PC Connection, Inc. Q4 FY2025 earnings call

• Fourth quarter results: Record gross profit in business solutions and enterprise solutions segments; public sector results disappointing. - Gross billings: Increased 2.9% to $1,060,000,000. - Consolidated performance: Gross profit increased 4.5% year over year to $135,600,000, gross margin expanded 100 basis points to 19.3%, total net sales $702,900,000, down 0.8% due to public sector challenges. - SG&A: Increased 1.7% year over year, driven by higher variable compensation; headcount down 2% year over year. - Key vertical markets: Retail net sales grew 22%, financial services net sales up 28% and gross profit increased 13%, health care net sales grew 19% and gross profit improved 18%.

Business solutions: Net sales increased 4.2% to $273,500,000, gross profit rose 11.4% to $69,800,000, gross billings grew 4.7% to $430,300,000, and gross margin expanded by 160 basis points to 25.5%. Public sector solutions: Net sales were $90,800,000, down 36.8% from a year ago, gross billings declined 23.7% to $170,700,000, but gross margin expanded 400 basis points to 19.4%. Enterprise Solutions: Net sales increased 11.9% to $338,700,000, gross profit grew 7.1% to $48,200,000, gross billings increased 16.1% to $457,800,000, and gross margin was 14.2%, down 70 basis points.

• Strategy remains clear: Expanding solutions-led business, deepening customer relationships, driving profitable growth in cloud, cybersecurity, AI, and services. - Expect to outperform the US IT market by 200 basis points in 2026. - Q4 had public sector headwinds, but future quarters expect to eliminate some of those headwinds as demand builds. - 2026 sees continued momentum in areas like PC refresh cycle, data center modernization, and AI-driven demand.

• Public sector: Non-repeating project straddling Q4 2024 and Q1 2025 and delay in project rollouts; also, a large public sector contract did not renew, causing headwinds. - Market factors: Memory supply constraints may affect the pace at which demand is realized.

Q: How would you define the US IT market growth baseline for 2026 and what are the internal budget trends?

A: Around 4% is a blended growth number we're working with; internally, budget for growth is higher, with demand for AI at the edge and edge product projects expanding.

Q: Why did you pull back on headcount despite a healthy IT market environment?

A: Internal system improvements and AI driving productivity gains are the main drivers; demand is solid for 2026 and we're operationally excellent.

Q: Comment on the cadence of sales or gross billings during Q4 and budget flush?

A: Saw market increase in December revenue, with some customers consuming budget before year-end and others trying to get ahead of price increases.

Q: Was memory supply constraints an issue in Q4?

A: Saw some price increases in Q4 but it didn't affect us much; advising customers to order soon as memory constraints continue.

Q: How do we think about operating margins going forward with cost reduction?

A: Cost reduction of $7,000,000 to $8,000,000 per year will improve operating leverage, aiming to get closer to 3.789% by year-end.