Market Overview

PCM Reports Third Quarter Results

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Q3 Gross Profit Margin 14.9%

Sales of Services grew 8%

PCM, Inc. (NASDAQ:PCMI), a leading technology solutions
provider, today reported financial results for the third quarter of 2017.

Highlights (Q3 2017 compared to Q3 2016):

  • Net sales declined 7% to $545.5 million
  • Sales of services grew 8% to $40.2 million
  • Gross profit declined 2% to $81.3 million
  • Gross profit margin of 14.9%, up from 14.1%
  • Operating profit declined 87% to $1.4 million
  • EBITDA of $5.1 million; adjusted EBITDA of $11.6 million
  • Diluted loss per share of $0.07; adjusted earnings per share (EPS) of
    $0.34
  • Repurchased 869,287 shares at an average price of $13.04

Frank Khulusi, Chairman and CEO of PCM, Inc., commented, "We continue to
execute on our long-term strategy of transitioning the business to
higher value-added services and solutions, as evidenced by our cohesive
go-to-market message and strategy around cloud, security and
transformational consulting. Our focused investment in faster growing
segments of the IT market are resulting in gains in our services and
software sales, and we continue to align our resources into areas that
are important to our future, such as our new UK segment, which we
anticipate to be accretive to growth and earnings for fiscal 2018.

"Our overall third quarter revenues declined by 7% and led to lower
gross profit. Revenues were impacted in the quarter by the NCE business
non-consolidation, a reduction of $30.9 million, or 5%, and by two major
hurricanes, which we believe reduced revenue by at least 3%. I'm pleased
that gross margin expanded to a third quarter record of 14.9%, including
increased sales of services and advanced solutions, with an 8% increase
in sales of delivered services, which reflects our success in executing
to our long-term strategy."

Khulusi continued, "In the latter part of the third quarter we executed
cost reductions totaling nearly $12 million per year in lower growth
potential areas of our business in order to finance our continuing
investments in the areas that we believe are strategic and have a much
higher growth potential and in order to optimize our cost structure. We
continue to analyze further cost optimization opportunities. During the
quarter we also completed the services transition from our previous
Pakistani BPO service provider, Ovex Technologies, primarily to our
captive offshore operations. We expect long-term cost savings associated
with this transition."

Jay Miley, President of PCM, Inc., said, "I continue to remain committed
to our investments in our advanced solutions practice groups, which
contributed to the 8% increase in service revenues and 5% growth in
software. As Frank has mentioned, we have worked hard to optimize our
core businesses and cost structure through targeted initiatives that
should provide productivity improvements beginning in the fourth quarter
and continuing into 2018. Together with our investments in cloud
migration, security, managed services and software, the net result will
be a transformed business model that we expect will be primed for
long-term, profitable and sustainable growth."

Commenting on PCM's outlook, Khulusi concluded, "For the fourth quarter,
we forecast adjusted EPS in the range of $0.55-$0.61, which assumes
flattish revenue growth and gross margins between 14.25% and 14.75%.
This forecast reflects the fact that a large and profitable customer
rollout which occurred in Q4 2016 and was previously expected to reoccur
in Q4 2017 has shifted to the first quarter of 2018, as well as the loss
of a low profit public sector contract, which we were unwilling to rebid
at a loss. This forecast also reflects the non-consolidation of the NCE
in 2017 which we expect will continue to create a tough year over year
comparison in the fourth quarter. Looking ahead to 2018, we are
confident that our focus on cloud migration, security, managed services,
software and the fastest growing solutions and emerging technologies in
the IT market, positions us to grow faster than forecast for overall IT
spending levels, and our goal is to grow our bottom line faster than our
topline."

Results of Operations

Net Sales

The following table presents our net sales by segment for the periods
presented (dollars in thousands):

 
  Three Months Ended September 30,    
2017   2016
  Percentage of   Percentage of Percent
Net Sales Total Net Sales Net Sales Total Net Sales Dollar Change Change
Commercial $ 424,010 78 % $ 459,558 79 % $ (35,548 ) (8 )%
Public Sector 80,702 15 89,688 15 (8,986 ) (10 )
Canada 38,167 7 35,724 6 2,443 7
United Kingdom 2,737 2,737
Corporate & Other   (137 )     (33 )     (104 )

NM

(1)

Consolidated $ 545,479   100 % $ 584,937   100 % $ (39,458 ) (7 )

_______________

(1)   Not meaningful.
 

