PC Connection Q1 2025 Earnings Call Transcript

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April 30, 2025

Key Takeaways

  • Net sales rose 10.9% year-over-year to $701 million and gross profit increased 8% to $127.3 million despite a 50 bps decline in gross margin to 18.2%.
  • Operating income excluding $2.9 million of severance expenses jumped 29.6% to $17.5 million, lifting the adjusted operating margin by 40 bps to 2.5% of sales.
  • Adjusted diluted EPS reached $0.60, a 20% gain over prior-year’s $0.50, compared to a 2% rise in GAAP EPS to $0.51.
  • Operating cash flow used $52.4 million in Q1 due to staging $56.7 million of inventory ahead of anticipated tariffs, partially offset by receivables improvements.
  • Backlog hit its highest level in nearly two years, and the board added $50 million to the share buyback program, repurchased $44.8 million of stock, and declared a $0.15 dividend as management targets mid-to-high single-digit growth in 2025.
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Earnings Conference Call
PC Connection Q1 2025
00:00 / 00:00

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Operator

Thank you, operator, and good afternoon, everyone. Welcome to the First Quarter twenty twenty five Connections Earnings Conference Call. My name is Deedee, and I will be the coordinator for today. At this time, all participants are in listen only mode. Following the prepared remarks, there will be a question and answer session.

Operator

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.

Samantha Smith
Samantha Smith
Account Manager at PC Connection

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 ks for the year ended 12/31/2024, 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.

Samantha Smith
Samantha Smith
Account Manager at PC Connection

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 first quarter twenty twenty five comparisons are being made against the first quarter of twenty twenty four.

Samantha Smith
Samantha Smith
Account Manager at PC Connection

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

Timothy McGrath
President & CEO at PC Connection

Thank you, Samantha. Good afternoon, everyone, and thank you for joining us today for Connection's Q1 twenty twenty five conference call. I'll begin this afternoon with an overview of our first quarter results and highlights of our performance. Tom will then walk us through a more detailed look at our financials. Our team remained focused on delivering extraordinary value through integrated IT solutions and customer service.

Timothy McGrath
President & CEO at PC Connection

This resulted in consolidated net sales of $7.00 $1,000,000 an increase of 10.9% in the first quarter. We delivered a solid start to 2025 in a dynamic macroeconomic environment. The quarter was characterized by some customers accelerating purchases in an attempt to minimize the impact of tariffs, while others elected to delay purchases due to uncertainty with respect to the near term economic environment. Gross profit increased by nearly 8% to $127,300,000 while gross margins were down slightly to 18.2%, fifty basis points below last year. As predicted, our mix shifted towards notebooks and desktops as customers executed on their device refresh initiatives.

Timothy McGrath
President & CEO at PC Connection

We continued our focus on driving internal efficiencies and reducing costs, resulting in operating income of $14,500,000 in Q1, an increase of 7.9 compared to Q1 twenty twenty four. Operating income as a percentage of sales remained flat at 2.1% year over year, although operating income excluding severance expense was $17,500,000 an increase of 29.6%. Operating income excluding severance expenses as a percentage of sales was 2.5%, an increase of 40 basis points. Net income was $13,500,000 an increase of 2.5% compared to $13,200,000 in the prior year quarter. In Q1 twenty twenty five, our diluted earnings per share was $0.51 an increase of 2% from $0.50 in Q1 twenty twenty four.

Timothy McGrath
President & CEO at PC Connection

However, adjusted diluted earnings per share was $0.6 an increase of 20%. In Q1, notebooks and desktops net sales increased 21% year over year and were up 7% on a sequential basis as a result of customers moving forward with their device refresh initiatives. Revenue for Advanced Technologies and Integrated Solutions increased by 7%, propelled by sales of software and server storage solutions. Customer priorities around data center refresh, server consolidation and edge computing are gaining momentum. We'll now look a little deeper into our segment performance.

Timothy McGrath
President & CEO at PC Connection

In our Business Solutions segment, our Q1 net sales were $258,400,000 an increase of 1% compared to the prior year. Our gross profit, which we believe is a better indicator of our performance, increased by 8.4% to $65,400,000 compared to the prior year. Gross margin increased 170 basis points compared to the prior year quarter to 25.3%. Gross margins were favorably affected by both customer and product mix. In our Public Sector Solutions business, Q1 net sales were $144,600,000 50 4 point 7 percent higher than a year ago.

