Connection (CNXN) Reports First Quarter 2021 Results

Connection (PC Connection, Inc.; NASDAQ: CNXN), a leading information technology solutions provider to business, government, and education markets, today announced results for the first quarter ended March 31, 2021.

"We experienced solid demand in Q1 in all of our business segments, which drove backlog to record levels -- and we believe this strong demand will continue through 2021 as the economy continues to improve. However, pandemic-driven supply chain disruptions affected our entire industry and have impacted our Q1 results. We are working closely with suppliers and customers to address these challenges. We also remain confident that the steps we took in 2020 have put us in a better position to capitalize on our opportunities, and to deliver for our shareholders over the course of 2021 and beyond,” said Tim McGrath, President and CEO of Connection.

McGrath continued, "We want to thank our committed team for all they do to meet the needs of our customers, especially during this challenging time.”

Net sales for the quarter ended March 31, 2021 decreased by 10.5% to $636.9 million, compared to $711.9 million for the prior year quarter. The reduction in revenue year over year is primarily due to the supply chain constraints in the Enterprise segment. Net income for the quarter ended March 31, 2021 decreased by 31.6% to $10.2 million, or $0.39 per diluted share, compared to net income of $14.9 million, or $0.56 per diluted share, for the prior year quarter.

Earnings before interest, taxes, depreciation and amortization, adjusted for stock-based compensation expense and restructuring and other charges ("Adjusted EBITDA”) totaled $84.4 million for the twelve months ended March 31, 2021, compared to $130.9 million for the twelve months ended March 31, 2020.¹

Quarterly Highlights

• We experienced another record quarter in our notebook and other mobility solutions product category. In addition to continued workplace transformation growth as a result of work-from-anywhere demand we also experienced strength in our Chromebook business within K-12.

• Our Manufacturing vertical market had another impressive quarter with 30.5% year-over-year revenue growth.

• Overall services revenue grew year-over-year. We achieved Microsoft Advanced Specialization in Windows and SQL Server Migrations to Azure. We experienced steady demand and growth for advanced technologies, data center, cloud, and remote support as customers continue to transform and enable their long-term hybrid workforce.

• We launched Connection Cares, our company social responsibility program. Building on Connection’s inclusive culture and longstanding history of employee volunteerism, this initiative formalizes the company’s community engagement, sustainability, and diversity and inclusion efforts into one cohesive program.

Quarterly Performance by Segment:

• Net sales for the Business Solutions segment decreased by 11.6% to $246.3 million in the first quarter of 2021, compared to $278.8 million in the prior year quarter. Gross profit decreased by 9.8% to $47.4 million in the first quarter of 2021, compared to $52.5 million in the prior year quarter. Gross margin increased by 40 basis points to 19.2% primarily due to an increase in cloud-based and security software, which are recognized on a net basis.

• Net sales for the Public Sector Solutions segment increased by 25.7% to $125.3 million in the first quarter of 2021, compared to $99.6 million in the prior year quarter. Sales to state and local government and educational institutions increased by 13.2%, compared to the prior year quarter, while sales to the federal government increased by 72.6%. Gross profit increased by 8.6% to $15.6 million in the first quarter of 2021, compared to $14.4 million in the prior year quarter. Gross margin decreased by 197 basis points to 12.5%.

• Net sales for the Enterprise Solutions segment decreased by 20.4% to $265.3 million in the first quarter of 2021, compared to $333.4 million in the prior year quarter. Gross profit decreased by 18.8% to $37.5 million in the first quarter of 2021, compared to $46.2 million in the prior year quarter. Gross margin increased by 28 basis points to 14.1% primarily due to an increase in cloud-based and security software, which are recognized on a net basis.

Quarterly Sales by Product Mix:

• Notebook/mobility sales, the Company’s largest product category, increased by 17% year over year and accounted for 37% of net sales in the first quarter of 2021, compared to 28% of net sales in the first quarter of 2020. The increase in this product category was due to the continued work-from-home trend.

• Accessories sales decreased by 37% year over year and accounted for 13% of net sales in the first quarter of 2021, compared to 18% of net sales in the first quarter of 2020.

• Software sales decreased by 19% year over year and accounted for 9% of net sales in the first quarter of 2021, compared to 10% in the first quarter of 2020. The reduction in software revenue is entirely due to an increase in security and cloud-based software recognized on a net basis.

• Desktop sales decreased by 24% year over year and accounted for 9% of net sales in the first quarter of 2021, compared to 11% of net sales in the first quarter of 2020.

Selling, general and administrative ("SG&A”) expenses decreased in the first quarter of 2021 to $86.4 million from $92.5 million in the prior year quarter. SG&A as a percentage of net sales, was 13.6%, compared to 13.0% in the prior year quarter. The decrease in SG&A was primarily due to a decrease in variable compensation due to the lower level of gross profit and a decrease in bad debt expense.

Cash and cash equivalents were $92.3 million at March 31, 2021, compared to $95.7 million at December 31, 2020. In January 2021, we paid a $0.32 per share special dividend to shareholders, which totaled $8.4 million.

Conference Call and Webcast

Connection will host a conference call and live web cast today, May 6, 2021 at 4:30 p.m. ET to discuss its first quarter financial results. To access the conference call (audio only), please dial 866-436-9172 (US) or 630-691-2760 (International) and enter the confirmation number 50157917. 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 is a non-GAAP financial measure. This measure is 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.

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.

"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, 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.

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

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