Participants

Samantha Smith; Investor Relations; PC Connection Inc

Timothy McGrath; President, Chief Executive Officer; PC Connection Inc

Thomas Baker; Senior Vice President, Treasurer, Chief Financial Officer; PC Connection Inc

Anthony Lebiedzinski; Analyst; Sidoti & Company

Presentation

Operator

Good afternoon and welcome to the fourth quarter, 2024 connection earnings conference call. My name is Josh and I will be the coordinator for today at this time. (Operator Instructions)
There will be a question-and-answer session as a reminder, this conference call is the property of connection and may not be recorded for 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.

Samantha Smith

Thanks 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 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 provision under the Private Securities Litigation Reform Act of 1,995.
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 factor section of the company's annual report on form 10-K for the year ended December 31, 2023 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. And 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, nongaap 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 at www.connection dotcom.
Please note that unless otherwise stated, all references to full year and fourth quarter, 2024 comparisons are being made against the year ended December 31, 2023, and the fourth quarter thereof.
Today's call is being webcast and will be available on connection's website. The earnings release will be available on the SEC website at www.sec.gov and in the investor relations section of our website, www.ir.connection.com.
I would now like to turn the call over to our host, Tim mcgrath, President and CEO Tim.

Timothy McGrath

Thank you, Samantha. Good afternoon, everyone. And thank you for joining us today for Connection's Q4 2024 conference call.
I'll begin this afternoon with an overview of our 2024 performance followed by our fourth quarter results. Tom will then walk us through a more detailed look at our financials for the full year revenue was $2.8 billion. A decrease of 1.7% compared to the prior year. While gross profit was $519.8 million. An increase of 1.6% gross margin was a record 18.6% growing 60 basis points.
Our SG&A was $422.3 million. An increase of 4% compared to the prior year. This increase was due to our investment in critical areas of our business which we will discuss in detail later in the call net income was 87.1 million. An increase of 4.6% compared to the prior year earnings per diluted share was $3.29 for 2024 compared to $3.15 in the prior year.
Now, let's discuss our Q4 performance consolidated net sales were $708.9 million an increase of 1.8% compared to the last year.
Gross profit was flat $129.8 million gross margins were down 30 basis points to 18.3% in Q4 compared to the prior year quarter. Primarily due to a shift in product mix.
Operating income in Q4 was $22.6 million. A decrease of 19% compared to Q4, 2023 operating income. As a percent of sales was 3.2% compared to 4% in net sales in the prior year quarter.
That income in Q4 was 20.7 million. A decrease of 12.9% compared to $23.8 million in the prior year quarter. In Q4, 2024 our diluted earnings per share was $0.78. A decrease of 12.8% from $0.90 in Q4 2023 last quarter. During our conference call, we noted that the recovery in it spending was taking longer than we anticipated.
This trend continued in Q4 which is reflected in our results. In Q4, we saw some evidence of a recovery year over year in select areas of our business.
We experienced notebook mobility and desktop revenue growth of 14% driven primarily by PC refresh initiatives by our customers revenue for advanced technologies continues to be challenged as customers wrestle with the timing of their AI deployment and data center refresh. Although our results for advanced technologies did not meet our expectations.
In Q4, we are cautiously optimistic about the future. As we've seen a marked increase in our pipeline of opportunities. We'll now look a little deeper into our segment performance in our business Solutions segment. Our Q4 net sales were 262 point 4,000,003 0.7% lower than a year ago as we experienced a 12% decrease in the sale of advanced technology products partially offset by an increase of 2% and endpoint devices.
Gross profit for the Business Solutions segment was $62.6 million. A decrease of 0.8% gross margin increased 70 basis points compared to the prior year quarter to 23.9%.
Our net sales and gross margins were favorably affected by customer mix and an increase in the mix of software recognized on a net basis in our public sector solutions. Business Q4 net sales were $143.7 million. 42.9% higher than a year ago. Sales to the federal government increased by $41.1 million. While sales to state and local government and educational institutions increased by $2 million.
Gross profit for the public sector segment was $22.2 million. An increase of 30.2% compared to Q4, 23 gross margin decreased by 150 basis points to 15.4% for the quarter compared to the prior year.
The revenue increase and margin decline resulted from a few large project rollouts in Q4, 2024 that were at lower than average margins in our enterprise solutions segment, Q4 net sales were 302 point 7,000,006 0.4% lower than a year ago as we experienced an increase of 3% in device sales offset by a 28% decrease in the sale of advanced technology.
Gross profit for the enterprise segment was 45,000,009 0.3% lower than the prior year quarter. Gross margin decreased by 50 basis points to 14.9% for the quarter. The margin decrease was a result of lower software license fees and product mix.
I'll now turn the call over to Tom to discuss additional financial highlights from our income statement, balance sheet and cash flow statement. Tom.

