Good afternoon, ladies and gentlemen, and welcome to the Fourth Quarter 2014 PC Connection Inc Earnings Conference Call. My name is Jonathan, and I will be the coordinator for today. At this time, all participants are in listen only-mode. Following the prepared remarks, there will be a question-and-session. As a reminder, this conference call is the property of PC Connection and may not be recorded or rebroadcasted without specific permission from the company. On the call today is Tim McGrath, President and Chief Executive Officer; and Joe Driscoll, Chief Financial Officer. Any statements or references made during the conference call that are not statements of historical facts, may be deemed to be forward-looking statements. Various remarks that management may make about the company's future expectations, plans, prospects, constitute forward-looking statements for the purposes of the Safe Harbor provisions under Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those disclosed in the Risk Factors section of the company's Annual Report on Form 10-K for the year ended December 31, 2013, 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 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 of any date subsequent to today. If you have not already seen the press release, you can contact Janice Rush at (603) 683-2322, and she will e-mail you a copy. Today's call is being webcast, and both the press release and webcast will be available at the Investor Media center page at PC Connection website. I would now like to turn the call over to Tim McGrath. Please proceed sir.

Thank you. Good afternoon, everyone, and thank you for joining us today to review the company’s fourth quarter and full-year financial results. We are pleased with our strong fourth quarter and full-year performance. We had another solid revenue quarter with 9% growth. For the full-year 2014, revenue growth was 11%. 2014 was a great year for the industry and for PC Connection. Our industry had a tailwind from the expiration of Windows XP and from the robust overall spending by corporate and educational customers. We benefited from those trends, and we were able to grow significantly faster than the overall market by taking market share from the competition and the VAR community. We grew earnings faster than sales, as net income and diluted earnings per share increased by 21% and 22% in the quarter respectively. For the full-year, earnings per share grew from $1.35 in 2013 to $1.61 in 2014. We continue to execute our core growth strategies to deliver a broad spectrum of IT solutions. Our goal is to increase market share, invest in higher margin technical solution capabilities, enhance operational efficiencies and maximize growth opportunities in targeted vertical markets. As we review our results, please that unless otherwise stated, all of our fourth quarter 2014 comparisons are being made against the fourth quarter of 2013. Consolidated net sales increased year-over-year by $52 million or 9% to $631 million. Gross profit dollars in the quarter increased by 10% to $83 million. Gross margin was slightly higher than the prior year at 13.2%. We had strong performance in software, storage, servers and networking, which are higher margin categories. Net income for the quarter increased by 21% to $11.9 million, and diluted earnings per share increased from $0.37 to $0.45. Earnings grew faster than the rate of sales growth, due to the leveraging of our fixed cost over higher net sales. Operating income as a percent of sales increased to 3.2% in Q4 versus 2.8% in the prior year. And now, I’ll turn the call over to Joe Driscoll to discuss the results of our business segments and financial highlights. Joe?

Thanks, Tim. Sales for our SMB segment, which serves small to medium-sized businesses, increased by 9.2% to $262 million, led by 23% growth in notebooks, the largest SMB category. Gross profit dollars for SMB increased by 8.6%. However, gross margin decreased by 9 basis points to 15.2%. The decrease in gross margin was due to increased demand for lower margin products, such as notebooks. Sales by our Large Account segment increased by 3.5% to $226 million, led by 32% sales growth in storage, and 22% sales growth in software. Total gross profit dollars grew by 6% and gross margin increased from 11.4% to 11.6%. Our overall commercial sales, which is the combination of our SMB and Large Account segments, grew by 6.5%. Quarterly sales in the Public Sector segment, which includes sales to government and education customers, increased by 19%. Sales to state and local governments and education customers, increased by 18%, whereas sales to the federal government increased by 19%. Gross profit dollars for the Public Sector segment increased by 20%, and gross margin increased from 11.7% to 11.9% in Q4. The increase in margin is attributable to the significant increase in sales of networking products during the quarter. Our SG&A expense increased by $3.7 million. However, SG&A as a percentage of net sales improved by 26 basis points. Variable SG&A accounted for a significant part of the increase in dollars due to higher net sales. Fixed SG&A increased due to planned additions to our sales teams and additions to our technical resources, including engineers focused on data center and cloud solutions. In 2015, we will be moving into a new distribution center in Wilmington, Ohio. This facility will be approximately 270,000 square feet and will replace two smaller facilities we currently operate in Wilmington. The new DC will…

