PC Connection, Inc.

Any statements or references made during the conference call that are not statements of historical fact may be deemed to be 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 provision under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by those forward -- 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, 2011, 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 views as of today and should not be relied upon as representing our 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 as of any date subsequent to today.

If you have not already seen the press release, you can contact Janice Rush at (603) 683-2322, and she will email a copy to you. You can also view it on the company's website.

Today's call is being webcast and will be available from the PC Connection's website.

I would now like to turn the call over to Mr. Tim McGrath.

Please proceed, sir.

Good afternoon, everyone, and thank you for joining us to review the company's financial results for the first quarter of 2012.

Let me first say how happy I am to have Joe on board as our Chief Financial Officer. His leadership, experience and hands-on approach will be invaluable to the company.

In Q1, we continued to execute our strategies to provide total IT solutions, increase market share, make operational improvements, and drive productivity gains.

We have a company-wide focus on these strategic initiatives, and we are pleased with the progress we've made, as evidenced by our solid Q1 performance.

As we review our results, please note that unless otherwise stated, all of our first quarter 2012 comparisons are being made against our first quarter 2011 results.

Net sales for the first quarter increased year-over-year by $37 million, or 8%, to $499 million compared to the prior-year quarter.

Each of our 3 segments, SMB, Large Account and Public Sector, achieved year-over-year sales growth. We continue to invest in improving our operations and expanding our solution sales capabilities.

These include our standards of excellence in data center, Net/Com, software, and life cycle services. We've experienced strong demand and expect that as we drive growth in these key areas, we will capture additional market share.

Net income for the quarter increased by 22% to $5.5 million and earnings per share increased from $0.17 in 2011 to $0.21 per share in 2012.

Included in the results for the quarter were charges of $1.1 million related to awards granted upon the retirement of a former executive, as well as workforce reductions. Had these charges not been incurred, pro forma net income would have been $6.2 million, or $0.23 per share, for the quarter, a 35% growth in earnings per share over the prior year quarter.

Our press release includes the reconciliation of these pro forma amounts. Our goal is to continue to increase earnings per share at a faster rate than the percentage growth in sales by leveraging our fixed cost over a larger sales base while we drive productivity gains.

Gross profit dollars in the quarter increased by $8 million, or 13%, to $67 million. Gross margin, representing gross profit as a percentage of net sales, increased to 13.4% versus 12.7% in the prior year quarter.

This was a result of our continued focus on operational improvements. This focus has resulted in 7 straight quarters of year-over-year margin growth.

In Q1, all 3 segments improved their invoice selling margins. While we were focused on expanding gross margins, we believe the gross margin rate for the next 3 quarters will be below the Q1 rate due to an expected seasonal increase in Public Sector sales.

Consolidated SG&A expenses increased by 10% to $56.5 million, or 11.3% of net sales, for the quarter. This was compared to $51.3 million, or 11.1%, for the prior-year quarter.

The dollar increase was in part due to the inclusion of ValCom's operating cost for the full quarter, which added $1.5 million to SG&A in comparison to the prior-year quarter.

Other SG&A increases included investments in solution sales, higher variable compensation associated with improved gross profits and the continued investment in our Customer Master Data Management, or MDM, project. The MDM project has been a significant undertaking for the company, which we expect to be completed later this year.

We are confident that this initiative will give us enhanced capabilities in customer service and provide additional opportunities to sell more products and services.

We are focused on operational efficiencies and cost controls and projected SG&A will be lower on a rate basis for the balance of the year. We believe that SG&A will be, at least, $57 million for each of the next 3 quarters due to increased variable expenses from higher sales.

And now I'll discuss the quarterly results of our business segments and cover some product trends.

Our overall commercial business, which is the combination of our SMB and Large Account segments, grew by 9%. Sales for SMB segment, which serves small- to medium-sized businesses, as well as our consumer customers, increased nominally in the quarter to $225 million.

Excluding sales [indiscernible] consumers, SMB would have increased by 4%.

