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Edited Transcript of PCMI earnings conference call or presentation 7-Mar-18 9:30pm GMT

Q4 2017 PCM Inc Earnings Call

TORRANCE Mar 8, 2018 (Thomson StreetEvents) -- Edited Transcript of PCM Inc earnings conference call or presentation Wednesday, March 7, 2018 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brandon H. LaVerne

PCM, Inc. - CFO, CAO, Treasurer & Assistant Secretary

* Frank F. Khulusi

PCM, Inc. - Co-Founder, Chairman & CEO

* Kim Rogers

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Conference Call Participants

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* Kara Lyn Anderson

B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group

* William Tennent Gibson

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2017 PCM, Inc. Earnings Conference Call. My name is Ashley, and I'll be your conference coordinator for today. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

For opening remarks and introductions, I would like to turn the call over to Kim Rogers of Hayden IR. Please go ahead.

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Kim Rogers, [2]

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Thank you, Ashley. Good afternoon, everyone. We appreciate you joining us today to discuss PCM's fourth quarter and full year 2017 earnings.

Joining me on the call today are Frank Khulusi, PCM's Chairman and Chief Executive Officer; Jay Miley, President, who's joining us remotely from a business event out of the country, and will be available for the Q&A at the end of the call as long as he has cell phone coverage; and Brandon LaVerne, Chief Financial Officer. Following the prepared comments, we will open the call for your questions.

At this time, I'd like to refer to the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. During this conference call, management may discuss financial projections, information or expectations about the company's products or markets or otherwise make statements about the future, which statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from statements made. These risks and uncertainties are detailed in the company's filings with the Security and Exchange Commissions.

Now I'd like to turn the call over to Frank Khulusi. Please go ahead, Frank.

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Frank F. Khulusi, PCM, Inc. - Co-Founder, Chairman & CEO [3]

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Thank you, Kim, and good afternoon, everyone, and thank you for joining us today. While some segments of our business performed well in the fourth quarter, I'm not pleased with our overall results. On a positive note, gross margins in Q4 and for the full year of 2017 improved over the prior periods.

Our services business continued to perform very well, with overall growth of 9% during the quarter and 12% for the full year, and remains a key element to our long-term strategy of transitioning our business to higher value-added services and solutions.

And I'm happy to announce that the securities class action lawsuit filed last year has been dismissed and been fully concluded in favor of PCM and its offices.

However, we did experience significantly lower than anticipated contribution during the quarter from our Public Sector business that drove the year-on-year decline in consolidated results. As we stated last quarter, we chose not to renew our contract in the federal space at a loss. And during the quarter, one of our more profitable federal contracts was pushed into 2018.

Our commercial segment grew 1% in Q4, despite a 5% headwind from the non-consolidation of the NCE.

We saw a nice growth in Q4 in our international segments, with our Canadian segment up 11% and our new U.K. segment generating just over $9 million of revenues in the quarter as it continues to ramp.

I'll now turn the call over to Brandon LaVerne, our CFO, who will discuss our fourth quarter and full year 2017 results in more detail. Brandon?

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Brandon H. LaVerne, PCM, Inc. - CFO, CAO, Treasurer & Assistant Secretary [4]

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Thanks, Frank. Detailed information about our non-GAAP financial measures and a reconciliation of those non-GAAP financial measures are provided in the current report on Form 8-K filed with the SEC earlier today and also available on our website.

As I review the results for the quarter, all comparisons will be relative to the fourth quarter of 2016 unless otherwise noted. In addition, as we said all year, our financial results for 2017 no longer consolidate the financial results of sales made some customer contracts we purchased in the En Pointe acquisition, which are now held by a partner, which qualifies for certification as a minority and women-owned business in accordance with customer/supplier diversity policies. We hold a 49% passive equity interest in this partner, and we've accounted for investment in this partner using the equity method of accounting beginning in the first quarter of 2017. Throughout these remarks, I will refer to this entity as noncontrolled entity, or NCE.

