Connection CEO McGrath: Hurricanes, Decline In Back-End Vendor Support Hurt Q3 Revenues

Product delivery delays caused by hurricanes Harvey and Irma cost Connection about 3 percent of its third-quarter revenue, CEO Tim McGrath told Wall Street analysts Thursday.

"We're driving hard to make sure we're recovered from that," McGrath said. "We didn't lose any of those orders, I'm proud to say. Many of our customers are still in the process of rebuilding or dealing with water damage. We have a large hospital that's dealing with a lot of water damage. As they get ready, we're certainly ready to shift."

McGrath added that the IT services heavyweight, No. 22 on the CRN Solution Provider 500, expects most of those missed sales to be recouped during the fourth quarter.

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Connection increased sales in its historically low-margin enterprise business, notching growth of 5 percent during the quarter, while its SMB-focused Business Solutions segment grew by 3 percent and its public-sector practice saw a 1 percent decline to $171 million.

McGrath partly attributed the SMB and government revenues to a lack of back-end channel program funding. Connection, which partners with many of the IT industry's largest suppliers, is a top Microsoft, Lenovo Dell EMC, HPE and VMware solution provider.

Asked whether the Merrimack, N.H.-based company anticipated any changes to vendor incentives moving forward, McGrath expressed confidence that the channel would see a "return to regular, seasonal back-end rates."

"It's a little difficult to predict," McGrath said. "I think our supplier base knows our value proposition is strong. Our customer relationships are strong. Pretty much across the board, they are working with us to help us improve this environment. In some cases, those programs shifted, and we have to shift toward that newer technology or newer model. In other cases, it's more about cloud-based subscriptions."

Part of those program shifts, he later added, stem from the "hyper-competitive" sales environment that exists among solution providers – one particularly driven by cloud-related market disruption. As customers evaluate their options, competing bidders begin to enter the equation.

"When you see consumption models shifting, there's a real opportunity for us. But in that change, there is often a pause," McGrath said. "If you look at infrastructure growth, we're likely helping our customers evaluate hybrid solutions, and off-prem or an on-prem solution. All of that takes time. There's a lot of change, a lot of shifting there. In addition to that, some of our delivery methods are changing. We're offering customers new and innovative ways to receive product. That also takes time."

Connection noted gains in its software practice, particularly around cloud, virtualization and security, as well as promising growth in the manufacturing, retail and financial spaces. All three of those vertical businesses experienced low double-digit growth rates during the quarter, with manufacturing leading the way at $90 million to 100 million in revenue.

Health care did not enjoy the same sort of positive momentum, holding nearly steady at 1 percent growth. McGrath said that while it reverses a trend the company endured last quarter, the White House's support for bill aimed at repealing and replacing the Affordable Care Act has many CIOs trying to figure out what they could mean for their businesses.

Within the Business Solutions segment, Connection saw desktop sales increase 29 percent, while mobility jumped up 11 percent and security also enjoyed "strong" growth. The company's federal government revenue improved by 3 percent, but those gains were offset by losses around its SLED dealings.

Overall, Connection collected revenues of $729.2 million for the third fiscal quarter ended Sept. 30, up 3 percent from last year's third-quarter mark of $708.5 million. That beat Seeking Alpha's projections by $1.39 million, or 2.9 percent.

Net income for the quarter was $13.1 million, or $0.49 diluted earnings per share, down 3.5 percent from $13.6 million, or $0.51 diluted per share, compared to the year-ago quarter. On a non-GAAP basis, Connection also reported net income of $13.1 million, or $0.49 per share, down 8 percent from $14.2 million, or $0.53 per share. Those numbers were in line with Seeking Alpha's third-quarter projections.

Connection's stock price has dropped $2.04 (7%) to $27.16 since the company released its third-quarter earnings estimates on Oct. 17.