PC Connection Q2 2025 Earnings Call Transcript

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July 30, 2025

Key Takeaways

  • Positive Sentiment: Q2 net sales reached $759.7 million, up 3.2% year-over-year, marking our fifth consecutive quarter of revenue growth.
  • Negative Sentiment: Gross margin declined by 40 basis points to 18.1%, driven by changes in partner subscription licensing programs that weighed on profitability.
  • Negative Sentiment: Net income fell 5.2% year-over-year to $24.8 million and adjusted EBITDA decreased 2% to $122.5 million, reflecting ongoing margin pressures.
  • Positive Sentiment: Backlog at the end of Q2 hit its highest level in nearly two years, with strong momentum from PC refresh cycles, data center modernizations, edge computing and AI solutions.
  • Positive Sentiment: Connection ended the quarter with $346.1 million in cash and investments, returned capital via a $0.15 quarterly dividend and $15.5 million in share repurchases, with $49.4 million remaining under its buyback program.
AI Generated. May Contain Errors.
Earnings Conference Call
PC Connection Q2 2025
00:00 / 00:00

There are 6 speakers on the call.

Speaker 4

Good afternoon and welcome to the second quarter 2025 Connection Earnings Conference call. My name is Liz, 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. 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.

Speaker 3

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.

Speaker 3

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. 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 second quarter 2025 comparisons are being made against the second quarter 2024. Today's call is being webcast and will be available on Connection's website.

Speaker 3

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?

Speaker 5

Thank you, Samantha. Good afternoon, everyone, and thank you for joining us today for Connection's Q2 2025 conference call. I'll begin this afternoon with an overview of our second quarter results and highlights of our performance. Tom will then walk us through a more detailed look at our financials. The second quarter marks our fifth consecutive quarter of year-over-year revenue growth. We executed well in this dynamic technology landscape, and we remain focused on driving extraordinary value through the delivery of integrated IT solutions and outstanding customer service. Net sales were $759.7 million in the second quarter, an increase of 3.2% over last year. We continued to see momentum with mobility and desktop categories as our sales increased 6% year-over-year and 5% on a sequential basis, driven by Windows 11 refresh and demand for AI PCs.

Speaker 5

Revenue for advanced technologies and integrated solutions increased by 3% due to sales of server storage and networking solutions as customers are investing in data center refresh, server consolidation, and edge computing. Gross profit increased to a record $137.8 million, while gross margins were down to 18.1%, 40 basis points below last year. Gross profit was favorably affected by an increase in sales, however, the gross margin percentage declined due to changes in partner subscription licensing programs. Despite these changes, operating income remained flat at $30.9 million year-over-year. Net income for Q2 was $24.8 million, down 5.2% compared to $26.2 million in the prior year. We will now look a little deeper into our segment performance. In our Business Solutions segment, Q2 net sales were $293.2 million, an increase of 5.4% compared to the prior year. Gross profit increased by 3.8% to $68.8 million.

Speaker 5

Gross margin decreased 30 basis points compared to the prior year quarter to 23.5%. The decline in gross margin was due to the reduction in subscription licensing programs. In our Public Sector Solutions business, Q2 net sales were $140.5 million, 11.9% lower than a year ago. Sales to the federal government increased by $1.9 million, while sales to state, local government, and educational institutions decreased by $20.9 million. Sales to state, local government, and higher education institutions increased modestly, offset by a decrease in K-12 sales. Gross profit for the Public Sector segment was $21.3 million, a decrease of 11.9% compared to Q2 2024. Gross margin remained flat at 15.2% for the quarter compared to the prior year. In our Enterprise Solutions segment, Q2 net sales grew 9.1% to $326 million compared to last year. The increase in net sales was driven equally by advanced technologies and endpoint devices.

Speaker 5

Gross profit for the Enterprise segment was $47.6 million, 3.4% higher than the prior year. Gross margin decreased by 80 basis points to 14.6% for the quarter. The margin decrease was the result of changes in subscription license programs and netted software sales. 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?

Speaker 2

Thanks, Tim. In the second quarter, SG&A increased by 1.6% over the prior year. The increase in SG&A was primarily due to an increase in professional fees associated with matters that we believe will be resolved in the second half of the year. On a percentage of sales basis, SG&A decreased 20 basis points to 14.1% of net sales in the quarter compared to 14.3% last year. Operating income, as a percentage of sales, decreased slightly to 4.1% in the second quarter compared to 4.2% in the prior year. Interest income for Q2 amounted to $3.2 million compared to $4.7 million last year. The decrease was due to both lower cash balances and lower interest rates. Our Q2 effective tax rate was 27.3%, up from 26.4%. Net income for the quarter was $24.8 million, a decrease of 5.2% from $26.2 million in the prior year quarter.

