Executive Summary / Key Takeaways

• Connection (NASDAQ: CNXN) is leveraging its evolution from a traditional reseller to a comprehensive IT solutions provider, supported by strategic investments in technical capabilities and AI initiatives like Connection Helix, to capitalize on market opportunities.
• First Quarter 2025 results demonstrated solid top-line growth (net sales up 10.9% year-over-year to $701.0 million), driven by strong device refresh cycles and momentum in advanced technologies like software and servers/storage.
• While gross margins faced pressure from a shift towards lower-margin endpoint devices, the company achieved operating income growth ($14.5 million, up 7.9%), supported by gross profit dollar expansion and improved SGA leverage as a percentage of sales.
• Management is optimistic about 2025, anticipating outperforming 2024 results and the broader US IT market growth by 200 basis points, fueled by a growing pipeline, a two-year high backlog, and continued device refresh and AI adoption.
• The company maintains a strong liquidity position ($340.3 million in cash, cash equivalents, and short-term investments as of March 31, 2025), enabling strategic capital allocation through increased share repurchases and dividends, while facing risks from macroeconomic uncertainty and tariff impacts.

Setting the Scene: Evolution, Strategy, and the Competitive Arena

PC Connection, Inc., operating under the Connection brand, has transformed itself into a Fortune 1000 Global Solutions Provider. Its core mission is to simplify the complex world of IT for customers, guiding the connection between people and technology. This evolution represents a strategic shift from primarily being a value-added reseller focused on product distribution to offering comprehensive, integrated IT solutions and services. The company serves distinct markets through its three segments: Enterprise Solutions for large corporations, Business Solutions for small-to-medium businesses (SMBs), and Public Sector Solutions for government and educational institutions.

This strategic pivot is underpinned by significant investments in its Technology Solutions Organization (TSO) and a state-of-the-art Technology Integration and Distribution Center. These capabilities allow Connection to provide end-to-end services, from design and configuration to implementation and ongoing managed services. Such service offerings are strategically important as they typically carry higher margins than traditional hardware sales. The company's technical certifications further enhance its ability to handle complex, higher-margin products. Its GlobalServe offering extends its reach, providing global procurement solutions across more than 150 countries for multinational clients.

The IT solutions market is dynamic and highly competitive, with players like CDW Corporation (CDW), Insight Enterprises (NSIT), TD SYNNEX Corporation (SNX), and Arrow Electronics (ARW) vying for market share. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, CNXN holds an estimated 2-3% aggregate market share, trailing larger players like CDW (estimated 15-20%). CNXN's strategic positioning leverages its targeted distribution channels and specialized focus on SMB and public sector markets, where it aims to build stronger customer loyalty. For instance, its emphasis on outbound sales and targeted marketing can lead to faster customer acquisition in SMBs compared to broader enterprise-focused rivals.

Technological differentiation is increasingly critical in this landscape. Connection's investments in its IT infrastructure are designed to enhance operational efficiency and provide customers with advanced functionality. A key initiative is Connection Helix, which includes a Center for Applied AI and Robotics. This program is focused on building frameworks, playbooks, and advisory capabilities to help customers navigate AI adoption, addressing critical concerns like AI trust and return on investment. The company is developing specialized programs and vertical strategies for AI infrastructure and solutions, positioning itself to support customer AI deployments at the edge and within data centers. Recent recognition, such as Intel's (INTC) AIPC Partner of the Year and Samsung's (SSNLF) Display Partner of the Year (the latter associated with 267% year-over-year growth), highlights the impact of these focused efforts and technical capabilities in specific technology areas. While specific quantifiable benefits of AI investments like processing speed improvements are still emerging, the strategic intent is to drive greater efficiency in service delivery and capitalize on the growing demand for AI-enabled solutions. This focus on integrated solutions and emerging technologies like AI is intended to provide a competitive moat against rivals, particularly as customers seek partners who can offer comprehensive guidance beyond simple product procurement. However, larger competitors like CDW and NSIT often possess greater scale and potentially larger R&D budgets, which can enable faster innovation and cost efficiencies in logistics and broader cloud expertise, posing a challenge to CNXN's market share growth and margin retention.

Recent Performance Reflecting Strategy and Market Dynamics

Connection delivered a solid start to 2025, with first-quarter results reflecting the interplay of its strategic focus and the prevailing market conditions. Net sales for the three months ended March 31, 2025, increased by a robust 10.9% year-over-year, reaching $701.0 million. This growth was primarily fueled by a strong device refresh cycle, with notable increases in notebooks/mobility (up $36.2 million), desktops (up $25.2 million), software (up $11.0 million), and servers/storage (up $7.6 million). The Public Sector segment was a significant contributor, with net sales surging 54.7% to $144.6 million, driven by large orders from the federal government (up 228%). The Enterprise Solutions segment also saw sales growth of 5.4% to $298.0 million, indicating that the strategy to deliver enterprise solutions is gaining traction, particularly with an 8% increase in Advanced Technologies sales within this segment.

Gross profit expanded by 7.8% year-over-year to $127.3 million. However, the gross margin slightly decreased to 18.2% from 18.7% in the prior year quarter. This margin contraction was primarily attributed to a shift in product mix towards lower-margin endpoint devices, particularly in the Enterprise segment where reduced software agency fees and a mix shift to desktops impacted margins. Conversely, the Business Solutions segment demonstrated resilience, increasing its gross margin by 170 basis points to 25.3%, favorably affected by customer and product mix improvements, including better margins on notebooks/mobility and desktops. The Public Sector segment's strong revenue growth came at a lower gross margin (13.6%, down 240 basis points), reflecting the impact of a few large, lower-margin project rollouts.

