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Connection CEO: Slight Dip In Federal Sales Not Slowing Company Down

Timothy McGrath says the solution provider is continuing to take market share from rivals, particularly in the SMB market, and growth in SLED sales partially offset a decline in federal government sales.

Solution provider Connection, formerly known as PC Connection, reported growing sales and earnings for its third fiscal quarter, and said it is continuing to take share from its rivals, especially in the small- and midsize-business segment.

For the first two months of the quarter, which ended Sept. 30, Connection saw sales that met expectations, said Timothy McGrath, CEO of the Merrimack, N.H.-based solution provider, during his prepared remarks during the company's Thursday financial analyst call.

"However, toward the end of September, we experienced some customer delays, along with some supplier constraints, in the small- to medium-business space," McGrath said. "In addition, our health-care vertical and our federal component of our public sector solutions segment performed at lower levels than expected."

[Related: PC Connection Changes Name To Connection To Flex Advanced Technologies Muscle]

However, McGrath said, the company, No. 19 on CRN's 2018 Solution Provider 500 list, saw a significant increase in its cloud and its security software sales.

"Consistent with this trend, we're seeing a greater number of project-based rollouts across all three of our sales subsidiaries," he said. "These project rollouts are a testament to our ability to help our customers improve their productivity, make them more secure, and enhance their growth. These projects ebb and flow for various reasons, and in Q3 created some variability in our results."

Even so, Connection is gaining market share and new customers while transforming its business with improvements to operational efficiencies, McGrath said.

"Demand for IT products and solutions continued to evolve as customers are using technology to transform and secure their businesses," he said. "It's good to see continued growth and execution in the retail, manufacturing and financial vertical markets. I'm also pleased with the growth and execution in our enterprise and SLED [state and local government and education] businesses."

McGrath, in response to a question from a financial analyst, said Connection is taking market share from its competitors, primarily in the smaller business segment.

"You do have to look by segment," he said. "Our enterprise team grew at over 13 percent in the quarter. And in that segment, we were more head-to-head with the larger players in the industry. Across the board, clearly we're taking share and growing faster than the IT market, and a lot of that is from the smaller VARs."

Connection did see some product constraint in the third quarter, particularly in the networking and communications market, but that seems to have resolved itself, McGrath said. The impact was a couple of million dollars, with the impacted product then shipping in the fourth quarter and a small part in the first fiscal quarter of 2019, said Stephen Sarno, senior vice president, CFO and treasurer.

Connection reported two different revenue figures for its third fiscal quarter. They differ by $107.8 million to reflect the company's adoption effective Jan. 1 of a new revenue recognition standard, Sarno said.

Revenue as presented for the quarter under the new standard was reported as $658.5 million. Under the old standard, revenue was reported as $766.3 million. The latter figure is up 5.1 percent compared with the $729.2 million the company reported for the third fiscal quarter of 2017.

"$103.3 million of this impact was related to treating certain software arrangements such as security, cloud-based license, and maintenance on a net revenue recognition basis,” Sarno said. This is in addition to $4.5 million related to the timing of bill and hold transactions."

Going forward, Connection will report both figures in the fourth fiscal quarter, but will only report revenue based on the new standard starting in fiscal 2019, Sarno said.

Total revenue included sales in the company's business solutions segment of $244.9 million per the new standard, and $294.2 million per the prior standard. That compares with last year's $290.6 million.

For the company's enterprise solutions segment, revenue per the old standard was reported at $265.5 million and per the old standard at $303.6 million. That compares with last year's $286.0 million, with growth being driven by sales of mobility devices, desktop PCs, and network and communications products.

Public sector solutions segment sales per the old standard were reported at $148.2 million and $168.5 million per the new standard. That compares with last year's $170.6 million. A drop in federal sales was offset in part by an increase in state and local government sales.

Network and mobility sales in the third fiscal quarter of 2018 rose 9 percent year over year, software sales fell 58 percent, and network and communications products rose 12 percent, per the old standard. The company said it also experienced solid growth in cloud-based offering, security and office productivity sales.

Net income on a GAAP basis for the third fiscal quarter of 2018 was reported at $13.8 million, or 51 cents per share, which was up over the $13.1 million, or 49 cents per share, reported for the same quarter last year.

On a non-GAAP basis, Connection reported net income of $23.0 million, down 7 percent over the $24.9 million it reported last year.

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