Our consolidated net sales declined $23.2 million in the quarter or 4% to $563.4 million. These consolidated sales did not include $21.3 million of net sales made under contracts held by the NCE, accounting for most of the decline. Consolidated sales of services grew 9% to $43 million and represented 8% of consolidated net sales compared to 7% last year.

By segment, our commercial sales increased $2.9 million or 1% to $460.4 million despite the $21.3 million NCE headwind, which impacted commercial sales by approximately 5%. Our commercial sales represented 82% of consolidated net sales in the quarter.

We also saw a nice growth of $4.1 million or 11% in our Canadian segment, which grew to $40.9 million and represented 7% of our consolidated net sales.

Our new U.K. segment, which we launched in Q2 2017, generated $9.1 million during the quarter, up sequentially from $2.7 million generated in Q3 and represented 2% of our consolidated net sales.

However, our Public Sector business overshadowed the quarter with a $39.3 million decline in sales or 42% to $53.1 million, driven in part by our exit from a lower-profit federal contract beginning in mid-Q3, and the push of another profitable federal contract into 2018 as well as other decreases in our federal and state, local and education businesses.

We also noted that we felt that quarter was impacted by the departure of our Public Sector president who left for personal reasons unrelated to the business. We are currently undertaking a search for his replacement. Public Sector represented 9% of our consolidated net sales during the quarter.

Our top partners by billed revenues in the fourth quarter of 2017 were Apple, Microsoft, HP Inc., Dell, Cisco, Lenovo and Hewlett-Packard Enterprise. Collectively, these top 7 partners represented approximately 58% of gross billed revenues.

Consolidated gross profit was $80.9 million or 1 point -- $80.9 million, a $1.9 million or 2% decrease from last year. However, gross margin improved to 14.3% from 14.1%, reflecting an increased mix of higher-margin solution service sales as well as the beneficial impact of the non-consolidation of contracts now held by the NCE, which have historically had lower gross margins.

Consolidated SG&A expenses were $80.9 million or 14.4% of net sales compared to $73.6 million or 12.6% of net sales in the year-ago quarter. The increase in consolidated SG&A expenses was primarily due to a $5 million increase in personnel costs which were mainly related to investments we made in account executives in the U.K., Canada and our Advanced Technology Solutions practices. The increase in consolidated SG&A expenses was also impacted by a $1.1 million increase in other taxes, a $600,000 increase in lease expenses, a $600,000 increase in bad debt expenses and a few other small increases, offset by a $1.9 million decrease in outside service cost primarily related to the termination of a Pakistani BPO service contract earlier this year.

Interest expense increased by $755,000 to $2.3 million, driven by higher average borrowings during the quarter coupled with higher variable interest rates over the prior-year period. Income tax expense was $400,000, down from $2.9 million last year.

Our effective tax rate was negative 15.7% compared to 38.5% in the prior year. The quarter had an outsized impact of adjustments related to the Tax Cuts and Jobs Act of 2017, including a $1.9 million onetime benefit of revaluing our deferred tax liabilities at the new lower federal tax rate, partially offset by a $700,000 onetime expense related to the foreign income transition tax.

Net loss for the quarter, on a GAAP basis, was $2.6 million compared to net income of $4.7 million in Q4 last year. GAAP loss per share was $0.22 compared to diluted earnings per share of $0.37. On a non-GAAP basis, adjusted EPS was $0.17 for Q4 compared to $0.51 in Q4 last year.

Turning to the full year results. Our 2017 consolidated net sales declined $57.2 million or 2.5% to $2.193 billion. These consolidated sales did not include $98.7 million of net sales made under contracts held by the NCE, accounting for a 4% decrease in our consolidated net sales. Consolidated sales of services in 2017 grew 12% to $160.8 million and represented 7% of consolidated net sales compared to 6% in 2016.

By segment, our commercial sales decreased $14.1 million or 1% to $1.732 billion, despite the $98.7 million NCE headwind, which impacted commercial sales by approximately 6%. Our commercial sales represented 79% of consolidated net sales in 2017 compared to 77% in 2016.

