PC Connection, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Second quarter marks fifth consecutive quarter of year-over-year revenue growth, with net sales at $759.7 million, up 3.2% y/y.
• Mobility and desktop sales up 6% y/y and 5% sequentially driven by Windows 11 refresh and AI PC demand; advanced technologies and integrated solutions up 3% y/y due to data center investments.
• Gross profit reached a record $137.8 million, but gross margin fell to 18.1%, 40 basis points below last year, affected by partner subscription licensing changes.
• Operating income flat at $30.9 million y/y; net income $24.8 million, down 5.2% y/y.
• SG&A increased 1.6% y/y, but % of sales down 20 basis points to 14.1%. Interest income down due to lower cash and rates; effective tax rate 27.3%, up from 26.4%.
• Declared $0.15 per share quarterly dividend; repurchased ~255k shares in Q2 with $15.5 million total cost.
• Cash flow used in operations in H1 2025 due to inventory and receivable increases, partially offset by net income and payable increases; cash from investing activities $103.1 million in H1; cash from financing activities $68.5 million in H1.
• Backlog at highest level in nearly 2 years; recognized by partners with awards like Lenovo and Veeam honors.

Segment Performance

• Business Solutions: 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, while gross margin decreased 30 basis points to 23.5% due to reduction in subscription licensing programs.
• Public Sector Solutions: Q2 net sales were $140.5 million, 11.9% lower than a year ago. Sales to federal government increased, but sales to state, local government, and educational institutions decreased. Gross profit was $21.3 million, a decrease of 11.9% compared to Q2 '24, with gross margin remaining flat at 15.2%.
• Enterprise Solutions: Q2 net sales grew 9.1% to $326 million compared to last year. Gross profit was $47.6 million, 3.4% higher than the prior year, but gross margin decreased by 80 basis points to 14.6% due to changes in subscription license programs and netted software sales.

Guidance

• Expect less impact from subscription program changes in the second half of 2025.
• Confident in strategy, expecting business to improve and aim to outperform the U.S. IT market growth by 200 basis points.
• Pipeline strong, backlog at record; PC refresh, data center modernization, and Edge AI driving growth prospects.

Risks

• Uncertainty regarding the timing and magnitude of tariff price increases.
• Changes in partner subscription licensing programs negatively impacted gross margins.
• Timing of customer payments and inventory staging for tariff anticipation affected cash flow dynamics.

Question and Answer

Q: Cadence of demand into July and pipeline commentary A: Confidence from customer discussions, backlog at record level, and a pickup in activity into July; pipeline strong with ongoing customer rollouts for the back half Q: Inventory staging for price increases, timing and magnitude of tariffs A: ~75% of inventory is customer-specific for rollouts; tariffs hard to qualify but less impact expected in the second half of 2025 Q: Cash flow reversal in the second half of 2025 A: Inventories normalized from abnormally low levels, expect positive cash flow for the year with operating cash flow trend continuing similar to current quarter Q: Gross margin direction in the second half of 2025 A: Margins likely to hold around current levels, stabilized absent the impact of subscription licensing programs Q: Excited vertical markets in the second half of 2025 A: Optimism around retail and manufacturing markets; health care had a year-over-year drop but solution-driven opportunities remain strong Q: Examples of long-term growth investments A: Investing in people focused on sales and solutions, platforms for productivity and sales, and additional AI initiatives to drive ROI