to the federal government increased by 2.8%. Gross margin decreased by 18 basis points primarily due to changes in certain vendor channel programs.

Quarterly Sales by Product Mix:

• Software sales, the Company’s largest product category, increased by 14% year over year and accounted for 24% of net sales in the third quarter of 2017 compared to 21% of net sales in the prior year quarter. We experienced growth in cloud-based offerings, security, and office productivity.
• Notebook/mobility sales increased slightly year over year and accounted for 23% of net sales in the third quarter of 2017 compared to 24% of net sales in the prior year quarter. Business Solutions experienced strong year-over-year growth in notebook/mobility sales.
• Desktop sales increased by 8% year over year and accounted for 10% of net sales in the third quarter of 2017 compared to 9% of net sales in the prior year quarter. The Business Solutions segment experienced strong year-over-year growth in desktop sales.

Overall gross profit decreased by $0.8 million, or 0.8%, in the third quarter of 2017, compared to the prior year quarter. Consolidated gross margin, as a percentage of net sales, decreased to 13.2% in the third quarter of 2017, compared to 13.7% for the prior year quarter. The decline in gross margin was attributed to a competitive demand environment and changes in certain vendor channel programs.

Selling, general and administrative dollars excluding special charges increased in the third quarter of 2017 to $74.4 million from $73.5 million in the prior year quarter. We continue to invest in technical solution sales capabilities and expect SG&A expenses to rise accordingly. However, we are highly focused on improving efficiencies and streamlining wherever possible.

Total cash was $62.3 million at September 30, 2017, compared to $49.2 million at December 31, 2016. Days sales outstanding were 43 days at September 30, 2017, and inventory turns were 22 turns in the third quarter of 2017.

"There were bright spots in the quarter, and we are encouraged by the growth in the vertical markets; manufacturing, retail, and finance. In addition, we saw strong growth in software and workforce productivity,” said Tim McGrath, President and Chief Executive Officer. "We believe our team and the strategies we have in place position Connection well to gain market share and increase long-term shareholder value,” concluded Mr. McGrath.

Non-GAAP Financial Information

Adjusted EBITDA and Adjusted EPS are non-GAAP financial measure. This information is included to provide 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.

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 9001:2008 certified technical configuration lab at its distribution center in Wilmington, OH. In addition, the Company has over 2,500 technical certifications to ensure 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), (the original business of PC Connection) operating through our PC Connection Sales Corp. subsidiary, is a rapid-response provider of IT products and services serving primarily the small- and medium-sized business sector. It offers more than 300,000 brand-name products through its staff of technically trained sales account managers, publications, and its website at www.connection.com.

Connection – Public Sector Solutions (800-800-0019), operating through our GovConnection, Inc. subsidiary, 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.

Connection – Enterprise Solutions (561-237-3300), www.connection.com/enterprise, operating through our MoreDirect, Inc. subsidiary, provides corporate technology buyers with best-in-class IT solutions, in-depth IT supply-chain expertise, and access to over 300,000 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.

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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 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, 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 for the year ended December 31, 2016. 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.

(1) Based on last twelve months' net income.
(2) Adjusted EBITDA is defined as EBITDA (earnings before interest, taxes, depreciation and amortization) adjusted for acquisition, rebranding, and restructuring costs, and stock-based compensation.
(3) Adjusted market capitalization is defined as gross market capitalization less cash balance.

(1) The Q3 2016 results for Business and Enterprise Solutions have been updated to reflect segment methodology used in our 2016 Annual Report on Form 10-K, which allocated the operating results for Softmart between these two segments. In the previously reported Q3 '16 results, the operating results of Softmart was reported solely in the Business Solutions segment. Accordingly, in comparison to our previously reported Q3 '16 results, the above Q3 '16 results reflect the reclassification of net sales of $20,495 and gross profit of $2,940 from our SMB segment to our Large Account segment attributable to Softmart.

(1) LTM: Last twelve months
(2) Restructuring and acquisition costs consist of severance, the relocation of our Softmart facility, and certain non-recurring Softmart charges, and in 2016, included our acquisition of Softmart, the rebranding of the Company, and duplicate costs incurred with the move of our Chicago-area facility.

(1) Restructuring and acquisition costs consist of severance, the relocation of our Softmart facility, and certain non-recurring Softmart charges, and in 2016, included our acquisition of Softmart, the rebranding of the Company, and duplicate costs incurred with the move of our Chicago-area facility.

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