We saw nice growth of $20.7 million or 14% in our Canadian segment, which grew to $171.3 million and represented 8% of our consolidated net sales in 2017 compared to 7% in 2016.

Our new U.K. segment generated $12.2 million since its Q2 2017 launch and represented 1% of our consolidated net sales.

However, similar, too, in Q4, our Public Sector business overshadowed the annual results with a $75.6 million decline or 21% to $277.9 million, driven by reductions in both the federal and state, local and educational side of the businesses. Public Sector represented 13% of our consolidated net sales during 2017 compared to 16% in 2016.

Our top partners by billed revenues for all of 2017 were Microsoft, HP Inc., Dell, Apple, Cisco, Lenovo and Hewlett-Packard Enterprise. Collectively, these top 7 partners represented approximately 58% of gross billed revenues for 2017.

Consolidated gross profit was $325.7 million in 2017, a $6.9 million or 2% increase from last year despite the 3% decline in revenue. Gross margin improved to 14.8% from 14.2%, reflecting an increased mix of higher-margin solutions and service sales as well as the beneficial impact of the non-consolidation of contracts now owned by the NCE, which historically have lower gross margins.

Consolidated SG&A expenses were $314.3 million or 14.3% of net sales in 2017 compared to $284 million or 12.6% of net sales in 2016. The increase in consolidated SG&A expenses was primarily related to a $19.1 million increase in personnel costs, which is primarily related to the investments we made in account executives in the U.K., Canada and our Advanced Technology Solutions practices.

The increase in consolidated SG&A expenses was also impacted by $3.6 million of restructure-related costs, $1.7 million of increased telecommunications cost and a $1.5 million increase in M&A and related litigation cost, partially offset by a $1.7 million reduction in amortization expense and a $1.6 million decrease in outside service cost, primarily related to the termination of our Pakistani BPO service contract.

As indicated in the earnings release today, major components of our 2018 strategy include leveraging the investments we've made in 2017, increasing sales productivity and controlling discretionary costs, all while maintaining our focus on advanced solutions and services. These investments include those in our security and cloud practices as well as the recent expansion of our professional and managed service capabilities in the voice and collaboration space. As such, we expect full year 2018 SG&A expenses as a percentage of net sales to improve by over 100 basis points.

Interest expense in 2017 increased by $1.8 million to $7.9 million, driven by higher average borrowings during the year, coupled with higher variable interest rates over the prior year. We expect our working capital metrics to normalize in 2018 from a peak at the end of 2017, which should help generate cash flow and reduce our borrowing levels, which should mitigate the expected increase in interest rates throughout in 2018. We currently are targeting interest expense to rise nearly $2 million in 2018 over 2017 levels.

Income tax expense was $900,000 in 2017, down from $11.1 million in 2016. Our effective tax rate for 2017 was $24.1 million (sic) [24.1%] compared to $38.7 million in -- 38.7% in 2016. The reduction in tax rate reflected the adoption of ASU 2016-09 in 2017, with a benefit associated with stock compensation as well as the impact of adjustments related to the Tax Cuts and Jobs Act of 2017, including the $1.9 million onetime benefit of revaluing on deferred tax liabilities at the new lower federal tax rate, partially offset by the $700,000 onetime expense related to the foreign income transition tax.

While we're still assessing the full impact of tax reform, given its expected impact in the U.S. and the relative mix of our U.S., Canada, U.K. profits, the expected impact of nondeductible expenses, stock compensation benefits and state income taxes, we expect our effective tax rate in 2018 to be in the 29% range.

Net income for 2017 on a GAAP basis was $3.1 million compared to net income of $17.6 million in 2016. GAAP diluted earnings per share was $0.24 compared to diluted EPS of $1.40 in 2016. On a non-GAAP basis, adjusted EPS was $1.20 for 2017 compared to $1.89 in 2016.

Turning to the balance sheet and cash flow. We had $65.5 million of net cash used in operating activities during 2017 compared to $96.5 million of net cash provided by operating activities in 2016.

