MSP Connection: Cloud Growth, Remote Work Helped Drive Demand

‘A number of factors contributed to our strong performance, including our continued focus on helping our customers navigate and optimize their supply chain needs. ... Our commitment to helping customers accomplish their work from anywhere initiatives and our continued focus on cloud and data center transformation helped to drive these record Q4 revenues,’ says Connection CEO and President Tim McGrath.

IT solution provider and MSP Connection saw a record fourth fiscal quarter, helped by a “continued focus on cloud and data center transformation” as well as aiding customers with their supply chain needs and work-from-home initiatives.

Tim McGrath, president and CEO of Merrimack, N.H.-based Connection, which was ranked No. 26 on CRN’s 2021 Solution Provider 500, said there were a number of factors at play “including our continued focus on helping our customers navigate and optimize their supply chain needs. ... Our commitment to helping customers accomplish their work from anywhere initiatives and our continued focus on cloud and data center transformation helped to drive these record Q4 revenues,” McGrath Monday told analysts during his prepared remarks during the company’s quarterly financial conference call.

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Supply chain issues have persisted throughout the fourth fiscal quarter, McGrath said.

“Consequently, our backlog increased slightly quarter over quarter,” he said. “Our team has continued to leverage our capabilities and scale to navigate the ongoing supply constraints on behalf of our customers.”

However, McGrath said, the supply chain has yet to recover to the point that it can consistently fulfill customer demands on a timely basis.

“We anticipate some of these challenges will persist through the first half of 2022,” he said. “Our loyal customers know that we have the expertise, scale, and capacity to secure and store product on their behalf. Consequently, our inventory levels have increased slightly in the fourth quarter when compared to the third quarter.”

We’ve continued to see strong growth in the enterprise solution segment. Our customers need to manage and secure endpoints in a work from anywhere environment helped to fuel our growth.

During the question and answer period after prepared remarks, an analyst asked how McGrath viewed mobile and desktop PC sales in 2022 and their potential impact on backlogs.

McGrath replied that Connection has always done well in the work from anywhere category.

“The hybrid work is certainly going to continue,” he said. “We’re now looking at stats that say more than half of our customer base will continue in some form of a hybrid motion. So we’re pretty bullish on that.”

Connection has a big history in hybrid work environments, and is able to connect mission-critical managed services to remote work solutions, including remote health desk and security services, McGrath said.

“So for us, it‘s a very strong category and we think that that strength is going to continue at least through the first half of the year,” he said. “And then perhaps we’ll see a little slow down, but we’re also forecasting our cloud and data center transformation business to really pick up based on our forecast for the second half of the year.”

Connection’s backlog in the fourth fiscal quarter was up slightly compared to what it was in the third fiscal quarter, McGrath said.

“We think the backlog is really going to help the first half of the year, and certainly will drive very strong results for the first half of the year,” he said. “And then with the second half, we may see a tapering [off] of more of that work from anywhere, as I mentioned. But again, I think that will be made up with more of the data center and cloud products.”

When asked by an analyst about Connection’s acquisition strategy, McGrath said the company is for now more focused on rewarding shareholders and investing in the business.

“But when it comes to acquisitions, we are growing, we are taking market share,” he said. “I think we have the right team and the right strategy in place. However, we are still interested in doing tuck-in acquisitions that are appropriate in some of those value-added categories. So we’re open to that. We don’t have anything on the immediate horizon. But as you know, our powder‘s dry, and we remain open.”

For its fourth fiscal quarter 2021, which ended December 31, Connection reported revenue of $800.2 million, up 18 percent over the $675.7 million the company reported for its fourth fiscal quarter 2020.

This includes enterprise solutions sales of $367.3 million, up 33.4 percent from last year’s $275.6 million; business solutions sales of $303.5 million, up 14.4 percent from $265.2 million, and public sector sales of $129.4 million, down 4.1 percent from $134.9 million.

Connection’s largest vertical, healthcare, saw a 29-percent rise in revenue during the fourth quarter compared to last year, while the IT solution provider’s retail vertical revenue grew 31 percent and its finance vertical 14 percent.

Notebook and mobility product sales accounted for 38 percent of total sales, up from 34 percent last year; accessories sales for 11 percent, down from 13 percent; display sales for 11 percent, up from 8 percent, software sales for 11 percent, down from 12 percent; desktop sales for 10 percent, up from 9 percent; server and storage sales for 6 percent, down from 7 percent; network and communications sales for 6 percent, down from 9 percent; and other hardware and services sales for 7 percent, down from 8 percent.

For the quarter, Connection reported net income on a GAAP basis of $22.4 million, or 85 cents per share, up significantly from last year’s $16.3 million. On a non-GAAP basis, the company reported the same numbers.

For all of fiscal 2021, Connection reported total sales of $2.9 billion, up 11.7 percent over fiscal 2020.

On both a GAAP and non-GAAP basis, the company reported net income for the year of $69.1 million, or $2.65 per share, up from the prior year’s $55.8 million, or $2.12 per share on a GAAP basis and $56.4 million, or $2.15 per share.