Good afternoon. And welcome to the Third Quarter 2024 Connection Earnings Conference Call. My name is Antoine, and I will be a coordinator for today. At this time, our participants are in listen-only mode. Following their 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, we have 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 statement. 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 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, 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, 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 at www.connection.com. Please note that unless otherwise stated, all references to third quarter 2024 comparisons are being made against the third quarter of 2023. 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.ir.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 2024 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 are in a period of rapid innovation. Technology advancements are happening at an unprecedented pace. The promise of digital transformation enabled by hybrid AI has never been greater. We are confident that as demand recovers, we have the right strategy to help our customers navigate through this challenging IT environment. Connection achieved record net income in earnings per share of $1.02 for the third quarter of 2024. In addition, we experienced moderate growth in gross profit in each of our business segments while making strategic investments to better position ourselves for the evolving technology landscape and what lies ahead for our industry. We saw some evidence of recovery year-over-year in select areas of our business in Q3. We experienced notebook, mobility and desktop revenue growth of 17% driven by PC refresh initiatives by our customers. Approximately 25% of those PCs were AI enabled. However, demand for advanced technologies has been negatively affected by our customers’ ongoing struggle with their IT roadmaps in the face of AI uncertainty. This resulted in a recovery that has been delayed longer than we anticipated. We believe our customers may continue to maintain this conservative approach for their IT spending for the balance of the year. In terms of advanced technology, our software category, which includes cloud and cybersecurity, had strong growth of 11%. This increase was offset by a 32% decline in networking solutions. This decrease in networking was in part the result of a tough compare against results in the prior year,…

Thanks, Tim. SG&A increased by 5.6% compared to the prior year quarter. The increase in SG&A was primarily due to an increase in investments and resources to strengthen our sales, technical sales and service capabilities. In addition, we spent an incremental $1.5 million on targeted technical marketing events for our customers. On a percentage of sales basis, SG&A increased 14 basis points to 14.5% of net sales in the quarter, compared to 14.4% in the prior year quarter. Interest income for Q3 amounted to $4.9 million, compared to $2.7 million last year, an increase of $2.2 million. Included in other income is $1.7 million of income from a lease settlement received during the quarter. Our effective tax rate was 26% down from 26.3%. Net income for the quarter was $27.1 million, an increase of 5.7% from $25.6 million last year and diluted earnings per share was $1.02, an increase of 5.4%. Adjusted diluted earnings per share remained flat at $0.97. Our trailing 12-month adjusted earnings for interest, income taxes, depreciation and amortization or adjusted EBITDA was $123.6 million, compared to $121.3 million a year ago, an increase of 2%. In terms of returning tax to shareholders, we paid a $0.10 per share quarterly dividend in August and we repurchased shares having an aggregate purchase price of $3.9 million in the quarter at an average price of $66.02 per share. As of September 30, 2024, we had $64.6 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 $0.10 per share. The dividend is payable to shareholders of record on November 12, 2024 and payable on November 29, 2024. Cash flow generated from operations for the first nine months of 2024 was $148.6 million. Our accounts…

Thanks, Tom. We have customized our go-to-market approach for each of our verticals, resulting in consistent growth across our key market sectors. While large deals continue to contribute to accelerating this momentum, we attribute our continued success to the strength of our vertical focus, which underpins our sustained performance and strong execution throughout all levels of the business. Healthcare revenue increased 20% year-over-year as our healthcare customers continue to prioritize software and system upgrades. Also, we gave us success with large client electronic health record system refreshes. Retail revenue increased 23% year-over-year as a number of our large retail customers began their Device Refresh. This strong revenue growth in retail in both our Business Solutions and Enterprise Solutions group was the result of multiple large customer deployments of endpoint solutions. Manufacturing revenue increased 1% year-over-year. Software, endpoint device, networking and cybersecurity continue to be a heavy focus for manufacturers as they look for productivity gains while keeping their businesses secure. We believe that many of our manufacturing customers are facing the need to modernize their facilities and technology infrastructure in support of the integration of intelligent digital technologies in manufacturing and in industrial processes. And many manufacturers continue to be targets of cybersecurity threats. Financial Services increased 5% year-over-year in part to address cybersecurity, flexibility and interoperability between IT systems. We continue to make good progress in our Solutions business driven by ongoing investments in technology, talent and tools. This has resulted in strong growth in cloud, cybersecurity and our managed services business. AI remains a focus of investment as many of our customers assess their AI strategies. We continue to strengthen our AI capabilities through the Connection Helix initiative. The Connection Helix Center for Applied AI and Robotics is foundational to our AI capabilities and fostering innovation for our…

Thank you. [Operator Instructions] Our first question comes from Adam Tindle from Raymond James. Please go ahead.

