PC Mall Sales, Inc. Q1 2010 Earnings Call Transcript

PC Mall Sales, Inc. Q1 2010 Earnings Call Transcript
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PC Mall Sales, Inc. (MALL)

Q1 2010 Earnings Conference Call

May 6, 2010 4:30 PM ET


Frank Khulusi – Chairman, President and CEO

Brandon Laverne – CFO

Kristin Rogers – VP, Marketing


Brian Peterson – Raymond James & Associates

Chris Krueger – Northland Securities

Bill Dawkins – Dawson Dawkins Inc.



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Good day ladies and gentlemen and welcome to the first quarter 2009 PC Mall Incorporated earnings conference call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, today’s conference is being recorded for replay purposes.

On the call with us today are Frank Khulusi, Chairman, President and Chief Executive Officer; Brandon Laverne, Chief Financial Officer; and Kris Rogers, Executive Vice President.

At this time, I would like to refer to the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information, or expectations about the Company’s products or markets, or otherwise make statements about the future which statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from statements made. These risks and uncertainties are detailed in the Company’s filings with the Securities and Exchange Commission.

I would now like to turn the conference over to Mr. Frank Khulusi. Please proceed sir.

Frank Khulusi

Good afternoon. Welcome and thank you all for participating on this call with PC Mall. Today we will be discussing the company’s financial results for the first quarter of 2010. I am pleased that in the first quarter we returned to double digit year-over-year growth as the demand environment continues to improve.

Sequentially on a $47 million seasonal reduction in consolidated sales from Q4 2009, we achieved comparable levels of profitability despite having $0.3 million of severance payments in Q1 2010 resulting from our announced headcount reduction. Higher depreciation expense of $0.5 million on a year-over-year basis is the result of our investments in systems and infrastructure which we believe positions us better for the future. Our results in Q1 support our previously announced goal of achieving 1.5% to 2% non-GAAP operating profit margin by the fourth quarter of this year and we remain committed to that goal.

Net sales without our MacMall segment in Q1 2010 increased by 23% year-over-year. We believe this number may be more relevant as a comparison to certain industry competitors due to them not having a comparable segment or having a much smaller comparable segment as percentage of the overall sales. Sales in the MacMall segment declined primarily due to our intentional strategy shift to focus the MacMall brand on more profitable consumer segments such as small businesses and creative professionals. We believe this strategy has paid off well as evidenced by the operating profit for our MacMall segment in the first quarter increasing by 36% sequentially over Q4 2009 on a 39% decrease in sales over the same period. This is a considerable achievement given that the fourth quarter is typically our strongest quarter for the MacMall segment. Going forward as we continue to execute on this new strategy for our MacMall segment, we believe that the year over year comparisons from a top line perspective will improve as well.

Now I would like to turn the call over to Brandon Laverne, our CFO who will present the financial results in a bit detail. Brandon?

Brandon Laverne

Thanks, Franks. All comparisons I make will be against Q1 2009 unless otherwise noted. Net sales for Q1 2010 increased 12% to $289.9 million and gross profit increased 1% to $38 million. Gross margin was 13.1% compared to 14.5% last year but up sequentially from 12% in Q4 2009. Operating profit for Q1 2010 decreased 62% to $800,000 compared to operating profit of $2.1 million last year.

Our first quarter 2010 results include a $600,000 increase in cost due to an appreciation of the Canadian dollar relative to U.S. dollar, $0.5 million increase in depreciation expense reflecting our IT investments and system and infrastructure upgrades and $300,000 increase in employee severance cost due to our previously announced employee reductions earlier this quarter.

Prior year first quarter results also included a onetime $600,000 benefit related to our Canadian subsidy that we discussed last year. The total of these items is $2 million.

Adjusted EBITDA was $3.1 million for Q1 2010. Net income for the first quarter was $200,000 compared to $1 million last year. Diluted earnings per share for the first quarter was $0.01 compared to diluted EPS of $0.08 last year. Our tax rate in Q1 2010 was 41% versus 40% in Q1 last year.

I will now speak a bit about our Q1 2010 segment results. Net sales for our SMB segment increased 21% to $108 million primarily due to an improvement in the demand environment and an increase in revenues from our new sales office located in Chicago. SMB gross profit increased by 19% to $13.4 million primarily due to the increased sales. SMB gross margin decreased by 20 basis points to 12.4% primarily due to competitive pricing environment and aggressive our SMB market share growth strategy. However, SMB gross margin was up 80 basis points sequentially from Q4 2009.

SMB operating profit increased by 17% to $6.4 million primarily due to the increased gross profit and $300,000 reduction in bad debt expense, offset by $1.3 million increase in personnel cost. These personnel cost increase primarily due to a onetime $600,000 benefit related to the Canadian government labor subsidy program in Q1 2009 that did not recur, a $400,000 impact of a higher Canadian exchange rate, investment in our Chicago office and our addition of account executives in that facility and the increase in variable commission and bonus expenses due to the increased SMB gross profit.

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