Thanks, Joe. The overall IT market continues to undergo significant changes. In 2014, both HP and Symantec announced plans to break into two companies and Lenovo completed the acquisition of IBM’s X86 server business. These changes along with other new disruptive industry dynamics may result in changes or possibly reductions in certain partner funding programs. In order to maximize channel incentives and our overall profitability, we need to continue to transform our business and invest in people and emerging technologies, which will increase our SG&A expenses. In addition, as Joe mentioned earlier, we will have the additional SG&A of just over $1 million in 2015 from the transition to our new distribution and advanced configuration center. As we look out to 2015, we believe that sales growth will return to levels that are consistent with industry expectations. We experienced significant growth in 2014 from several areas that are not likely to continue to grow at the same rate in 2015, including the expiration of Windows XP, the increase in education business from the implementation of the common core standards, and an increase in corporate project roll-outs. In addition to these factors, our customers in all sales segments continue to research new disruptive technologies for their data centers and are also evaluating cloud alternatives, which has resulted in lengthening of purchasing decisions in some complex solution categories. Our expectations are that revenues will grow in the low-single-digit range in 2015. Industry experts are now predicting overall IT spending growth in the 3% range and we will be comparing against the 11% growth that we achieved in 2014. Given this revenue outlook, we expect that earnings per share growth will be in the mid-single-digit range in 2015 before the additional costs related to the new distribution and advanced configuration center. As changes in the markets continue to unfold, we feel it’s critical that we manage our growth appropriately, while keeping our balance sheet strong. We believe that our balanced portfolio of customers, suppliers, products and solutions has helped us to deliver solid results. Our goal is to continue to deliver sustained and consistent performance. We’ll now entertain your questions. Operator?

Certainly. [Operator Instructions] Our first question comes from the line of Prabhakar Gowrisankaran from Canaccord. Your question please.

Congrats on the strong quarter. Just a couple of questions. One, on the growth rates that you expect, the low-single-digits. Are you expecting to grow faster than the 3%? And other thing, you had commented on those lengthening sales cycle in some segments. If you can add a little bit more color, that would be great.

: So it’s more of a complex solution set. The discussions are more advanced than they often take a longer time. So yes, our growth rates are really consistent with what the industry is saying right now.

Yes. And Prab, really the first six months of 2015 is really going to be what we think a challenging growth period, just because of the big comps we had. Windows XP really impacted the first six months of 2014. So, as we look out to 2015, it’s really the first six months that we see the need to overcome the big comps from last year. But we still feel very good about the business. It’s just the comps we’re going up against.

Okay. And the second question I had was just in terms of the notebook benefit that you saw in SMB. Is that like your end-budget flash thing [ph] or do you expect it to continue - are you seeing a recovery there? And then you saw a pretty strong net income in public sector. What do you see the trends there?

So thanks. So it’s interesting. We are seeing a lot of strength in our notebook category. Clearly many of our customers are moving into what we consider more of the third platform technologies; mobile, social, cloud, big data and security. And that is driving growth. But we want to underscore that a lot of the notebook and some of the desktop growth that happened in 2014, especially in the first two quarters, was about the Windows XP expiration. So that’s the component that we don’t think will repeat. We do think there is still some - a good opportunity out there. There is some pent-up project demand. The finals look okay, but we’re not going to see the growth rates in notebooks that we saw last year.

And then in terms of networking, and you specifically asked for the public sector. We had several excellent projects in Q4, really spread across the public sector. There were some education customers as well, some government accounts. And we expect networking to continue to be a good category for us in the future.

Okay, great. Thanks a lot.

Thank you.

Thank you. Our next question comes from the line of Jeff Martin from ROTH Capital Partners. Your question please.

Thanks. Hi guys.

Hello.

Hi Jeff.

Could you give us an update on the progress you’re making in advanced technologies. I know your goal is to get to 50% of revenue from those types of sales. An update would be helpful.

Thanks. So we’re excited about the direction we’re going in. We’re making a number of changes internally and a number of investments, but we also saw in Q4, a nice little spike up in the advanced technology sector, consistent with, more of the data center type discussions that we’ve been having. So Q4 was our best quarter to-date in advanced technologies. And that did jump up a little bit from Q2 and Q3, because again in those quarters, we had the Windows XP kind of velocity business.

Okay. And then what’s your current view on acquisitions? Are you always looking - is there anything interesting out there, specific areas that would help maybe further you along in the advanced technologies? What do you think about acquisition these days?

