What were q4 profits for 2022 of pcm

PCM, Inc. (NASDAQ:PCMI) Q4 2014 Earnings Conference Call February 12, 2015 4:30 PM ET

Executives

Frank Khulusi - Chairman and CEO

Brandon LaVerne - CFO

Jay Miley - President

Analysts

Scott Tilghman - B. Riley

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2014 PCM Incorporated Earnings Conference Call. My name is Michelle, 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 is being recorded for replay purposes. On the call with us today are Frank Khulusi, Chairman and CEO; Brandon LaVerne, CFO and Jay Miley, President. At this time, I would like to refer to the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995.

During this conference call, management may discuss financial projections, information and expectations about the Company’s products or markets or otherwise make statements about the future, which statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results and differ materially from statements made. These risks and uncertainties are detailed in the company’s filings with the Securities and Exchange Commission.

I would now like to turn the call over to Mr. Frank Khulusi. Sir, please proceed.

Frank Khulusi

Thank you, Michelle. Good afternoon, everyone. Welcome and thank you all for participating on this call with PCM. Today, we will be discussing the company’s financial results for the fourth quarter of 2014.

First, let me share some of our fourth quarter highlights. Net sales increased 1% to $359.2 million, gross profit increased 4% to $50.2 million resulting in gross margin of 14% compared to 13.5% last year. Operating profit increased 7%, while EBITDA increased 4%. Diluted EPS for the quarter was $0.16 per share. We generated $11.6 million of operating cash flow during the quarter and repurchased approximately 118,000 shares at an average price of $9.22.

I'm generally pleased with our fourth quarter results. While our revenues grew 1%, we were able to grow our gross profit by four times of that percentage growth and improved our gross margin by 50 basis points to 14% on the strength of some of our most strategic categories, such as software, networking and storage, which grew at 15%, 55% and 13% respectively. I'm also pleased with how Jay Miley has began to put his mark on the organization since his joining in December.

Now me let me turn the call over to our new President, Jay Miley. Jay?

Jay Miley

Thanks Frank. When I decided to join PCM, I knew I was joining one of the leading and most capable technology solution providers in North America. Since joining this past December, I've been amazed to see how much passion and enthusiasm the PCM team members have for our company and their jobs. I believe PCM has a tremendous opportunity to achieve better than market growth and to that end, I've been busy assessing all areas of the business to drive and accelerate such growth.

I've recently made several changes in the sales organization, such as shifting management responsibilities and realigning business units and sales territories and I've made significant investments in our field sales resources and software sales teams. While I expect such changes to be somewhat disruptive to the first quarter results, I also expect the benefit to quickly accrue into the subsequent quarters of 2015 and beyond. To that end, we continue to target double-digit growth beginning in the second quarter and our non-GAAP EBITDA margin to exceed 2.5% by the fourth quarter. I firmly believe that our continued transformation towards a value added IT solution provider combined with the benefits of these recent and upcoming moves should significantly improve shareholder value over this year. I accepted my position at PCM based on the belief that PCM is very well positioned for the future and based on where I believe I can help drive the equity value going forward.

I will now turn the call over to Bran LaVerne, our Chief Financial Officer who'll take you through our results in a bit more detail. Brandon?

Brandon LaVerne

Thanks Jay. Detailed information about our use of non-GAAP financial measures and a reconciliation of those non-GAAP financial measures are provided in our current report on Form 8-K filed with the SEC earlier today and also available on our Web site. All comparisons I make will be against Q4 2013 unless otherwise noted and a reflective of our continuing operations.

During Q4 2014, we discontinued the operation of our remaining retail stores located in Santa Monica, California. As previously announced during the second and third quarters, we discontinued the operation of three retail stores located at Huntington Beach and Torrance California and Chicago Illinois and our OnSale and eCost businesses. We reflected the results of these operations which were historically reported as part of our MacMall segment as discontinued operations for all periods presented herein.

