PC Connection, Inc. (CNXN) Q2 2026 Earnings Report, Transcript and Summary

Thank you. Good afternoon and welcome to the Second Quarter of the 2026 Connection Earnings Conference Call. My name is Shannon and I will be your coordinator for today. As a reminder, this conference call is the property of Connection 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.

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. The 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 Factor section of the company's Annual Report on the Form 10-K for the year ended December 31, 2025, 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 a 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. 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 second quarter 2026 comparisons are being made against the second quarter 2025. Today's call is being webcast and will be available on Connection's website. The earnings release will be available on the SEC website at www.sec.gov and in the investors' 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.

Thank you, Samantha. Good afternoon, everyone, and thank you for joining us today for Connection's Q2 2026 Conference Call. I'll begin this afternoon with an overview of our second quarter results and highlights of our performance. Tom will then walk us through a more detailed look at our financials. Connection delivered strong results in the second quarter, highlighted by record net sales, record gross billings, and record gross profits. Our results reinforce what we believe is a fundamental shift taking place across enterprise technology, as organizations are beginning to move beyond AI experimentation and into enterprise-wide AI adoption. As they do, they're looking for trusted partners that can help them modernize infrastructure, strengthen security, integrate cloud and data platforms, and deploy AI in ways that deliver measurable business outcomes. Our strategy is centered on delivering full-stack technology solutions to bring together infrastructure, cloud, software, cybersecurity, AI, and services into a single integrated customer experience. Through our technical solutions organization, TSX, powered by Helix, our Center for AI and Applied Robotics, we're helping customers evaluate, deploy, and scale AI with confidence while accelerating their broader digital transformation initiatives. In Q2, net sales were $854 million, representing a 12.4% increase year-over-year. The increase in net sales was driven by 19.5% growth in notebooks, mobility, and desktops. This growth was a combination of higher average selling price and a 3% increase in units sold. Software grew 15%, while networking increased 11.5% in the quarter. Gross billings increased 14% to $1.2 billion compared to $1 billion in the prior year quarter. Gross profit increased 14.3% to a record $157.5 million and gross margin expanded by 30 basis points to 18.4%. The investment continues across networking, storage, server, software, and modern workplace technologies. We believe these investments form the foundation for future AI deployment. During the quarter, we continued to navigate the pricing and supply dynamics we discussed last quarter. Our teams worked closely with customers and strategic partners to manage supply constraints, optimize purchasing decisions, and maintain business continuity. While some customers accelerated purchases and others took a more measured approach, our diversified customer base, broad partner ecosystem, and disciplined execution enabled us to successfully navigate these dynamics across all three sales segments. With that, let's turn to our segment performance. Our Business Solutions segment delivered another outstanding quarter, demonstrating the strength of our customer relationships and the continued demand for modern workplace technologies. Net sales increased 17.3% to a record $343.9 million, while gross profit rose 14.9% to a record $79.1 million. Gross billings grew 16.7% to $496.1 million. Gross margin was 23% compared with 23.5% in the prior year quarter, reflecting a higher mix of endpoint devices and changes in customer mix. Demand remained broad-based across the portfolio with double-digit growth across endpoint devices, NetCom, and storage. Customer purchasing patterns in the Business Solutions segment continued to vary during the quarter, as some pulled forward demand in advance of price increases. Despite the pull-forward in demand, we have good momentum in the Business Solutions group, as backlog is at its highest level in three years. With Public Sector Solutions, net sales were $140.5 million, consistent with the prior year, while gross billings increased 1.7% to $197.1 million. Importantly, gross margins expanded 130 basis points to 15.5%, reflecting a favorable customer mix. Government agencies continue to prioritize modernization initiatives focused on cybersecurity, cloud adoption, and operational efficiency. As these organizations increasingly evaluate how AI can enhance mission outcomes, they require trusted technology partners capable of integrating infrastructure, software, security, and services within highly regulated environments. Our Enterprise Solutions segment also delivered an outstanding quarter, reflecting continued customer investment in technology modernization and the growing demand for enterprise AI-ready infrastructure. Net sales increased 13.4% to $369.6 million driven by strong demand for endpoint devices, software, servers, and services. Gross profit grew 15.8% to $55.2 million, while gross billings increased 17% to $477 million. Gross margin expanded 30 basis points to 14.9%, benefiting from favorable product mix and particularly strong growth in services. Enterprise customers experienced the greatest impact from the supply chain dynamics we discussed earlier. Some customers accelerated purchases into the quarter, while others delayed ordering during the second quarter because of fixed IT budget cycles. We also saw customers make strategic inventory commitments to secure supply. While these commitments did not affect our revenue or profitability, they increased inventory and we believe reflect customers' confidence in future deployment schedules. Importantly, Enterprise Solutions ended the quarter with a record backlog. We believe this, combined with continued demand for infrastructure modernization to support enterprise AI adoption, positions us well for continued momentum into the third quarter. Across each of our three sales segments, we continue to see the same underlying trend. Customers are investing in modern infrastructure, modern device, edge computing, cybersecurity, cloud and AI. Not as isolated technologies, but as integrated enterprise platforms. With that, I'll turn the call over to Tom for a review of our financial results in greater detail. Tom?

