Good afternoon, and welcome to the Fourth Quarter 2025 Connection Earnings Conference Call. My name is Lisa, and I will be the coordinator for the call today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question and answer session. As a reminder, this conference call is the property of PC Connection, Inc. and may not be recorded or rebroadcast without specific permission from the company. On the call today are Tim McGrath, President and Chief Executive Officer, and Tom Baker, Senior Vice President and Chief Financial Officer. I will now turn the call over to the company. Please go ahead.

Thank you, operator, and good afternoon, everyone. I will now read our cautionary note regarding forward-looking statements. Any statements or references made during the conference call that are not statements of historical fact may be deemed to be forward-looking statements. Various remarks that management may make about the company's future expectations, plans, and prospects constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in the Risk Factors section of the company's annual report on Form 10-Ks for the year ended December 31, 2024, which is on file with the Securities and Exchange Commission as well as in other documents that the company files with the commission from time to time. In addition, any forward-looking statements represent management's view as of today and should not be relied upon as representing views as of any subsequent date. While the company may elect to update forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so other than as required by law even if estimates change. And therefore, you should not rely on these forward-looking statements as representing management's views as of any date subsequent to today. During this call, non-GAAP financial measures will be discussed. A reconciliation between any non-GAAP financial measure discussed and its most directly comparable GAAP measure is available in today's earnings release and on the company's website at www.connection.com. Please note that unless otherwise stated, all references to fourth quarter 2025 comparisons are being made against the fourth quarter 2024. Today's call is being webcast and will be available on PC Connection, Inc.'s website. The earnings release will be available on the SEC website at www.sec.gov and in the Investor Relations section of our website at www.connection.com. I would now like to turn the call over to our host, Tim McGrath, President and CEO. Tim?

Thank you, Samantha. Good afternoon, everyone. And thank you for joining us today for PC Connection, Inc.'s Q4 2025 conference call. I'll begin this afternoon with an overview of our fourth quarter results and highlights of our performance. Tom will then walk us through a more detailed look at our financials. I'm pleased to share that in the fourth quarter, we delivered record gross profit in our business solutions and enterprise solutions segments as they each performed above our expectations. The results in our public sector segment were disappointing and below prior year levels. This was primarily due to a non-repeating project that straddled both Q4 2024 and Q1 2025. In addition, there was a delay in several project rollouts. The strong execution across our business solutions and enterprise solutions segments drove gross profit performance led by growth in software, including cloud and security, and supported by steady growth for endpoint devices. These results underscore the strength of our strategy delivering higher value solutions driving long-term customer relationships, and executing with consistency and discipline. Beginning this quarter, we are disclosing gross billings which represents the total dollar value of goods and services billed during the period net of customer returns and credit memos, and any applicable sales or other taxes and also includes agency fees and free. Gross billings increased by 2.9% to $1,060,000,000 compared to $1,030,000,000 from the prior year. The increase in gross billings demonstrates the overall growth in customer demand despite the headwinds experienced in the public sector. Now I'd like to highlight our consolidated performance. Gross profit increased 4.5% year over year to $135,600,000. Gross margin expanded 100 basis points to 19.3%, reflecting our disciplined approach to pricing as well as a shift in product and customer mix. Total net sales were $702,900,000, down 0.8% from…

Thanks, Tim. Earlier, Tim briefly discussed the new key performance metric, gross billings. We believe that this metric will provide additional insight into the company's periodic performance. We use the gross billings operating metric for evaluating the sales performance of our operating segments by providing insight into the total value of our business transactions. We believe that gross billings provide the same insight to investors. In the fourth quarter, SG&A increased by 1.7% year over year, driven primarily by higher variable compensation tied to the increase in gross profit. We remain highly disciplined on expenses. In fact, our headcount is down 2% year over year, allowing us to keep total payroll costs flat while continuing to invest in our high-priority growth areas. As previously mentioned, we took action in the quarter to further streamline our cost structure resulting in a $3,100,000 severance charge. These actions align our expense structure with our strategic priorities and enhance operating leverage as demand continues to build. SG&A was 15.5% of sales, up 40 basis points year over year, reflecting both the increase in variable compensation and change in sales mix. Operating income margin improved to 3.4% compared to 3.2% last year. Excluding severance expense and other charges, operating income margin improved to 3.8%. Interest income for the quarter was $3,600,000 compared to $4,800,000 last year, resulting from lower average cash balances as we deployed capital and a lower interest rate environment. Our effective tax rate for the quarter was 23.7%, down from 24.1% in the prior year. As a result, net income for the fourth quarter was flat at $20,700,000 year over year. Excluding severance expenses and other charges, net income increased $2,300,000 or 11.3% compared to last year. Diluted earnings per share were $0.82, up $0.04 year over year, while adjusted diluted earnings…

