Good afternoon and welcome to the First Quarter 2020 Connection Earnings Conference Call. My name is Kevin, and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. As a reminder, this conference call is the property of Connection and may not be recorded or rebroadcast without specific permission from the company. On the call today are Tim McGrath, President and Chief Executive Officer; and Tom Baker, Senior Vice President and Chief Financial Officer. I will now turn the call over to the company.

Thank you. I will now read the safe harbor act. Any statements or references made during the conference call that are not statements of historical fact may be deemed to be forward-looking statements. Various remarks that management may make about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31, 2019, which is on file with the Securities and Exchange Commission as well as in other documents that the company files with the commission from time to time. In addition, any forward-looking statements represent management's view as of today and should not be relied upon as representing views as of any subsequent date. While the company may elect to update forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so even if estimates change. Therefore, you should not rely on these forward-looking statements as representing views as of any date subsequent to today. During this call, GAAP and non-GAAP financial measures will be discussed. A reconciliation between the two is available in today's earnings release and on the company's website at www.connection.com. Please note that unless otherwise stated, all references to first quarter 2020 comparisons are being made against the first quarter of 2018. Today's call is being webcast and will be available on Connection's website. The earnings release will be available on the SEC’s website at www.sec.gov and in the Investor Relations section of our website at www.connection.com. I would now like to turn the call over to our host, Tim McGrath, President and CEO. Please proceed sir.

Good afternoon everyone and thank you for joining us today for Connection's Q1 2020 conference call. I'll be sharing a brief update on our business including our strategic initiatives; and Tom Baker, our Chief Financial Officer, will join me to provide a review of the company's first quarter financial results. This quarter's earnings call finds us at an unprecedented time. We are all facing one of the greatest health threats the world has experienced in recent history. As an essential business in the fight against COVID-19, we are currently operating with the majority of our employees working remotely, a transition we made rapidly and, to date, successfully. As you can imagine, the needs of our customers have evolved significantly over the past two months. During this time, the depth and frequency of our communication with our employees, customers, and partners has intensified. This pandemic is top of mind for all of us. The challenges that we are facing together continue to unfold. Naturally, we cannot predict the precise impact on our business. We are confident that our committed and resilient team of employees combined with our scalable business model will enable us to adapt and respond appropriately to the future economic conditions. We will do everything in our power to serve our customers and the communities where we live and work. I'm pleased to announce that we had the best Q1 results in our history, and I thought this would be a good opportunity to start our call with a review of our strengths that have fueled Connection's success. Connection's three distinct sales subsidiaries deliver a level of service and a deep understanding of our customers' environments. When combined with the expertise of our Industry Solutions Group, Connection's vertical market-focused team, we're able to deliver technology solutions customized to the specific needs of our public sector organizations, small and medium-sized businesses, and large enterprises. This specialization goes beyond a different department name or a unique sales rep title. It's baked into the training, the culture and the focus of our teams. We understand our customers' needs and can collaborate with our customers to deliver specific solutions based on their needs. This level of service would not be possible without the specialization I just mentioned, and it really grows out of our understanding of the customer's environment, their team and their business. After all, Connection is a purpose-driven organization, and our sales and sales support teams have done an exceptional job of living our mission. We've built a committed team around our mission of enhancing growth, elevating productivity and empowering innovation for our customers. I'd also like to highlight the great work that's being done in our Technology Solutions Group, or TSG, and our Technology Integration and Distribution Center. Our TSG team continues to drive the sales of advanced technology solutions, delivering the technical expertise and outstanding follow-through our sales teams need to exceed our customers' expectations. The Technology Integration and Distribution Center team continues to enhance our capabilities while remaining focused on the customer experience. We achieved records in our first quarter revenue, gross profits, gross margin, net income and earnings per share. During the first quarter, revenue increased by 12.5% to $711.9 million and gross profit increased by 13.9% compared to Q1 of 2019. We achieved gross margins of 15.9%, which represented growth of 19 basis points. Operating income increased by 86% to $20.7 million or 2.9% of net sales compared to $17.4 million or 2.8% of net sales in the prior year quarter. In Q1 2020, diluted earnings per share increased by 18% from Q1 2019. We experienced strong growth in both our enterprise solutions and business solutions operating segments. The Enterprise Solutions segment achieved 21% revenue growth in the quarter compared to Q1 2019. Followed by the Business Solutions segment, which experienced growth of 10%. The growth in these segments was partially offset by a 5% decrease in our public sector segment. We believe that growth in gross profit is a better indicator of our success serving our customers than using revenue alone as a growth metric. Gross profit in the quarter increased by 17% in Business Solutions, 12% in Enterprise Solutions and 10% in Public Sector Solutions compared to Q1 2019. In March, we benefited from the work-from-home initiative and a higher demand from healthcare customers due to the global pandemic. The increase in both revenue and gross profit was enhanced by strong growth in all of our vertical markets. We also saw strong growth in mobility, accessories, and networking categories. We remain committed to helping our customers efficiently and intelligently build out solutions that help our customers solve IT. Now, I'd like to provide a more detailed discussion of our performance by segment. In our Business Solutions segment, Q1 net sales increased by 10.2% to $278.8 million compared to $252.9 million a year ago. Gross profit in the Business Solutions segment increased 16.7% from a year ago and gross margin for this segment increased by 105 basis points to 18.8% in the quarter. Our Business Solutions segment margins benefited from an increase in volume and a change in customer mix. Business Solutions continue to focus on advanced technologies that have higher margins and represented a larger percentage of our revenue this quarter. In our Public Sector solutions business, Q1 net sales decreased by 4.5% to $99.6 million compared to $140 million a year ago. Sales to the federal government decreased by 42.2% compared to the prior year. Q1 of 2019 benefited from the timing of several large project rollouts that did not repeat in Q1 2020. Sales to state and local governments and educational institutions increased by 15.6%. This increase was driven by mobility and net/com products. Gross profit for the Public Sector segment increased by 9.7% in the quarter and gross margin grew by 187 basis points to 14.5% due to changes in customer mix along with increased sales of cloud-based software. In our Enterprise Solutions segment, Q1 net sales were $333.4 million, a 21% increase compared to $275.6 million a year ago. Gross profit for the Enterprise segment increased by 12.1% in the quarter. Gross margin for the Enterprise segment decreased by 110 basis points to 13.9%. The decrease in gross margin was related to the changes in customer hardware and product mix. Having covered our sales and gross margin performance, I will now turn the call over to Tom to discuss additional financial highlights from our income statement, balance sheet and cash flow statement.

