PC Connection, Micro Warehouse Post 4Q Gains

Computer-product resellers continued to report strong fourth-quarter results despite margin pressures from price competition. Following the suit of Insight Enterprises Inc. and CDW Computer Centers Inc., PC Connection Inc. reported large gains for the period and for all of 1998.

Micro Warehouse also reported gains for the fourth quarter, although its increases were not as strong as those of the other companies in the niche.

PC Connection Inc., Merrimack, NH, reported profits of just over $5 million, or 32 cents per share on revenues of $220.29 million for the fourth quarter, which ended Dec. 31, compared with profits of $2.75 million on revenues of $167.12 million in the fourth quarter of a year ago. The company did not report per-share earnings for the year-ago quarter.

For the year the company posted net income of $18.64 million on revenues of $732.37 million vs. profits of $5.2 million on revenues of $550.58 million in the preceding year.

The ongoing success of PC Connection and other major resellers that target small businesses and government and education accounts are a testament to the validity of the direct model in technology sales, analysts said.

“I think these companies continue to do extremely well because they have the right formula,” said analyst Michael S. Rosen of Blackford Securities, New York. “They focus on small- and medium-sized business customers, they give great service and they are selling the convenience of the direct model.”

PC Connection, which sells computer products and periphery through the Internet, direct-mail catalogs and telemarketing, said the declining prices of personal computers impacted its margins in '98, however. Gross profit margins were 12.5 percent of sales in the more recent fourth quarter vs. 13.5 percent of sales in the fourth quarter of a year ago. Gross margins for all of '98 were 12.7 percent of sales vs. 13.8 percent of sales in '97.

An increase in telephone sales — which the company said produce lower margins than sales through other channels — also contributed to the decrease in margins.

Internet-only and Internet-enhanced sales increased for the quarter and year, the company said. For the full year, PC Connection said sales processed through the Internet were $29.1 million or 4 percent of net sales, compared with less than 1 percent of net sales in '97. Sales generated through the Web site, including those processed online and Web-initiated phone orders, totaled $62.7 million for the year or 8.5 percent of net sales vs. 3.5 percent of net sales in the year-ago period.

Meanwhile Micro Warehouse Inc., Norwalk, CT, reported minimal sales gains for the fourth quarter and year after the company underwent a restructuring that included a new sales-management team and an expanded telemarketing sales force.

The company reported profits of $13.59 million or 39 cents per share in the recent quarter vs. a loss of $45.2 million or $1.30 per share in the fourth quarter of a year ago that included a charge of $52.5 million for the write-off of goodwill and restructuring costs.

Sales for the period, which ended Dec. 31, were $595.04 million, up 3.7 percent over sales of $573.7 million in the year-ago quarter.

The company said margins on its domestic sales decreased for the quarter because of “competitive pressures and greater low-margin Internet sales.”

The company also said its worldwide catalog circulation was flat at 32.6 million catalogs for the quarter, including an increase in domestic circulation of 3.9 percent and a decrease in European circulation of 17.4 percent.

Separately, Micro Warehouse said it formed Computersbynet.com, a discount site for computer products that will be combined with the company's Internet auction venue, Webauction.com. The company's core Internet business is conducted through its main Web site, Warehouse.com.

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