Timothy McGrath
President & CEO at PC Connection

Sales to the federal government increased by $40,000,000 while sales to state and local government and educational institutions increased by 11,000,000 Gross profit for the Public Sector segment was $19,600,000 an increase of 30.9% compared to Q1 twenty twenty four. Gross margin decreased by two forty basis points to 13.6 for the quarter compared to the prior year. The revenue increase and margin decline resulted from a few large project rollouts in Q1 twenty twenty five that were lower than average margins. In our Enterprise Solutions segment, Q1 net sales grew 5.4% to $298,000,000 compared to last year. Our strategy to deliver Enterprise Solutions is taking hold as we drove an increase of 8% in Advanced Technologies.

Timothy McGrath
President & CEO at PC Connection

Gross profit for the Enterprise segment was $42,300,000 1 percent lower than the prior year. Gross margin decreased by 90 basis points to 14.2% for the quarter. The margin decrease was a result of the expected lower license fees from enterprise agreements. 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?

Thomas Baker
Thomas Baker
Senior VP, CFO & Treasurer at PC Connection

Thanks, Tim. In the first quarter, SG and A increased by 5% over the prior year. The increase in SG and

Thomas Baker
Thomas Baker
Senior VP, CFO & Treasurer at PC Connection

A was primarily due to an increase in variable compensation due to higher levels of gross profit in the quarter. On a percentage of sales basis, SG and A decreased 88 basis points to 15.7% of net sales in the quarter compared to 16.6% in the prior year quarter. In the first quarter of twenty twenty five, we continued our initiative to reduce our cost structure. As a result, we recorded a charge of $2,900,000 for severance expenses associated with internal cost reduction activities. Currently, we expect these actions to result in approximately $5,000,000 of net annualized savings split evenly between SG and A and cost of goods sold.

Thomas Baker
Thomas Baker
Senior VP, CFO & Treasurer at PC Connection

Interest income for Q1 amounted to $3,900,000 compared to $4,600,000 last year, a decrease of $664,000 Our effective tax rate was 27.1%, up from 27%. Net income for the quarter was 13,500,000.0 an increase of 2.5% from $13,200,000 in the prior year quarter. In Q1 twenty twenty five, diluted earnings per share was $0.51 an increase of 2%. Adjusted diluted earnings per share was $0.60 an increase of 20%. Our trailing twelve month adjusted earnings before interest, income taxes, depreciation and amortization or adjusted EBITDA was $123,100,000 compared to $120,300,000 a year ago.

Thomas Baker
Thomas Baker
Senior VP, CFO & Treasurer at PC Connection

In the first quarter, we paid a zero one five dollars per share quarterly dividend. In addition, we significantly increased the activity under our share buyback program. We purchased 697,000 shares at an average price of $64.22 per share for a total cost of $44,800,000 This represented 2.7% of shares outstanding at 12/31/2024. At the end of the quarter, we had $14,900,000 remaining for share repurchases under our existing stock repurchase program. As we announced earlier today, our Board of Directors authorized an additional $50,000,000 to be added to our existing share repurchase program as we consumed virtually all of the buybacks previously authorized in the month of April.

Thomas Baker
Thomas Baker
Senior VP, CFO & Treasurer at PC Connection

As of today, we have 25,400,000.0 shares outstanding, a decrease of 3.4% from 12/31/2024. Today, we also announced that our Board of Directors declared a quarterly dividend of $0.15 per share. The dividend is payable to shareholders of record on 05/13/2025 and payable on 05/30/2025. Cash flow used in operations for the first quarter of twenty twenty five was $52,400,000 primarily driven by an increase in inventory of $56,700,000 and a decrease in accounts payable of $27,000,000 These outflows were partially offset by 13,500,000 in net income and an increase in accrued expenses and other liabilities of $7,800,000 and a decrease in accounts receivable of $7,100,000 The increase in inventory was a result of our decision to stage inventory for both daily customer needs and rollouts in advance of anticipated price increases resulting from tariffs. Our accounts payable balance decreased $27,000,000 for the first quarter of twenty twenty five, largely due to the timing of payments.