Our Q4 consolidated net sales were $359.2 million compared to $357.2 million last year, an increase of $2 million or 1%. Commercial net sales decreased $15.5 million or 6%. Consistent with our previously disclosed expectations, our commercial net sales were negatively impacted by $36 million resulting from reductions in sales from three large enterprise customers. Other than the impact of these three customers who continue to actively purchase from us today, we believe our growth was strong in the remainder of our commercial business.

We continue to expect that our revenue will be impacted, but to a lesser extent in the first quarter of 2015, our reductions from certain large enterprise customers. Our public sector net sales increased by $24.2 million or 62%, while the MacMall net sales decreased by $6.5 million or 15% in Q4 2014.

Consolidated sales of services were 8% of net sales in each of Q4 2014 and Q4 2013. We believe we are seeing traction from the investments we are making in the areas of sales, headcount, software and advanced technology solutions. Looking forward, we expect to see accelerated improvements from these investments. Our top partners by revenue in Q4 2014 were Apple, HP, Cisco, Microsoft, Oracle and Dell. We saw a 10% lift in sales account executives in our commercial segment, rising 46 account executives from 445 last year to 491 this year, as we invest heavily in the future growth of that segment. Consolidated gross profit in Q4 was $50.2 million, an increase of $2 million or 4% from $48.2 million last year.

Consolidated gross profit margin increased to 14.0% from 13.5% last year and we currently expect to be somewhere around the same range for the first quarter of 2015. The increase in Q4 gross profit was primarily due to an increase in public sector selling margin. The increase in consolidated gross profit margin was primarily due to a higher mix of solution sales including the increase in sales reported on a net basis.

Consolidated SG&A expenses in Q4 were $45.6 million compared to $43.9 million last year, an increase of $1.7 million or 4%. Consolidated SG&A expenses as a percentage of net sales in Q4 increase to 12.7% from 12.3% last year primarily due to a $2.3 million increase in personnel cost related to the increase in sales headcount including software sales, advanced solutions in our new Austin office partially offset by $400,000 decrease in advertising expenditures and $300,000 bad debt expense in Q4 2013 in the public sector segment that did not reoccur this year.

Turning to the balance sheet and cash flow, net cash provided by operating activities for the year ended 12/31/2014 was $73.3 million compared to $900,000 for the same period in the prior year. The primary sources of cash during the current period was a decrease in inventory of $66.3 million due to the sell-through of inventory purchase for a specific customer contract and our strategic purchases made near the end of 2013.

Capital expenditures during the 12 months ended 12/31/2014 were $26.7 million compared to $17.2 million during the 12 month period last year. CapEx in 2014 includes the construction of a new cloud data center in New Albany, Ohio, leasehold improvements and build-out cost related to our new Chicago and Austin offices and increase costs associated with our ERP upgrade.

Outstanding borrowings under our line of credit decreased by $57.7 million to $52.8 million at December 31, 2014 from prior year end, while overall working capital increased by $5.8 million.

At this point, I'll turn the call back over to Michelle and open it up for questions. Michelle?

Question-and-Answer Session

Operator

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

Scott Tilghman

Thanks, good afternoon. Couple of things, first off with the data center largely behind you, what are your expectations for CapEx in the coming year?

Brandon LaVerne

Hey Scott, it's Brandon. So, we've announced the acquisition of a building in [indiscernible] our headquarter is out there. We're looking at another building here in the West Coast as well that we look to close somewhere in the first quarter. Beyond that, we don't have any major plans beyond the continuation of our ERPs throughout the year. So we should see CapEx ultimately reduce substantially year-over-year.

Scott Tilghman

Okay, and then with respect to the public sector, obviously it's early in the year but any read through from the strength of the current quarter as to what 2015 will shape up like?

Frank Khulusi

In terms of the public sector?

Scott Tilghman

Yes.

Frank Khulusi

That continues to be strong in the first quarter, however the year-over-year growth rate is not as strong as Q4 due to the timing of when certain order is filed. But that business continues to perform well inside and even if you noticed in the fourth quarter we had some year-over-year growth as well that was attenuated by the fact that we had a higher net down of software transactions that brought the overall number down. So, overall we did great in Q4, we continue to do well in Q1 and our projections for the year are also for positive year-over-year growth.

