Good afternoon and welcome to the First Quarter 2023 Connection Earnings Conference Call. At this time, all participants are in 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.

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 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 views 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, non-GAAP financial measures will be discussed. A reconciliation between any non-GAAP financial measures discussed and its most directly comparable GAAP measure 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 2023 comparisons are being made against the first 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 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 Q1 2023 Conference Call. I'll begin this afternoon with an overview of our first quarter results and highlights of our performance. Tom will then walk us through a more detailed look at our Q1 financials. Over the last several weeks, you've seen the earnings announcement in our industry, along with our preliminary results we released two weeks ago. We experienced a continuation of a weak economic backdrop in the first quarter, leading our customers to exercise greater caution and selectivity with their short-term IT investment plans. Sales of endpoint devices were lower than anticipated across most of our customer base. While we saw good overall growth in our Solutions business, including software, cloud, security and networking, it was not enough to offset the contraction in demand in endpoint devices. This resulted in our first quarter performance being below our expectations. Endpoint devices, which include notebooks, desktop, displays and accessories were down 16.6%. The first quarter is historically our lowest quarter of the year, and this quarter's results are being compared to a record first quarter for us a year-ago. We believe that our overall performance should improve sequentially and demand for endpoint devices will gradually improve in the back half of the year. Advanced technologies, which include servers, storage, networking, software and services grew 15.6% as our customers prioritize our investments in projects that improve productivity, reduce costs and that were essential to their ongoing business needs. While growth rates for the U.S. IT market are expected to be challenging in the near-term, we believe that we can outperform the market and continue to take market share. Due in part to the strength of our long-term customer relationships. Our customer base has remained loyal. In…

Thanks, Tim. SG&A increased 174 basis points to 14.2% of net sales in the quarter compared to 12.5% in the prior year quarter, primarily driven by lower revenues. On a dollar basis, SG&A increased $5.1 million compared to the prior year quarter. Investment in resources to strengthen our sales, technical sales, information technology and service organizations were up slightly over 10% year-over-year. We reduced the spending in general and administrative functions by over 10%. Looking forward, we intend to continue to invest in technical resources while focusing on improving our efficiency in light of what we perceive to be a softer near-term business environment. For Q2, we anticipate a reduction in our SG&A as a percentage of sales by approximately 100 basis points. The first quarter of 2023 results included $897,000 of restructuring and other related costs associated with internal cost reduction activities. In the first quarter of 2023, we launched an initiative intended to reduce our cost structure by $8 million to $10 million annually. The inflammation [ph] of these cost reduction initiatives are on track. We are planning to take additional cost reduction measures to further reduce our operating expenses for the remainder of 2023. Q1 operating income was $18.1 million, down 39.9% this quarter from $30.1 million a year-ago. Our effective tax rate was 26.8%, down from 27.7% in the same period a year-ago. Net income for the quarter was $14.2 million, a decrease of 34.8% from $21.8 million a year-ago. Diluted earnings per share was $0.54, a decrease of 34.9% from the prior year period. Diluted earnings per share adjusted for restructuring and other charges was $0.56, a decrease of 31.9%, from the prior year period. Our trailing 12-month adjusted earnings before income taxes, depreciation and amortization or adjusted EBITDA was $130 million compared to $129.1…

Thanks, Tom. As we move forward through the balance of 2023, you can be confident that our focus is where it has always been on our customers. In our experience, market inflections driven by economic uncertainty tend to create a rich environment to not only win new accounts but also increase our share with our existing customer base. We have aligned our sales and marketing strategies accordingly. We believe that demand for endpoint devices will continue to be challenged as they were in Q1. Our customers continue to tell us that they are not canceling projects. However, their spending decisions are more targeted and tightly managed. We do expect our customers will continue to shift their priorities toward hybrid data center, cybersecurity and cloud transformation, which should partially offset the weakness we expect to see in the endpoint market. Services and advanced technology should be a growth driver for Connection as clients will look to us to help supplement their continued needs for technical resources and solutions. As we navigate through the remainder of 2023, we'll remain focused on improving our operational efficiencies, managing our costs and scaling our expenses appropriately. Remember that great companies can take market share in any economic environment. I'd like to take a moment to thank our valued employees for their continued effort and extraordinary dedication in this rapidly changing environment. We'll now entertain your questions. Operator?

