PC Connection Inc (CNXN) 2025 Q4 法說會逐字稿

Good afternoon, and welcome to the Fourth Quarter 2025 Connection earnings conference call. My name is Lisa, and I will be the coordinator for the call today. (Operator Instructions)

As a reminder, this conference call is the property of Connection and may not be recorded or rebroadcast without specific permission from the company. On the call today are Tim McGrath, President and Chief Executive Officer; and Tom Baker, Senior Vice President and Chief Financial Officer.

I will now turn the call over to the company. Please go ahead.

Thank you, operator, and good afternoon, everyone. I will now read our cautionary note regarding forward-looking statements. Any statements or references made during the conference call that are not statements of historical fact may be deemed to be forward-looking statements. Various remarks that management may make about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31, 2024, which is on file with the Securities and Exchange Commission as well as in other documents that the company files with the commission from time to time.

In addition, any forward-looking statements represent management's view as of today and should not be relied upon as representing views as of any subsequent date. While the company may elect to update forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so other than as required by law, even if estimates change. And therefore, you should not rely on these forward-looking statements as representing management's views as of any date subsequent to today.

During this call, non-GAAP financial measures will be discussed. A reconciliation between any non-GAAP financial measure discussed and its most directly comparable GAAP measure is available in today's earnings release and on the company's website at www.connection.com.

Please note that unless otherwise stated, all references to fourth-quarter 2025 comparisons are being made against the fourth-quarter 2024. Today's call is being webcast and will be available on Connection's website. The earnings release will be available on the SEC website at www.sec.gov and in the Investor Relations section of our website at www.connection.com.

I would now like to turn the call over to our host, Tim McGrath, President and CEO. Tim?

Thank you, Samantha. Good afternoon, everyone, and thank you for joining us today for Connection's Q4 2025 conference call. I'll begin this afternoon with an overview of our fourth quarter results and highlights of our performance. Tom will then walk us through a more detailed look at our financials.

I'm pleased to share that in the fourth quarter, we delivered record gross profit in our Business Solutions and Enterprise Solutions segments as they each performed above our expectations. The results in our Public Sector segment were disappointing and below prior year levels. This was primarily due to a nonrepeating project that straddled both Q4 2024 and Q1 2025.

In addition, there was a delay in several K-12 project rollouts. The strong execution across our Business Solutions and Enterprise Solutions segments drove gross profit performance, led by growth in software, including cloud and security and supported by steady growth for endpoint devices. These results underscore the strength of our strategy, delivering higher-value solutions, driving long-term customer relationships, and executing with consistency and discipline.

Beginning this quarter, we are disclosing gross billings, which represents the total dollar value of goods and services billed during the period, net of customer returns and credit memos and any applicable sales or other taxes and also includes agency fees and freight. Gross billings increased by 2.9% to $1.06 billion compared to $1.03 billion from the prior year. The increase in gross billings demonstrates the overall growth in customer demand despite the headwinds experienced in the public sector.

Now I'd like to highlight our consolidated performance. Gross profit increased 4.5% year over year to $135.6 million. Gross margin expanded 100 basis points to 19.3%, reflecting our disciplined approach to pricing as well as a shift in product and customer mix. Total net sales were $702.9 million, down 0.8% from last year due to the Public Sector challenges previously mentioned. Excluding these headwinds, underlying sales were healthy, especially in software, including cloud and security, endpoint devices and displays.

Now let's take a look at the segments. Business Solutions delivered a standout quarter with broad-based growth and meaningful margin expansion. Net sales increased 4.2% to $273.5 million, while gross profit rose 11.4% to $69.8 million. Gross billings grew 4.7% to $430.3 million, and gross margin expanded by 160 basis points year-over-year to 25.5%. These results reflect double-digit growth across desktops, Notebooks, net/com and software, including cloud and cybersecurity solutions.

In Public Sector Solutions, net sales were $90.8 million, down 36.8% from a year ago for the reasons previously mentioned. While the Public Sector business experienced some headwinds this quarter, we believe conditions will improve later in 2026. Gross billings declined 23.7% to $170.7 million. Even with lower revenue, gross margin expanded 400 basis points to 19.4% due to changes in customer and product mix.

Enterprise Solutions delivered robust top line growth with net sales increasing 11.9% to $338.7 million, driven by strong demand for advanced technologies and endpoint devices. Gross profit grew 7.1% to $48.2 million, while gross billings increased 16.1% to $457.8 million. Gross margin was 14.2%, down 70 basis points year over year, reflecting changes in subscription license programs and product mix.

