PC Connection signals public sector uncertainty but targets outperforming IT market by 200 bps as backlog hits two-year high

Earnings Call Insights: PC Connection, Inc. (CNXN) Q3 2025

MANAGEMENT VIEW

* Timothy McGrath, President & CEO, opened by stating, "I'm pleased to share that our third quarter was another solid one for the company. We continue to execute well, delivered record gross profit and expanded our margins despite some expected headwinds in parts of the business." He highlighted a record gross profit of $138.6 million, driven by "strong growth in cloud software, cybersecurity and services," with gross margin expanding to 19.6%. McGrath noted challenges in the public sector due to "timing of some large federal projects and ongoing funding uncertainty at the federal, state and local levels," but emphasized this as a temporary pause.
* In Business Solutions, he cited "continued strength of our cloud and cybersecurity offerings, 2 areas in which we built recurring profitable revenue streams," leading to a 7.8% increase in gross profit. Enterprise Solutions also saw growth due to "strong demand for advanced technologies and endpoint devices."
* McGrath described a clear strategy: "We're focused on expanding our solutions-led business, deepening customer relationships and driving profitable growth in cloud, cybersecurity, AI and services."
* Thomas Baker, Senior VP, CFO & Treasurer, stated, "In the third quarter, SG&A expenses increased 2.9% year-over-year, primarily driven by higher personnel-related costs." He added, "Operating income margin improved slightly to 4.3% compared to 4.1% last year, reflecting continued focus on profitability despite cost pressures."

OUTLOOK

* McGrath said, "While funding cycles and project timing can affect quarter-to-quarter results, we believe the long-term trends are all moving in the right direction."
* The company expects continued momentum in AI, cloud, and cybersecurity, with McGrath noting, "We feel confident about where we're headed, and we're continuing to invest in projects and programs that strengthen our sales capabilities, service delivery and systems, all while maintaining disciplined about cost management and productivity."
* Baker added, "We're thinking sales mid-single digits next quarter year-on-year. That's kind of how we're thinking."
* For 2026, McGrath said, "Overall, we're thinking about mid-single digit for 2026 with the understanding that could go well above that as things start to normalize."

FINANCIAL RESULTS

* Gross profit reached $138.6 million, gross margin was 19.6%. Net sales were $709.1 million. Net income was $24.7 million. Diluted earnings per share and adjusted diluted earnings per share each came in at $0.97. Operating income margin was 4.3%. Adjusted EBITDA on a trailing 12-month basis was $122.7 million.
* SG&A expenses rose 2.9% year-over-year. Interest income was $3.7 million. Effective tax rate was 27.1%.
* The company paid a quarterly dividend of $0.15 per share and repurchased approximately 84,000 shares at an average price of $61.21.
* Operating cash flow for the first nine months of 2025 was $38 million, with $399.2 million in cash, cash equivalents, and short-term investments at quarter end.

Q&A

* Adam Tindle, Raymond James: Asked about Q4 budget flush and the potential for top-line growth. Timothy McGrath responded, "In our Enterprise segment, there's -- for the first time in many quarters, there is talk of budget flush. We do see our pipeline building there and a number of projects and opportunities that could well pass through the fourth quarter. ... The wildcard remains our Public Sector business. ... The timing, though, is still a big question mark."
* Tindle asked about backlog drivers. McGrath answered, "Clearly, the majority of our backlog is all customer-driven. ... it's absolutely customer-driven and the delays on the customer side." Baker added, "We had a lot of software and cloud in our numbers this quarter. ... it came through in the gross margins were over 19.5%."
* Tindle asked about IT spending in 2026. McGrath said, "We think the refresh will still continue, but definitely at a lower pace. ... for 2026, we see continued growth in data center, continued growth in cloud, in cyber. And we see certainly AI PC perhaps leveling off, but will continue to deliver some good results for us."
* Anthony Lebiedzinski, Sidoti: Asked about sales cadence during the quarter. Baker replied, "July was like 34-ish percent, 33%. August was down a bit and then September proved to be the best of the quarter."
* Lebiedzinski inquired about the impact of the federal government shutdown on Public Sector results. McGrath responded, "Obviously, the federal government being shut down does affect the quarter. ... we clearly have orders and products that we can't ship because there's nobody there to receive them. ... for right now, it's a big concern."
* Lebiedzinski asked about margin expectations. Baker said, "The margins -- the gross margins, I don't think will be as high as they were this quarter because I don't see all the same mix of cloud and software revenues coming through that could netted down. So I think probably year-on-year margins will be about flat."
* Lebiedzinski asked about acquisitions. McGrath replied, "We continue to look at tuck-in acquisitions that would enhance some of our solutions capability. ... But at this point, nothing to report."

SENTIMENT ANALYSIS

* Analysts focused on uncertainty in the public sector segment and closely questioned timing of recovery and backlog conversion, with a neutral to slightly cautious tone.
* Management maintained a confident outlook in prepared remarks but acknowledged uncertainties in public sector and product mix, using phrases such as "the wildcard remains our Public Sector business" and "the timing ... is still a big question mark."
* Compared to the previous quarter, analyst sentiment remains cautiously optimistic, while management continues to express confidence in strategic direction but increased emphasis on specific segment risks.

QUARTER-OVER-QUARTER COMPARISON

* The current quarter saw a shift in guidance language; while maintaining a positive view on long-term trends, management highlighted public sector timing as "a big question mark," compared to last quarter's expectation of improvement in the second half.
* The focus on recurring revenue streams and margin expansion continued, but public sector uncertainty was more pronounced this quarter.
* Backlog hit its highest level in nearly two years, emphasized in both quarters, with more explicit linkage to delayed customer projects this quarter.
* Both management and analysts remained focused on segment performance, especially public sector, and margin sustainability.
* Management's confidence in high-growth areas (cloud, cybersecurity, AI) persisted, but with a more measured tone on near-term growth versus prior quarter.

RISKS AND CONCERNS

* Challenges in the public sector segment due to "timing of some large federal projects and ongoing funding uncertainty at the federal, state and local levels."
* Federal government shutdown directly impacting the ability to ship products and recognize revenue, with McGrath stating, "we clearly have orders and products that we can't ship because there's nobody there to receive them."
* Management flagged mix and margin volatility, especially if cloud and software revenues decline.
* Analysts highlighted backlog conversion risk and the timing of revenue recognition for delayed projects.

FINAL TAKEAWAY

Management emphasized ongoing execution in high-value solution areas, record gross profit, and expanding recurring revenue, while acknowledging greater uncertainty in the public sector due to government funding and project delays. The company expressed confidence in its long-term strategy, strong backlog, and ability to outperform the U.S. IT market by 200 basis points, although near-term results remain contingent on resolution of public sector challenges and normalization of funding cycles.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/cnxn/earnings/transcripts]

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