Thomas Baker
Thomas Baker
Senior VP, CFO & Treasurer at PC Connection

Cash generated from investing activities of $104,700,000 was a result of $108,800,000 of proceeds from the sale of investments and $50,000,000 of investment maturities, offset by $52,400,000 of investment purchases. We used $48,200,000 of cash for financing activities during the first quarter of twenty twenty five, primarily for repurchases of $43,700,000 of stock and payment of $3,900,000 of dividends to shareholders. We ended Q1 with $340,300,000 of cash, cash equivalents and short term investments. When we are thinking about capital allocation, we remain committed to growing the business and have an ongoing program focused on investing in inorganic opportunities and organic growth programs.

Timothy McGrath
President & CEO at PC Connection

I will now turn the call back over to Tim to discuss current market trends. Thanks, Tom. Reflecting on the quarter, we executed well against our strategic plans as evidenced by our Q1 results. In fact, our performance has been recognized by our partner community as we've been the recipient of several awards, including Intel's AIPC Partner of the Year, HPI's U. S.

Timothy McGrath
President & CEO at PC Connection

Print National Solution Provider of the Year, HPI's U. S. Commercial supplies partner of the year, and finally, Samsung's display partner of the year. Shifting to our vertical market performance, Financial Services net sales increased 32% and gross profit 31% year over year. Our Healthcare team grew net sales by 13% and gross profit 10% year over year.

Timothy McGrath
President & CEO at PC Connection

As we look across the evolving technology landscape, we are seeing strong momentum in the AI PC space. Entire application layers are being built around AI capable PCs, creating tailwinds for refresh cycles across enterprise and commercial markets. This transformation is driving two consistent themes, AI trust and AI return on investment. They are now at the forefront in decision making for every AI deployment. Trust in AI systems around security and compliance is a gating factor.

Timothy McGrath
President & CEO at PC Connection

Similarly, the ability to measure and defend return on investment is shaping AI adoption curve. Both areas are core focus points for our Connection Helix organization, and we're investing in building framework, playbooks and advisory capabilities to lead these conversations. Looking to the future, there's much speculation about near term economic conditions. We remain confident in our ability to outperform the market and take market share. We're encouraged by several emerging trends that reinforce our positive outlook, including continued momentum around device refresh, compelling business cases for data center modernization, customer initiatives to implement AI technology to drive return on investment, momentum in edge computing and AIPCs as data becomes increasingly distributed.

Timothy McGrath
President & CEO at PC Connection

Our pipeline of opportunities continues to grow. Finally, our backlog at the end of Q1 was at its highest level in nearly two years. We anticipate that 2025 will outperform the results we saw in 2024. Because of this confidence in our business, we continue to invest in key projects and programs to enhance our sales, services delivery and systems. At the same time, we took additional steps this quarter to reduce costs, allowing us to allocate more resources toward driving long term growth and strengthening the foundation of our business.

Timothy McGrath
President & CEO at PC Connection

We are optimistic about the prospects for the balance of the year and believe that we can outperform The U. S. IT market growth by 200 basis points. We believe our focus and business strategy remains well aligned with the shifting dynamics of how customers deploy, utilize and consume technology. We continue to connect our customers with technology that enhances growth, elevates productivity and empowers innovation.

Timothy McGrath
President & CEO at PC Connection

We help our customers expertly navigate through a complex set of choices within the technology landscape. We help calm the confusion of IT for our customers. We know that in this complex world of technology, change happens and expertise wins. On that note, I'd like to take a moment to thank our extremely dedicated and valued employees for their continued and extraordinary effort during this rapidly changing environment. We will now entertain your questions. Operator?

Operator

Thank you. And our first question comes from Adam Tindle of Raymond James. Your line is open.

Adam Tindle
Adam Tindle
Managing Director at Raymond James Financial

Thanks. Good afternoon. Tim, I want to start in your opening comments, how you talked about how some customers in the quarter were accelerating purchases, some customers were delaying purchases, so kind of like two different camps. Is there more of a pattern to the type of customer or vertical that was accelerating versus maybe holding off? And similar question on product category, any particular product category that's being sweated on in terms of sweating assets versus maybe accelerating purchases?