Thanks, Tom. Let me take a moment to walk through how our key vertical markets performed. In retail, net sales grew 22% driven by several large deployments as retailers continue investing in technology to improve employee productivity and operational efficiencies which enhance the customer experience. In financial services, net sales were up 28% and gross profit increased 13% year over year. The focus here remains on modernizing infrastructure and improving security. Areas where our solutions and expertise continue to resonate with our customers. Health care grew net sales 19%, while gross profit improved 18% year over year. PC Connection, Inc. had a strong Q4 in health care, attributed to large enterprise deployments for electronic health record management and security. Looking ahead in an AI-first IT environment, we see demand building across our customer base. Customers continue to move forward with refresh initiatives and modernization plans as AI adoption expands. We expect infrastructure strategies to evolve and security requirements to remain front and center. While there are near-term factors that can influence the timing of this demand, such as memory supply constraints, these do not change the strength or scale of the opportunity ahead of us. Rather, they may affect the pace at which demand is realized. We are building for the future, advancing our three-part growth strategy, driving data center modernization, digital workplace transformation, and supply chain solutions. With our differentiated portfolio, disciplined execution, and loyal customer relationships, we believe we are exceptionally well-positioned to capture demand as economic and supply chain conditions stabilize. Our confidence in the business is underpinned by several technology trends that continue to drive pipeline and customer activity. The PC refresh cycle will continue into 2026 as customers modernize aging fleets and increasingly adopt AI-enabled solutions that deliver high performance, strong security, and better user…

Thank you. As a reminder, if you would like to ask a question, please press 11 on your telephone. You will then hear an automated message advising your hand is raised. If you would like to remove yourself, please press 11 again. Our first question for the day will be coming from the line of Adam Tindle of Raymond James. Your line is now open.

Okay. Thanks. Good afternoon. Tim, I think you just kind of wrapped up by saying you expect to outgrow the US IT by 200 basis points. But I guess how would you define what you're thinking of as IT market growth for 2026 as the baseline? And if you could, you know, I know that's a hard question because we've got a bunch of prognosticators trying to figure out what that market growth is. When you look internally, at your customer conversations and, you know, what budget trends are, at the customer and sales quotas and Salesforce, you know, what does growth look like, you know, internally from a budget perspective as well would be helpful. Thanks.

Thanks. So right now, the U.S. market is a little tricky to pin down. We've seen a lot of different estimates, but around 4% is a blended growth number that we're working with. Internally, our budget for growth is a little higher than that. And, really, what we're seeing for drivers of demand out there for 2026. Right now, about 61% of our endpoints are AI-enabled, and we do see a demand continuing for AI at the edge. We also see edge product projects starting to expand for 2026. So all of that really bodes well for our business. In addition to the growth we've been experiencing in our cloud business. So clearly, there are some headwinds, Adam, as you know, when we think about things like memory constraint and inflation as a result, those are headwinds. But there'll be some percent of our customer base that try to pull ahead of that. And then some percent that try to push a little beyond that. We're really trying to balance that equation.

Okay. I mean, as I think about those growth numbers, those are pretty healthy. And then, you know, on this call, you talked about some restructuring, essentially, voluntary early retirement as well as additional actions that you took in January. I guess, you know, maybe just double click on those decisions, you know, at the IT market environment's healthy. You know, why does it make sense to kind of pull back on headcount at this point? And how do you think about headcount on a go-forward basis? Are there more opportunities for additional actions or is this kind of, you know, it at this point?

