Good afternoon, and welcome to the Third Quarter Connections Earnings Conference Call. My name is James, and I will be the 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 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, operator, and good afternoon, everyone. I will now read our cautionary note regarding forward-looking statements. Any statements or references made during the conference call that are not statements of historical facts 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 provision 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, 2022, 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 other than as required by law, even if estimates change. Therefore, you should not rely on these forward-looking statements as representing management's views as of any date subsequent to today. During this call, non-GAAP financial measures will be discussed. A reconciliation between any non-GAAP financial measure discussed and its most directly comparable GAAP measure is available in today's earnings release and on the company's website. Please note that unless otherwise stated, all references to third quarter 2023 comparisons are being made against the third quarter of 2022. Today's call is being webcast and will be available on Connection's website. The earnings release will be available on the SEC website and in the Investor Relations section of our website. I would now like to turn the call over to our host, Tim McGrath, President and CEO. Tim?

Thank you, Samantha. Good afternoon, everyone, and thank you for joining us today for Connection's Q3 2023 conference call. I'll begin this afternoon with an overview of our third quarter results and highlights of our performance. Tom will then walk us through a more detailed look at our Q3 financials. We executed well against our strategic priorities while improving our mix of advanced technologies and integrated solutions. Record gross margins and cash flow, combined with our improved operational efficiencies enable us to deliver record earnings per share of $0.97 during the third quarter. In broad terms, what we are experiencing is a continued shift in the mix of our product as endpoint devices continue to be a lower priority for our customers. In fact, sales of endpoint devices declined in the mid-teens in the quarter. This shift in customer demand aligns with our strategic initiatives to drive growth in integrated technology solutions and services across each of our segments. Advanced technologies, which include server storage, networking, software, and services grew 6% compared to the prior year and resulted in meaningful margin expansion in the quarter. We continue to believe that gross profit is a better measurement of our performance for this reason. The impact of these factors resulted in a decline of gross profit by 3.5%, while our net revenue declined by 10.6%. Now let's discuss our Q3 performance. Consolidated net sales declined by 10.6% to $693.1 million in Q3 compared to Q3 2022. Our customers continue to prioritize investments in advanced technologies though it was not enough to offset the decrease in demand for endpoint devices. Gross profit declined 3.5% to $131.9 million. However, gross margins were up 142 basis points to a record 19% in Q3 compared to Q3 2022. This increase in gross margin reflects the growth and the shift in mix of our advanced technology solutions, which generally have higher margins than our endpoint devices. Operating income in Q3 was $32 million, an increase of $300,000. Operating income as a percentage of sales was a record 4.6% compared to 4.1% of net sales in the prior year quarter. Net income in Q3 was a record $25.6 million, an increase of 10.3% compared to $23.2 million in the prior year quarter. In Q3 2023, our diluted earnings per share was a record $0.97, an increase of 10.4% from $0.88 in Q3 2022. We'll now take a little deeper look at our segment performance. In our Business Solutions segment, our Q3 net sales were $269 million, a decrease of 14.8% compared to $315.8 million a year ago. The decline in revenue is largely a result of the reduction in demand for endpoint devices. Gross profit for the Business Solutions segment was $62.7 million, a decrease of 1% from a year ago. Gross margin increased 326 basis points to 23.3% in the quarter compared to the prior year. This increase was the result of our successful execution in growing sales of integrated solutions and advanced technologies, which includes services and software that are recorded on a net basis. In our Public Sector Solutions business, Q3 net sales were $147.5 million, a decrease of 4.4% compared to $154.4 million a year ago. Sales of endpoint devices were down 15%, offset by an increase of 31% in sales of Advanced Technology Solutions category, driven by networking, software, and services. Sales to the federal government increased by 9.5% compared to the prior year quarter. Sales to state and local government and education institutions decreased by 7% compared to the prior year. Increases in higher ed and state and local were offset by decreases in the K-12 market. Gross profit for the Public Sector segment was $25 million, which was consistent with the prior year. Gross margin increased by 67 basis points to a record 16.9% in the quarter. The increase in gross margin percentage was due to a higher mix of software and services, which are recorded on a net basis, in addition to growth in sales of networking, software, servers, and services. In our Enterprise Solutions segment, Q3 net sales were $276.6 million, a decrease of 9.5% compared to $305.5 million a year ago. The decline in revenues was due primarily to a decrease in endpoint device sales compared to the prior year. Gross profit for the Enterprise segment was $44.2 million, a decrease of 8.3% compared to the prior year quarter. Gross margin increased by 21 basis points to a record 16%. Our enterprise customers continue to prioritize software and services recorded on a net basis. 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 decreased $5.1 million compared to the prior year quarter. The decrease in SG&A was in part the result of the realization of the ongoing cost reduction initiatives we have undertaken this year. On a percentage of sales basis, SG&A increased 89 basis points to 14.4% of net sales in the quarter compared to 13.5% in the prior year quarter, primarily driven by lower revenues. Q3 operating income was $32 million, an increase of 0.9% this quarter from $31.7 million a year ago. Our effective tax rate was 26.3%, down from 27.7% due to changes in state tax rates. Net income for the quarter was a record $25.6 million, an increase of 10.3% from $23.2 million last year. Diluted earnings per share was a record $0.97, an increase of 10.4% from the prior year period. Our trailing 12-month adjusted earnings before income taxes, depreciation, and amortization or adjusted EBITDA was $127.9 million compared to $145.5 million a year ago, a decrease of 12%. In terms of returning cash to shareholders, we paid an $0.08 per share quarterly dividend in September. As of September 30, 2023, we had $32.3 million remaining for stock repurchases under our existing stock repurchase program. Today, we announced that our Board of Directors has declared a quarterly dividend of $0.08 per share payable to shareholders of record on November 14, 2023, and payable on December 1st, 2023. Cash flow generated from operations for the first nine months of 2023 was $185.7 million, an improvement of $170 million from the same period a year ago. The increase in cash flow from operations reflects a decrease in accounts receivable and inventory and an increase in accounts payable. Our accounts receivable balance decreased $20.9 million for the first nine months of 2023. Our DSO increased to 71 days from 70 days for the same period a year results, primarily a function of netted product sales. Our inventory balance decreased $56.4 million for the first nine months of 2023. Improvement in the supply chain has enabled us to complete and deliver orders for which we were holding a portion of the inventory at year-end. Our accounts payable increased $31.6 million for the first nine months of 2023. Our net cash used in investing activities was $56.1 million for the first nine months of 2023 was primarily the result of $48.7 million of investment purchases and $7.4 million of IT equipment purchases. The company used $12 million of cash for financing activities during the first nine months of 2023, consisting primarily of payments of $6.3 million of dividends to shareholders and $5.4 million of stock repurchases. We ended Q3 with $240.5 million of cash and cash equivalents. I will now turn the call over to Tim to discuss current market trends.