Consolidated net sales were $545.5 million in the three months ended
September 30, 2017 compared to $584.9 million in the three months ended
September 30, 2016, a decrease of $39.4 million, or 7%. As previously
announced, beginning in the first quarter of 2017 our financial results
do not consolidate the financial results of sales made under some
customer contracts we purchased in the En Pointe acquisition, which are
now held by a partner which qualifies for certification as a minority
and women owned business in accordance with customer supplier diversity
policies. We hold a 49% passive equity interest in this partner and we
have accounted for our investment in this partner using the equity
method of accounting beginning in the first quarter of 2017. We refer to
this entity as the non-controlled entity or NCE. Our consolidated net
sales for the three months ended September 30, 2017 do not include $30.9
million of net sales made under contracts held by the NCE. Further, our
consolidated net sales in the quarter were negatively impacted by
Hurricanes Harvey and Irma. Consolidated sales of services were $40.2
million in the three months ended September 30, 2017 compared to $37.2
million in the three months ended September 30, 2016, an increase of
$3.0 million, or 8%, and represented 7% and 6% of consolidated net sales
in the three months ended September 30, 2017 and 2016, respectively.

Commercial net sales were $424.0 million in the three months ended
September 30, 2017 compared to $459.6 million in the three months ended
September 30, 2016, a decrease of $35.6 million, or 8%, primarily due to
$30.9 million of net sales made under contracts now held by the NCE and
not consolidated in our Commercial net sales and the impact of
hurricanes in the quarter. Sales of services were $29.7 million in the
three months ended September 30, 2017 compared to $28.0 million in the
three months ended September 30, 2016, an increase of $1.7 million, or
6%, and represented 6% of Commercial net sales in each of the three
months ended September 30, 2017 and 2016, respectively.

Public Sector net sales were $80.7 million in the three months ended
September 30, 2017 compared to $89.7 million in the three months ended
September 30, 2016, a decrease of $9.0 million, or 10%. The decrease in
Public Sector net sales was primarily due to a $7.2 million increase in
products reported on a net basis. Net sales in our state and local
government and educational institution ("SLED") portion of our Public
Sector business decreased 13% and net sales in our federal business
declined 4% in each case primarily due to this shift in sales mix
towards products reported on a net basis. Sales of services in our
Public Sector segment were $2.7 million in the three months ended
September 30, 2017 compared to $3.1 million in the three months ended
September 30, 2016, a decrease of $0.4 million, or 14%, and represented
3% of Public Sector net sales in each of the three months ended
September 30, 2017 and 2016.

Canada net sales were $38.2 million in the three months ended September
30, 2017 compared to $35.7 million in the three months ended September
30, 2016, an increase of $2.5 million, or 7%, primarily related to
increased sales of services in our Canadian business units. Sales of
services were $7.8 million in the three months ended September 30, 2017
compared to $6.2 million in the three months ended September 30, 2016,
an increase of $1.6 million, or 27%, and represented 21% and 17% of
Canada net sales in the three months ended September 30, 2017 and 2016,
respectively.

Our United Kingdom segment, which officially launched in the second
quarter of 2017, generated net sales of approximately $2.7 million in
the three months ended September 30, 2017.

Gross Profit and Gross Profit Margin

Consolidated gross profit was $81.3 million in the three months ended
September 30, 2017 compared to $82.7 million in the three months ended
September 30, 2016, a decrease of $1.4 million, or 2%. Consolidated
gross profit margin increased to 14.9% in the three months ended
September 30, 2017 from 14.1% in the same period last year. The decrease
in consolidated gross profit was primarily due to the decrease in sales
as discussed above. The increase in consolidated gross profit margin was
primarily due to an increase in higher margin sales in each of our
segments, including the impact of the increased sales of services and
advanced solutions and increased vendor consideration as a percentage of
our net sales. Our consolidated gross profit margin also benefited from
the non-consolidation in 2017 of contracts now held by the NCE, as
discussed above, which have historically had lower margins.

Selling, General & Administrative Expenses

Consolidated SG&A expenses were $79.9 million in the three months ended
September 30, 2017 compared to $72.0 million in the three months ended
September 30, 2016, an increase of $7.9 million, or 11%. Consolidated
SG&A expenses as a percentage of net sales increased to 14.6% in the
three months ended September 30, 2017 from 12.3% in th

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