Accounts receivable at December 31, 2017, was $439.7 million, an increase of $80.7 million from December 31, 2016, due to timing differences compared to the end of prior year. Inventory at December 31, 2017, was $103.5 million, an increase of $22.6 million from December 31, 2016, with the increase primarily related to certain purchases made in the fourth quarter, which have largely been sold in the first quarter of 2018 to date. Accounts payable at December 31, 2017, was $289.2 million, an increase of $12.7 million from December 31, 2016, due to the timing differences compared to the end of the prior year.

Cash used in investing activities during 2017 totaled $22.1 million compared to $10.8 million during 2016. Investing activities for 2017 were primarily related to the purchase of real property in Illinois for $3.1 million, acquisitions in our U.K. business of $4.8 million and expenditures related to investments in our IT infrastructure and leasehold improvements. Investing activities for 2016 were primarily related to $8.7 million of capital expenditures and $2.1 million of acquisition activities.

Within cash flows from financing activities, we paid earnout payments of $13.4 million in 2017, a 3% increase compared to $13.1 million paid in 2016. We repurchased $11.6 million of common stock during 2017 compared to $3.6 million in 2016. The net result of these and other smaller items as the outstanding borrowings under our line of credit, which increased by $106.4 million -- excuse me, which increased by $213.8 million at December 31, 2017, compared to December 31, 2016. As I stated earlier, in 2018, we expect working capital trends to return to normalized levels, which should provide a boost to cash flow in 2018.

I'd now like to address some of the changes we anticipate as a result of the adoption of ASC 606, the new revenue recognition standard in 2018. As we have indicated in our prior 10-Qs, we will adopt the standard utilizing a full retrospective method and thus restating our historical results. There are 2 primary areas that we expect will be impacted. The timing of revenue recognition of product in transit to customers and the gross versus net treatment of certain security software revenues.

Let me explain the first area a bit, and be advised, I'm going to get a little technical. Historically, different businesses within PCM have had varying terms of sale when it comes to entitle and risk of loss transfer to the customer. Generally speaking, many of our components of the business have had terms providing title and risk of loss, transferring upon delivery to the customer, while certain other components within our commercial segment provide for the transfer upon shipping. Historically, regardless of the terms of sale, PCM has recorded revenue under prior guidance, formerly known as SAB 104, upon delivery to the customer.

ASC 606 changes the way we would recognize revenue for sales made, where title and risk of loss transfer at shipping point, such that they are now to be recorded at shipment, which is when we transfer control, rather than upon delivery to the customers.

Given that PCM is migrating to a common ERP, and to ensure consistent application of the new revenue standard across all of our businesses as we adopt and implement ASC 606, we changed the terms of sale prior to the end of 2017, such that all of our businesses have terms of transfer upon delivery to the customer. As a result, we will continue to record all sales in 2018 and beyond similar to how we have historically recorded them in 2017 and prior by effectively recording them upon delivery to our customers.

However, because of the retrospective adoption of the standard, we will be restating 2016 and each quarter of 2017 to reflect the impact of recording revenue at its historical stated terms and conditions rather than using the synthetic destination as prescribed by the former SAB 104.

The net impact on 2017 will be a reduction of reported revenue of $9.6 million, all in our commercial segment. By quarter, Q1 will increase by $3 million, Q2 will decrease by $300,000, Q3 will increase by $2.2 million and Q4 will decrease by $14.5 million.

Similarly, cost of goods sold will be reduced in 2017 by $8.7 million for the year. By quarter, Q1 will increase by $2.7 million, Q2 will decrease by $100,000, Q3 will increase by $2.1 million and Q4 will decrease by $13.3 million.

There will be a small impact on SG&A with a 2007 (sic) [2017] reduction of $200,000. By quarter, Q1's SG&A will increase by $100,000, Q2 will have nearly no impact, Q3 will increase less than $100,000 and Q4 will decrease by $300,000.