Thanks, Tom. We expect that the trends in demand that we have seen year-to-date will continue in Q4 with this challenging economic backdrop. Looking forward to 2024, there are a number of secular factors that should drive significant growth in several of our IT solutions and product categories. The promise of genuine improvement in productivity and efficiencies driven by artificial intelligence will positively impact the demand in several areas of our business. AI solutions will require additional infrastructure, storage, compute, and security. We're confident that solutions developed for AI will require investments across the IT spectrum. We also should experience an endpoint device resurgence. This will be driven by a number of factors, including the need to upgrade operating systems, the demand for AI, which will require more powerful PCs, the evolution of collaboration tools, improved security as well as impending recycles for devices. Security continues to be a high priority as our customers need to protect their IT environment. This will continue to drive demand for hardware, software, and services that will be required to properly secure the IT environment for the foreseeable future. To address these trends, we are taking the following actions. For AI, although not a current driver of revenue, we have developed a modern infrastructure center of excellence. This will help us focus on go-to-market and sales enablement solutions with a specific focus on integrated systems to support the growth driven by AI, machine learning, data analytics, high-performance computing, and edge computing. We recognize the transformative potential of artificial intelligence and its pivotal role in shaping the future of industries and customer experiences. To realize that potential, we have a team dedicated to working with our partners, focused on driving their AI solutions and developing complementary value-added services. By making this commitment, we need to bridge the existing gaps within the market and create offerings ensuring that our customers receive unparalleled AI-driven solutions that will harness its power for successful customer innovation. For endpoint devices, we're working with our customers to assess their current environment and identify upgrade opportunities to take advantage of new hardware and software that will facilitate improved security, enhanced collaboration, and a platform to run AI applications. We have service offerings to assess, design, deploy, and secure systems and operating systems, which will promote adoption for customers. For security, we're continuing to develop our security catalog of offerings, including four key areas. Modern firewall with analytics and security integration, automated network fabric provisioning, network virtualization, and managed network. We believe we are well positioned to help our customers through these transformational changes when IT spending and the related demand improves. Our customers know they can count on Connection to help them standardize, simplify, and optimize their end-to-end IT environment and deliver their business outcomes through technology. We believe our focus in our business strategy remains well aligned with the shifting dynamics of how customers deploy, utilize, and consume technology. We continue to connect our customers with technology that enhances growth, elevates productivity, and empowers innovation. We help our customers expertly navigate through a complex set of choices within the technology landscape. We help to clarify the confusion of IT for our customers. Our growth rates for the U.S. IT market continue to be challenging in the near term. We're encouraged by the number of new customers we're acquiring, and we believe we can outperform the market and take market share. On that note, I'd like to take a moment to thank our extremely dedicated and valued employees for their continued and extraordinary efforts during this rapidly changing environment. We'll now entertain your questions. Operator?

Thank you. At this time, we will conduct the question-and-answer session. Our first question comes from Anthony Lebiedzinski from Sidoti.