Okay. Thank you. Good afternoon. Tim, I just wanted to start. I noticed that gross margin was down 30 basis points and understand that PC mix may be driving some of that, but wanted to ask on the competitive environment as well. One of your main competitors this morning cited an increasingly competitive environment. So, just wondering what you’re seeing from that standpoint in the quarter and how you’re expecting that to evolve going forward?

Well, thanks, Adam. I would say really our gross margin pressure was the result of large project rollouts for big contract wins that we had in particular with the Federal Government and in Enterprise. Those were the main drivers. However, no doubt about it, in this economic backdrop, customers are cautious. There are really -- they’ve been very concerned about what that IT budget is going to look like next year, how they adopt AI and where that fits into the budget and that has made the market more competitive as customers evaluate their options.

Got it. Okay. And Tom, Tim had mentioned that the Device Refresh is going to continue to mix down and put pressure on the gross margin line, which makes sense. Just wondering how you’re thinking about the impact to operating margin and ability to grow earnings. Any initiatives that you’re considering to sort of offset that gross margin pressure and how we should think about operating margin and ability to grow earnings? Thanks.

Yeah. So I think what you’re seeing, Adam, is a few things. One, if we get a pickup in the device, the endpoint device market, which I think pretty much everyone agrees is going to happen in 2025, we’ll see some margin rate compression, but we should see overall gross profit growth. So we’ll grow the dollars. Frankly, kind of the struggle we had this quarter, I wouldn’t say, it’s necessarily a struggle, but our operating, our SG&A was up. And we’ve been investing, we’ve had the opportunity to hire some people and we’ve been taking advantage of it. We’re trying to improve our technical sales capabilities and those things just take a little bit of time to manifest themselves and to improve profit. But we’re really trying to get set up for next year. But I think that’s kind of where we’re at.

Got it. Okay. One last one, Tim, just kind of near-term as we think about Q4 trends. I think you mentioned that the advanced tech segment has been negatively impacted by AI pausing and you’re expecting a delayed recovery that’s going to continue for 2024. I know that category tends to be important for budget flush in Q4. Just how you’re thinking about the trends in Q4 and expectations for budget flush based on the pipeline that you’re seeing. And Tom, any parameters that you might want to give us from a modeling standpoint for Q4 just so we are on the same page? Thanks.

Well, thanks. That is a great question. There’s been a lot of speculation around what might happen after November 5th in the election. But if we look at kind of where the quarter has started, it feels an awful lot like Q3. And still, we’re optimistic that in 2025, advanced technologies will be a real driver of growth. We believe that on-prem technologies, edge technologies will be a driver of growth. But we’re just not seeing that for Q4. Q4, everything has kind of remained in that, I think you used the term AI fog. That AI fog is out there in our customer environment. We do have, as you know, the drivers in 2025, including the Windows 10 expiration. But for the balance of the year, you know, we think it’s a lot like what we’ve been seeing.

Yeah. I think, Adam, I went back and looked from 2019 to today, at the sequential growth, Q3 to Q4 and you can’t really discern any patterns. What I would tell you is kind of the way Q4 has started out, it’s probably going to be a little bit on the weaker side. That’s the way it’s looking. In terms of modeling, I think we should see, I wouldn’t expect to see a huge change in the gross margin rate. SG&A should be down a little because we kind of, we’re going to pull out some of those one-time events that we had this quarter. So I think other than that, it’s kind of going to look like Q3, like Tim said.

Got it. That’s helpful. Thank you.

Thank you, Adam.

Thank you. One moment for our next question. Our next question comes from Anthony Lebiedzinski from Sidoti & Co. Please go ahead.

Good morning. Actually, good afternoon, sorry. And thanks for taking the questions. So I guess just to follow up on the previous comment about the strategic investments in terms of AI readiness, technical sales and customer engagement. I guess when would it be reasonable for you guys to start to see the benefits of that spending? Would it be Q1 or later? I mean, just any sort of ballpark estimate would be helpful just for us to gauge as far as when we could expect tangible benefits from that?