The net impact to pretax earnings, therefore, will be a reduction in 2017 of $800,000. And by quarter, Q1 will increase by $200,000, Q2 will decrease by $200,000, Q3 will increase by $100,000 and Q4 will decrease by $1 million.

There are a lot of numbers here, and we will have more succinct disclosures contained in our 10-K filing next week.

The second area affecting PCM relates to the treatment of sales of certain security software products, one of the faster-growing areas of our business. PCM already reports software maintenance and hardware maintenance on a net basis. Under ASC 606, certain security software previously reported on a gross basis will need to be reported on a net basis.

We are finalizing the impact of this on our prior results, and we currently expect that we will have reduced revenues with no change to gross profit dollars by upwards of $20 million more in 2017 or less than 1% of sales. This would cause 2017 restated gross margins to improve by approximately 15 basis points. Similarly, we would expect our results from 2018 to be impacted by the adoption of the standard.

To be clear, since we are still finalizing the impact of these standards on our historical and future results, the sales growth and margin expectations given in our earnings release today do not give effect to these accounting adjustments.

At this point, I'll turn the call back over to Frank to discuss our outlook and provide closing remarks. Frank?

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Frank F. Khulusi, PCM, Inc. - Co-Founder, Chairman & CEO [5]

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Thanks, Brandon. I believe PCM is very well positioned for the future. We expect 2018 to be a record year in sales, gross profit and adjusted EPS, with the major headwinds that impacted our 2017 top line growth behind us and as we expect to begin to reap the benefits of our 2017 investments in security, cloud, hybrid data center and managed services.

We're forecasting 2018 revenue growth of approximately 5% over 2017, which is above protected IT spending growth rates. 2018 is off to good start, with growth for the first 2 months, in line with this forecast, including a return to growth in gross billings for our Public Sector segment. Gross margin is expected to remain at the increased levels we achieved in 2017, as we continue our focus on sales of Advanced Solutions and Services.

SG&A expenses as a percent of sales are expected to decline significantly, realizing the effect of our optimization effort, tight expense management and leverage on incremental sales. As such, we're forecasting non-GAAP earnings per share in 2018 to grow significantly and be in the range of $2 to $2.10 per share, including the results of the U.K. segment.

With respect to our new U.K. segment, it continues to grow rapidly and capture the attention of vendors, customers and competitors alike in this very important market. Having taken advantage of a market opportunity to hire numerous experienced salespeople in Q4, as we previously stated, Q4 was our peak investment period from an income statement impact standpoint.

We're very pleased to share that January was our first month with the U.K. segment operating results near breakeven. This important milestone for a startup was reached 8 months from our launch date. We're confident in our trajectory for our U.K. business, and we currently expect at least a $1 million improvement from the fourth quarter in our U.K. bottom line in Q1, and we continue to expect full year profit for 2018.

Finally and importantly, I'd like to thank the teams that contributed to our successes in 2017 and prior and to all the PCM employees who work hard day in and day out to drive our business forward.

This concludes our prepared remarks. At this point, Ashley, you may now open the call for questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Kara Anderson of F.B. Riley.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [2]

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Can you further discuss where the shortfall was relative to your internal expectation? That Q3 included the expectation that the Public Sector rollout wouldn't occur in 2017 and that you weren't rebidding the unprofitable federal contract.

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Frank F. Khulusi, PCM, Inc. - Co-Founder, Chairman & CEO [3]

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Yes, so the results in Public Sector were even lower than we had anticipated by a wide margin, including in -- for all the reasons that we mentioned.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [4]

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And I'm sorry if I missed it, but can you or did you quantify the impact of the 2 contracts that didn't occur in Q4?

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Brandon H. LaVerne, PCM, Inc. - CFO, CAO, Treasurer & Assistant Secretary [5]

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No. We did not quantify them at the time, and we're not prepared to on the call.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [6]

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With respect to the one that was pushed out into, I guess, this year, I think, previously, it was targeted for the first quarter. Now it seems like it's for the second half -- or excuse me, the first half. Am I reading that appropriately? And what is the risk here that it's not a push out and you just -- it's not something that you're going to close?

