PC Connection, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Overall, third quarter was solid with record gross profit ($138.6 million, +2.4% year-over-year) and gross margin 19.6% (+90 basis points).
• Operating income was flat year-over-year, net income $24.7 million (down from $27.1 million last year), diluted EPS $0.97 (down $0.05).
• Returned capital to shareholders via dividends and share repurchases; board declared quarterly dividend of $0.15 per share.
• Backlog ended Q3 at its highest level in nearly 2 years, largely driven by enterprise business.

Segment Performance

• Business Solutions: Net sales grew 1.7% to $256.8 million, gross profit increased 7.8% to $68 million, with gross margin reaching a record 26.5% (up 150 basis points year-over-year). Driven by strength in cloud and cybersecurity offerings.
• Public Sector Solutions: Net sales were $132.5 million, down 24.3% year-over-year due to timing of federal projects and funding uncertainty. Gross margin was 17.2% (up 230 basis points) due to higher mix of cloud and cybersecurity solutions.
• Enterprise Solutions: Net sales grew 7.7% to $319.8 million, gross profit up 3.4% to $47.8 million. Gross margin was 14.9% (slightly down due to changes in subscription license programs and software mix), with strength in AI infrastructure, data center modernization, and edge computing.

Guidance

• Enterprise segment sees budget flush and pipeline building; Business Solutions expects good Q4. Public Sector recovery timing uncertain.
• Next quarter expected mid-single digit revenue growth; gross margins likely flat year-over-year due to mix.
• 2026 expected mid-single digit growth with potential for higher if normalization occurs.

Risks

• Public Sector business affected by federal project timing, funding uncertainty, and government shutdown impact on shipments.
• Potential impact of supply challenges or customer delays on backlog resolution.

Question and Answer

Q: Thoughts on year-end/Q4 and top-line growth?

A: Enterprise has momentum, Business Solutions expects good Q4, but Public Sector recovery timing uncertain.

Q: Backlog build rationale?

A: Majority of backlog is customer-driven, delays on customer side; Public Sector large rollout last year affected revenue.

Q: 2026 IT spending and PC refresh?

A: PC refresh continues but at lower pace; data center, cloud, cyber growth expected.

Q: Public Sector shutdown impact?

A: Shutdown affects shipments, hoping for resolution to catch up demand.

Q: Profitability and margins?

A: Gross margins likely flat year-over-year next quarter; G&A spending may be higher with revenue.

Q: Acquisitions?

A: Looking at tuck-in acquisitions to enhance solutions, but no current reports.