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Connection (CNXN) Reports Record Second Quarter Results

August 2, 2018

MERRIMACK, N.H.--(BUSINESS WIRE)--Aug 2, 2018--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, 2018. Net income for the second quarter ended June 30, 2018 increased by 34.2% to $18.2 million, or $0.68 per basic and diluted share, compared to net income of $13.6 million, or $0.51 per basic and diluted share for the prior year’s quarter.

As previously disclosed, effective January 1, 2018, the Company adopted a new revenue recognition standard. Please note that the financial results presented in this release include both amounts, “as presented,” which reflect the implementation of the new revenue recognition standard, as well as amounts prior to the impact of the new revenue recognition standard to allow for comparability against historical results. Starting in calendar year 2019, we will no longer present our financial results under the previous revenue recognition standard. For additional information and reconciliations of our financial results between the new and prior revenue recognition standards, please see the additional tables included in this press release.

Net sales as presented for the quarter ended June 30, 2018 were $706.6 million. Net sales prior to the impact of the new revenue recognition standard for the quarter ended June 30, 2018 increased by 9.3% to $819.8 million, compared to $749.8 million for the prior year’s quarter.

Gross profit as presented for the quarter ended June 30, 2018 was $107.5 million. Gross profit prior to the impact of the new revenue recognition standard for the quarter ended June 30, 2018 was $108.9 million, compared to $99.7 million in the second quarter a year ago, an increase of 9.2%.

Gross margin as presented for the quarter ended June 30, 2018 was 15.2%. Gross margin prior to the impact of the new revenue recognition standard was 13.3%, consistent with the same quarter a year ago.

Operating income as presented for the quarter ended June 30, 2018 was $24.9 million. Operating income prior to the impact of the new revenue recognition standard was $26.0 million, compared to $22.4 million in the same quarter a year ago.

Net income as presented for the quarter ended June 30, 2018 was $18.2 million. Net income prior to the impact of the new revenue recognition standard was $19.0 million, compared to $13.6 million in the second quarter a year ago, an increase of 39.9%.

Earnings per share (“EPS”) on both a basic and diluted basis as presented for the quarter ended June 30, 2018 was $0.68. EPS prior to the impact of the new revenue recognition standard was $0.71 per share, compared to the prior year’s $0.51 on both a basic and diluted basis.

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 $100.9 million for the twelve months ended June 30, 2018, Adjusted EBITDA prior to the impact of the new revenue recognition standard was $101.5 million, compared to $94.0 million for the twelve months ended June 30, 2017.

Net sales for the six months ended June 30, 2018 were $1,331.5 million. Net sales prior to the impact of the new revenue recognition standard for the six months ended June 30, 2018 increased by 7.0% to $1,520.2 million, compared to $1,420.4 million for the six months ended June 30, 2017.

Gross profit for the six months ended June 30, 2018 was $203.8 million. Gross profit prior to the impact of the new revenue recognition standard for the six months ended June 30, 2018 was $204.6 million, compared to $186.4 million for the six months ended June 30, 2017, an increase of 9.8%.

Gross margin as presented for the six months ended June 30, 2018 was 15.3%. Gross margin prior to the impact of the new revenue recognition standard was 13.5%, compared to 13.1% for the six months ended June 30, 2017.

Operating income as presented for the six months ended June 30, 2018 was $40.4 million. Operating income prior to the impact of the new revenue recognition standard was $41.0 million, compared to $33.9 million for the six months ended June 30, 2017.

Net income as presented for the six months ended June 30, 2018 was $29.5 million. Net income prior to the impact of the new revenue recognition standard was $29.9 million, compared to $21.0 million for the six months ended June 30, 2017, an increase of 42.5%.