We continue to focus on operational efficiencies and expense management. In the quarter, we executed a voluntary retirement offering for our tenured employees. These associated charges are reflected in the severance expenses and other charges in the income statement. This, in addition to severance charges in the quarter totaled $3.1 million.

Operating income was up 4.2% to $23.6 million. Excluding severance expenses and other charges, operating income was up 17.8% to $26.7 million compared to the prior year, underscoring our strong expense discipline while continuing to invest in areas of our business that will drive future growth. Diluted earnings per share were $0.82, an increase of 5.1%, while adjusted diluted earnings per share was $0.91, an increase of 16.7% compared to the prior year. Looking ahead, our strategy remains clear and unchanged: expanding our solutions-led business, deepening our customer relationships and driving profitable growth in cloud, cybersecurity, AI and services.

We continue to see strong customer engagement as organizations modernize their infrastructure and invest in AI-driven technologies. These are several areas where we deliver differentiated value and where we expect sustained momentum. While funding cycles and project timing can impact quarter-to-quarter results, the long-term trends supporting our business remain firmly intact. With improved gross profit, expanding margins and a growing base of reoccurring and solutions-driven revenue, we enter 2026 with confidence and strong strategic positioning.

I'll now turn the call over to Tom to discuss additional financial highlights from our income statement, balance sheet, and cash flow statement. Tom?

Thanks, Tim. Earlier, Tim briefly discussed the new key performance metric, gross billings. We believe that this metric will provide additional insight into the company's periodic performance. We use the gross billings operating metric for evaluating the sales performance of our operating segments by providing insight into the total value of our business transactions. We believe the gross billings provides the same insight to investors.

In the fourth quarter, SG&A increased by 1.7% year over year, driven primarily by higher variable compensation tied to the increase in gross profit. We remain highly disciplined on expenses. In fact, our headcount is down 2% year over year, allowing us to keep total payroll costs flat while continuing to invest in our high-priority growth areas.

As previously mentioned, we took action in the quarter to further streamline our cost structure, resulting in a $3.1 million severance charge. These actions align our expense structure with our strategic priorities and enhance operating leverage as demand continues to build.

SG&A was 15.5% of sales, up 40 basis points year over year, reflecting both the increase in variable compensation and change in sales mix. Operating income margin improved to 3.4% compared to 3.2% last year. Excluding severance expense and other charges, operating income margin improved to 3.8%.

Interest income for the quarter was $3.6 million compared to $4.8 million last year, resulting from lower average cash balances as we deployed capital and a lower interest rate environment. Our effective tax rate for the quarter was 23.7%, down from 24.1% in the prior year. As a result, net income for the fourth quarter was flat at $20.7 million year over year. Excluding severance expenses and other charges, net income increased $2.3 million or 11.3% compared to last year.

Diluted earnings per share were $0.82, up $0.04 year over year, while adjusted diluted earnings per share were $0.91, an increase of $0.13 year over year, highlighting the strength and underlying stability of our earnings profile. On a trailing 12-month basis, adjusted EBITDA was $126.4 million compared to $118.9 million a year ago, an increase of 6%.

In addition to the Q4 voluntary retirement offering previously mentioned, we completed additional targeted headcount reductions at the end of January. These actions are expected to result in total charges of $5.9 million to $6.2 million over Q4 2025 and Q1 2026, of which $3.1 million was recognized in Q4. Together, these initiatives are expected to generate approximately $7 million to $8 million in ongoing annual cost savings split between both SG&A and cost of goods.

During the quarter, we continued to return capital to shareholders through both dividends and share repurchases. We paid a quarterly dividend of $0.15 per share and repurchased approximately 179,000 shares at an average price of $59.53 per share for a total cost of $10.7 million. In 2025, we repurchased over 1.2 million shares at an average price of $62.64. In 2025, between the share buyback of $76.1 million and dividends paid of $15.3 million, we returned $91.4 million to shareholders.

At the end of the year, we had $33.6 million remaining for stock repurchases under our existing stock repurchase program. But as we announced earlier today, our Board of Directors authorized an additional $50 million to be added to our existing share repurchase program.

We also announced today that our Board of Directors has declared a $0.20 per share dividend, a 33% increase. The dividend is payable on March 6, 2026, to shareholders of record as of February 17, 2026.

