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PC CONNECTION INC (CNXN)·Q2 2025 Earnings Summary

Executive Summary

  • Q2 2025 delivered fifth consecutive y/y net sales growth, with revenue $759.7M (+3.2% y/y), gross profit a record $137.8M, but gross margin compressed to 18.1% (-40bps y/y) and diluted EPS $0.97 (-2% y/y) as subscription licensing changes weighed on margin .
  • Versus estimates, EPS beat (actual $0.97 vs $0.905 consensus), while revenue was a slight miss ($759.7M vs $764.1M consensus); sequentially, revenue and EPS improved from Q1 on Windows 11 refresh and AI PC demand .
  • Management expects gross margins to “hold” within ±10–15bps and less impact from subscription program changes in 2H; backlog ended Q2 at its highest level in nearly two years, underpinning confidence to outperform U.S. IT market growth by ~200bps .
  • Capital returns remained active: $0.15 dividend declared (payable Aug 29) and 255K shares repurchased for $15.5M; $49.4M remains under the buyback program, supporting shareholder yield .
  • Near-term stock reaction catalysts: backlog strength, sustained PC refresh and AI endpoints, and clarity around licensing program impacts and tariffs; watch for estimate revisions given EPS beat and margin stabilization commentary .

What Went Well and What Went Wrong

What Went Well

  • Record gross profit ($137.8M) with fifth straight y/y net sales growth; momentum in endpoints and advanced technologies (servers/storage/networking) tied to Windows 11 and data center refresh .
  • EPS resilience despite licensing fee changes; management executed cost discipline with SG&A at 14.1% of sales (-20bps y/y) .
  • Backlog at a near two-year high and pipeline strength into 2H; CEO: “We’re optimistic… believe we can outperform the U.S. IT market growth by 200 basis points” .

What Went Wrong

  • Gross margin down 40bps y/y to 18.1% primarily due to changes in partner subscription licensing programs; operating margin ticked down y/y to 4.1% .
  • Public Sector net sales fell 11.9% y/y to $140.5M; segment gross profit down 11.9% y/y with margin flat at 15.2% .
  • Interest income decreased to $3.2M (vs $4.7M prior-year) given lower balances/rates; effective tax rate rose to 27.3% (vs 26.4%) impacting net income (-5.2% y/y to $24.8M) .

Financial Results

MetricQ4 2024Q1 2025Q2 2025
Revenue ($USD Millions)$708.9 $701.0 $759.7
YoY Growth %+2% +10.9% +3.2%
Gross Profit ($USD Millions)$129.8 $127.3 $137.8
Gross Margin %18.3% 18.2% 18.1%
Operating Income ($USD Millions)$22.6 $14.5 $30.9
Operating Margin %3.2% 2.1% 4.1%
Net Income ($USD Millions)$20.7 $13.5 $24.8
Diluted EPS ($USD)$0.78 $0.51 $0.97
Estimates vs ActualsQ4 2024Q1 2025Q2 2025
Revenue Consensus Mean ($USD Millions)$716.2*$646.0*$764.1*
Revenue Actual ($USD Millions)$708.9 $701.0 $759.7
ResultMiss*Beat*Miss*
Primary EPS Consensus Mean ($USD)$0.90*$0.415*$0.905*
Primary EPS Actual ($USD)$0.78 $0.60 (Adj) $0.97
ResultMiss*Beat*Beat*
# of Estimates (EPS/Revenue)2 / 2*2 / 2*2 / 2*
Segment BreakdownQ4 2024 Net Sales ($M)Q4 2024 Gross Margin %Q1 2025 Net Sales ($M)Q1 2025 Gross Margin %Q2 2025 Net Sales ($M)Q2 2025 Gross Margin %
Business Solutions$262.4 23.9% $258.4 25.3% $293.2 23.5%
Enterprise Solutions$302.7 14.9% $298.0 14.2% $326.0 14.6%
Public Sector Solutions$143.7 15.4% $144.7 13.6% $140.5 15.2%
KPIs and Operating DetailsQ4 2024Q1 2025Q2 2025
Inventory Turns23 18 17
Days Sales Outstanding72 72 68
SG&A as % of Net Sales15.1% 15.7% 14.1%
Interest Income ($M)$4.672 $3.900 $3.216
Cash & Short-term Investments ($M)$442.6 $340.3 $346.1
Share Repurchases (Quarter)69,366 sh, $4.9M 697,069 sh, $44.8M 254,695 sh, $15.5M

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Gross Margin Direction2H 2025None provided“Margins will probably hold… give or take 10 or 15 basis points” Maintained/stable
Subscription Licensing Impact2H 2025Ongoing impact“Less impact in the second half of the year” Improved
Market Growth OutperformanceFull-year 2025None provided“Outperform the U.S. IT market growth by 200 basis points” Introduced
Tariff Impact on Pricing2H 2025Elevated concernSuppliers shifting notebook production to Vietnam; desktops/servers to Mexico; tariff impact “perhaps less than we thought” Reduced risk
Operating Cash FlowFY 2025None providedCFO expects full-year positive operating cash flow; roughly tracking net income run-rate Improved
DividendQ2 2025$0.15 (Q1) $0.15 declared; payable Aug 29, 2025 Maintained
Share Repurchase AuthorizationQ1 to Q2 2025Increased by $50M to $170M total; $50.5M available post-increase $49.4M remaining at Q2 end Drawdown through repurchases

