BUSINESS OVERVIEW AND HISTORY
Connection (NASDAQ:CNXN) is a leading information technology solutions provider serving business, government, healthcare, and education markets. With a history spanning over three decades, the company has established itself as a trusted partner, guiding its customers through the rapidly changing technology landscape.
Connection, formerly known as PC Connection, Inc., was founded in 1982 and is headquartered in Merrimack, New Hampshire. The company started as a reseller of personal computer hardware and software products, primarily serving small- to medium-sized businesses. Over the years, Connection has evolved into a Fortune 1000 Global Solutions Provider that offers a wide range of IT solutions, from the desktop to the cloud.
In the early years, Connection focused on building strong relationships with customers and vendors. The company leveraged its expertise in product selection and technical support to differentiate itself in the market. As the IT industry grew and became more complex, Connection expanded its portfolio to include value-added services such as configuration, integration, and managed services.
One key milestone for the company was the decision to organize its business into three distinct segments – Enterprise Solutions, Business Solutions, and Public Sector Solutions. This allowed Connection to better serve the unique needs of large enterprises, small-to-medium businesses, and public sector organizations, respectively. The segmentation strategy has been instrumental in driving the company’s growth and profitability over the past two decades.
Navigating the evolving technology landscape has presented some challenges for Connection. The company has had to adapt to changing customer buying behaviors, the rise of direct sales by manufacturers, and the shift towards cloud-based solutions. To address these challenges, Connection has invested heavily in its IT infrastructure, technical talent, and solution-selling capabilities. The company has also forged strategic partnerships with leading technology vendors to better serve its customers.
Through its dedication to customer service, technical expertise, and operational excellence, Connection has established itself as a trusted IT solutions provider. The company’s ability to anticipate and adapt to industry trends has been a key driver of its success over the past four decades.
FINANCIAL PERFORMANCE AND LIQUIDITY
Connection’s financial performance has been consistent, with a track record of profitability and liquidity. For the fiscal year ended December 31, 2023, the company reported revenue of $2.85 billion, net income of $83.27 million, operating cash flow of $197.95 million, and free cash flow of $188.36 million.
As of the latest reported quarter (Q3 2024), the company’s net sales stood at $724.7 million, representing a 4.6% increase compared to the same period in the previous year. This growth was driven by increases in notebooks/mobility, desktops, software, and accessories, partially offset by decreases in netcom products, servers/storage, and other hardware/services. Gross profit for the quarter was $135.4 million, an increase of 2.7% year-over-year, with a gross margin of 18.7%. However, the gross margin decreased by 30 basis points due to a shift in product mix towards lower-margin sales of endpoint devices.
The company’s net income for the third quarter of 2024 was $27.1 million, a 5.7% increase from the same quarter in the prior year. Diluted earnings per share reached a record $1.02, up from $0.97 in the year-ago period. Operating income decreased by 6.2% year-over-year due to an increase in SG&A expenses, partially offset by the increase in gross profit.
Connection’s balance sheet remains strong, with a healthy cash and short-term investments position of $429.1 million as of September 30, 2024. The company’s current ratio stands at 3.13, and its quick ratio is 2.82, indicating a robust working capital position and the ability to meet its short-term obligations. As of December 31, 2023, Connection had no outstanding debt, resulting in a debt-to-equity ratio of 0.
The company has a $50 million credit facility collateralized by accounts receivable, which expires in March 2025. As of September 30, 2023, the entire $50 million was available for borrowing, providing additional financial flexibility.
SEGMENT PERFORMANCE
Connection operates through three main business segments: Enterprise Solutions, Business Solutions, and Public Sector Solutions. Each segment caters to specific customer needs and demonstrates unique performance characteristics.
The Enterprise Solutions segment, which serves primarily medium-to-large corporations, reported net sales of $297 million in Q3 2024, representing a 7.4% increase compared to the prior-year quarter. Gross profit for this segment increased by 4.4% to $46.2 million, with a gross margin of 15.6%. For the first nine months of 2024, this segment generated $878.44 million in net sales, representing 42% of the company’s total net sales. The gross margin for this period was 15.4%, up from 14.7% in the same period of the prior year, driven by improved invoice margins in desktops, displays, and notebooks/mobility products. However, SG&A expenses increased to 12.4% of net sales, up from 11.7% in the prior year, primarily due to higher allocated costs from corporate headquarters.