Well, thanks. So internally, for the past few years, we've implemented a number of system improvements and we are now starting to realize those efficiencies, which is really exciting. In addition, as you know, AI is driving some productivity gains throughout the business. So that really is the main driver of our headcount reduction. We want it to be super efficient. We really are working on being operationally excellent in a continuous improvement motion there, and we're starting to realize a lot of that. I don't see additional headcount reductions. I think that demand is going to be solid for 2026, and we're encouraged by all of that. I think we're in a pretty good place right now. Tom, anything to add?

Yeah. I mean, I think, Adam, if you look at the quarter, right, you know, BSG grew gross profit 11.4%. Enterprise grew their gross profit 7.1%. I mean, that's pretty healthy. You know, one issue we had was we had a very large public sector contract last year that did not renew. So, you know, that was almost a $30,000,000 headwind for us this quarter. And it's been almost a $40,000,000 headwind for us next quarter. However, you know, those other businesses performing the way they are, you know, we can look at the quarter next year. Next quarter is kind of gonna look a little like this quarter, you know, flattish on revenue. Probably low to mid-single digits increase in gross profit. And the way we're managing our costs, we're gonna be sub 3% on G&A. So that's pretty good for that next quarter. And then as we get into Q2, Q3, and beyond, we eliminate that public sector headwind. We're pretty excited about, you know, how the business is looking. Enterprise is adding a bunch of new customers. And, you know, that's just gonna ramp throughout the year.

That's helpful color. Thanks, Tom.

Thank you, Adam.

One moment for the next question. And our next question is coming from the line of Anthony Lebiedzinski of Sidoti. Your line is open.

Good afternoon, and thank you for taking the question. So just wondering if you guys could just comment on the cadence of sales or gross billings during the fourth quarter and whether or not you saw the notable budget flush in Q4?

Yeah, Anthony. So we definitely saw a market increase in December revenue this quarter. You know, it typically bumps along, you know, 35-ish percent of the quarter. I think it bumped over 38% this quarter. And, you know, buried in that, we saw a couple of things. We did have some customers that were, you know, very focused on consuming their budget before the end of the year. And then we haven't seen that in a number of years. And then we also did see some customers trying to get ahead of the price increases, which is why you see a little bit of a bump in our inventory as well. So I think those two things together, I don't know if it was incredibly material, but it was, you know, it definitely did affect the quarter.

Got it. Okay. Yeah. Thanks for that, Tom. And then Tim, I believe you mentioned earlier about the memory supply constraints, which is certainly something that's been, you know, talked about. Was that an issue in the fourth quarter? Or was that comment more about your concern for 2026?

We did start to see in the fourth quarter some price increases, but I do not think it was an issue. Some customers probably pulled their business in, and they moved orders up. And those price increases, of course, are inflationary. And at this point, we're advising all our customers to order, you know, as soon as possible because we see those memory constraints going throughout the year. So it really didn't affect us in the fourth quarter. The inflation that we saw was reasonable, and, you know, we're thinking for the first quarter, again, that will actually spike some demand and we think that'll kind of level out throughout the year.

Gotcha. Okay. And then, with the cost reduction that you have done with the restructuring, how do we think about operating margins here going forward? Any sort of thought on that would be very helpful.

Yeah. I mean, obviously, it's gonna help us. You know, we talked about $7,000,000 to $8,000,000 of net cost reduction, you know, for the year. And when I say net, that means, you know, some of those people that took retirement, you know, we are gonna have to replace some of them, maybe, you know, different levels, maybe in a little bit different positions, maybe with a little bit more of a technological aptitude. But as we go through the year, the operating leverage is definitely gonna improve. And, you know, we want to move much closer to the, you know, 3.789% is kind of where we think we can get to by the end of the year.

That's very helpful color. Well, thank you very much, and best of luck.

Thank you, Anthony.

Thank you. This concludes the Q&A session for today, and I would like to turn the call back over to management for closing remarks. Please go ahead.

Well, thank you, operator. I'd like to thank all of our customers, vendor partners, and shareholders for their continued support. And once again, our coworkers for their efforts and extraordinary dedication. Your time and interest in PC Connection, Inc. are appreciated. I'd also like to thank those of you who are listening to our call this afternoon. Have a great evening.

Thank you all for joining today's program. You may now disconnect.