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PCM Sees Q2 Profit Increase As Revenue Dips

PCM's falling revenue for its second fiscal 2018 quarter was spun as a good thing because of the drop in low-margin sales that is leading to higher overall margins, company executives told analysts on Wednesday's earnings call.

IT solution provider PCM on Wednesday reported a drop in revenue, but brushed away concerns by noting that that the sales falloff stemmed from a decrease in low-margin business that led to a significant jump in profit for its second fiscal quarter of 2018.

Indeed, Frank Khulusi (pictured), chairman and CEO of the El Segundo, Calif.-based solution provider seemed to relish the increased profitability at the expense of revenue for the second quarter, which ended June 30, and for the rest of the year.

Khulusi, during PCM's earnings conference call on Wednesday, said the company increased its focus on higher-margin sales stemming from managed services, advanced technologies, cloud, and security, leading the company to a gross margin of sales of 16.5 percent, its highest ever.

[Related: PCM Acquires Top Cisco, VMware Partner To Strengthen Collaboration Practice In 'Win-Win' Deal]

"And in some cases [we] walked away from some low-margin volume business we identified as unprofitable," he said. "These moves helped us achieve our highest-ever gross margin."

Wall Street rewarded PCM by sending the stock up 19 percent to $18.75 in after-hours trading on Wednesday.

Robert "Jay" Miley, president of PCM, told analysts on the call that his company is continuing to focus on advanced technology areas such as managed services, hybrid data center, security, collaboration, and cloud practices.

"Our end customers are expecting more and more from their trusted advisors, and as such, we are making the appropriate investments to assist them on their digital transformation journey in all areas, from the edge to the data center and to the cloud," Miley said. "To that end, we continue to add resources to all these strategic areas. The resources that we are hiring are not only focused on securing net-new customers for our business, but are also focused on higher value-added activities that in turn enable us to earn higher margins not only on the new business they secure, but also on our existing base of business, which is helping to drive our margin rate to record higher margins."

Miley said software was the biggest product for PCM in terms of gross billed sales during the quarter, accounting for 29 percent of revenue, with sales down 10 percent over the second fiscal quarter of 2017.

"The software category is the category that is most affected by our largest software partner's push away from the traditional legacy licensing models towards subscription and cloud-based annuity models. Despite the drop in gross billing revenue, the software category performed very well for us in the quarter as we pivoted to this annuity model, and is one of the contributing factors in our strong gross profit and margin performance."

Brandon LaVerne, chief financial officer for PCM, later named Microsoft as PCM's largest vendor partner.

In other product areas, notebook and tablet sales represented 17 percent of total revenue, with sales down 8 percent do to the ending of some projects, Miley said. Desktops and delivered services represented 8 percent of total revenue each, networking accounted for 7 percent, manufacturer service and warranties 4 percent, and areas including servers, storage, display, accessories, input devices, and printers accounted for the rest.

In addition to Microsoft, PCM's top vendor partners by billed revenue also included Hewlett-Packard Inc., Dell Technologies, Cisco, Apple, Lenovo, and Hewlett Packard Enterprises, LaVerne said. Those partners represented about 60 percent of PCM's gross billing revenue.

PCM, which early last year started a concentrated push into the European market and in September acquired Liverpool, U.K.-based The Stack Group, is seeing lower gross margin in that market, LaVerne said in response to an analyst question. He said PCM has relatively little public sector revenue in the U.K, but expects to do more in 2019.

There is some softness in the U.K. business because of Brexit, LaVerne said. "We don't think that affected us because we're still kind of small and growing in that market," he said. "But we do hear a lot of good things to come in the future. And there was of course a lot of focus on GDPR that took away some of the attention of these companies, and some of their capital expenses in the quarter and concentrated it towards achieving the GDPR compliance."

LaVerne also said that government sales generally increase in the third quarter, which also leads to lower overall gross margins.

For the quarter, PCM reported total revenue of $546.4 million, down about 2 percent over the $556.1 million in sales the company reported for its second fiscal 2017 quarter. Zack's Investment Research estimated the company would report $569.97 in revenue for the quarter.

About 75 percent of sales came from the U.S. commercial market, which were down overall by 6 percent over last year. About 14 percent of sales were from the U.S. public sector, 9 percent from Canada, and 2 percent from the U.K.

PCM reported GAAP net income of $7.9 million, or 64 cents per share, up from last year's $2.4 million, or 18 cents per share. Zack's estimated earnings per share of 55 cents. On a non-GAAP basis, net income was 10.0 million, or 82 cents per share, up from last year's $5.2 million, or 38 cents per share.

Looking forward, Khulusi said PCM increased its full-year 2018 guidance for non-GAAP earnings per share by 20 cents to a range of $2.20 to $2.30 per share. The company also increased its gross margin guidance to a new range of 15.60 percent to 15.85 percent thanks to the low revenue growth guidance which reflects on PCM's more profitable sales.

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