Software and Net/Com sales increased by double-digit growth rates, due to our focus on enterprise products. However, these increases were partially offset by the lower consumer sales compared to Q1 of last year.

Gross profit dollars for SMB increased by 8% in the quarter. SMB had the highest gross margin improvement of our segments, with an over-100 basis point improvement to 15.2% margin.

We attribute this improvement to the focus on higher-margin products and services, the automation of deal registrations and the use of predictive analytics, and improvement in sales productivity tools.

Sales by our Large Account segment increased this quarter by 24% to $181 million. Consistent with prior quarters, we've included the operating results of ValCom under this segment.

Excluding ValCom revenues, Large Account would have increased by 17%.

Gross profit dollars increased by 28% for this segment and gross margin increased by 40 basis points due to strong demand for enterprise solutions.

Quarterly sales in the Public Sector segment, which includes sales to government and educational customers, increased by approximately 2%. Sales to the Federal government increased by 6% over the prior year, whereas sales to state and local government and education customers were level year-over-year.

Gross profit dollars for the Public Sector increased in the quarter by 6% due to growth in solution sales.

And now Joe Driscoll will discuss our financial results in more detail. Joe?

Thanks, Tim. In summary, our operating results for the quarter were very positive.

Consolidated sales for the quarter increased 8% on a year-over-year basis, with each of the segments contributing to the overall increase. There were significant gross margin improvements in all 3 business segments, with an overall improvement of over 60 basis points.

Pro forma earnings per share increased from $0.17 to $0.23 in the quarter. There was significant positive cash flow in the quarter.

Our cash balance at the end of the quarter was approximately $50 million versus $5 million at December 31, 2011, and the company had no outstanding bank debt at quarter end.

Cash flow provided by operations for the quarter ended March 31, 2012, was $55 million. The primary source of operating cash during the quarter was a $53 million decrease in accounts receivable.

Days sales outstanding, or DSOs, were 43 days as of March 31, 2012, compared to 47 days as of December 31, 2011.

In addition, our quarter-end inventory levels decreased from year-end 2011 by $15 million, primarily due to much tighter working capital management.

Inventory turns for the first quarter of 2012 increased to 25 compared to 24 turns in Q1 2011.

Capital expenditures in the first quarter of 2012 totaled $2.8 million. These expenditures, primarily related to our MDM project, which we expect to complete in late 2012.

We are looking forward to the completion of this project and realizing the efficiencies in our operations and the benefits to our customers.

In addition to capital expenditures, we have agreed to pay up to an additional $2 million in contingent consideration in 2012 for the ValCom acquisition, upon the achievement of certain revenue milestones.

Net cash used in financing activities in 2012 was $7.2 million. We purchased $1.7 million of our outstanding stock for treasury at an average price of $9.05 per share.

We also repaid $5.3 million of bank debt during the quarter and had 0 bank debt outstanding at March 31.

Net sales of products drop-shipped by distributors and other vendors directly to customers were 66% of total net sales in the first quarter of 2012 compared to 64% in the corresponding prior year period.

We continue to focus on increasing drop shipments where appropriate and cost-effective, which enables us to support our customers with lower inventory levels.

Overall, we are very pleased with the significant positive cash flow in the quarter. Note that we expect the cash balance to decrease somewhat over the balance of the year due to projected higher levels of sales and working capital in the next several quarters.

Even with this slight decrease, we expect that the balance sheet will be healthy this year.

We will now entertain your questions. Operator?

Well, thank you, operator. I'm pleased with our sales results this quarter.

The PC Connection team continues to execute well. We generated solid sales growth and increased our pro forma earnings per share by 35%.

In addition, we strengthened our balance sheet and generated significant positive cash flow. We believe the strategy that we put in place will position us well to gain market share and enhance long-term shareholder value.

I'd like to thank all of our customers, vendor partners and shareholders for their continued support and for our dedicated coworkers for their efforts. I'd also like to thank those of you listening to our call this afternoon.

Your time and interest in PC Connection are appreciated. Have a great evening.