What PC Connection (CNXN) Said on Its Q3 Earnings Call

Key Points

• Record Q3 performance: PC Connection’s net sales rose 23.3% year over year to $874.3 million, gross profit increased 16.7% to $161.9 million, and diluted EPS climbed 27.8% to $1.24. Operating income and adjusted EBITDA also reached record levels.
• Broad-based demand drove growth: Server and storage sales increased 45.1%, networking rose 43.3%, and Enterprise Solutions revenue grew 27.4% to a record $407.5 million, supported by a record backlog.
• Outlook remains positive but mixed: Management expects endpoint demand to moderate in 2027 after the current upgrade cycle, while on-premises infrastructure, servers, networking, security and software demand should remain solid. Gross margin fell to 18.5% because of customer and product mix, including lower-margin endpoint sales and software accounting effects.

PC Connection NASDAQ: CNXN reported record third-quarter net sales, gross billings and gross profit, as demand rose across endpoint devices, software, servers, storage and networking products.

Net sales increased 23.3% year over year to $874.3 million, while gross billings rose 19.4% to $1.3 billion. Gross profit grew 16.7% to a record $161.9 million. Gross margin declined 110 basis points to 18.5%, which President and Chief Executive Officer Tim McGrath attributed to customer mix, large project rollouts and a lower contribution from software revenue recognized on a net basis.

McGrath said customers are seeking more control over their data, applications and technology infrastructure as artificial intelligence becomes more central to business operations. He said the company’s strategy centers on digital workspace, modern infrastructure and multicloud, and supply chain and lifecycle services.

Growth Across Product Categories and Segments

Connection said growth was broad-based during the quarter. Notebooks, mobility and desktops sales increased 26.6%, software sales rose 23.2%, server and storage sales increased 45.1%, and networking sales grew 43.3%.

• Business Solutions: Net sales increased 27.8% to $328.2 million, gross profit rose 14.9% to $78.2 million, and gross billings grew 22.1% to a record $522.7 million. Gross margin fell to 23.8% from 26.5%, reflecting customer mix and a lower contribution from net-basis software sales.
• Public Sector Solutions: Net sales rose 4.6% to $138.6 million and gross billings increased 6.8% to $233.3 million. Gross margin declined 30 basis points to 16.9%, reflecting greater sales of lower-margin endpoint devices and changes in customer mix.
• Enterprise Solutions: Net sales rose 27.4% to a record $407.5 million, while gross profit increased 26% to a record $60.2 million. Gross billings grew 23.1% to a record $521.2 million. Gross margin declined 10 basis points to 14.8%.

McGrath said Enterprise Solutions ended the quarter with a record backlog, which he said positioned the segment for continued momentum in the fourth quarter.

During the question-and-answer session, McGrath said Public Sector Solutions benefited from a strong performance in state, local and education markets, while the company continued to rebuild its federal business. He said the federal operation returned to growth and that management was optimistic about its growth trajectory.

Profitability and Capital Returns

Senior Vice President and Chief Financial Officer Tom Baker said selling, general and administrative expense increased 11.5% to $120.9 million, but declined to 13.8% of net sales from 15.3% a year earlier. The increase in spending reflected higher variable compensation associated with gross-profit growth, event-related marketing costs and investments in platform modernization, he said.

Operating income increased 35.4% to $41 million, and operating margin improved to 4.7% from 4.3%. Net income rose 27.2% to $31.5 million, while diluted earnings per share increased 27.8% to $1.24.

Trailing 12-month adjusted EBITDA reached a record $155.2 million, up 26% from $122.7 million a year earlier. The company paid a quarterly dividend of $0.20 per share and announced another $0.20-per-share dividend payable Nov. 27, 2026, to shareholders of record on Nov. 10, 2026. Connection had $81.2 million remaining under its stock repurchase authorization.

For the first nine months of 2026, cash used in operations totaled $39.8 million, reflecting working-capital investments supporting growth. Accounts receivable increased $144.8 million and inventory rose $83 million, partly offset by a $74.5 million increase in accounts payable. The company ended the quarter with $343.3 million in cash equivalents and short-term investments.

Pricing, Demand and Outlook

Management said pricing pressure and supply-chain conditions continued to affect customer purchasing decisions. Some customers accelerated purchases ahead of further price increases, while others delayed investments or extended the life of existing technology assets.

McGrath said approximately half of the year-over-year gross-margin decline stemmed from software accounting mix, while the remainder reflected customer and product mix. He noted that notebook and laptop revenue rose more than 30%, although unit count declined about 5%, indicating a changed pricing environment.

The company said healthcare net sales increased 34% and gross profit rose 33%. Financial services net sales increased 12% and gross profit grew 11%, while manufacturing net sales rose 26% and gross profit increased 10%.

Looking to the fourth quarter, Baker said the company historically experiences a 3% to 4% sequential decline in sales from the third quarter and expects that pattern to recur, with SG&A tracking accordingly. McGrath said Connection entered the quarter with a strong backlog and funnel, but management had not seen signs of an unusual year-end budget flush.

For 2027, McGrath said the company expects endpoint demand to be slightly lower than in 2026 as much of the device upgrade cycle has passed. However, he said demand for on-premises infrastructure, agentic servers, networking, security and software should remain solid. Management expects Connection to outperform the U.S. IT market by 200 basis points in 2026.

About PC Connection (NASDAQ:CNXN)

PC Connection, Inc is an information technology solutions provider that supplies technology products, services and expertise to businesses, government agencies, educational institutions and other organizations. The company helps customers plan, acquire, deploy and manage IT environments across workplace, data center, networking, security and cloud infrastructure.

Its offerings include computers, servers, storage systems, networking equipment, software, peripherals and related technology accessories.

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