Thanks, Tim. In the second quarter, SG&A increased 7.1% to $114.5 million year-over-year, driven by an increase in variable compensation due to higher levels of gross profit in the quarter and an increase in marketing costs due to the timing of activities. SG&A was 13.4% of net sales, down 70 basis points year-over-year, reflecting our continued focus on efficiency and scale. Operating income increased by 39.2% to a record $43 million year-over-year, demonstrating strong operating leverage as we continue to balance expense discipline with targeted investment in areas of our business that will drive future growth. Operating income margin improved to a record 5% compared to 4.1% last year. Interest income for the quarter was $2.5 million compared to $3.2 million last year, primarily a function of lower cash balances and interest rates. Our effective tax rate for the quarter was 27.2%, down from 27.3% in the prior year. As a result, net income for the second quarter increased 33.8% to a record $33.2 million, reflecting strong underlying earnings performance. Diluted earnings per share were $1.31, an increase of 35.1%, or $0.34 compared to the prior year. On a trailing 12-month basis, adjusted EBITDA was $144.5 million compared to $122.5 million a year ago, an increase of 18% resulting from improved earnings. During the quarter, we continued to return capital to shareholders through dividends as we paid a quarterly dividend of $0.20 per share. We also announced today that our board of directors has declared a $0.27 per share dividend. The dividend is payable on August 28, 2026 to shareholders of record as of August 11, 2026. As of today, we have $81.2 million remaining for stock repurchases under our existing stock repurchase program. Turning to the balance sheet and cash flow, cash used from operations from the first half of 2026 was $49.5 million, reflecting positive working capital investments to support growth. This included a $61.5 million increase in inventory and an $80.6 million increase in accounts receivable, partially offset by a $39.3 million increase in accounts payable. Cash used in investing activities totaled $6.4 million, driven by $105.7 million of new investment purchases and $3.9 million of purchases of property, plant, and equipment, partially offset by $103.2 million investment maturities. Cash used in financing activities was $13.6 million, reflecting our ongoing share repurchase activity of $2.5 million and dividend payments of $10.1 million to shareholders. We ended the quarter with a strong liquidity position, $340.7 million in cash, cash equivalents, and short-term investments, providing significant flexibility to execute our strategic priorities and continue returning capital to shareholders. We believe our disciplined approach to capital allocation, continued focus on margin execution, and targeted strategic investments position us well for the remainder of 2026 and beyond. I will now turn the call back over to Tim to discuss current market trends.

