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Connection CEO: Sales Hit Hard By COVID-19, ERP Implementation

‘After a strong first quarter, driven in part by urgent demand in March from customers transitioning their people to working from home, the pandemic‘s impact on our customer base and demand was significant,’ says Tim McGrath, Connection president and CEO.

It was a tough second fiscal quarter 2020 for Connection due to a combination of the impacts from both the COVID-19 coronavirus pandemic and a painful ERP implementation.

However, the national solution provider formerly known as PC Connection sees momentum going into the third fiscal quarter it expects will result in a resumption of growth.

It was a tough quarter, said Tim McGrath, president and CEO of Merrimack, N.H.-based Connection, in his prepared remarks during the company‘s Monday second fiscal quarter 2020 financial analyst conference call.

[Related: The 25 Top Solution Provider Companies: 2020 Solution Provider 500]

“After a strong first quarter, driven in part by urgent demand in March from customers transitioning their people to working from home, the pandemic‘s impact on our customer base and demand was significant,” McGrath said.

Connection, ranked No. 24 on the CRN Solution Provider 500 list, entered the second fiscal quarter with good momentum in early April, but demand declined later in the month and dropped significantly in May to a low point before recovering somewhat in June, McGrath said. However, he said, July improved over June, although sales were still somewhat lower than those of July 2019.

Connection‘s business solutions segment bore the brunt of the COVID-19 coronavirus pandemic during the second fiscal quarter, McGrath said.

“Many business solution customers were forced to shut down in the March and April time frame, sharply curtailing their purchases of equipment,” he said. ”In other cases, certain larger projects were deferred until later in the year.”

Connection‘s enterprise business was hit by a drop in demand for data center planning and related projects, McGrath said.

“Demand shifted to more work-from-home projects and software subscriptions,” he said. ”We are beginning to see industry-leading customers take this opportunity to invest in their transformational technologies.”

McGrath, responding to an analyst‘s question about where the impact from the pandemic hit hardest, said Connection’s SMB group in the business solutions team was the hardest hit.

“We have the largest number of buying customers there, and also the largest number of customers who are impacted by the pandemic,” he said. ”So that combination was tough, and certainly magnified by our ERP implementation. And behind that would be in particular our federal business had a very tough quarter. Our enterprise is probably the least affected simply because of our marketplace, technology and our go-to-market status.”

When asked by an analyst about expectations about the third fiscal quarter, McGrath said Connection expects to see improvement over the second quarter.

“We have a seasoned team,” he said. ”We have some extraordinary employees who really know the business. We just had to get the system in place to support that. And when it comes to the customer-facing aspect, we are there. And so we‘re now really looking forward to getting back to business into driving growth. That said, you know, the pandemic is still out there. And so we think about Q3, maybe overall, and we don’t have a great barometer, but maybe negative 10 percent for the quarter year over year, being a much better benchmark over where we were in Q2.”

McGrath, responding to another analyst‘s question about the impact from the pandemic, said the reality of a post-COVID-19 world remains unclear, but one thing is certain.

“Technology offers the innovation of safety we need to move forward,” he said. “I want to thank our team for their passion in extraordinary efforts through the most difficult quarter in recent history. We are confident that our financial strength, dedicated workforce, constant pursuit of innovation, and strong customer relationships will drive our growth.”

The second big impact during the second quarter was Connection‘s long-planned new ERP system deployment.

“Although the new system was much needed, and frankly overdue, the deployment over the last 80 days or so was difficult to say the least. But I strongly believe the pain will be worth it. The new system will serve as the foundation for our path forward, supporting growth, greater collaboration, visibility and efficiency across our entire organization, helping with solution sales, cloud CRM, common catalog and financials. It will also enable better customer service and give us an improved foundation for evaluating and integrating future acquisitions.”

The ERP implementation was substantially complete by the end of the second quarter, and management, key employees and sales personnel were distracted by moves to implement it, McGrath said.

“Our customer-facing work on the system is essentially complete, and some back-office work has continued into the current quarter,” he said. ”You can be sure I‘m very focused on this and I believe that our most significant difficulties on the ERP execution front are now mostly behind us.”

For its second fiscal quarter 2020, which ended June 30, Connection reported total revenue of $550.0 million, down 26 percent over the $741.1 million the company reported for its second fiscal quarter 2019.

Analysts had been expecting revenue of $684.7 million, according to Seeking Alpha.

The company‘s second fiscal quarter revenue included business solutions revenue of $191.1 million, down 29.5 percent over last year; public sector solution revenue of $112.2 million, down 26.2 percent; and enterprise solutions revenue of $246.8 million, down 22.4 percent.

On the product side, Connection said its notebook and mobility sales fell 9 percent over last year, accessories sales fell 31 percent, desktop sales fell 45 percent and software sales fell 40 percent.

GAAP net income for the quarter was reported at $7.6 million, or 29 cents per share, down significantly from last year‘s net income of $23.7 million, or 89 cents per share. On a non-GAAP basis, Connection reported net income of $15.6 million, or 32 cents per share, down from last year’s $36.5 million, or 89 cents per share.

Analysts had been expecting earnings per share of 71 cents per share on a GAAP basis, according to Seeking Alpha.

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