Quarterly Performance by Segment:

Net sales as presented for the second quarter of 2018 were $270.0 million for the Business Solutions segment. Net sales prior to the impact of the new revenue recognition standard for the second quarter of 2018 increased by 5.0% to $311.3 million, compared to $296.4 million for the prior year’s quarter. Net/com and mobility products experienced strong revenue growth in this segment with an increase of 18% and 8%, respectively. Gross margin increased by 191 basis points to 17.5% primarily due to the adoption of the new revenue recognition standard. Gross margin prior to the impact of the new revenue recognition standard for the second quarter of 2018 was 15.5%. Net sales as presented for the second quarter of 2018 were $301.1 million for the Enterprise Solutions segment. Net sales prior to the impact of the new revenue recognition standard for the second quarter of 2018 increased by 15.5% to $349.0 million, compared to $302.1 million for the prior year’s quarter. Mobility and server/storage products experienced solid growth during the quarter at 37% and 27%, respectively. Gross margin increased by 208 basis points to 14.4% primarily due to the adoption of the new revenue recognition standard and the increase in invoice selling margins. Gross margin prior to the impact of the new revenue recognition standard for the second quarter of 2018 was 12.6%. Net sales as presented for the second quarter of 2018 were $135.5 million for the Public Sector Solutions segment. Net sales prior to the impact of the new revenue recognition standard for the second quarter of 2018 increased by 5.4% to $159.4 million, compared to $151.3 million for the prior year’s quarter. Gross margin increased by 170 basis points to 12.5% primarily due to the adoption of the new revenue recognition standard. Gross margin prior to the impact of the new revenue recognition standard for the second quarter of 2018 was 10.6%.

Quarterly Sales by Product Mix:

Notebook/mobility sales, the Company’s largest product category, as presented, increased by 16% year over year and accounted for 26% of net sales in the second quarter of 2018, compared to 21% of net sales in the prior year quarter. Excluding the impact of the adoption of the new revenue recognition standard, notebook/mobility sales increased by 17% year over year and accounted for 23% of net sales in the second quarter of 2018, compared to 21% in the prior year quarter. The Enterprise Solutions and Business Solutions segments experienced strong year-over-year growth in notebook sales. Servers/storage, as presented, increased by 7% year over year and accounted for 10% of net sales in the second quarter of 2018, compared to 9% of net sales in the prior year quarter. Excluding the impact of the adoption of the new revenue recognition standard, servers/storage sales increased by 8% year over year and accounted for 8% of net sales in the second quarter of 2018, compared to 9% in the prior year quarter. The Enterprise Solutions and Public Sector Solutions segments experienced strong year-over-year growth in server/storage sales. Software sales, as presented, decreased by 50% year over year and accounted for 12% of net sales in the second quarter of 2018, compared to 23% of net sales in the prior year quarter. The decrease in software sales was due to the adoption of the new revenue recognition standard. Excluding the impact of the adoption of the new revenue recognition standard, software sales increased by 13% year over year and accounted for 24% of net sales in the second quarter of 2018, compared to 23% of net sales in the prior year quarter. We experienced solid growth in cloud-based offerings, security, and office productivity.

Selling, general and administrative (“SG&A”) expenses as presented, increased in the second quarter of 2018 to $82.5 million from $77.2 million in the prior year quarter. SG&A in the second quarter of 2018 prior to the impact of the new revenue recognition standard was $82.8 million. The increase was primarily the result of increased variable compensation associated with our higher gross profits as well as investments made in our technology solutions group. SG&A as reported as a percentage of net sales was 11.7%, compared to 10.3% in the prior year quarter. However, SG&A in the second quarter of 2018, prior to the impact of the new revenue recognition standard, was 10.1%.

Cash and cash equivalents were $68.7 million at June 30, 2018, compared to $50.0 million at December 31, 2017. During the second quarter of 2018, the Company repurchased 53,221 shares of stock for $1.4 million. As of June 30, 2018, the Company had $13.4 million available for stock repurchases remaining under previous authorizations made by its Board of Directors. Days sales outstanding were 53 days at June 30, 2018, up from 47 days in the prior year quarter; the increase of 6 days from 47 days was due to the adoption of the new revenue recognition standard. Inventory turns were 26 turns in the second quarter of 2018, up from 22 turns in the prior year quarter; excluding the impact of the new revenue recognition standard, inventory turns would have increased to 31 turns.

“We executed well during the second quarter and in the first half of 2018. We continued to see strong growth in advanced technologies and vertical markets.” 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.

Conference Call and Webcast

Connection will host a conference call and live web cast today, August 2, 2018 at 4:30 p.m. ET to discuss its second quarter financial results. A web cast of the conference call, which will be broadcast live via the Internet, and a copy of this press release, along with supplemental slides used during the call, 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 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.connection.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 – 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.

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.

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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, the impact of changes in accounting requirements, 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, 2017. 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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