Thanks, Tom. We had good growth across each of our key vertical markets. In retail, net sales grew 31% year-over-year, while gross profit increased 29%. Retail remained one of our strongest performing verticals as customers accelerated investments in networking, storage, security, and AI-ready endpoints. In healthcare, net sales grew 15% and gross profit grew 14% year-over-year. Healthcare organizations continue to modernize technology environments while balancing security, compliance, and operational efficiency. In financial services, net sales increased 23% while gross profit grew 17% year-over-year. Financial institutions continue to prioritize cybersecurity, infrastructure modernization, and digital transformation as they prepare their environments for AI-enabled applications. In manufacturing, net sales increased 27% while gross profit increased 8% year-over-year, reflecting broad-based demand across our manufacturing customer base. Endpoint in the digital workspace remained an important growth driver. We also saw increasing investment in the data center technologies that enable enterprise AI adoption, including compute, storage, networking, and security. Manufacturers continue to focus on automation, operational resilience, productivity improvement, and supply chain optimization despite ongoing geopolitical tariffs and cost pressures. The value we deliver to customers continues to be validated by our strategic partners and independent third parties. During the quarter, we were honored with awards that reflect the strength of our execution, our solution capabilities, and our commitment to customer success. We were recognized as Dell's 2026 North America Channel Services Sales Partner of the Year. This award recognizes partners that demonstrate exceptional performance, innovation, and customer impact. We were named to TIME Magazine's 2026 list of America's best companies. This recognition is based on employee satisfaction, financial performance, and ESG transparency, reflecting the strength of our culture, our disciplined execution, and our long-term commitment to creating value for customers, employees, and shareholders. Looking forward, although AI may enter the enterprise as software, it runs on a foundation that includes compute, storage, networking, security, and cloud, as well as on the services required to design, deploy, secure, and manage those environments at scale. Through TSX, powered by Helix, our Center for AI and Applied Robotics, and our broad solutions portfolio, Connection gives customers a single, accountable path from AI capability to business outcomes. Toward that end, we continue to see strong customer engagement as organizations modernize their data centers, refresh AI-ready endpoints, strengthen their security posture, and prepare their environments for enterprise AI. These areas continue to drive healthy pipeline growth and represent some of our largest opportunities going forward. While short-term demand variability may occur as customers manage procurement cycles and supply chain dynamics, we continue to work closely with our partners and customers to minimize those impacts. More importantly, the long-term technology trends driving our business remain very much intact. And we believe Connection is well positioned to deliver sustained profitable growth. And our confidence in the business is underpinned by several long-term technology trends that continue to drive customer activity, expand our pipeline, and create opportunities across our business. The PC refresh cycle continues through 2026 as customers modernize aging fleets, complete Windows 11 migrations, and adopt AI-enabled devices that provide enhanced performance, security, and user experiences. Data center modernization remains a core priority as customers build the compute, storage, networking, cloud, and security foundations required to support increasingly complex data-intensive workloads. We continue to expand our technical services organization to help customers design, deploy, secure, and manage complex technology environments throughout the entire lifecycle. And we're investing in training and tools to ensure that our teams are fully equipped through AI adoption and next-generation architectures at scale and help them turn technology investments into measurable business outcomes. As we move forward, our backlog remains elevated relative to the past few years despite record net sales in the quarter. While we've benefited from price inflation and healthy demand, there is some uncertainty that supply chain constraints and other macroeconomic conditions still exist. However, demand continues to be solid through Q3. We're positioning Connection for sustained long-term growth, and we expect to continue to outperform the U.S. IT market by 200 basis points this year. In a world where technology changes fast, expertise wins, and that's where Connection continues to differentiate. We will now entertain your questions. Operator?

Please stand by while we compile the Q&A roster. Our first question comes from the line of Anthony Lebiedzinski with Sidoti. Your line is now open.

Could you comment first on the monthly trends that you saw in the quarter? It sounds like July has also continued at a similar pace, but if you could add any other trends commentary about it, that'd be great.

What we saw, Anthony, is we had a really strong April and a reasonably strong June, and May was, frankly, a little bit soft. I'm not quite sure why that happened that way, but that's kind of the way it rolled through. We had a really good year-end with Microsoft this year. And to that end, I think, as we look forward, you know, I think our sequentially will probably be down a little bit, I would say, in revenues next quarter compared to this quarter and probably in the, you know, year-on-year and like the high single digits in terms of growth.

You asked about July. And July did start and is going strong with solid momentum.