Timothy McGrath
President & CEO at PC Connection

So thanks, Adam. I'll start with the customer perspective. And it really has been a mixed bag. We're talking with many customers who are very concerned with cost containment, expense reduction, and doing everything they can do to prepare for this economic backdrop and for the tariff waves that are certainly affecting their future outlook. So a lot of concern around expense optimization and productivity gains.

Timothy McGrath
President & CEO at PC Connection

There are other customers who are realizing that many of these projects, some enabled by AI, are driving productivity and technology is the right path forward. So it really is a mixed bag. And as you know, it continues to be an evolving situation as the threat of tariffs kind of moves up and down. That said, we did see really good growth in the quarter in a couple of our vertical markets. To begin with, we consider Federal part of our GovConnection subsidiary.

Timothy McGrath
President & CEO at PC Connection

But that said, Federal was very strong. That is large project driven. We also had good growth in finance and healthcare vertical markets. And again, that's based on business driven projects that were kind of in the queue. Our BSG and smallmid market teams have been very consistent, but their forecasted growth is a little lower than what we're expecting in large enterprise just based on our enterprise funnel.

Timothy McGrath
President & CEO at PC Connection

But we do need customers to have a clear view of the future. And obviously, if they're concerned about their customer end markets and their share price, it does affect their spending.

Adam Tindle
Adam Tindle
Managing Director at Raymond James Financial

Got it. Okay. Then as we kind look

Timothy McGrath
President & CEO at PC Connection

I left out endpoint. Sorry, Adam. We are seeing now we had about 21% growth in our endpoint business. About 40% of that was AI enabled customers, we think, are placing those orders for investment protection, but also to prepare for their AI projects and projects at the edge.

Adam Tindle
Adam Tindle
Managing Director at Raymond James Financial

That's helpful. And as we look forward, your comment there at the end talking about how backlogs at the highest level in nearly two years is very encouraging. I guess, would you maybe try to put a little bit finer point on expected growth for the year? I know IT market plus 200 basis points, but I mean, here we are in Q1 with gross profit dollar growth in the high single digit range. I'm just wondering as you think on a forward basis, what a reasonable gross profit dollar growth might be given that backlog.

Adam Tindle
Adam Tindle
Managing Director at Raymond James Financial

And Tom, I imagine you might weigh in on that. If you could also maybe just double click on OpEx in general. Obviously, we saw the leverage come through with the SG and A initiatives. Is that fully reflected? Is there more in the future?

Adam Tindle
Adam Tindle
Managing Director at Raymond James Financial

How can we think about OpEx growth for the year as well? Thanks.

Thomas Baker
Thomas Baker
Senior VP, CFO & Treasurer at PC Connection

Yes. So I think, Adam, in terms of overall growth, I think we're probably looking at maybe mid to high single digits on the year. We came out of the chute at 10%. Looking here in April, I'd say I think there's still a little bit of uneasiness in the market. We're still in the early innings of Q2, but I think mid to high single digits is probably about where we're going to be on the top line.

Thomas Baker
Thomas Baker
Senior VP, CFO & Treasurer at PC Connection

In terms of SG and A growth, in the quarter, in Q3, none of the cost savings were really realized in Q1. Mean, those will start to come through in Q2. And like I said in my remarks, they're kind of split evenly between G and A and cost of goods sold. And I think as we go through the quarter, we're probably looking at, I'd say, mid ish single digit growth in SG and A year over year. So we're definitely absolutely trying to keep it below the revenue growth.

Timothy McGrath
President & CEO at PC Connection

And as you did, I'll go back to markets. I clearly say that our large enterprise business has a pretty robust funnel of projects to roll out. Of course, we need customers to agree to move forward on those projects. But our funnel and our forecast is solid with the caveat being the economic backdrop.

Adam Tindle
Adam Tindle
Managing Director at Raymond James Financial

Very understandable. Thanks, guys.

Timothy McGrath
President & CEO at PC Connection

Thank you.

Operator

Thank you. Our next question comes from Anthony Lebiedzinski of Sidoti. Your line is open.