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Frank F. Khulusi, PCM, Inc. - Co-Founder, Chairman & CEO [7]

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We don't see that as a significant risk. Obviously, we don't control what customers do and how they choose to spend. However, also please note that I articulated that our first 2 months have been in line with our expectations, and that does not include any of that spend coming in, in the first 2 months. So we're -- we have -- we believe that with the plans we have in place, we are well positioned to achieve those plans.

Did that answer your question, or would you like any additional color on that?

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [8]

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No, that helps. I guess kind of on that point, how can we get comfortable with your 5% guidance for revenue growth in 2018 in the, call it, $2 to $2.10 in EPS, given the last 2 quarters that really underperformed on top line; and expenses seem to be going in the opposite direction, even if you back out the spending for the U.K. and other onetime expenses.

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Frank F. Khulusi, PCM, Inc. - Co-Founder, Chairman & CEO [9]

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Let me answer that; so first of all, our U.K. business is now performing, as it was a startup, and it was a very good investment on our part because our total investment, all-in, is significantly less than what we would have spent if were -- had acquired a company. And we get to start something from scratch with our own culture, et cetera. And as I mentioned, January was near-breakeven and it actually generated a small profit when you consider a foreign exchange gain, which we are not factoring here. So that's a huge factor. The second thing is the first 2 months of the year so far are actually running at higher than the 5% that I articulated. So we're actually leaving some room for March not being strong as January and February in our assumptions. And then third, like I said, that contract has not even come into effect. And so that's something for the latter part of the year. Hopefully, Q2, that's when will it happen. On the expense side, we have taken additional steps, as Jay articulated in the press release, et cetera; things with the investments are where -- we believe we're going to start realizing some of the benefit of those investments. We have started realizing some of that this year. However, we also do not plan on keeping our foot on the gas with respect to having to add more investments this year at the same rate that we were adding last year. So SG&A will be more under control relative to percentage of sales. And as a result, we do believe strongly that our SG&A as a percent of sales will drop more than 100 basis points as compared to last year. Brandon, do you want to add anything?

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Brandon H. LaVerne, PCM, Inc. - CFO, CAO, Treasurer & Assistant Secretary [10]

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Yes. I think that's -- I mean, you pretty much nailed it. Revenue, from a market perspective, Kara, U.S. IT growth is somewhere in the low to mid-single digits. We continue to expect overall that we're going to be growing faster than this, obviously including in the U.K. Gross margins, as we said, are at these high levels. They -- we've -- substantially over the prior year, and we expect that they're going to continue at these high levels. And you combine that and the leverage that we get off that incremental gross profit on reasonable growth levels with the benefit of, effectively, lower SG&A as a percentage. And so there's a lot of leverage in this model, as you well know. And so we've put the -- we've put everything in place. We're seeing the benefits. The first 2 months of the year are testament to that so far. 2 months don't a quarter make, but -- or a year, but we're definitely seeing different trends than what we saw during 2017. And we're excited about our prospects in that regard.

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Frank F. Khulusi, PCM, Inc. - Co-Founder, Chairman & CEO [11]

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And the last, but not least, please don't forget about the significant headwinds that we had last year, not the least of which is the NCE headwind, which is not going to be any major factor with us this year. And our growth would have been a completely different story had it not been for the deconsolidation of that revenue, which was caused by moving to those contracts to the NCE.

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Brandon H. LaVerne, PCM, Inc. - CFO, CAO, Treasurer & Assistant Secretary [12]

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Correct. And so despite the Public Sector headwind that we talked about, the NCE was about 6% impact on revenue for the year, but we overall declined 3%. And so we still had low-single-digit growth during 2017 on a "same-store sale basis" if you want to think about it that way. And we're not forecasting much greater than that for 2018.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [13]

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Okay. And then on the margin profile for the U.K. business relative to your overall gross margin target of, I think, it's 14.25% to 14.75%. How does that compare? And is there room for that to expand?