Good afternoon gentlemen. Thank you for taking the questions. So nice job with gross margin expansion here. So given what you're seeing right now in the business and assuming no major changes to the mix of products and services. Would you say that you would expect at least near term, gross margins to be kind of sustainable from here?

I would say, Anthony, a couple of things. If we just bridge last year to this year on our gross margins, about half of the improvement was just due to the netted product versus gross product. The other half was driven by product mix into more profitable categories. So I think all else being equal, we can probably hold about where we are. The thing that I would think about going forward, at some point, the device side of the business is going to come back. And when that happens, I think you will see some pressure on the margins.

Understood. Okay. And I think Tim, you mentioned that you expect next year that you'll see an uptick in endpoint devices. Do you think it will be early in the year or kind of later? What's your best guess at this point?

Well, thanks, Anthony. There's a lot of promise around AI and technology in general for 2024. And that said, we don't know when that upgrade cycle, that refresh cycle really begins. A lot of speculation that will be in the second half. We are having more conversations with our customers and relevant conversations about future projects. Our RFPs are up in number. Our technical engagements are up, but we really don't know when that demand recovers. And from our suppliers, I think the consensus is the second half.

Okay, that's very helpful. Tim, I wanted to follow up on a point you made at the end of your prepared remarks. You mentioned being encouraged by the number of new customers. Could you provide more details on that, like where you're gaining share from? Is this happening across the board, or is it more concentrated in business solutions or enterprise? I would appreciate any additional details you can share.

Thanks, Anthony. So it is indeed across the board. We have an acquisition engine for each of our three main sales subsidiaries, and we really are doing very well with that. On top of that, we also are doing well with acquisitions across each of our four vertical markets. So we'll start with enterprise in the large account sector, winning several key new logos there that will convert into legitimate revenue streams later on. It takes some of the larger customers some time to ramp up. When we look at our SMB business, we're also adding new customers. The SMB business has been under a little more pressure as you know, from the competitive landscape. We're pretty excited about that. And finally, in the public sector space, on the federal side, it's really about contract vehicles. And on the state local K-12 and higher ed, it's about winning those new customers as well. So I'd say across the board, our acquisition engines are working really well. What we need now is that IT spend and that demand to return.

Got it. Okay. And then my last question before I pass it on to others. So you have a very sizable cash and investment position now approaching $300 million. So what are your plans to do with all that cash?

So when we think about capital allocation and rewarding shareholders, we are doing a quarterly dividend, as you know. We'll look at the appropriate level of share buybacks. We still have over $32 million approved by the Board for share buybacks. And finally, probably most importantly, we continue to pursue tuck-in acquisitions in the solutions arena that would be accretive, that would have a common culture, and most importantly, that would augment or extend some of our solutions capabilities. Nothing immediate to announce, but we do continue to look and we're very much committed toward that end.

Well, thank you very much and best of luck.

Thank you.

Thanks Anthony.

Appreciate the color.

Thank you for standing by. Once again, our next question comes from Jake Norrison from Raymond James.

Hello?

How you doing Jake?

How you guys doing?

Good.

So can you guys just touch on the health of the pipeline and sentiment from your sales force currently as December is typically the big corporate budget flush month. What are you anticipating there? And further, can you just touch on the real-time update on SMB and Enterprise? Are you seeing any other green shoots there other than sort of on the quoting and inquiry side of the business, as you just touched on? Thanks.

I'll start, and then Tom can add his thoughts. When we consider the typical budget flush in Q4, our forecast indicates that Q4 might be slightly lower than Q3, likely showing some low single-digit declines. We are still observing our customers facing challenges due to the current economic environment, which includes factors like inflation, interest rates, and geopolitical issues. As a result, they are very cautious in the short term. However, they remain optimistic about the long-term outlook. As I mentioned in my prepared remarks, the potential of technology to enhance our customers' productivity and efficiency is quite significant.

Yes. I mean, I think Tim hit the nail on the head in terms of how Q4 is going to look. We are seeing spots where it looks like customers are exploring perhaps doing a little bit more next year, but it hasn't gotten to the point where we're going to be highly, highly confident that we're going to have a double-digit growth rate next year.

Then in conclusion, on the green shoots part of the question. We are seeing many of our customers evaluate new software operating systems and the potential of layering AI on top of that. Certainly, with Windows 11 and customers piloting co-pilots, it is an encouraging part of the business. And there is activity and real movement there, but nothing that we can point to as an absolute driver of demand at this point.

Perfect. Thank you.

Thank you, Jake.

I'm showing no further questions at this time. I would now like to turn it back to Tim McGrath for closing remarks.

Thanks, James. I'd like to thank all of our customers, vendor partners, and shareholders for their continued support. And, once again, our coworkers for their efforts and for their extraordinary dedication. I'd also like to thank those of you listening to the call this afternoon. Your time and interest in Connection are appreciated. Have a great evening.

Thank you for participating in today's conference. This does conclude the program. You may now disconnect.