Turning to the balance sheet and cash flow. Operating cash flow for the year ended 2025 was $65.4 million. This reflects working capital investments, including $48.5 million increase in inventory and a $38.4 million increase in accounts receivable, partially offset by $38.1 million increase in accounts payable. The increase in inventory was intentional as we procured ahead of the anticipated price increases and support customer rollouts. The increased accounts receivable was primarily due to the timing of customer deliveries.

Cash generated from investing activities totaled $42.8 million, driven by $108.8 million in proceeds from the sale of investments and $205.6 million in investment maturities, partially offset by $264.1 million of new investment purchases. Cash used in investing activities was $93.4 million, reflecting our ongoing share repurchase activity of $76.3 million and dividend payments of $15.3 million to shareholders.

We ended the quarter with strong liquidity position, $406.7 million in cash, cash equivalents and short-term investments, which we believe provides significant flexibility to support our strategic priorities and continued shareholder returns. We believe our disciplined approach to capital allocation, continued focus on margin execution and targeted strategic investments position us well for 2026 and beyond.

I will now turn the call back over to Tim to discuss current market trends.

Thanks, Tom. Let me take a moment to walk through how our key vertical markets perform. In retail, net sales grew 22%, driven by several large deployments as retailers continue investing in technology to improve employee productivity and operational efficiencies, which enhance the customer experience. In financial services, net sales were up 28% and gross profit increased 13% year over year. The focus here remains on modernizing infrastructure and improving security, areas where our solutions and expertise continue to resonate with our customers.

Healthcare grew net sales 19%, while gross profit improved 18% year over year. Connection had a strong Q4 in health care attributed to large enterprise deployments for electronic health record management and security. Looking ahead in an AI-first IT environment, we see demand building across our customer base. Customers continue to move forward with refresh initiatives and modernization plans. As AI adoption expands, we expect infrastructure strategies to evolve and security requirements to remain front and center.

While there are near-term factors that can influence the timing of this demand, such as memory supply constraints, these do not change the strength or scale of the opportunity ahead of us. Rather, they may affect the pace at which demand is realized. We're building for the future, advancing our three-part growth strategy, driving data center modernization, digital workplace transformation and supply chain solutions.

With our differentiated portfolio, disciplined execution and loyal customer relationships, we believe we're exceptionally well positioned to capture demand as economic and supply chain conditions stabilize. Our confidence in the business is underpinned by several technology trends that continue to drive pipeline and customer activity. The PC refresh cycle will continue into 2026 as customers modernize aging fleets and increasingly adopt AI-enabled solutions that deliver high performance, strong security and better user experiences.

Data center modernization continues as customers are taking a more balanced approach to hybrid IT, optimizing workloads across on-prem and cloud environments to improve cost predictability, enhance security and unlock the benefits of server consolidation and infrastructure efficiency. AI-driven demand is expanding across the edge, security and intelligent endpoints. Customers are moving from experimentation to execution, creating meaningful opportunities for integrated solutions that combine hardware, software and services.

We continue to expand our technical services organization to help customers design, implement, migrate and manage their IT environments end-to-end. We are investing in training and tools to ensure our teams are fully equipped to guide customers through AI adoption and next-generation architectures with confidence. As we move into 2026, our backlog remains strong. In fact, it ended Q4 at its highest level since 2022. We feel confident about where we're headed and we're continuing to invest in sales capability, service delivery and systems while remaining disciplined around cost management and productivity.

We are positioning Connection for sustained long-term growth, and we expect to outperform the US IT market by 200 basis points this year. As customers rethink how they deploy and manage technology, our strategy meets them where they are. We help them navigate the complexity, modernize with purpose and make confident informed decisions that drive real business outcomes. In a world where technology changes fast, expertise wins, and that's where Connection continues to differentiate.

We'll now entertain your questions. Operator?

(Operator Instructions) Adam Tindle, Raymond James.

Tim, I think you just kind of wrapped up by saying you expect to outgrow the US IT market by 200 basis points. But I guess, how would you define what you're thinking of as IT market growth for 2026 as the baseline?

And if you could -- I know that's a hard question because we've got a bunch of prognosticators trying to figure out what that market growth is. But when you look internally at your customer conversations and what budget trends are at the customer and sales quotas and sales force, what does growth look like internally from a budget perspective as well would be helpful.

So right now, the US market is a little tricky to pin down. We've seen a lot of different estimates, but around 4% is a blended growth number that we're working with. Internally, our budget for growth is a little higher than that. And really, what we're seeing for drivers of demand out there for 2026, right now, about 61% of our endpoints are AI-enabled, and we do see demand continuing for AI at the edge.

