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PC Connection, Inc. Reports Preliminary Fourth Quarter and Full Year Results

Earnings Subject to Potential Goodwill Impairment Adjustment

MERRIMACK, N.H., Feb 05, 2009 (BUSINESS WIRE) -- PC Connection, Inc. (NASDAQ: PCCC):

PC Connection, Inc. (NASDAQ: PCCC), a leading direct marketer of information technology (IT) products and services, today announced preliminary results for the quarter ended December 31, 2008. Net sales for the three months ended December 31, 2008 decreased by $50.5 million, or 10.3%, to $439.1 million from $489.6 million for the three months ended December 31, 2007. Preliminary net income for the quarter was $1.9 million, or $.07 per share, compared to $6.2 million, or $.23 per share, for the corresponding prior year quarter.

The three-month periods ended December 31, 2008 and 2007 included special charges that reduced earnings and earnings per share. In the fourth quarter of 2008, the Company's small- and medium-sized business (SMB) segment incurred a preliminary special charge of $1.2 million related to a non-cash goodwill impairment adjustment, which represented the entire goodwill balance for this reporting unit. In the fourth quarter of 2007, the Company's large account segment incurred a special charge of $0.5 million related to management restructuring. Had these charges not been incurred, pro forma net income for the quarter ended December 31, 2008 would have been $2.7 million, or $.10 per share, compared to $6.5 million, or $.24 per share, for the quarter ended December 31, 2007. A reconciliation between preliminary net income on a GAAP basis and pro forma net income is provided in a table below immediately following the Consolidated Income Statements.

Due to the economic downturn and the subsequent decline in the market value of the Company's stock, management is performing a goodwill impairment assessment as required by Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." The Company has not yet completed its review of the goodwill attributed to its public sector and large account segments. The completion of this review may result in an additional non-cash impairment charge, which could be material and would decrease the Company's reported preliminary GAAP net income and earnings per share for the fourth quarter and the year 2008. The review is expected to be completed and the additional charge, if any, determined prior to the Company's filing of its Annual Report on Form 10-K for the year ended December 31, 2008. Total goodwill at December 31, 2008 attributed to the public sector and large account segments aggregated $55.7 million.

The Company's effective income tax rate for the quarter ended December 31, 2008 was 57.2%, compared to 37.8% for the corresponding prior year quarter. The increase was due primarily to an increase in valuation allowances associated with certain state tax credits which reduced earnings per share by $0.02.

Net sales for the year ended December 31, 2008 decreased by $31.7 million, or 1.8%, to $1,753.7 million from $1,785.4 million for the year ended December 31, 2007. Preliminary net income for the year ended December 31, 2008 was $15.0 million, or $.56 per share, compared to $23.0 million, or $.85 per share, for the year ended December 31, 2007. Both 2008 and 2007 included special charges that reduced earnings and earnings per share. Had these charges not been recorded, pro forma net income for the year ended December 31, 2008 would have been $16.7 million, or $.62 per share, compared to $23.3 million, or $.86 per share, for the year ended December 31, 2007. Preliminary net income and earnings per share for the year ended December 31, 2008 are subject to a potential non-cash goodwill impairment adjustment, as noted above. A reconciliation between preliminary net income on a GAAP basis and pro forma net income is provided in a table below immediately following the Consolidated Income Statements.

Quarterly Sales Comparisons by Business Segment:

• Net sales for the SMB segment decreased by 14.7% to $225.1 million compared to the fourth quarter of 2007. Corporate outbound sales within the segment declined year over year, offsetting increased consumer web sales. Approximately half of this year's decrease resulted from lower sales of Video products from three customers.
• Net sales for MoreDirect, Inc., the Company's Large Account segment, decreased by 19.5% to $113.4 million compared to the fourth quarter of 2007. MoreDirect's revenues continue to be impacted by declines in spending by its larger enterprise customers.
• Net sales for GovConnection, Inc., the Company's Public Sector segment, increased by $15.6 million, or 18.4%, to $100.6 million compared to the fourth quarter of 2007. Increased customer acquisitions and strong federal government contract sales accounted for most of this double-digit increase.

Quarterly Sales by Product Mix:

• Net/Com Product sales increased 24% year over year, accounting for 12% of net sales in the fourth quarter of 2008 compared to 9% of net sales for the corresponding prior year period. We experienced year-over-year growth for this category in all business segments and with several strategic vendor partners.
• Sales of Notebooks and PDAs decreased 9% year over year, accounting for 15% of net sales in both fourth quarters of 2008 and 2007. Notebook units' sales increased slightly year over year but were impacted by a decline in average selling prices.
• Video, Imaging and Sound sales decreased 21% year over year, accounting for 15% of net sales in the fourth quarter of 2008 compared to 18% for the corresponding prior year quarter.
• Accessories/Other sales increased 4% year over year, accounting for 12% of net sales in the fourth quarter of 2008 compared to 10% for the corresponding prior year quarter. The fastest growing products within this category were power management and point-of-sales equipment.