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Frank F. Khulusi, PCM, Inc. - Co-Founder, Chairman & CEO [14]

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It's actually higher. It's significantly higher at this time. And it leaves us with a little bit of upside relative to what we said is our goal for this year in terms of gross margin. Right now it's about -- around the -- right now, it's approximately around the 17% mark. But as the business scales, we don't expected it to remain at that level. So we really are not comfortable with projecting that because we're waiting for the business to mature and for us to have more of a steady-state margin associated with that business.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [15]

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Got it. And then the last question for me is: talk to me about the decision to retain certain real estate assets that don't seem really part of your core business as it stands today.

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Frank F. Khulusi, PCM, Inc. - Co-Founder, Chairman & CEO [16]

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Well, they -- in some cases, they are. I mean, our corporate headquarters, for example, is a very important part of our image. And so there always are -- and you'll see the same with our competitors, et cetera, there always are reasons to retain certain core real estate assets, others. For example, we have -- we do have a facility in Orange County that has been for sale, it just has not had any people -- I mean, it has gone into escrow once or twice, and it did not successfully close. So we're actively -- we actively continue to look at selling that property. So we're always evaluating, just like everything else, what assets to retain and what assets to not. We don't retain assets just for the heck of it. And any time we see that there is not more than a need -- more of a need than not to retain or would be in a better position to lease or whatever, obviously, that's something that we would do in a second.

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Operator [17]

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Our next question comes from William Gibson of Roth Capital Partners.

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William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [18]

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When Brandon was going through the list of your partners, I didn't -- I heard Microsoft for the year, but I didn't hear them for the fourth quarter. Did I miss that? Or what happened to them?

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Brandon H. LaVerne, PCM, Inc. - CFO, CAO, Treasurer & Assistant Secretary [19]

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No. Microsoft for the fourth quarter was actually -- I'm sorry. For the fourth quarter, let me get that for you. Was #2 behind Apple.

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William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [20]

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Okay. And what was -- could you explain the $700,000 onetime tax expense, foreign, to me?

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Brandon H. LaVerne, PCM, Inc. - CFO, CAO, Treasurer & Assistant Secretary [21]

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Sure. So there's a -- it's basically a repatriation tax, if you want to call it that, of our foreign earnings and profits. And so if you look across the board, anyone who's got any kind of international business where the profits had not been taxed in the U.S., this was a way, under the new tax reform, to provide an inflow to the U.S. government, but then allows a lot more flexibility on how to deal with those earnings and profits overseas in the future.

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William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [22]

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Okay. And then lastly, you were just going so quickly, I missed it. What was the cost of the BPO change?

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Brandon H. LaVerne, PCM, Inc. - CFO, CAO, Treasurer & Assistant Secretary [23]

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You say the cost of the BPO change. So we talked about, for the year, a substantial portion of a number that's under...

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Frank F. Khulusi, PCM, Inc. - Co-Founder, Chairman & CEO [24]

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(inaudible) $1.5 million.

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Brandon H. LaVerne, PCM, Inc. - CFO, CAO, Treasurer & Assistant Secretary [25]

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I'm sorry?

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Frank F. Khulusi, PCM, Inc. - Co-Founder, Chairman & CEO [26]

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It was a benefit of $1.5 million.

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Brandon H. LaVerne, PCM, Inc. - CFO, CAO, Treasurer & Assistant Secretary [27]

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Correct. It was upwards between $1.5 million and $2 million for the year. Not much -- I'm sorry, in the fourth quarter as well as the full year period. It started during the third quarter on the year-over-year drop when you guys did --

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William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [28]

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Okay. I thought I heard you mention a cost prior to the change, but not the benefit after it happened. Oh, okay, I misunderstood.

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Operator [29]

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(Operator Instructions) And I'm showing no further questions at this time. I would now like to turn the call back to Frank Khulusi for any closing remarks.

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Frank F. Khulusi, PCM, Inc. - Co-Founder, Chairman & CEO [30]

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Thank you all for joining us this afternoon. And we look forward to updating you on our progress in the coming quarters. Until then, good bye.

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Operator [31]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.