Thomas Baker

Thanks Tim in the fourth quarter. G&A increased by 5.2% over the prior year.
The increase in G&A was primarily due to investments and resources to strengthen our sales, technical sales and services capabilities on a percentage of sales basis D&A increased 49 basis points to 15.1% of net sales in the quarter. Compared to 14.6% in the prior year.
Interest income for Q4 amounted to $4.8 million compared to $4.1 million last year. An increase of 660,000 and our effective tax rate was 24.1% down from 25.8%.
That income for the quarter was $20.7 million. A decrease of 12.9% from $23.8 million and diluted earnings per share was $0.78. A decrease of 12.8%.
Our trailing 12 month adjusted earnings for interest, income taxes, depreciation and amortization or adjusted EBITDA was $118.9 million compared to $125.5 million a year ago. A decrease of 5% in the fourth quarter, we paid a $0.10 per share quarterly dividend and we repurchase shares having a total cost of $4.9 million at an average of $70.39 per share.
At the end of the year, we had $59.7 million remaining for stock repurchases under our existing stock repurchase program. Today, we announced that our board of directors has prepared a 50% increase in our quarterly dividend to $0.15 per share. The dividend is payable to shareholders of record on February 25th and payable on March 14th, 2025.
Cash flow generated from operations from year end in 2024 was $173.9 million. Our accounts receivable balance increased $6.5 million for the year ended 2024 and our DSO decreased to 72 days from 73 days for the same period. A year ago, cash from operations benefited from a reduction in inventory of $29.1 million for the year.
Our accounts payable balance increased $36.5 million for the year ended 2024. Largely due to timing of payments.
Cash used in investing activities of $115.3 million was the result of $358.3 million of investment purchases offset by $250.6 million of investment maturities. We use $25.2 million of cash for financing activities during the year, primarily for the payment of $10.5 million of dividends to shareholders and repurchases of $12.4 million of stock.
We ended Q4 with $442.6 million of cash equivalents and short term investments. When we're thinking about capital allocation, we remain committed to growing the business and have an on growing program focused on investing in organic opportunities in organic growth programs that Tim will expand upon later.
Furthermore, as announced above, we have increased our dividend by 50%. We anticipate evaluating our dividend program regularly and target a payout in the range of 15 to 20% of net income. During 2024 we significantly increased our repurchases of stock and we anticipate continuing to do so in a disciplined manner.
I will now turn the call back over to Tim to discuss current market trends.

Timothy McGrath

Thanks Tom. During 2024 market conditions remain challenging as customers continue to struggle with the timing and priority of their it investments.
As a result, overall, it spend was lower than expected in Q4 and for all of 2024. While we continue to see year over year growth in the device ecosystem including endpoint and related categories. Many customers have delayed investments in large advanced technology projects.
We do believe that budgets will free up to support those initiatives throughout 2025. In 2024 we made significant investments and improvements in our business and we are confident that will position us to be successful in 2025 and beyond, we've invested in a world class CRM system A I enabled workflow tools enhancement to our technical integration and distribution operations.
Perhaps more importantly, we've elevated our investment in key technical resources. These include solution, sales executives, pre and post sales, technical sales experts, engineering, personnel services, personnel, additional resources focused on Helix A I initiatives.
In 2025 we expect customers to invest in data center and infrastructure projects driven in part by A I and server consolidation as well as anticipated growth coming from the device refresh these trends in technology advancements are driving growth in a number of opportunities in our pipeline.
We believe that the strategic investments we have made will allow us to efficiently and effectively take advantage of this expected increase in demand and enable participation in many more larger scale opportunities.
Our investments have resulted in higher levels of SG&A and are a key component of our ongoing transformation.
There are other catalysts for growth in 2025 and we expect customers to focus on refreshing their networks, data management and security A I automation and hyper personalized marketing solutions will drive deployment at scale in 2025 A I remain the focus of investment. As many of our customers assess their A I strategies. We continue to strengthen our A I capabilities through connections, Helix initiatives.
We're excited to report advancements in our connection, Helix capabilities which continue to mature and excel with the A I sector in Q4. We continue to bolster our technical capabilities, developing a mature pipeline of A I opportunities and strengthening our alliances with key partner organizations within the A I ecosystem.
We are particularly proud to announce that we've been recognized with a first place award in the Naval Information Warfare Center.
Their challenge for the Atlantic palmetto tech bridges, secure, commercially based artificial intelligent environment was for real world naval applications.
This accolade serves not only as a recognition of connections, innovativeness but also affirms our deep understanding of A I technologies and the specific challenges our clients face.
As you can tell by the tone of our call, we're optimistic about our prospects in 2025. However, there are a number of macroeconomic events that could impact the timing of customer investment. These include recent developments with the A I landscape and the potential impact of tariffs for 2025. We're confident we can outperform the U SI T market rate of growth by 200 basis points.
We remain committed to stay at the forefront of the technology curve ensuring that our integrated solutions effectively meet the evolving needs of our customers. We believe that our focus and 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, elevate productivity and empower innovation.
We help our customers expertly navigate through a complex set of choices within the technology landscape.
We help calm the confusion of it for our customers. We know that in this complex world of technology change happens and expertise wins.
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.

Question and Answer Session

Operator

(Operator Instructions)
Anthony Lebiedzinski from Sidoti & Company.