Well, Jeff, that’s an interesting question. To begin with, we feel that we have the right team, the right strategies in place. So we don’t feel the need to do anything. However, we’re open to opportunities. We think it is a consolidating market. And clearly, we’re open to opportunities that would be accretive, opportunities that would give us round out a solution set that we might need, or a tuck-in would certainly be interesting to us.

Okay. And then as you’re looking out further this year, are there specific areas where you expect either a pick-up in demand or continuation of demand? Just kind of walking through your various categories would be helpful.

So Jeff, that is a terrific question, because clearly there is going to be an opportunity. And if you look out at the drivers of growth, I mean we’re seeing an opportunity with software, seeing an opportunity with security. And clearly with the Windows Server expiration, there is an opportunity. But that is against a backdrop of a myriad of alternatives, lot of disruptive technologies, workloads being moved off premise to the cloud. So there is an opportunity, but we’re going to have to go execute against our strategy and make sure that we’re guiding our customers through these complex and changing times.

Okay. And then you mentioned two things that are going to affect SG&A this year. One being the data center. The other - or the distribution center, sorry. The other being the investment in emerging technologies. Are you able to quantify the later and give some timing on the investments there?

So you should see a similar kind of ramp in - when we say investments in emerging technologies, that’s really hiring people. Really hiring more engineers who can help us sell more advanced solutions. So that’s the primary item that’s going to impact our SG&A. So we’re looking at these people all the time. So we don’t have a specific dollar amount other than we’re constantly looking to recruit new engineers who can help us in that area. But it will be several million dollars worth of SG&A in 2015, if you want a round number.

Okay. You’ve been making those investments over the past couple of years as well though. Is that right?

That’s correct. It’s really a continuation what we’ve been doing in the last several years where we’re adding a couple of million dollars worth of additional headcount expense to sort of the technical areas.

:

Okay. And then final question on the competition in the VAR community. You’re taking share. Is there anything specifically going on within the VAR community or the competition that’s leading to that share or is it just execution of new VAR [ph]?

What we’re seeing there, we’re just looking at growth rates and exiting the year about 11% growth rate with the growth rates that we’re seeing from some of the public competitors and what we’re seeing with some of the VAR community, we think in most cases we’re growing a little faster than some of them. So we know we’re taking share there.

We’re growing faster than the IT market. And really, a lot of the smaller players in our space really don’t have the end-to-end solutions that we have. So we can sell everything from books and printers on one end, all the way up through data center solutions on the more complex end. So what we’re finding is that the smaller players out there really don’t have that end-to-end capability and customers are demanding that more and more from their suppliers.

Great. Thanks for taking my questions guy.

Good talking to you.

Thank you. Our next question comes from the line of Rich Kugele from Needham & Company. Your question please.

Thank you. Good afternoon. Just two quick ones for me. I guess first - and you somewhat addressed it just in the last question. Clearly you have been gaining some share, but beyond that the ability to grow beyond the market growth rate, are there adjacencies that you’re trying to target beyond what has been traction in the most recent quarters? And then secondly in a different vein, on the server side. If we do see a pickup in Windows Server 2003 refresh, does that typically pull through other products with it, and is there any type of rule of thumb that you generally have for how it pulls through versus a PC where you maybe only get like a case or something? Is there a pull-through ratio for other higher end components like software and networking and storage?

Yes. So we do think - I’ll answer that in reverse order. I think there is some pretty strong ecosystem around the server software and there are a number of components that could easily pull into that, or it could go the other direction and process could be moved off premise. So in addition to making the decision to really upgrade your server software, you’re probably going to expand that and just look at what is the optimum data center strategy. And that would include a myriad of products and a number of alternatives that range from - as I mentioned from cloud to virtualization to a more of an infrastructure upgrade that would be server storage and networking along with the software. So you have big ecosystem, but also a big question mark. We’ve got to go and deliver and execute against that opportunity.

And then in terms of other areas of growth. Yes, I think that’s your first question?

Yes.

Internally, we’re focused on four vertical markets that were driving growth in 2015; healthcare vertical, which is - healthcare now is over $400 million business for us; the financial and banking vertical; the retail vertical, with all the changes that are happening there with the internet of things and the energy vertical. So if you consider for our public sector business to be a subsidiary, in addition to that, we’re very focused on driving growth in these four verticals. And then finally, the other big focus area is getting better utilization from the investments that we have made in the MDM and our analytic and predictive software capabilities. We’ve made big investments there, and we’re really confident that’s going to drive good return and some dividends for us.

