Executive Summary / Key Takeaways

• Solutions-Led Transformation Driving Profitability: PC Connection, Inc. (NASDAQ:CNXN) is successfully executing a strategic shift towards higher-value, solutions-led offerings in cloud, cybersecurity, and AI, evidenced by record gross profit and expanding margins despite recent revenue headwinds.
• Strategic Investments in Technology and Talent: The company has made significant investments in its Technology Solutions Organization (TSO), AI-enabled platforms (Connection Helix), and skilled personnel, positioning it to capitalize on key industry trends like PC refresh, data center modernization, and AI adoption.
• Robust Liquidity and Shareholder Returns: CNXN maintains a strong liquidity position, enabling continued capital allocation through increased dividends and an active share repurchase program, reflecting management's confidence in future performance.
• Mixed Market Dynamics with Strong Backlog: While the Public Sector segment faces temporary challenges due to funding uncertainties and government shutdowns, the Enterprise and Business Solutions segments show solid momentum, contributing to a strong, customer-driven backlog.
• Optimistic Outlook with Market Outperformance Target: Management anticipates mid-single-digit sales growth for Q4 2025 and 2026, expecting to outperform the U.S. IT market growth by 200 basis points for the remainder of 2025, driven by its strategic focus and technological differentiation.

A Solutions-Driven Evolution in a Dynamic IT Landscape

PC Connection, Inc., founded in 1982 and headquartered in Merrimack, New Hampshire, has evolved into a Fortune 1000 Global Solutions Provider. The company's core mission is to simplify the IT customer experience by seamlessly connecting people and technology. It offers a comprehensive suite of IT solutions, encompassing computer systems, data center solutions, software, peripheral equipment, networking communications, and a robust portfolio of managed and professional services . This extensive offering is delivered through three distinct segments: Enterprise Solutions, Business Solutions, and Public Sector Solutions, each tailored to specific market needs .

The competitive landscape for IT solutions is intense, with major players like CDW Corporation (CDW), Insight Enterprises (NSIT), and TD SYNNEX Corporation (SNX) vying for market share. CNXN differentiates itself through a product-neutral approach, offering customized solutions from a diverse network of over 2,500 suppliers, including industry giants like Apple (AAPL), Cisco (CSCO), Dell (DELL), HP (HPQ), Intel (INTC), Lenovo (LNVGY), and Microsoft . This strategy helps mitigate the impact of manufacturers attempting to sell directly to customers. While larger competitors like CDW benefit from scale in enterprise markets, CNXN's segmented focus allows for greater agility and deeper customer relationships, particularly within the SMB and public sector domains. Against digital transformation specialists like NSIT, CNXN provides a comprehensive hardware and services portfolio, while its tailored service delivery counters the broad distribution efficiencies of SNX. Indirect competitors, including major cloud providers like Amazon Web Services (AMZN) and Microsoft Azure (MSFT), also present a challenge by shifting IT infrastructure consumption towards subscription models.

Central to CNXN's competitive advantage and strategic direction is its Technology Solutions Organization (TSO) and a state-of-the-art Technology Integration and Distribution Center, which boasts an ISO-certified technical configuration lab . This infrastructure provides end-to-end services, from design and configuration to implementation of complex IT solutions. These service offerings inherently carry higher margins than traditional product sales, enhancing the company's profitability in a competitive environment. The technical certifications of its service engineers further enable CNXN to offer more sophisticated products and services.

Beyond its core TSO, CNXN is actively investing in and developing its Connection Helix initiative, which focuses on strengthening AI capabilities. This includes building frameworks, playbooks, and advisory services to guide customers through AI deployments. The company's expertise in this area was recently recognized with a first-place award from the Naval Information Warfare Center for its secure, commercially based artificial intelligence environment . These technological differentiators are crucial for CNXN, contributing to its competitive moat by allowing it to offer integrated, high-value solutions that address evolving customer needs in areas such as AI infrastructure, data center modernization, and edge computing. These capabilities are vital for driving higher average selling prices, optimizing costs through efficient solution delivery, and securing a stronger market position for long-term growth.

The broader industry is experiencing several tailwinds that align with CNXN's strategic focus. The PC refresh cycle continues, driven by the adoption of Windows 11 and the emergence of AI-capable PCs . Data center modernization is gaining significant momentum as customers repatriate workloads from public clouds, seeking better cost predictability, enhanced security, and the benefits of server consolidation . Furthermore, AI-driven demand is expanding across the edge, security, and smart endpoints, fueling the need for next-generation storage solutions to manage unstructured data . These trends underscore the increasing customer demand for comprehensive and integrated IT solutions, rather than fragmented product acquisitions, a demand CNXN is well-positioned to meet.

Financial Performance and Strategic Execution

CNXN's strategic pivot towards solutions-led offerings is clearly reflected in its recent financial performance. For the third quarter ended September 30, 2025, the company reported net sales of $709.1 million, a 2.2% decrease year-over-year . Despite this top-line decline, gross profit increased by 2.4% to a record $138.6 million, and gross margin expanded by 90 basis points to 19.6% . This margin expansion was primarily driven by strong growth in higher-value cloud software, cybersecurity, and services, which are recognized on a net basis . Net income for the quarter was $24.7 million, down 8.6% from the prior year, primarily due to the absence of a one-time legal settlement and lower interest income . Diluted earnings per share stood at $0.97 .

