Good afternoon, and welcome to the Third Quarter 2021 Connection Earnings Conference Call. My name is Laurie, 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 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, operator, and good afternoon, everyone. I will now read our safe harbor 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 the 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, 2020, 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, and therefore, you should not rely on these forward-looking statements as representing views as of any date subsequent to today. During the 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 third quarter 2021 comparisons are being made against the third quarter of 2020. 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 at www.connection.com. 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 2021 Conference Call. I'll begin this afternoon with an overview of our third quarter results, highlights of our performance and then share our updated thoughts on the balance of the year. Tom will walk us through a more detailed look at our financials and our capital allocation strategy. We're excited to announce record Q3 revenue and gross profit for both our Enterprise and our Business Solutions segment. These results demonstrate the continued execution of our business strategy to connect our customers with technology that enhances growth, elevate productivity and empowers innovation. A number of factors combined to improve our results, including strong performance in our manufacturing and healthcare vertical markets, along with growth in mobility, desktops, displays, storage and services. These results were driven by the continued trends of work from anywhere and the need for services and security. On a consolidated basis, Q3 organic revenue grew by 15.1% compared to last year's third quarter. Looking at our segments, Business Solutions grew 21.8%, the Enterprise segment grew 19.2%, while the Public Sector segment declined 1.1%. In Q3, demand was again greater than supply, and lead times extended in several areas. Our team continued to leverage our capabilities and scale to navigate the ongoing supply constraints on behalf of our customers. However, the supply chain has yet to recover to the point that it can consistently fulfill demand on a timely basis. In fact, our backlog has increased once again to record levels. We anticipate some of these challenges will persist for the balance of the year and into 2022. We're continuing to work with our partners and customers on a daily basis to manage these issues. In addition, a number of our customers are…

Thanks, Tim. SG&A was $93.4 million this quarter, an increase of 7.6% from $86.8 million a year ago. As a percentage of net sales, this represented a decrease of 86 basis points year-over-year. The year-over-year Q3 increase in SG&A was primarily driven by an increase in variable compensation and increases in marketing costs. Q3 operating income was $27.3 million, up 29.7% this quarter from $21.1 million a year ago. Our Q3 effective tax rate was 26.7%, up from 19.6% in the same period a year ago. As you may recall, in the prior year quarter, we recorded some onetime cash bonus that favorably affected our tax rate. Net income for the quarter was $20 million, an increase of 18.4% from $16.9 million a year ago. Diluted earnings per share was $0.76, an increase of 18.1% from the prior year period. Our trailing 12-month adjusted earnings before income taxes, depreciation and amortization, or adjusted EBITDA, was $102.4 million compared to $99.3 million a year ago. Cash flow from operations for the first nine months of 2021 was $8.8 million versus $46.3 million for the same period a year ago. In the year ago quarter, we generated significant cash as business activity dropped off and partners extended terms. Cash flow from operations for the first nine months was driven by a decrease in accounts receivable as DSO improved by nine days since December. As we stated earlier, customers are placing orders in advance to mitigate the risk of product shortages, which has resulted in a higher-than-normal inventory levels, negatively affecting our cash flow. A decrease in payables also negatively impacted cash flow from operations for the first nine months of 2021. Our net cash used in investing activities of $5.6 million in the first nine months of 2021 was primarily the result of equipment purchases and IT initiatives, offset by proceeds from life insurance. The company used $9.2 million of cash for financing activities during the first nine months, consisting primarily of the Q1 payment of our 2020 special dividend. We expect to exit 2021 with approximately 10% growth. Based on our confidence in the business and our desire return cash to our shareholders, we are announcing that our Board of Directors has approved a special dividend of $1 per share payable on December 3 to shareholders of record on November '18. Our strong balance sheet allows us to pay this dividend while maintaining the ability to continue to grow the business. Let me remind you, we also have $12.7 million remaining for stock repurchases under our existing stock repurchase program. I will now turn the call back over to Tim to discuss current market trends.

Thanks, Tom. I want to take a few moments to review some of the highlights in our business. In Q3, Connection continued to experience significant demand in products and solutions that enable our customers to be productive from anywhere. We expect this trend will continue into the first half of 2022. In addition, continued growth across our vertical markets. Manufacturing saw revenue growth of 24% year-over-year and 7% sequentially compared to Q2 2021 as manufacturers look to augment the available workforce, automate and invest in new technologies to address both short-term and long-term workforce challenges stemming from the COVID-19 and workforce skills shortages. Healthcare experienced revenue growth of 10% year-over-year as a result of organizations expanding and securing infrastructure to support a surge in employee remote access and telemedicine activity as well as improving the patient and provider experience. Our Technology Solutions Group saw strong demand and growth for managed services, cybersecurity and network transformation services. Our services business grew more than 23% year-over-year. In addition, we achieved Microsoft Azure expert managed service provider certification. As an Azure expert in MSP, we offer customer access to in-demand hyperscale cloud solutions and resources. Connection has demonstrated industry-leading technical capabilities and offers end-to-end support across Azure cloud environments through our Microsoft Center of Excellence. Looking at the balance of 2021, and assuming that supply chain constraints don't further deteriorate, we believe we can deliver long-term growth rates that are 300 basis points above the IT industry. We are focused on helping our customers enable their post-COVID hybrid workforce, accelerate their digital transformation and empower their innovation. We'll now entertain your questions. Operator?

Thank you. [Operator Instructions]. We have a question from Adam Tindle of Raymond James.

Hi, this is Catherine on for Adam. And let me add my congratulations to your results. Tim, you talked about backlog and lean times continuing to grow. Could you dive into the composition of this backlog? And is it more concentration in a product category or consumer vertical? And taking that a step further, even though manufacturing and health were up strong double-digits year-over-year. Was demand limited by supply in these areas?

Well, thanks, Catherine. So there's a lot to cover there. When we think about our backlog, clearly, in the quarter, as you hear, we had significant growth in mobility. And so the backlog for devices is strong. But there's also additional backlog for net/com products, backlog for storage and some of the data center products. So the backlog -- while we expect some of that will be reduced in Q4, we really need to see that end-to-end supply chain improve to help our overall margins. But we're pretty confident that will happen. And so we think that we'll see a good margin recovery here in Q4 and continue to see good growth. When it comes to the manufacturing healthcare vertical. Yes, I'd say, overall, not just our business, certainly, throughout the competitive landscape, backlog and supply constraints has been a challenge. And we did see constraints pretty much across the board. Tom, what would you add to that?

No, I would just say the product mix probably had the biggest impact on our gross margins. So I think we said we were down 46 basis points. That is exclusively due to shifts in product mix. And in fact, as I mentioned in the call, if you look at the client base -- the client devices, we were actually able to improve margins there pretty reasonably well. So it's a little bit of softness in software. Client devices were better, but it is -- the totality of the mix is really what affected the margins.

Okay. That was very helpful. And Tom, on the margins on a go-forward basis, you said that they would moderate a little bit in client devices over time. And we can expect operational improvement in the second half of 2022?

Yes. So I think what you should see is probably a little bit more of a shift back towards a richer software mix and a richer data center mix. And notebooks and mobility comprise 40% of our revenue this quarter. I think it was an eight or nine point increase. So that should moderate, maybe not completely next quarter, but certainly over the next couple of quarters. And then in terms of the operational improvements, I think our G&A was 12.4% of revenues this quarter. That should also moderate a little as the revenues go up.

Perfect. Thank you.

Thank you Catherine.

And there are no further questions at this time. I will turn the call over back to the company for closing remarks.

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

And this concludes today's conference call. Thank you for participating. You may now disconnect.