Speaker 2

In Q2 2025, diluted earnings per share was $0.97, down $0.02. Adjusted diluted earnings per share was $0.97, down $0.03. Our trailing 12-month adjusted earnings before interest, income taxes, depreciation, and amortization, or adjusted EBITDA, was $122.5 million compared to $125.4 million a year ago, a decrease of 2%. In the second quarter, we paid a $0.15 per share quarterly dividend. We repurchased approximately 255,000 shares at an average price of $60.95 per share for a total cost of $15.5 million, bringing our year-to-date total shares repurchased to 952,000 at an average price of $63.35 per share for a total cost of $60.3 million. At the end of the quarter, we had $49.4 million remaining for stock repurchases under our existing stock repurchase program. Today, we also announced that our board of directors has declared a quarterly dividend of $0.15 per share.

Speaker 2

The dividend is payable to shareholders of record on August 12th, 2025, and payable on August 29th, 2025. Cash flow used in operations for the first half of 2025 was $26.1 million, primarily driven by an increase in inventory of $38.4 million and an increase in accounts receivable of $26.7 million. These outflows were partially offset by $38.3 million in net income and an increase in accounts payable of $3.4 million. The increase in inventory was a result of our decision to stage inventory for customer rollouts in advance of anticipated price increases resulting from tariffs. Our accounts receivable balance increased $26.7 million for the first half of 2025 due to the timing of payments from customers, and our accounts payable balance increased $3.4 million for the first half of 2025.

Speaker 2

Cash generated from investing activities of $103.1 million during the first half of 2025 was a result of $108.8 million of proceeds from the sales of investments and $50 million of investment maturities, offset by $52.4 million of investment purchases. We used $68.5 million of cash for financing activities during the first half of 2025, primarily for repurchases of $60.5 million of stock and a payment of $7.7 million in dividends to shareholders. We ended Q2 with $346.1 million of cash, cash equivalents, and short-term investments. I will now turn the call back over to Tim to discuss current market trends.

Speaker 5

Thanks, Tom. We delivered solid results despite the challenging economic environment, combined with the material reductions in subscription licensing programs. While the impact of these program changes occurred throughout the year, the effect is the largest in Q2. We have successfully implemented several initiatives to diminish the impact. However, we were unable to completely offset the reduction in fees this quarter. We expect less impact in the second half of the year. Looking forward, we are encouraged by several key trends in our business. We expect the PC refresh cycle to continue. There are compelling business cases for data center modernization. Demand for solutions, including edge AI and AI-enabled endpoints, is driving pipeline growth. We continue to expand our technical solutions, helping our customers design, implement, migrate, and manage their IT infrastructure.

Speaker 5

We are investing in education and tools to enable our teams to help our customers with AI and next-generation architectures. Finally, our backlog continues to be strong, and at the end of Q2, it was at its highest level in nearly two years. In addition to these positive technology trends, Connection was also recognized by our partner community for growth and innovation. We have been the recipient of a number of awards, including Lenovo 360 Nationals Partner of the Year, Veeam’s US Value-Added Reseller Growth Partner of the Year, and we achieved the full suite of Microsoft Security Specializations. As we enter the second half of 2025, we're confident in our strategy and expect business will continue to improve. We'll continue to invest in key projects and programs to enhance our sales, service delivery, and systems.

Speaker 5

We are allocating more resources toward driving long-term growth and strengthening the foundation of our business. In addition, we continue our initiatives to reduce costs and increase productivity. We're optimistic about our prospects for the balance of the year and believe we can outperform the U.S. IT market growth by 200 basis points. We believe our focus and business strategy remain 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. 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.

Speaker 5

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.

Speaker 4

If you'd like to ask a question at this time, please press *11 on your telephone and wait for your name to be announced. To withdraw your question, please press *11 again. Our first question will come from the line of Adam Tindle with Raymond James.

Speaker 4

Okay, thanks. Good afternoon. Tim, at the end there, you talked about a lot of bullishness around the pipeline that you're seeing into the back half of the year, and I wanted to ask about that. Before I do, maybe just get some context for how we're moving into the back half of the year. The question would be if you could just touch on maybe the cadence of the quarter and some trends that you're seeing into July. Is this something that's, you know, we're seeing sort of acceleration into the month of July or how you would characterize the cadence of demand in the quarter?

Speaker 4

Secondly, on that pipeline commentary for the back half of the year, just wonder if you could maybe double-click on that, put any sort of additional parameters to help us understand how much it's increased or how we could kind of think about this relative to maybe where this was prior. Thanks. Great.

Speaker 2

Thank you, Adam. To begin with, I think a good part of our confidence comes from our customers' discussions and planned rollouts for the back half of the year. You heard me say on the call that our pipeline is strong, our backlog is at a record level, and overall, there's just a pickup in activity. Indeed, that has continued into July with the conversations around the back half of the year. Adam, as you also know, there's been a lot of optimism around the year, and for the first half of 2025, that was probably a little slower than we thought. Look at all the drivers of growth. We expected, I think, a bigger first half, and that didn't happen. I think the tariff discussions are now taking a back seat to the more technology and solution-based discussions. That's really what drives my optimism.

Speaker 2

We still want to be a little cautious with that, but we're excited about the conversations, the pipeline, and the backlog.