Okay. That’s helpful. Thank you.

Thank you.

Thank you. Our next question comes from the line of Adam Tindle from Raymond James. Your question please.

Hi guys, thanks. This is Adam in for Brian. Just wanted to touch on margins coming into 2015. We talk a lot about big deceleration in PCs and you mentioned strong software, server, storage and networking. Can you talk about gross margin change in the 2015 and the potential expansion there?

Yes, really for us gross margin improvement is going to come from getting better at selling more advanced technologies. So as we sell more data center, more products in that world, our margins should increase as the mix increases. So what you saw in 2014, what you saw kind of a flattening out of margin year-over-year, we had big mix that shifted more towards sort of the notebook category. So as we move forward, we expect the gross margins will increase. We may not have the same sales growth percentage that we achieved in 2014, but on sort of lesser percentage sales growth, we think the gross margins should be better as our mix improves.

All right, thanks. And then one last. You had mentioned a little bit on vendor incentives. Can you maybe talk about the environment there? And we’ve been hearing things about large vendors looking to go direct, any commentary around that?

There is really nothing specific. I just think that with all of the changes in the industry that always presents kind of a question mark. So we pointed to a number, the changes that are happening, but we really don’t have anything definitive. We’re not particularly concerned about any vendor or their backend programs, but feel it’s prudent to point out that with all of the changes happening, that’s certainly within the realm of possibility.

And generally speaking the vendors will pay you more if you sell their most advanced technologies, their most current product lines. So the better we get at selling the most advanced technologies, the better the backend dollars are going to be. So that’s sort of an ongoing process for us to - we have the right technical resources, we have the right training for our people, etcetera.

Thanks guys.

Thank you.

Thank you. Our next question comes from the line of Scott Tilghman from B. Riley. Your question please.

Thanks, good afternoon. I’m going to follow-up on the last question. You had talked about some concerns on partner funding into the back-half of the year. Did those play out? And if so, can you quantify what type of impact they had on margins?

So year-over-year 2014 versus 2013, we are relatively flat as a percent of sales, our overall vendor funding. Within that number, there were many vendors that were up and many vendors that were down, but when you throw it all together, we kind of came out fairly reasonably well compared to 2013. So I think you’re going to continue to see that some vendors are going to offer more incentives going forward and some are going to offer less, but right now we’re projecting that to be relatively flat as a percent of sales.

That’s helpful. And then I wanted to circle back to one of the earlier questions. You talked about market share opportunities, being an end-to-end solution provider. Specifically I wanted to ask about all the various disruptions that are occurring, and whether you see those predominantly as a challenge or predominantly as an opportunity over the - call it the next 12 to 18 months?

Yes. I think the answer is a little of both. Well, clearly there is an opportunity. So we think about more of the legacy suppliers, call that the second platform if you will. Some of their products are going to be in slight recession. However, when we look at some of the newer technologies and more of the third platform technologies, some of those are really going to grow. And we are seeing a good adoption for newer - we’ll call them disruptive technologies in the advanced configuration and technology space. So, some of the newer names are really coming on fast.

That’s helpful. And then just on a related note, do you feel like there are any holes that you need to fill in the near-term? Obviously you’re bringing on board some other folks with different levels of expertise, but are there any specific holes that you’d like to fill in the short-term?

There is nothing immediate that comes to mind. We are opportunistic, but right now I do think we have the right team in place and the right strategy in place. And we’ll keep our eyes open for market opportunities.

Great. Thank you.

Thank you.

Thank you. [Operator Instructions] And this does conclude the question-and-answer session of today’s program. I’d like to hand the program back for any further remarks.

Thank you operator. We are encouraged with PC Connection’s strong performance this quarter and for the year ended December 31, 2014. We had solid execution across all three of our sales segments, reinforcing the strength and diversity of our business model. As a national solution provider, our goal is to consistently invest in more complex solution capabilities, while delivering solid financial performance. We were able to accomplish that goal in 2014 with an 11% sales increase and 20% increase in net income. In a rapidly changing industry, we believe our team and the strategies we have in place will position PC Connection to gain market share and increase long-term shareholder value. And I’d like to thank all of our customers, vendor partners and shareholders for their continued support, and our dedicated coworkers for their efforts. I’d also like to thank those of you listening to our call this afternoon. Your time and your interest in PC Connection are appreciated. Have a great evening.