Selling, general and administrative (SGA) expenses increased by 5.0% to $109.9 million, primarily due to higher personnel costs related to variable compensation, service contracts/subscriptions, and marketing. Despite the dollar increase, SGA expenses decreased as a percentage of net sales to 15.7% from 16.6%, demonstrating improved operating leverage as revenue grew faster than costs. The company also incurred $2.9 million in severance expenses during the quarter as part of an initiative to lower its cost structure, which is expected to yield approximately $5 million in net annualized savings.

Operating income for Q1 2025 increased by $1.0 million to $14.5 million, maintaining a consistent operating margin of 2.1% of net sales. The increase in gross profit dollar contribution offset the rise in SGA and the severance charge. Net income saw a modest increase of 2.5% to $13.5 million, resulting in diluted earnings per share of $0.51, up 2% year-over-year. Adjusted diluted EPS, excluding severance, was $0.60, an increase of 20%.

Connection maintains a strong balance sheet and robust liquidity. As of March 31, 2025, cash, cash equivalents, and short-term investments totaled $340.3 million.

While operating activities used $52.4 million in cash during Q1 2025, primarily due to a strategic increase in inventory ($56.7 million) for large customer rollouts and in anticipation of tariffs, and a decrease in accounts payable ($27.0 million) due to payment timing, this was more than offset by cash provided by investing activities ($104.7 million) from the sale and maturity of short-term investments. The company's cash conversion cycle remained stable at 53 days.

Demonstrating confidence in its financial health and future prospects, the company's Board authorized a $50.0 million increase to its share repurchase program on April 30, 2025, adding to the $14.9 million remaining as of March 31, 2025. The company was active in repurchasing shares in Q1, spending $43.7 million. A quarterly cash dividend of $0.15 per share was also declared on April 30, 2025, reflecting a commitment to returning value to shareholders, with a target payout ratio of 15% to 20% of net income. The expiration of the company's credit facility on March 31, 2025, without renewal, underscores its current strong liquidity position.

Outlook, Risks, and Strategic Trajectory

Management is cautiously optimistic about the remainder of 2025, anticipating that the year will outperform 2024 results. This outlook is underpinned by several positive indicators and strategic tailwinds. The backlog at the end of Q1 2025 reached its highest level in nearly two years, signaling potential for future revenue. The pipeline of opportunities continues to grow, particularly within the Enterprise segment, driven by anticipated large projects.

Key market trends are expected to support this growth. The device refresh cycle, propelled by factors like Windows 11 adoption and the emergence of AI PCs, is gaining momentum and is expected to continue driving endpoint device sales. Management noted that approximately 40% of the Q1 2025 endpoint growth came from AI-enabled PCs, indicating customer investment in future-proofing and preparing for AI projects at the edge. Beyond devices, customer priorities around data center modernization, server consolidation, and edge computing are also building momentum, contributing to the growth seen in software and servers/storage in Q1. Connection's investments in its TSO and Connection Helix initiative position it to capture these opportunities by providing the necessary integrated solutions and technical expertise.

Despite the positive outlook, the company acknowledges significant risks and challenges in the macroeconomic environment. Uncertainty regarding near-term economic conditions continues to cause some customers to delay purchases or scrutinize IT investments closely. Tariffs are a notable concern, weighing heavily on the customer base and impacting supply chains. The complexity of supplier manufacturing locations (desktops primarily in Mexico, notebooks heavily in China/Vietnam, displays in China) makes the impact of tariffs difficult to predict, potentially leading to increased inventory costs, reduced margins, or the need to raise prices. While suppliers are exploring alternatives, the clarity and certainty of these shifts remain low. Connection is actively working with customers to navigate these potential impacts and has strategically increased inventory in anticipation of tariff-related price increases.

Management projects mid to high single-digit top-line growth for the full year 2025 and expects SG&A growth to be managed in the mid-single digits, aiming to keep it below revenue growth. The cost reduction initiatives undertaken in Q1 are part of this effort to improve efficiency while continuing strategic investments in sales, services delivery, and systems to support long-term growth. The company's confidence is reflected in its target to outperform the overall US IT market growth rate by 200 basis points in 2025.

Conclusion

Connection's first quarter 2025 performance provides a compelling narrative of a company successfully executing its strategic evolution amidst a dynamic IT landscape. The strong top-line growth, fueled by a resurgent device refresh cycle and increasing momentum in advanced technologies like AI infrastructure, underscores the effectiveness of its transition to a solutions-focused provider. While product mix shifts temporarily pressured gross margins, the underlying gross profit dollar growth and improved operating leverage signal operational strength. The company's robust liquidity, demonstrated by its significant cash reserves and proactive capital allocation through increased share buybacks and dividends, positions it well to fund future growth initiatives, including further investments in its technical capabilities and the promising Connection Helix AI program. Despite facing headwinds from macroeconomic uncertainty and the complex implications of tariffs, Connection's growing pipeline, record backlog, and targeted investments in high-growth areas like AI and data center solutions provide a solid foundation for its optimistic outlook and the potential to outperform the market in 2025. The investment thesis hinges on the company's ability to continue leveraging its differentiated service model and technical expertise to navigate competitive pressures and capitalize on the evolving demands for integrated IT solutions and emerging technologies.