Well, thanks, Anthony. So I think there are a couple of different components that really make up that and so I do think that in 2025, you’ll see continued uptick in the AI device side of the ecosystem. Again, a lot of that just driven by the aging install base and Windows 10 and the need to refresh. But we do think that AI at the edge, at the PC level, is going to be a continued driver. However, the AI applications and the proof-of-concepts and a lot of the on-prem AI implementations, we think are pushed more to the back half of the year. There are longer term engagements. They require a lot of study, a lot of proof-of-concept and customers are still cautious as they really look at what the ROIs will be. So the irony is probably the greatest promise for technology in our industry that we’ve seen since the advent of the internet, yet the timing of that, I think, does remain a little delayed.

I think the investments we’ve made in technical sellers, technical salespeople and just salespeople that we’ve hired over the past year, those are starting to take hold now. I mean, we have a tremendous amount of activity going on in terms of trying to land new logos and expand our wallet share. It just takes a little bit of time. So to answer your question directly, hopefully Q2 we’ll start seeing some of this stuff come through. Q1’s usually a pretty light quarter to begin with. But I think that’s probably Q2, Q3, I think, is where we’ll start seeing some tangible results.

Gotcha. Okay. Well, that’s good to hear. And as far as -- I mean, so looking at the quarter, obviously, even with the tough macro environment, your sales were up in two out of the three segments. In terms of just the Business Solutions, which was down, how should we think about the recovery for that segment? You think it will be delayed till next year? Like, just -- what are your thoughts just on Business Solutions?

Yeah. Again, a good question, Anthony. So we’re seeing our Enterprise customers really start to plan for the future. So we’re seeing an uptick in RFPs, in requests for quotations. So the Enterprise business is really starting to move. We’re also seeing some continued growth in the Federal space. But in our SMB space, our customers have been more cautious. And we talked about endpoint upgrades and the reality is a lot of Windows upgrades are being done on current devices rather than new devices and we didn’t expect that, not to the level that we’re seeing that. And that SMB customer, I think, is more dependent on the macroeconomic backdrop, very concerned about the outcome of the election and just cautious overall. So we don’t see that SMB customer coming back with the speed or the velocity that we think that Enterprise customer will be coming on.

Yeah. And…

Gotcha. Sorry.

… the revenue was down in SMB, but the gross profit was up. I mean…

Yeah.

… that’s pretty impressive, actually.

Yes. Indeed. And that’s actually just to actually follow up on the SMB gross margin. So this is even with a bit of, I guess, headwind as far as the, I think, you had a 4% increase in endpoint devices and Business Solutions. So, yeah, so what drove that gross margin percentage increase? Is it just a favorable mix shift or what else is behind the scenes there?

I had a couple of large customers that didn’t buy a lot and we had cloud sales, cloud software.

Yeah. Cloud software’s fine.

Gotcha. Okay. That’s helpful. Okay. And then just touching based on the balance sheet, you guys made further progress with your inventory, and obviously, that’s a nice -- has a nice impact on cash flows. I mean, do you think you’re tapped out with inventory reductions or do you think you could make some further progress there?

I think we’re probably about as low as we’re going to go for the time being. Because once the device ecosystem starts picking up, that’s going to probably put $20 million of inventory in play pretty quickly. So I think maybe make a little more headway with our receivables, although our DSO is probably as good as it’s been in three years or four years. So that part of the business is actually kind of clicking pretty well for us.

But I’ll add, Anthony, that we do have a big focus on operational efficiencies and we’re using AI to drive efficiencies internally and very focused on getting better there. So there should be some continuous improvement, as you would expect with our business.

Gotcha. Right. And it’s helpful to hear the comment about your AR. So despite the uncertainties in the macro environment, sounds like, generally speaking, people are paying their bills on time. So that’s good to hear. So thanks very much and best of luck.

Thank you.

Thank you, Anthony.

Thank you. I’m showing no further questions at this time. I will turn it over to Tim McGrath for closing remarks.

Well, thank you, Antoine. And I’d like to thank all of our customers, vendor partners and shareholders for their continued support, and once again, our co-workers for their efforts and extraordinary dedication. I’d also like to thank those of you who are 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.