Speaker 2

Got it. Okay, thanks. You talked about also staging inventory for customer rollouts ahead of price increases, or potential price increases, I should say. I just wonder, is that something that customers are asking you to do, or is this sort of proactive on your part? I wonder if you also might kind of double-click on how you're thinking about timing and magnitude of potential price increases, and maybe Tom can weigh in on how you're thinking about potentially protecting that working capital investment that you're making for those customer rollouts and what that means for cash flow in the back half of the year. Thanks.

Speaker 2

Yeah, I would say, Adam, in terms of the rollouts, I would say two-thirds of that to 75% of that is customer inventory for customers, customer-specific. We did do some buy-ins for a little bit, just to try to take advantage of some favorable pricing. I think as we go forward, working capital, the inventory is committed, so we're not, we're certainly not going to get stuck with anything, but we're going to have to roll it out to the customers over the next two quarters would be my guess.

Speaker 5

Yeah, we don't see a lot of risk with our current inventory because it is largely solution-based, customer-driven. Regarding the tariff-driven price increases in the back half of the year, that is a much bigger question mark. It's just really hard to qualify. Our suppliers are now saying that more than a majority of notebooks are now coming out of Vietnam, and so the tariffs will be reduced. As you know, the majority of desktops and servers are now coming out of Mexico, for example. There's so much movement and so much up and down there that we're starting to get a level of confidence that the tariffs will drive some increases, but perhaps less than we thought for the back half of the year.

Speaker 5

Okay, and Tom, just thinking about cash flow, I know that's probably a little bit of a tougher question from a timing perspective, but I think we're at a use year to date here in the first half. Does that potentially reverse itself in the back half, or do you think we'll still be kind of like in a use for 2025? If you could put any, you know, sort of ballpark magnitude on that.

Speaker 2

At the end of December, our inventories were abnormally low. I think they were like $95 million. Typically, they're in the $120 million-ish range. We've kind of normalized back on that. I would say it will reverse. I believe it will reverse, and we will generate positive cash flow for the year. It's probably going to be in the, I would say, in the range of, you know, kind of on the same trend we're on now, where our operating cash flow is roughly our net income for this quarter. I think that trend will probably continue.

Speaker 2

Got it. That's helpful. Thank you.

Speaker 5

Thank you.

Speaker 4

Our next question comes from Anthony Livozinski with Stifel.

Speaker 4

Good afternoon, and thank you for taking the questions. It's certainly nice to hear the optimism and the bullishness that you talked about. I'm just curious, as we move into the back half of the year, how do we think about the gross margins? Should we see kind of similar levels as you saw in the second quarter, or if you could provide us some general directional guidance in regards to that, that'd be great.

Speaker 2

Yeah, I think, Anthony, your margins will probably hold about where they are, give or take 10 or 15 basis points. We mentioned a couple of times in the script about the impact of some of the licensing fee programs. When you look at our decline in gross margins this quarter, year over year, it's almost entirely due to that. I feel like things have kind of stabilized absent that one item.

Speaker 2

Thanks for that clarification, Tom. Just thinking about the different vertical markets that you guys serve, just wondering what are you seeing that which markets are you particularly excited about for the back half of the year?

Speaker 5

For the back half of the year, you know, there's some optimism clearly with our retail and our manufacturing markets. We have projects and opportunities planned there. For the front half, we did a little better in finance and in healthcare. Healthcare dropped off a little in the second quarter, and a lot of that is about a year over year compared for some big epic rollouts that we completed a year ago in the quarter. That said, the vertical market outlook is strong because it's solution-driven. As you know, so many of the newer technologies will drive real productivity gains into those verticals, again, like retail and manufacturing.

Speaker 5

Gotcha. Tim, towards the end of your prepared remarks, you said that you guys are continuing to invest more resources to drive long-term growth. Can you give us some examples of things that you're doing and what do you hope to be able to achieve from those initiatives?

Speaker 5

Yeah, so we're doing probably a three-pronged kind of approach there, Anthony. The first is, you know, we're investing in good people across the board where we can find them, focused, excuse me, on sales and solutions. That effort will continue. Secondly, we've invested in our platforms, and we are doing a lot with productivity packages around solutions and around sales. We made big investments there, and that will continue for the back half. Finally, internally, we're investing in some additional AI initiatives, and that should drive a pretty solid ROI. I'll turn it over to Tom to see what perhaps I've forgotten.

Speaker 2

I think some of the tools that we're investing in to make our salespeople more effective and more productive are spot on. Those are significant investments, and they're starting to have an impact. We have some particularly good projects rolled out this year because of those. I think we're in large part due to that. We're going to continue to invest in anything that makes our salespeople more productive.

Speaker 2

That's very helpful. Thank you very much, and best of luck.

Speaker 2

Thank you, Anthony.

Speaker 4

That concludes today's question and answer session. I'd like to turn the call back to Tim McGrath for closing remarks.

Speaker 5

Thanks, Liz. 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 greatly appreciated. Have a great evening.

Speaker 4

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

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