Scott Tilghman

That's helpful, and Jay, welcome aboard. Just curious what you see in terms of necessary investments or expenditures during the course of the year, given the short angular?

Jay Miley

Yes, look, I believe we will continue to make the investments that we've been making right, in the field resources required to assist in the corporate business model. In addition to some of the software investments we are making, in addition to some of the investments we're making in -- what we refer to here is our advanced solutions group. So, really continuing down the same road we've been on with stable investment mindset that will assist us in the Q2 quarter and beyond.

Scott Tilghman

And two other questions, if I may. One, just a quick housekeeping item, it looks like the tax rate was much higher than where you've been running just wondering what the case was there?

Brandon LaVerne

Yes, it was just some -- the way we ultimately adjust at year end and there are some cost ultimately increase, that's a little higher than we would normally expect on a go forward basis. And so just from the modeling perspective somewhere in the lower 40s is more appropriate, kind of somewhere in between 41.5 and 43.5ish would probably be even more normalized.

Scott Tilghman

So no discrete items, just sort of a catch up?

Brandon LaVerne

No real discrete items now.

Scott Tilghman

Okay.

Brandon LaVerne

Some items related to the closure of the -- some of the accruals and costs associated with the operations and how that ultimately impacts the rates, but nothing acutely I mean it's nothing acute.

Scott Tilghman

Okay, and the last thing I just want to ask and really open this to all three of you is -- with a number of competitors in the space, some public some private, all the different borrowers out there, just curious what you are seeing in the landscape today versus 6 or 12 or 18 months ago?

Frank Khulusi

Really nothing that's hugely different, what has happened over the last little bit here is a lot of the competitors were going after the commodity stuff. There was a significant refresh cycle going on as a result of the operating system stuff. We have chosen to remain laser focused on our migration to more office solutions sales environment. Maybe we left a little bit on the table with respect to the commodity stuff, but change is not easy and we've done all the heavy lifting associated with that change and now we're locked and loaded and ready to go into next year including maybe even more participation on the commodity stuff, but we're not going waiver with respect to our migration path and are focused on being more of a solution provider and more relevant as a consultant and as an advisor and as suite player rather than just dealing with processing agents and taken down commodity sales.

Scott Tilghman

And I'm sorry, I'm going to add one question on here is an aside, a number of companies that had some sort of consumer presence are beginning to feel the pressure to beef up security, wondering if that's something that you were seeing at all?

Jay Miley

And are you pertaining question in respect to securing our website or is the question with respect to the market sell -- I personally believe there is a very very large opportunity for us to make investments that ultimately will position us more strongly in the security environment. I spent quite a bit of my career in that area. Quite frankly given all the breaches that you read about today in the Wall Street Journal, there's nothing but opportunity there and I think we're focused on charting a path forward there, Scott.

Scott Tilghman

I guess specifically one of the large retailers made a comment in the fall that they thought most other retailers and any company frankly that had a consumer presence was going to have to invest heavily in security going forward, because many of the systems were not as secure as they should be, customer information database, different attributes you're seeing that.

Jay Miley

That's actually true, right, I mean I think we have partnerships with a lot of the leading security players in the marketplace from a manufacturer software publishing perspective and we do definitely see not only opportunity there, but we are seeing some tailwinds in terms of the result in that area.

Operator

Thank you. [Operator Instructions] And I'm showing no further questions and I'd like to turn the call back over to Mr. Frank Khulusi for any closing remarks.

Frank Khulusi

Thank you, Michelle. I'd like to thank everyone on the PCM team for their continued efforts, dedication and good work. Thank you all very much again for spending some time this afternoon with us on this call and for your interest in PCM. We appreciate your support and look forward to speaking with you again on our first quarter conference call. In the meantime, please contact us with any questions or if you have a need for IT solutions. Thanks again and have a great afternoon or evening.

Operator

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

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