Gross profit dollars totaled $51.9 million in the fourth quarter of 2008, representing a 10% decline from the corresponding period a year ago and reflecting lower volumes. Gross profit margin, as a percentage of net sales, increased 10 basis-points year over year to 11.8% in the fourth quarter of 2008. Higher invoice product margins and increased vendor consideration offset lower agency fee revenues in the fourth quarter of 2008.

Overall annualized sales productivity decreased 14% in the fourth quarter of 2008 compared to the fourth quarter of 2007. Sales productivity in our Large Account segment decreased 16% year over year. Sales productivity in our SMB segment decreased 15% year over year. Sales productivity in our Public Sector segment decreased 5% year over year primarily due to the hiring of sales representatives late in the quarter. On a consolidated basis, the total number of sales representatives was 712 at December 31, 2008, compared to 683 at December 31, 2007.

Total selling, general and administrative expenses for the quarter decreased year over year by $0.6 million, or 1%, but increased as a percentage of net sales to 10.5% for the fourth quarter of 2008 from 9.5% for the fourth quarter of 2007. Lower variable compensation associated with reduced sales levels contributed to the dollar decline in SG&A expenses. The fourth quarter of 2008 was negatively impacted by a $0.6 million charge related to a fixed asset disposal. The year-over-year rate increase was primarily attributable to lower sales volumes as the weaker demand environment adversely affected such expenses as a percentage of net sales. Management implemented a number of cost reduction initiatives in the third quarter and continues to review operating expenses to adjust for changes in revenues.

Patricia Gallup, Chairman and Chief Executive Officer said, "Our results for the quarter reflected the decline in demand for IT products. Customers are taking a wait-and-see attitude toward IT spending as they try to determine what their own demand, technology budgets, and staffing levels will be for the year. Nonetheless, our customers rely on us to provide them with the advanced technology solutions they need to help them run their operations more effectively. Our ability to offer valued services in concert with the industry's leading brand-name products gives us confidence PC Connection will continue to stand out as an industry leader."

About PC Connection, Inc.

PC Connection, Inc., a Fortune 1000 company, has three sales subsidiaries: PC Connection Sales Corporation, MoreDirect, Inc., and GovConnection, Inc., headquartered in Merrimack, NH, Boca Raton, FL, and Rockville, MD, respectively. All three companies can deliver custom-configured computer systems overnight. Investors and media can find more information about PC Connection, Inc. at http://ir.pcconnection.com.

PC Connection Sales Corporation (1-800-800-5555), the original business of PC Connection, Inc. serving the small- and medium-sized business sector (SMB), is a rapid-response provider of information technology (IT) products and services. It offers more than 150,000 brand-name products through its staff of technically trained sales account managers and catalog telesales representatives, catalogs, and publications, and its website at www.pcconnection.com. The subsidiary serves the Apple/Macintosh community through its MacConnection division (1-800-800-2222), which also publishes specialized catalogs and is online at www.macconnection.com.

MoreDirect, Inc. (561-237-3300), www.moredirect.com, provides corporate technology buyers with a comprehensive web-based e-procurement solution and in-depth IT supply-chain expertise, serving as a one-stop source by aggregating more than 300,000 products from the inventories of leading IT wholesale distributors and manufacturers. MoreDirect's TRAXX(TM) system is a seamless end-to-end interface that empowers clients to electronically source, evaluate, compare prices, and track related technology product purchases in real-time.

GovConnection, Inc. (1-800-800-0019) is a provider of IT products and services to federal, state, and local government agencies and educational institutions through specialized account managers, catalogs, and publications, and online at www.govconnection.com.

"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995: This release contains forward-looking statements that are subject to risks and uncertainties, including, but not limited to, the impact of changes in market demand and the overall level of economic activity and environment, completion and valuation of any goodwill impairment, or in the level of business investment in information technology products, competitive products and pricing, product availability and market acceptance, new products, fluctuations in operating results, and the ability of the Company to hire and retain essential personnel, and other risks that could cause actual results to differ materially from these detailed under the caption "Risk Factors" in the Company's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission for the quarter ended September 30, 2008. More specifically, the statements in this release concerning the Company's outlook for 2009 and the statements concerning the Company's gross margin percentage, productivity, and selling and administrative costs and other statements of a non-historical basis (including statements regarding implementing strategies for future growth and the ability of the Company to improve sales productivity) are forward-looking statements that involve certain risks and uncertainties. Such risks and uncertainties include the ability to realize market demand for and competitive pricing pressures on the products and services marketed by the Company, the continued acceptance of the Company's distribution channel by vendors and customers, continuation of key vendor and customer relationships and support programs and the ability of the Company to hire and retain qualified sales representatives and other essential personnel. Except for the reporting of any adjustments required upon completion of its goodwill impairment review, the Company assumes no obligation to update the information in this press release or revise any forward-looking statements, whether as a result of any new information, future events, or otherwise.

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SOURCE: PC Connection, Inc.

PC Connection, Inc.
Stephen Baldridge, 603-683-2322
Sr. Vice President of Finance & Corporate Controller

Copyright Business Wire 2009

Copyright 2009 PC Connection, Inc.