Thanks, Tim. SG&A increased this quarter to $92.5 million from $81.2 million a year ago. The increase in SG&A was driven in part by an increase in headcount and variable compensation due to the higher level of sales and gross profit achieved compared to the prior year quarter. Additionally, we recognized bad debt expense of $2.8 million, an increase of $2.6 million compared to the prior year. We anticipate collection challenges from certain customers who have been significantly impacted by the COVID-19 pandemic. SG&A as a percentage of net sales increased by 15 basis points year-over-year. The increase in bad debt expense had the effect of increasing SG&A as a percentage of net sales by 37 basis points. Looking forward, a large portion of our cost structure is variable and will scale with the business. We are committed to optimizing our cost structure to scale with the demands of our business as necessary. Our operating income increased 18.6% this quarter to $20.7 million from $17.4 million a year ago. Our Q1 effective tax rate was 28.2%, up from 27.7% the period a year ago. Net income for the quarter increased 17% to $14.9 million from $12.7 million a year ago. Diluted earnings per share was $0.56, an increase of 18% from the prior year period. Our trailing 12 month adjusted earnings before income taxes, depreciation and amortization, or adjusted EBITDA, increased 21% to $130.9 million from $108.1 million a year ago. During Q1, we repurchased 247,000 shares for $10.2 million at an average price of $41.34 per share. As of March 31, 2020, we had $12.7 million remaining for stock repurchases under our existing stock repurchase program. Cash flow from operations for the first quarter was $44.6 million versus $18.1 million for the same period a year ago. The change was driven primarily by a reduction in accounts receivable. Our net cash used in investing activities of $4.6 million in the first quarter was primarily the result of equipment purchases and IT initiatives. The company used $18.7 million of cash for financing activities during the quarter, consisting primarily of the payment of $8.4 million for a previously declared 2019 special dividend and $10.2 million stock repurchases. Our balance sheet continues to be strong. We ended Q1 with $111.3 million of cash and cash equivalents, representing an increase of $21.3 million from December 31st. The COVID-19 global pandemic has created financial uncertainty and a number of customers across the affected industries have requested various concessions. We have worked with our partners to mitigate the impact these concessions would have on the company. We expect that these situations will be ongoing as we navigate through this crisis. And in the near-term, we believe revenue will be adversely affected.