We also see edge projects starting to expand for 2026. So all of that really bodes well for our business in addition to the growth we've been experiencing in our cloud business. So clearly, there are some headwinds, Adam, as you know, when we think about things like memory constraint and inflation as a result, those are headwinds, but there'll be some percent of our customer base that try to pull ahead of that and then some percent that try to push a little beyond that. So we're really trying to balance that equation.

Okay. I mean as I think about those growth numbers, those are pretty healthy. And then on this call, you talked about some restructuring essentially, voluntary early retirement as well as additional actions that you took in January. I guess maybe just double-click on those decisions.

If the IT market environment is healthy, why does it make sense to kind of pull back on headcount at this point? And how do you think about headcount on a go-forward basis? Are there more opportunities for additional actions? Or is this kind of it at this point?

Well, thanks. So internally, for the past few years, we've implemented a number of system improvements, and we are now starting to realize those efficiencies, which is really exciting. In addition, as you know, AI is driving some productivity gains throughout the business. So that really is the main driver of our headcount reduction.

We wanted to be super efficient. We really are working on being operationally excellent in a continuous improvement motion there. And we're starting to realize a lot of that.

I don't see additional headcount reductions. I think that demand is going to be solid for 2026, and we're encouraged by all of that. So I think we're in a pretty good place right now. Tom, anything to add?

Yeah. I mean I think if you look at the quarter, right, BSG grew gross profit 11.4%, Enterprise grew their gross profit at 7.1%. I mean that's pretty healthy. The one issue we had was we had a very large public sector contract last year that did not renew. So that was almost a $30 million headwind for us this quarter, and it's going to be an almost $40 million headwind for us next quarter.

However, those other businesses performing the way they are, we can look at the quarter -- next quarter is kind of going to look a little like this quarter, flattish on revenue, probably low to mid-single-digit increase in gross profit. And the way we're managing our costs, we're going to be sub-3% on G&A.

So that's pretty good for that next quarter. And then as we get into Q2, Q3 and beyond, we eliminate that Public Sector headwind, we're pretty excited about how the business is looking. Enterprise is adding a bunch of new customers, and that's just going to ramp throughout the year.

Anthony Lebiedzinski, Sidoti.

So just wondering if you guys could just comment on the cadence of sales or gross billings during the fourth quarter and whether or not you saw any notable budget flush in 4Q?

Yeah, Anthony. So we definitely saw a market increase in December revenue this quarter. It typically bumps along 35%-ish of the quarter. I think it bumped to over 38% this quarter. And being that we saw a couple of things.

We did have some customers that were very focused on consuming their budget before the end of the year. And then we haven't seen that in a number of years. And then we also did see some customers trying to get ahead of the price increases, which is why you see a little bit of a bump in our inventory as well. So I think those two things together I don't know if it was incredibly material, but it definitely did affect the quarter.

Got it. Okay. And then Tim, I believe you mentioned earlier about the memory supply constraints that you called out, which is certainly something that's been talked about. Was that an issue in the fourth quarter? Or was that comment more about your concern for '26?

We did start to see in the fourth quarter some price increases, but I do not think it was an issue. Some customers probably pulled their business in, they moved orders up. And those price increases, of course, are inflationary. And at this point, we're advising all our customers to order as soon as possible because we see those memory constraints going throughout the year. So it really didn't affect us in the fourth quarter.

The inflation that we saw was reasonable. And we're thinking for the first quarter, again, that will actually spike some demand, and we think that will kind of level out throughout the year.

Got you. Okay. And then with the cost reductions that you have done with the restructuring, how do we think about operating margins here going forward? Any sort of thought on that would be very helpful.

Yeah. I mean, obviously, it's going to help us. We talked about $7 million to $8 million of net cost reduction for the year. And when I say net, that means some of those people that took retirement, we are going to have to replace some of them, maybe different levels, maybe in a little bit different positions, maybe with a little bit more of a technological aptitude.

But as we go through the year, I think the operating leverage is definitely going to improve. And we want to move much closer to the 3.7%, 8%, 9% is kind of where we think we can get to this by the end of the year.

This concludes the Q&A session for today. And I would like to turn the call back over to management for closing remarks. Please go ahead.

Well, thank you, operator. I'd like to thank all of our customers, vendor partners and shareholders for their continued support. And once again, our coworkers for their efforts and extraordinary dedication.

I'd also like to thank those of you who are listening to our call this afternoon. Your time and interest in Connection are appreciated. Have a great evening.

Thank you all for joining today's program. You may now disconnect.