Anthony Lebiedzinski

Good afternoon everyone and thank you for taking the questions. So first, just just curious, can you comment on the sales progression that you saw during the quarter? Ju just you again, I just wanted to get a better sense as to how the quarter trended, October through December. And so any early indication about, how Q1 has started? That would be great.

Thomas Baker

Yeah, so I think Anthony, October was probably a little bit better than we've seen in the last three years. November was markedly worse in terms of a percentage of sales that we've seen in the last three years in December was about the same. We didn't really see any budget flush, but, but November was pretty low. And then in terms of, what we're seeing going forward, I think for Q1 flat, maybe up very low, single digits on the top line is kind of what we're expecting and, that's kind of how things are looking right now.

Timothy McGrath

Yeah, thanks Anthony. I add that that, that tells kind of part of the story looking back. But if we continue to look forward, we are seeing a very large number of projects come into the funnel, our customers engaging us in a number of areas. And you know, we're confident that a number of those projects will be significant for us in 2025.

Anthony Lebiedzinski

That's very helpful color. And just to follow up in terms of tho those projects, I mean, are you seeing that as far as like w which vertical markets, can you speak of, I guess, you know, maybe just, just as far as talk about the opportunity that you see going forward as for which, which of your vertical markets do you, do you think it will have the most opportunity? And maybe conversely, which ones are you less bullish on?

Timothy McGrath

Well, thanks. So let me start with our subsidiaries and then we'll talk about vertical. So currently our large enterprise group has a large number of new projects, new customers in a lot of momentum going into 2025. So we're very optimistic about that. Our, our SMB group, our, our business solutions team, also their funnels are building but probably at a lower rate. And our public sector team, it is very much a large contract, large customer dependent, a few in the federal space and a few in the sled space when we think about the vertical markets that underpin a lot of that growth. Clearly, we're seeing a number of projects in the retail space. So we are looking at good growth there. A number of projects in health care really around the GPO S and the group purchasing organizations and a number of manufacturing projects are coming into play. So those would be kind of the leaders of our vertical market segment.

Anthony Lebiedzinski

Thank you for that Tim and then I guess, just to switch gears here as far as the SG&A so, it was up 4% in 2024 versus gross profit growth of 1.6%. So, as we look forward to 2025 you know, how should we think about expected expense growth versus what you think you can do as far as gross profit growth?

Thomas Baker

Well, as you know, said throughout the call to Anthony, I think Tim, in his remarks, we've invested a lot of money in people and, and you know, solution sellers and technical people and we're laying the infrastructure, we've invested in a lot of tools because we see this pipeline coming and we think we have to be ready to answer your, your question directly. I think we'll probably see three ish four ish percent SG&A growth over the next couple of quarters, year on year. Obviously, we're doing everything, we can to pull it back. But what you're seeing is just a real reallocation of resources here.

Timothy McGrath

And also I would, I would classiFY24 as a building year for Anthony, we invested in somewhat of a down market. So we have now a additional capability, additional capacity and many of the investments have already been made. So when we think about growth in 25 that SG&A growth, a lot of it will come from variable compensation.

Thomas Baker

Yeah. And the other thing I would add on Q4, specifically Anthony because, there, there was a bit of a Miss, there, we had a couple of, I would say 231 time items that probably cost us, $2.5 million to $3 million that will not repeat. And those were just kind of out of the blue.

Anthony Lebiedzinski

Okay. Well, thanks for clarifying that. That's, that's definitely very helpful call I get, I guess, last question for me before I pass on to others as far as can, can you speak to the expected impacts from tariffs that you may have to deal with? Just curious to get your thoughts on that.

Timothy McGrath

It's a great question. And as you know, our major suppliers have very complex supply chains and so it's really difficult to have any, any accuracy in our predictions.
The sort of the upside is it's a great opportunity to reach out and touch all of our customers. It's a great opportunity to engage them and have meaningful conversations about planning for their contingencies. You know, generally speaking, the majority of our suppliers manufacture their desktops in Mexico. Generally speaking, the majority of our suppliers have the majority of their notebook manufacturing in China and Vietnam and, and standing up a few other locations.
And then of course, display is a little more spread out, but also a lot of display coming out of China. So when you start to put all that together, it really depends on the specific product from the specific supplier at this specific time. So many of our suppliers are moving quickly to stand up alternatives to some of the tariff countries that said, still not really clear and it's not clear to our customers either, but we will work through this together.

Thomas Baker

Yeah. And the only other thing I'd add, the only other thing I'd add to that Anthony, we're going to work with customers to tailor programs to help optimize all of us through this. So I think, I think a lot's going to evolve over the next three to three weeks or so.

Anthony Lebiedzinski

All right. Well, thank you very much and best of luck. Okay. Thank you.

Operator

Thank you. I would not like to turn the call back over to Tim mcgrath for any closing remarks.

Thomas Baker

Well, thanks.

Timothy McGrath

Josh. 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 extraordinary dedication.
I'd also like to thank all of you listening to the call this afternoon. Your time and interest in connection are appreciated. Have a great evening.

Operator

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.