Thanks, Tom. As discussed, we continue to see solid performance across our organization. In particular, our Enterprise Solutions and Business Solutions segments demonstrate the importance of specialization and customer segmentation. As our customers are adjusting to the challenges brought about by the COVID-19 pandemic, we are focused on helping them through this difficult time with technological solutions and services. For example, many customers need our support in their work-from-home initiatives. They also need related services including asset management, asset recovery and deployment. In addition, many companies need our help redeploying existing assets and augmenting their IT staff. Finally, the strength of our e-commerce engine enables our customers to seamlessly transact with us remotely. As our customer needs grow and change, we'll be here to help them enhance their growth, elevate their productivity, and empower their innovation with technology. We will continue to invest in systems and subject matter experts that enable us to deliver the exceptional quality and service, which we are known. As stated earlier, it's not possible to predict what impact the global pandemic will have on our business. But as Tom said, we do believe that revenues will be adversely affected in the near term. We have to be flexible and resilient to navigate what is ahead of us. We believe that we are experiencing a fundamental shift in the way many businesses will operate in the future. We are confident whatever the future brings, technology will be critical to this business transformation. We believe that we can continue to win market share in this rapidly changing IT environment. In any market condition, technology is an enabler of customer growth. We will continue to do everything in our power to help our customers move forward on the path to recovery. We believe that our team and the strategy that we have in place position us well to gain market share and increase long-term shareholder value. We will now entertain your questions.

Our first question comes from Adam Tindle with Raymond James.

Hi, thanks. Good afternoon. Tim, I just wanted to touch on some of the revenue commentary. Obviously, you had very strong results in the March quarter, but both you and Tom mentioned expecting to be adversely affected moving forward, which is understandable. Could you maybe just give us an updated view of what you saw in maybe late March and what you're seeing now as April closes? Have you seen that adversely affected impact yet? How large have those declines been? And are they getting better or worse?

Sure, Adam. Thanks. I think the commentary that you wrote about is really on target meaning that we saw real growth in March in anything that enabled work from home for those types of products and services. And we saw real growth in the healthcare arena as we work through this pandemic. So that's probably not a surprise to you. So clearly, March was up for us. Moving forward, there's that uncertainty that we referenced, and it truly is that we really don't know exactly where this will end. We are expecting, like everyone else, a U-shaped recovery. We do think that there'll be opportunities for us to help our customers navigate through this. But in terms of specific growth numbers, we don't really have anything that we could share for the quarter yet just because there is all that uncertainty. It really depends on when we recover and how quickly we recover. So I don't have a specific Q2 estimate. We will say that April was lighter than March, the start of April.

Okay, that’s helpful. And I think that’s a little bit unusual because your Q2 coincides with the big vendor fiscal year-end. Your Q2 is actually typically up sequentially. So as we think about the models, I'm assuming, as of now, based on what you're seeing in April being down sequentially, if things don’t get any better, that's kind of how we should potentially think about June quarter revenue?

Yes. I think it's pretty early to tell, but everything you said, I think, is true.

Okay, that’s fair. And then obviously work from home was very strong in the March quarter, have you seen like any evidence that the demand is kind of exhausting itself? Did we get the surge, and now we're on the back end of it? And secondly, I know there was a lot of supply chain constraints and inventory issues there. Maybe just talk about lead times that you’re seeing in work from home devices.

So, lead times are extended. There's no doubt about that. There has been some newfound confidence in the supply chain that supply will catch up to demand in late April, early May. But any way you slice it, lead times have been extended. They're a couple of weeks longer than normal. And there are some specific categories, for example, Chromebooks, where the demand is greatly outstripping supply. So there are still some spots where we're a little concerned about supply chain. But overall, we think it is going to get better in the quarter, especially as the quarter goes along.

Okay. And maybe one last one for me, Tom. On the bad debt expense and commentary around that, obviously, you have a very healthy balance sheet, good to be net cash right now. But I just wanted you to expand on those comments a little bit. Talk about how you're looking to your AR, particularly on the SMB customer base. Do you think that you're going to need to reserve more? Just any sort of ballpark in helping us quantify how large that could be, acknowledging there's a lot of uncertainty, but just walk us through how you’re thinking about it.

Yes, so a lot of this is based upon, frankly, direct discussions we've had with some of our customers. We do have customers who saw their revenues go to zero, and they would tell us, hey, we're working on it. We're going to pay it. But obviously, there is some doubt around the ability to pay by some of those customers. So this gets back to really, how long does this go, and what's the liquidity profile of many of these companies? If we think things are going to open back up tomorrow, that's one thing. If this goes on through the summer, you're going to have a pretty different profile. In terms of what we did, I think we were pretty prudent. We did a detailed analysis customer-by-customer of what we thought the exposures were, and that's how we arrived at our numbers. It's a disciplined, not precise, but it's a rigid process that we went through to get there. And we did what we think is appropriate, and we've had reviews on it. And that's kind of where we're at.

Okay, so the $2.8 million is kind of the max impact that you're expecting? Or you’re thinking that it's potentially worse from there?

I think it's okay. But just like everything else, how long does this go on, right? Because it's going to be much different if it goes on for one month versus nine months. And we’re making estimates of this just like every other part of the business.

Makes sense. I said the last one would be the last, but I want to ask how this impacts the competitive landscape. How are your suppliers and distributors reacting? This is a significant potential structural change for the industry, so please share what you are observing.