Segment performance in Q3 2025 further illustrates this dynamic:

• Business Solutions: Net sales grew 1.7% to $256.8 million, while gross profit increased 7.8% to $68 million. The segment achieved a record gross margin of 26.5%, up 150 basis points, reflecting the continued strength and profitability of its cloud and cybersecurity offerings .
• Enterprise Solutions: Net sales increased 7.7% to $319.8 million, driven by robust demand for advanced technologies and endpoint devices. Gross profit rose 3.4% to $47.8 million, though gross margin slightly decreased to 14.9% due to changes in subscription license programs and software mix .
• Public Sector Solutions: This segment experienced a 24.3% decline in net sales to $132.5 million, primarily due to the timing of large federal projects and ongoing funding uncertainties. However, even with lower revenue, gross margin increased 230 basis points to a record 17.2%, thanks to a higher mix of cloud and cybersecurity solutions sales .

Operating income remained flat year-over-year at $30.3 million, demonstrating disciplined cost management despite ongoing investments in growth areas . Selling, general, and administrative (SG&A) expenses increased by 2.9% year-over-year, mainly due to higher personnel-related costs, though headcount was down 2.8% .

CNXN maintains a robust liquidity position, with $399.2 million in cash, cash equivalents, and short-term investments as of September 30, 2025 . The company's $50 million credit facility expired on March 31, 2025, and was not renewed, underscoring its ample internal liquidity . Operating cash flow for the nine months ended September 30, 2025, was $38 million, a decrease from $148.6 million in the prior year. This change was primarily attributed to increased inventory purchases for customer rollouts, timing of accounts receivable collections, and timing of accounts payable and accrued expense payments . The cash conversion cycle increased to 46 days from 40 days year-over-year, reflecting these working capital dynamics .

The company actively returns capital to shareholders. The Board of Directors declared a quarterly cash dividend of $0.15 per share on October 29, 2025, targeting a payout range of 15% to 20% of net income . Additionally, $44.3 million remained available under the existing share repurchase authorization as of September 30, 2025, with an additional $50 million authorized in April 2025 .

Outlook, Risks, and Competitive Positioning

Management expresses cautious optimism for the remainder of 2025 and into 2026. For Q4 2025, sales are anticipated to grow in the mid-single digits year-over-year, with gross margins expected to remain flat compared to the prior year, not reaching the record highs of Q3 due to a different mix of cloud and software revenues . SG&A expenses are projected to increase by approximately 3-4% year-over-year in the coming quarters, reflecting continued investments in sales capabilities, service delivery, and systems . The company aims to outperform the U.S. IT market growth by 200 basis points for the rest of 2025 and expects 2025 results to surpass those of 2024 . Looking further ahead, mid-single-digit growth is anticipated for 2026, with potential for higher growth as market conditions normalize, driven by continued expansion in data center, cloud, and cybersecurity solutions .

A significant indicator of future revenue is the company's backlog, which reached its highest level in nearly two years by the end of Q3 2025, largely driven by the Enterprise segment. This backlog is primarily customer-driven, indicating solid demand despite customer-side delays . Investments made in 2024, characterized as a "building year," included a world-class CRM system, AI-enabled workflow tools, and enhanced technical resources, all designed to strengthen the business and capitalize on future demand . Cost reduction initiatives, including severance expenses incurred in Q1 2025, are expected to generate approximately $5 million in net annualized savings, beginning to be realized from Q2 2025 .

Despite the positive outlook, several risks warrant attention. The Public Sector Solutions segment remains a "wildcard" due to ongoing funding uncertainty at federal, state, and local levels, and the recent federal government shutdown directly impacted Q4 2025 by delaying orders . Macroeconomic factors such as inflation and increased interest rates could also affect customer IT investment timing and size. The impact of tariffs remains complex and uncertain, although suppliers are actively shifting manufacturing to mitigate effects . The persistent threat of manufacturers selling directly to customers is an ongoing competitive challenge, which CNXN addresses through its product-neutral, solutions-led approach. Furthermore, the company's investments in highly skilled service engineers increase the cost of services, necessitating robust growth in service revenues to offset these expenditures and maintain operating results.

Conclusion

Connection (CNXN) is undergoing a strategic transformation, shifting its focus towards higher-margin, solutions-led offerings in critical technology domains like cloud, cybersecurity, and artificial intelligence. This pivot is already yielding tangible results, as evidenced by record gross profit and expanding margins, even amidst a challenging macroeconomic environment and temporary headwinds in its Public Sector segment. The company's proactive investments in its Technology Solutions Organization and the innovative Connection Helix AI initiative are foundational to its competitive differentiation, enabling it to deliver complex, integrated IT solutions and capture growth in evolving market trends such as PC refresh and data center modernization.

With a strong liquidity position, a commitment to shareholder returns through dividends and share repurchases, and a robust, customer-driven backlog, CNXN is well-positioned for sustained long-term growth. While the timing of Public Sector recovery and the full impact of tariffs introduce some uncertainty, management's guidance to outperform the U.S. IT market underscores confidence in its strategic execution and technological leadership. For investors, CNXN presents a compelling thesis rooted in its ability to adapt, innovate, and drive profitable growth by expertly connecting customers with the technology that powers their future.