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Anthony Lebiedzinski from Sidoti. Your line is now open.

Hey, good afternoon and thank you for taking the questions. So first, in terms of your device sales, do you have an expectation as to when this piece of the business bottoms off for you?

Anthony, good to hear from you, thanks for the question. We've seen much like yourself, we've seen all of the estimates. And I would -- we certainly hope that the worst is behind us. We did see in terms of linearity, we did have a better March than January or February. As I mentioned, devices were down 16.6% in the quarter. And we are hoping for sequential improvement throughout the year. That said, we really don't expect device to recover until Q3 or perhaps Q4.

That's helpful color. And as far as just overall demand environment, so you mentioned -- thanks for giving us color about the monthly progression of your demand now. As we now get into early May, I mean just curious as to how April was. If you could comment on that.

So April looks a lot like Q1. We don't -- it's early to give you a great outlook or to differentiate the quarter. We're still optimistic that we will have sequential growth Q2 over Q1. But April, I'd say was very consistent with what we saw in Q1 and in March.

Okay. Thanks for that, Tim. And then just switching gears to the public sector. So within that, the federal government was a nice bright spot for sure. Were there any one-off deals? Or just curious about the sustainability of business through the federal government?

Yes. So we are confident that we'll continue to sustain the momentum we've had with the federal government. We have won a few large contracts, and we're going to continue to pursue those vigorously. And so obviously, we all have the same challenges in this economic backdrop. But again, I think Fed will continue to show nice progress for us and sequential growth.

Got you. Okay. All right. And then lastly for me before I turn it over to the next caller. Just as far as the share buyback, how much do you guys have left on the share repurchase authorization?

I think we said it's like $34 million left, Anthony. And you can see from what we did in the quarter when the market pulled back a little, we try to be a little on the opportunistic side, and I expect that we'll probably continue to do that going forward.

All right. Okay, go ahead, please.

Anthony, I want to say in terms of capital allocation though, we're going to be diligent toward that end. You heard us announce the dividend, but we continue to believe buying back stock is a great opportunity in this environment.

Sounds good. Thank you. Best of luck.

Thank you.

Thanks Anthony.

Thank you. [Operator Instructions]. Our next question comes from Jake Norrison of Raymond James. Your line is now open.

Hey, thanks for taking my question. Just firstly, if you could go back and touch on the sort of public segment. Can you just provide any color on how budgets are holding up that state in federal levels? And what should we expect for sort of seasonality not at the federal level?

So thanks, Jake. It's a good question. Given this market environment, there's a little uncertainty around that. Clearly, the state, local and education side of the business has been under more pressure. We do expect that the expiring ECF funds that expires, excuse me, in June of this year, make me give us a little more momentum for Q2. So we're working that actively. And as I mentioned, our federal contracts, we expect will continue to roll out throughout Q2 and into Q3. So we're fairly confident there that there is a lot of pressure on the SLED side. Tom?

Yes. I think kind of we talked about April a little bit. And just from a shipment perspective, year-over-year, the SLED business did appear to hold up fairly well on a relative basis. So I'm a little hopeful going into their typical SLED busy season that things will continue to hold together.

Okay. Perfect. And then last one for me, just wanted to double click on capital allocation real quick. In terms of M&A, what are you looking for there? What sort of characteristics or technologies are you talking on -- just more color on that would be helpful.

Yes, so we are starting to see valuations come down, albeit it's a good start. But clearly, when it comes to M&A, we remain very focused on tuck-in acquisitions that give us good solutions, additional capability. So areas would include, from our perspective, cloud, security and, of course, that advanced technology focused space.

Perfect, thanks so much.

Thank you, Jake.

Thank you. At this time, I would like to turn it back to Tim McGrath, President and Chief Executive Officer for closing remarks.

Thanks, Gerald. 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 those of you listening to our call this afternoon. Your time and interest in Connection are appreciated. Have a great evening.

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