That's great to hear. And then, so you gave some color about the notebooks, mobility, and desktops in terms of inflation and pricing versus units. Now on a consolidated level, can you help us out as far as maybe giving us a little bit more context as to just pricing versus unit dynamics?

Yes, so Anthony, thanks. So in units, we were up 3% for endpoint devices. So the unit count was up 3%. The revenue was up about 19% overall. So that's kind of how that breaks out.

Right, right. Okay. And then, but as far as on a consolidated basis for the whole company, as far as all the product categories, if you could maybe just give a little bit more color as far as pricing versus units.

Yes, I think in the servers and networking, I mean, it's obviously a little inflation built in there too, particularly strong software quarter, like I said, with Microsoft year-end. So that helped the margins a little bit as all that stuff or most of that stuff gets netted down to revenue and gross profit are equal. So I think that's kind of what we saw. I think in terms of what we saw with the mobility and desktops, there was absolutely price inflation. And I think we did a reasonably good job pushing that through and maintaining our margins.

Got you. Okay. And then last for me, as far as on the balance sheet, as you pointed out, Tom, your accounts receivable and inventories were up as well as accounts payable. How do you see these settling by the end of the year? Any sort of ballpark estimate as to like where we could see those?

Yes. So the timing in the quarter, which was, you know, your first question has a lot to do with what that receivable balance looks like. And I think we had about 40% of our revenue in June. So that obviously, you know, elevates that balance. And especially when you look at our gross billings, which are up even more than our revenue, that's reflective of what's in that receivable balance. If business kind of stays at this level, receivables probably don't come down a ton. Where I think we'll see a little bit more movement is on the inventory, because we did bring in a bunch of inventory and we're kind of deploying that for our customers over time. So I would expect sequentially the inventory balance to come down a little bit by the end of the year, say $150 million range.

Got it. All right. Well, that's very helpful. Well, thank you very much and best of luck.

Thank you. Our next question comes from the line of Logan Katzman with Raymond James. Your line is now open.

This is Logan on for Adam. It was helpful hearing you kind of talk about your thoughts on the sequential revenue growth here. But given the record backlog you guys have in Enterprise Solutions and your high backlog in Business Solutions, I'm just curious, you know, how all of that's kind of informing the gross profit dollar growth and EPS expectations through the end of the year.

Thanks, Logan. There are two things that jump out at us right away. The first is, as Tom mentioned, with our Microsoft business, June is their year-end and that's traditionally, the month of June is a large Microsoft month for us, and we did see that this year. Also, historically, Q2 is usually slightly larger than Q3. They're close, but slightly larger. So given the combination of pull-ins, the Microsoft year-end, and just the history of Q2 versus Q3, we feel like sequentially Q3 might be down a little, but we're pretty confident about the quarter overall.

Okay, that's helpful. Thank you. Can you help quantify the pull-in activities that you saw in the quarter? And then I think you also called out maybe some headwinds from some of the late purchases. Is there any way you could quantify both those impacts?

Yes, it's hard to quantify all the pull-ins because we don't always know what's in the customer's mindset. Some we know explicitly. I mean, we had a couple of customers we probably did over $10 million of business with that were pretty clearly pull-ins. So I would say it's, you know, it certainly wasn't 10% of the business, was, let's say, mid-single digits, maybe a little lower overall. And then the question is, on some of this stuff, the supply chain issues worked their way through. When is the backlog going to get relieved? Because we do have a good, solid backlog, but it's just... It feels like some of it will go out in Q3, and I know some of it's going to roll into at least Q4. So it's a little bit difficult to quantify specifically at this point.

No, that's super helpful. Thank you.

Thank you, Logan.

Thank you, and I'm currently showing no further questions at this time. I'd now like to turn the call back over to Tim McGrath for closing remarks.

Thank you, Shannon. I'd like to thank all of our customers, vendor partners, and shareholders for the continued support, and once again, our co-workers for their efforts and extraordinary dedication. I'd also like to thank those of you listening to our call this afternoon. Your time and interest in Connection are greatly appreciated. Have a great evening.

This concludes today's conference. Thank you for your participation. You may now disconnect.