Earnings Call Themes & Trends

TopicQ4 2024Q1 2025Q2 2025Trend
AI/Technology InitiativesInvestments to enhance integrated solutions incl. AI; record gross margins on advanced technologies Double-digit growth in digital workplace and datacenter modernization (servers/storage/cloud/software) Pipeline driven by edge AI and AI-enabled endpoints; investing in AI tools and education Strengthening focus; accelerating demand
Supply Chain/TariffsMacro/shipping cost risks noted —Staged inventory ahead of possible tariff-driven price increases; majority of notebooks from Vietnam, desktops/servers from Mexico reducing tariff impact Risk moderating; proactive staging
Subscription Licensing Programs——Material reductions in partner subscription licensing fees pressured margins; less impact expected in 2H Headwind peaking; easing ahead
Product PerformanceNotebooks/mobility strong (+14% y/y mix) Endpoints up 21% y/y; servers/storage +18% y/y Endpoints +6% y/y; servers/storage +12% y/y Sustained endpoint and infrastructure demand
Vertical MarketsPublic Sector strong in Q4 (federal up) Public Sector up 54.7% y/y (federal +228%) Optimism in retail/manufacturing; healthcare softer on tough comp from prior epic implementations Mixed; retail/manufacturing improving
Backlog/Pipeline——Backlog highest in nearly two years; pipeline strong into July/2H Building support for 2H

Management Commentary

  • CEO: “Q2 2025 represents our fifth consecutive quarter of year-over-year net sales growth… positive momentum in advanced technologies and end point devices.”
  • CEO: “We’re optimistic… believe we can outperform the U.S. IT market growth by 200 basis points.”
  • CFO on margins: “Margins will probably hold about where they are, give or take 10 or 15 basis points… decline almost entirely due to licensing fee programs.”
  • CFO on cash flow and staging: “We will generate positive cash flow for the year… inventory is committed… roll out to customers over the next two quarters.”
  • CEO on tariffs: Suppliers shifting production (notebooks Vietnam; desktops/servers Mexico) → tariff-driven price increases likely less than initially expected .

Q&A Highlights

  • Back half demand cadence and pipeline: Management cited continued pickup into July, record backlog, and stronger technology solution-based discussions vs tariff focus .
  • Inventory staging ahead of tariffs: ~66–75% customer-specific; committed working capital with rollout over next two quarters; low risk of getting stuck with inventory .
  • Gross margin trajectory: Expect GM to hold within ±10–15bps, with licensing program impacts largely explaining y/y compression and expected to diminish in 2H .
  • Vertical markets: Retail and manufacturing outlook improving; healthcare softer on prior-year epic rollout comp; finance strong in 1H .
  • Productivity investments: Ongoing spend in platforms and tools to increase sales force effectiveness; additional AI initiatives targeting ROI .

Estimates Context

  • Q2 2025: EPS beat — $0.97 actual vs $0.905 consensus*; Revenue slight miss — $759.7M actual vs $764.1M consensus* .
  • Q1 2025: EPS beat — $0.60 adjusted vs $0.415 consensus*; Revenue beat — $701.0M vs $646.0M consensus* .
  • Q4 2024: EPS miss — $0.78 vs $0.90 consensus*; Revenue miss — $708.9M vs $716.2M consensus* .
  • With management guiding margin stability and less licensing impact in 2H, estimates may need upward adjustment on EPS trajectory; revenue revisions will hinge on PC refresh sustainability and timing of staged inventory rollouts .

Values retrieved from S&P Global.*

Key Takeaways for Investors

  • EPS resilience amid margin headwinds demonstrates operating discipline; with licensing program pressure abating in 2H, EPS trajectory should improve relative to consensus .
  • Backlog strength and AI/Windows 11-driven endpoints/data center refresh underpin 2H revenue visibility; monitor conversion pace of staged inventory into shipments .
  • Public Sector softness in Q2 is a watch item after Q1 strength; diversified segment mix (Enterprise and Business Solutions growth) provides offset .
  • Capital returns continue: $0.15 dividend and active buybacks ($49.4M authorization remaining); supports total shareholder yield and downside support .
  • Near-term trading: Favorable EPS beat and margin stabilization commentary are positive; caution on revenue miss and licensing program transition until evidence of full normalization .
  • Medium-term thesis: Investments in sales productivity, platforms, and AI solutions position CNXN to capture secular modernization cycles; expect improving GM and cash flow as staged inventory converts .
  • Risks: Subscription licensing program changes, tariff policy variability, and macro IT spend pacing remain key variables; watch interest income headwinds vs prior-year and tax rate normalization .
Notes:
- All dollar figures USD.
- Non-GAAP metrics (Adjusted EPS/EBITDA) per company reconciliations **[1050377_0001558370-25-009793_cnxn-20250730xex99d1.htm:8]** **[1050377_0001558370-25-009793_cnxn-20250730xex99d1.htm:9]** **[1050377_0001558370-25-005988_cnxn-20250430xex99d1.htm:7]** **[1050377_0001558370-25-005988_cnxn-20250430xex99d1.htm:8]** **[1050377_0001558370-25-000657_cnxn-20250205xex99d1.htm:8]** **[1050377_0001558370-25-000657_cnxn-20250205xex99d1.htm:9]**.