Anthony Lebiedzinski
Senior Equity Research Analyst at Sidoti & Company, LLC

Good afternoon and thank you for taking the questions. Certainly nice to see the better than expected Q1 results. So just curious to get first of all, take on how the I mean, sounds like there was some pre tariff buying, but maybe just kind of maybe walk us through as far as January through March, how the quarter progressed?

Thomas Baker
Thomas Baker
Senior VP, CFO & Treasurer at PC Connection

Yes. So I would tell you, January and February were a little bit on the light side and March certainly came through better. So it was more heavily weighted to March than last year, but it really hasn't gotten back to the twenty two percent, '20 '3 percent range yet. So I think we were like I don't know, 34% of our revenues came through in March of this year. So it definitely improved through the quarter.

Thomas Baker
Thomas Baker
Senior VP, CFO & Treasurer at PC Connection

And I think people were getting more and more comfortable with the economic situation. So I think they cut some POs loose. And I also think there was definitely some buying ahead of expected tariffs. You know, I mean, we bought inventory ourselves to get some price protection.

Anthony Lebiedzinski
Senior Equity Research Analyst at Sidoti & Company, LLC

Understood. Okay. So just curious what you've seen so far in Q2. There's been a lot of noise with the tariffs and the macroeconomic concerns. Any kind of early read on Q2 that you can share?

Anthony Lebiedzinski
Senior Equity Research Analyst at Sidoti & Company, LLC

Certainly, would love to hear what you guys are seeing in the marketplace since the quarter ended.

Timothy McGrath
President & CEO at PC Connection

Well, thanks, Anthony. So when we think about Q2, there's no denying that the tariffs are weighing heavy on our customer base. And also, when we talk to our suppliers, while they're interested in moving workloads to avoid tariffs, they really can't do it quickly with any certainty or any confidence. And so again, we believe that we have a short window to help our customers navigate through this as we had the ninety day reprieve a couple of weeks ago. So we're working with customers toward that end.

Timothy McGrath
President & CEO at PC Connection

But generally speaking, again, they're worried about their end markets, their customer base, their share price in this economic backdrop. So there is a lot of concern, and we have to move through this together. The projects that are mission critical will drive productivity and efficiencies and cost savings, for example, a server consolidation, well, those really make sense. The other projects we know will be scrutinized.

Anthony Lebiedzinski
Senior Equity Research Analyst at Sidoti & Company, LLC

Understood. Okay. Got you. Okay. And then I know you guys have talked about looking at acquisitions for a while.

Anthony Lebiedzinski
Senior Equity Research Analyst at Sidoti & Company, LLC

Given what's going on in the marketplace, are you kind of backing off of that? Or are you still looking to possibly do some deals?

Timothy McGrath
President & CEO at PC Connection

Yes. So Anthony, as I continue to say, our powder is dry. We are looking clearly, the interest rate environment has affected some of the opportunities that we're looking at kind of from their perspective. But we are ready to go. We continue to search.

Timothy McGrath
President & CEO at PC Connection

And to be clear, that would be tuck in acquisitions that expand our solutions capability or bring us into new markets.

Anthony Lebiedzinski
Senior Equity Research Analyst at Sidoti & Company, LLC

Well, you very much and best of luck.

Thomas Baker
Thomas Baker
Senior VP, CFO & Treasurer at PC Connection

Thank you.

Timothy McGrath
President & CEO at PC Connection

Thanks, Anthony.

Operator

Thank you. This concludes our question and answer session. I'd like to turn it back to Tim McGrath for closing remarks.

Timothy McGrath
President & CEO at PC Connection

Thanks, KD. 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 listening to our call this afternoon. Your time and interest in Connection are appreciated. Have a great evening.

Operator

This concludes today's conference call. Thank you for participating, and you may now disconnect.

Executives
    • Samantha Smith
      Samantha Smith
      Account Manager
    • Thomas Baker
      Thomas Baker
      Senior VP, CFO & Treasurer
Analysts
    • Timothy McGrath
      President & CEO at PC Connection
    • Adam Tindle
      Managing Director at Raymond James Financial
    • Anthony Lebiedzinski
      Senior Equity Research Analyst at Sidoti & Company, LLC
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