The Business Solutions segment, which focuses on small to medium-sized businesses, generated net sales of $252.6 million in Q3 2024, a 6.1% decrease year-over-year. However, this segment’s gross profit remained relatively stable at $63.1 million, and its gross margin increased by 170 basis points to a record 25%. For the first nine months of 2024, this segment generated $786.70 million in net sales, accounting for 37.6% of total net sales. The gross margin for this period increased to 24.1%, up from 22.9% in the same period of the prior year, driven by an increase in higher-margin software sales recognized on a net basis and improved invoice margins in desktops and accessories. SG&A expenses as a percentage of net sales increased to 16.8% from 15.9%, largely due to higher allocated costs from corporate headquarters and increased advertising spend.
The Public Sector Solutions segment, serving federal, state, and local government, as well as educational institutions, reported an 18.7% increase in net sales to $175.1 million in Q3 2024. Gross profit for this segment increased by 4.4% to $26.1 million, with a gross margin of 14.9%. For the first nine months of 2024, this segment generated $428.09 million in net sales, representing 20.4% of the company’s total net sales. The gross margin for this period increased to 15.2%, up from 14.5% in the same period of the prior year, driven by better invoice margins in notebooks/mobility, servers/storage, and other hardware/services. However, SG&A expenses as a percentage of net sales increased to 14.8% from 13.3%, primarily due to higher allocated costs from corporate headquarters and the impact of the decrease in net sales.
STRATEGIC INITIATIVES AND GROWTH DRIVERS
Connection’s strategic focus on delivering comprehensive IT solutions and expertise has been a key driver of its success. The company’s continued investments in its Technology Solutions Organization (TSO) and its state-of-the-art Technology Integration and Distribution Center have strengthened its ability to design, configure, and implement tailored IT solutions for its customers.
Additionally, Connection’s GlobalServe offering, which provides worldwide procurement solutions through its network of in-country suppliers in over 150 countries, has expanded the company’s reach and enhanced its ability to serve multinational customers.
The company’s focus on emerging technologies, such as cloud computing, cybersecurity, and artificial intelligence (AI), has positioned it well to capitalize on the growing demand for these solutions. Connection’s Connection Helix initiative, which includes the Connection Helix Center for Applied AI and Robotics, has enabled the company to develop specialized programs and vertical strategies to support its customers’ evolving technology needs.
Looking ahead, Connection anticipates that demand will remain somewhat muted for the remainder of 2024, but the company is confident it can outperform the IT market growth by 200 basis points. The company expects device demand to improve in 2025 overall, as IT demand may continue to be impacted by deal scrutiny and cautious investments in infrastructure due to the macroeconomic backdrop. Connection believes that on-premises technologies and edge technologies will be drivers of growth in 2025, including the Windows 10 expiration. However, the company expects that the Device Refresh and the assumed change in product mix will continue to produce downward pressure on gross margins for the remainder of 2024.
RISKS AND CHALLENGES
While Connection has demonstrated resilience and adaptability, the company faces several risks and challenges that warrant consideration:
Vendor Relationships: Connection’s business model is dependent on its relationships with key vendors and manufacturers. Any disruptions or changes in these relationships could impact the company’s product offerings and revenue streams.
Macroeconomic Conditions: Fluctuations in the global economy, changes in customer spending patterns, and geopolitical tensions can all affect Connection’s financial performance and growth prospects.
Cybersecurity Threats: As a provider of IT solutions, Connection is exposed to the risk of cyberattacks and data breaches, which could harm its reputation and financial well-being.
Workforce Challenges: Attracting and retaining highly skilled technical personnel is crucial for Connection’s success, as it enables the company to deliver its value-added services and solutions.
CONCLUSION
Connection has established itself as a leading provider of IT solutions, navigating the evolving technology landscape with expertise and innovation. The company’s diversified business model, focus on value-added services, and strategic investments in emerging technologies have positioned it well for continued growth and success. While the company faces various risks and challenges, its strong financial performance, liquidity position, and customer-centric approach suggest that Connection is well-equipped to capitalize on the opportunities in the IT solutions market.
The IT services industry has seen a compound annual growth rate (CAGR) of 5-7% over the past three years, as businesses continue to invest in digital transformation and cloud-based solutions. Connection’s ability to outperform this market growth, as evidenced by its recent financial results and strategic initiatives, demonstrates the company’s strong market position and potential for future success. As Connection continues to adapt to changing market conditions and customer needs, it remains a compelling investment opportunity in the dynamic IT solutions sector.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.