PC Connection Q1 Earnings Call Highlights

Key Points

• Solid start to 2026: Gross billings rose 4.3% to $1.0 billion and net sales were up 3% to $721.9 million, with gross margin expanding 20 bps to 18.4%; operating income increased 39.3% to $20.2 million and net income rose 27.8% to $17.2 million (EPS $0.68, adjusted $0.77).
• Commercial strength vs. public-sector drag: Connection Business Solutions sales grew 6.6% to $275.6 million and Enterprise Solutions surged 16.3% to $346.5 million (record backlog), while Public Sector sales declined 31% to $99.8 million due to a non‑recurring federal contract.
• Supply-driven dynamics and liquidity actions: Memory shortages lifted prices while unit volumes fell, prompting a planned inventory build of $50.7 million and elevated backlog; the company maintained capital returns with a $0.20 quarterly dividend and ~42,000 shares repurchased, though management warned of uncertainty later in 2026.

PC Connection NASDAQ: CNXN reported a “solid start to 2026” in its first-quarter earnings call, as growth in its Business Solutions and Enterprise Solutions segments helped offset an anticipated year-over-year decline in Public Sector results tied to a prior-period, non-repeating federal project.

First-quarter results show higher sales, expanding margins

President and CEO Tim McGrath said the company executed “with discipline and agility despite ongoing supply challenges and a dynamic economic landscape.” On a consolidated basis, he reported gross billings increased 4.3% year-over-year to $1.0 billion, while net sales rose 3% to $721.9 million. Gross profit increased 4.3% to $132.7 million, and gross margin expanded 20 basis points to 18.4%.

McGrath attributed margin performance to “disciplined pricing strategy” and execution navigating costs, along with favorable shifts in product and customer mix. He also said growth was driven by endpoint devices, networking, services, and software, including cloud and security offerings.

Segment performance: Business and Enterprise strength; Public Sector down on tough comp

McGrath highlighted strength in the company’s two commercial segments:

• Connection Business Solutions: Net sales rose 6.6% to $275.6 million; gross profit increased 3.2% to a record $67.5 million. Gross billings grew 9.3% to $446.0 million. Gross margin declined 80 basis points to 24.5%, which management said was due to a shift in customer mix. McGrath said the segment posted double-digit growth in networking and in software (including cloud and security).
• Connection Enterprise Solutions: Net sales increased 16.3% to $346.5 million, driven by demand for endpoint devices. Gross profit rose 18.7% to $50.2 million, and gross billings increased 10.3% to $439.6 million. Gross margin was 14.5%, up 30 basis points, reflecting product-mix changes.
• Connection Public Sector Solutions: Net sales fell 31% to $99.8 million, which McGrath said was “mostly due to the large federal contract” that was non-recurring and previously discussed. Gross billings declined 21.2% to $135.7 million. Gross margin expanded 140 basis points to 15% on favorable customer and product mix.

McGrath said Public Sector underlying performance was stable excluding the non-recurring item, and he added that management expects conditions to improve as 2026 progresses.

Supply constraints and pricing: memory shortages influence demand patterns

Management said industry-wide memory constraints and related price increases began to impact results in the first quarter. McGrath said the company engaged in planning sessions with partners and customers to manage supply limitations, and described mixed customer behavior: some pulled purchases forward, while others took a more measured approach due to budgets and project timing.

On Enterprise Solutions, McGrath said the segment was “the most affected by supply chain dynamics,” with some pull-in activity benefiting enterprise revenue by “low to mid-single digits” as a percentage in the quarter. He also said some enterprise customers made aggressive commitments to secure supply ahead of needs, which did not affect revenue and profit but increased inventory. McGrath added that Enterprise ended the quarter with a record backlog.

In the Q&A, Raymond James analyst Adam Tindle asked whether elevated backlog resembled 2022 conditions, when channel double-ordering was a concern. McGrath said the company has “better tools and really much better visibility” than in 2022 and stated, “I don’t think there’s any evidence at all of double orders,” while noting some customers are ordering more aggressively to get ahead of potential shortages and price increases.

CFO Tom Baker said Connection typically requires “non-cancelable POs” before committing for product unless product can be returned. He added that in 2022 the company had “virtually no issues” and said he did not see a reason the current environment should be different. Baker also said elevated backlog in Business Solutions included orders the company could not fulfill due to availability.

Asked about pricing versus unit trends, Baker said pricing increases were “pretty pervasive,” while unit volumes declined, adding: “In general, what we’re seeing is prices are up and unit counts are coming down.” McGrath said that, at least at the time of the call, price inflation “a little more than offset” reduced units.

Profitability improves as SG&A declines; severance charge taken

Baker said SG&A declined modestly year-over-year, driven by lower marketing costs due to timing and a decrease in payroll, partially offset by higher variable compensation. He said Connection executed a net headcount reduction of 3% year-over-year and took additional actions at the end of January to streamline costs, resulting in a $3.1 million severance charge.

SG&A was 15.2% of net sales, down 50 basis points. Operating income increased 39.3% to $20.2 million. Excluding severance and other charges, operating income rose 33.4% to $23.3 million. Operating margin improved to 2.8% from 2.1%, and was 3.2% excluding severance and other charges.

Net income increased 27.8% to $17.2 million. Diluted EPS was $0.68, up $0.17, while adjusted diluted EPS was $0.77, also up $0.17. Baker cited an effective tax rate of 27% and interest income of $3.4 million, down from $3.9 million a year ago due primarily to a lower interest rate environment.

Capital returns, liquidity, and inventory build

Baker said the company continued returning capital through dividends and buybacks. Connection paid a quarterly dividend of $0.20 per share and repurchased about 42,000 shares at an average price of $57.70, for a total cost of $2.4 million. The board also declared another $0.20 per share dividend payable May 29, 2026, to shareholders of record May 12, 2026. Baker said $81.2 million remained under the repurchase authorization.

Operating cash flow was $14.3 million, reflecting working capital investment that included a $50.7 million increase in inventory and a $13.7 million increase in accounts receivable, partially offset by a $58.1 million increase in accounts payable. Baker said the inventory increase was planned, as the company procured ahead of anticipated price increases and to support continuity of supply for customer deployments.

Connection ended the quarter with $411.4 million in cash equivalents and short-term investments, which Baker described as providing flexibility for strategic priorities and continued capital returns.

Looking ahead, McGrath said key technology trends—including a PC refresh cycle continuing through 2026, data center modernization, and expanding AI-driven demand—are supporting pipeline and customer activity. He also said the company’s backlog was at its highest level since mid-2022. Baker noted some uncertainty around how pricing dynamics and the memory shortage may evolve, saying management was not yet confident enough to conclude 2026 would be materially better than previously thought and that there “may be a little bit of softening in the back end of the year.”

About PC Connection NASDAQ: CNXN

PC Connection, Inc NASDAQ: CNXN, now operating under the trade name Connection, is a value-added provider of information technology solutions founded in 1982 and headquartered in Merrimack, New Hampshire. The company offers a broad portfolio of hardware and software products sourced from leading technology vendors, alongside professional services designed to help organizations design, deploy and maintain IT environments.

Connection's product offerings encompass desktop and notebook computers, servers and storage systems, networking and cybersecurity solutions, as well as cloud and virtualization technologies.

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