So I'll tell you how we approach. I mean I said in my prepared remarks, we have had customers come to us and say, hey, can you work with us? We're going through a crunch. In turn, we have gone to partners and said, we can't do this all on our own. You guys got to pitch in and help. And that has been quite an effective process. So I think I used the term neutralize. And I think that's kind of where we're at. In terms of the competitiveness, I'll give you my thoughts, and then Tom can kick in here. I suspect that relative to some of the smaller competitors, we're in a better position to weather this storm. And I think as we go through these things, it should create opportunities for us. But I don't know. Tom?

No, I totally agree. As you know, in a market like this, there always is opportunity. And we think that, in particular, with our balance sheet, we're well positioned. We’re also have partnered closely with our suppliers, and it really is a partnership in every sense of the word, and they have really stepped up and helped us with the extended terms and cash discounts. So that's been a big advantage.

Okay, very helpful color. Thank you very much.

Thank you, Adam.

Thanks, Adam.

Our next question comes from Anthony Lebiedzinski with Sidoti and Company.

Good afternoon. Thank you for taking the question. So, I was just wondering results if you could perhaps parse out the trend that you saw before and after the COVID-19 outbreak? I know you mentioned that the March was strong, but if you could just maybe just touch on how January, February was in just the high-level overview and then how March was? That would be great.

Yes, I think that Anthony, we had a pretty nice January. Some stuff we'll win from the end of the year. March was pretty light. I mean February was pretty light. And that as people start migrating with these new initiatives to work from home, we had a very strong March.

Got it. Okay. That’s very helpful. So, in terms of the uncertainty related to COVID-19, which areas of the business do you feel have the most uncertainty? It would be great if you could provide some insight on whether it's by vertical markets or segments, whatever you think is most relevant. I'm interested in where you see the most concern and where there might be potential opportunities.

Sure, well, thanks Anthony. We’re seeing really a lot of concern in the very small business arena. Clearly, there's a percentage of small businesses that are having a significant challenge. When you get above a certain size, to us, it appears to be much better. So we're in the medium to large in Enterprise. I think there's a lot more strength there. We also, vertically speaking, of course, healthcare is very strong. Many trends driving that, telemedicine, for example, the deregulatory environment there. Everything's sort of opening up in healthcare has been very strong for us. Education, of course, is strong. We think education will come on as the care that kicks in and the stimulus continues to drive growth. We think there'll be additional opportunity in education. So that's an area of strength. And I think overall, as customers work through this transformation, they're going to look at different business very differently and that may mean different opportunities. For example, it may mean for them to really reevaluate the way that they consume and use technology. And there is an opportunity for us in all of that.

Got it. That’s very helpful. And you mentioned that you have had an increase in your headcount, so just wondering if you could perhaps expand on that.

Yes, so going into the quarter, we had a strong services business and a strong demand in our PIDC and that we have been investing in some of our technological-selling initiatives. So that's kind of where most of the headcount came from. And there's a little bit in sales headcount in SMB.

That’s right. Anthony, a lot of specialization added in the quarter. And as Tim mentioned, in our TIDC, demand has surged. You can imagine if you're a company that was forced to do a layoff or a furlough, perhaps you're interested in repurposing technology, perhaps you’re interested in outfitting technology and all of that requires life cycle services, so that business for us, we’re really seeing a spike in demand there.

Got it. Lastly, regarding capital allocation, you have repurchased some shares. How should we view potential additional buybacks and what is your current interest in possible acquisitions? This might not be immediate, but there could be opportunities compared to your competitors, so I'd like to hear your thoughts on that. Thank you.

Yes, so I will talk about the buybacks a little bit, then maybe I will let Tom discuss his thoughts on the acquisition front. I think in terms of the buyback, we'll continue to be optimistic, I think. But I suspect we're going to be a little more tempered until we see how we think all of this plays out. So we'll be probably trying to do something, but we're going to be cautious.

Okay.

And then overall our capital allocation and the way that we view acquisitions will be very measured. We think, clearly, there'll be opportunities. We're open to opportunities in a consolidating market. The opportunities would really have to provide a solution or real benefit, perhaps a tuck-in opportunity that we don't currently have but could use. We're always open to that. But given this environment we are going to be very cautious.

Understood. Okay, thank you very much. Best of luck.

Thank you.

Thanks, Anthony.

And I am not showing any further question at this time. I would like to turn the call back over to Tim.

Thanks, Kevin. So, I would like to thank all of our customers, vendor partners and shareholders for their continued support and our dedicated coworkers for their efforts. I'd also like to thank those of you listening to our call this afternoon. Your time and interest in Connection are appreciated. Have a great evening.

Ladies and gentlemen, this concludes today’s presentation. You may now disconnect. And have a wonderful day.