Connection accepts trade off for greater market share
Sales increase 17 percent in first quarter, but profits drop 18 percent
Closing the first quarter of 2017, Connection’s sales grew by about the same amount as its profits fell, but the company felt it was a fair trade off — initial low margins in exchange for capturing some very large customers — to gain greater market share.
The Merrimack-based technology provider’s revenues increased about 17.2 percent, reaching $671 million in the quarter ending March 31, thanks to hefty gains — 26 percent and 30 percent respectively — in the large accounts and public sector.
Meanwhile small and medium business account – the main segment once served by the legacy PC Connection, when it started out as a computer catalogue company – went up five percent.
But getting these larger accounts means more expenses and lower profits. Net income decreased 18 percent to $7.4 million or 28 cents a diluted share. One reason was the servicing of a large federal customer, the identity of which officials did not disclose.
Other bids were to get market share, that did not help the bottom or top line.
“I’d like to share an example,” explained CEO Tim McGrath on the earnings call transcript. “One of the large accounts that we took on, that was a new account for us, we did a project that was fairly low margin, about a little less than $8 million in revenue, but they have an annual spend of about $100 million. And there is a lot of advanced technology and value to come. So those are examples of where, we may bid a project competitively, in an effort to kind of land and expand.”
The other reason behind the discrepancy between revenue and profits was the acquisition last May of Softmart, a Microsoft licensing service provider. Softmart was responsible for about $28 million of Connections increased quarterly, not as much as it had hope, McGrath said in the earnings call. And there were expenses to integrate the two companies’ sales forces, a task he said was completed last quarter. But the future benefits of capturing this Microsoft business was worth it, he said.
Because of the company’s increased sales, Connection now has $66 million in cash, compared to $49 million at the start of the year.