PC Connection's Q3 2025: Contradictions Highlight Budget Flush, Backlog, Margins, IT Spending, and Public Sector Impact

Date of Call: October 29, 2025

Financials Results

• Revenue: $709.1M, down 2.2% YOY
• EPS: $0.97 per diluted share, down $0.05 YOY; adjusted diluted EPS $0.97, flat YOY
• Gross Margin: 19.6%, up 90 basis points YOY
• Operating Margin: 4.3%, compared to 4.1% prior year

Guidance:

• Q4 2025: expect mid-single digit revenue growth year-over-year.
• Gross margins likely lower than Q3; year-on-year margins expected to be roughly flat next quarter.
• 2026: company planning for mid-single digit growth, with upside if normalization occurs.
• Backlog ended Q3 at highest level in nearly two years, supporting Q4 pipeline.
• Public Sector timing/funding uncertainty (and federal shutdown) is a wildcard that may delay shipments.

Business Commentary:

* Record Gross Profit and Expanding Margins: - PC Connection, Inc. reported a record gross profit of $138.6 million for Q3 2025, up 2.4% year-over-year. - The company's gross margin expanded by 90 basis points to 19.6%, driven by strong growth in cloud software, cybersecurity, and services. - This was attributed to strong performance in the Business Solutions and Enterprise Solutions segments, despite challenges in the Public Sector Solutions segment.

• Public Sector Challenges and Funding Uncertainty:
• The Public Sector Solutions segment saw net sales decline to $132.5 million, down 24.3% from the previous year.
• The decline was due to the timing of federal projects and reduced funding at federal, state, and local levels.

• The company anticipates a rebound in this segment once funding cycles normalize.

• Strong Performance in Business Solutions and Enterprise Solutions:

• In the Business Solutions segment, net sales grew by 1.7% to $256.8 million, with gross profit increasing by 7.8% to $68 million.
• The Enterprise Solutions segment saw net sales rise by 7.7% to $319.8 million.

• Growth in these segments was driven by strong demand for cloud, cybersecurity, AI infrastructure, data center modernization, and edge computing solutions.

• Profitability and Shareholder Returns:

• Operating income was flat year-over-year, showing good cost discipline despite continued investments.
• The company returned capital to shareholders through dividends and share repurchases, with over 1 million shares repurchased year-to-date.
• This reflects the company's commitment to maximizing shareholder value through strategic capital allocation and margin discipline.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted "record gross profit" and "expanded our margins," said backlog "ended Q3 at its highest level in nearly 2 years," and stated "we feel confident" and expect to "outperform the U.S. IT market by 200 basis points," while acknowledging Public Sector timing risk.

Q&A:

• Question from Adam Tindle (Raymond James & Associates, Inc., Research Division): How are you thinking about year-end and Q4 acting as a budget-flush period — what are you seeing in the first month of Q4 vs Q3 and is there a case to return to top-line growth in Q4?
  Response: Enterprise and Business Solutions show pipeline momentum for Q4 and could drive top-line growth; Public Sector timing remains the wildcard.

• Question from Adam Tindle (Raymond James & Associates, Inc., Research Division): The Q3 backlog was the largest in years — is the backlog driven by supply challenges or customers delaying acceptance, and when will it unentangle?
  Response: Backlog is primarily customer-driven delays (not supply risk); management views it as solid and expects some of the deferred work to flow into coming quarters, targeting mid-single digit sales next quarter.

• Question from Adam Tindle (Raymond James & Associates, Inc., Research Division): Early indications for 2026 IT spending and the PC refresh — will that create difficult comparisons and what is your early take on 2026?
  Response: PC refresh continues but at a slower pace (Windows 11 conversion ~60%); strong demand in data center, cloud and cyber supports a mid-single digit growth view for 2026 with upside as normalization occurs.

• Question from Anthony Lebiedzinski (Sidoti & Company, LLC): Can you comment on the cadence of sales during the quarter — demand trends from July through September?
  Response: Seasonal cadence: July ~34%, August down, September strongest at ~35%, which management called typical.

• Question from Anthony Lebiedzinski (Sidoti & Company, LLC): Is the federal government shutdown impacting Q4 numbers and how should we think about that potential impact?
  Response: The shutdown is delaying shipments because sites can't receive orders; prolonged shutdown would materially challenge Public Sector results in Q4.

• Question from Anthony Lebiedzinski (Sidoti & Company, LLC): How should we think about gross margins and operating margin leverage going forward?
  Response: Gross margins likely won't match this quarter's level and are expected to be about flat YOY next quarter; G&A may be modestly higher depending on revenue, with mid-single digit sales growth targeted.

• Question from Anthony Lebiedzinski (Sidoti & Company, LLC): With strong cash, are you looking at acquisitions?
  Response: The company is actively evaluating tuck-in acquisitions to bolster solutions capabilities but has nothing to announce.

Contradiction Point 1

Budget Flush and Q4 Growth Expectations

It involves differing perspectives on the potential for a budget flush and growth expectations for the fourth quarter, which are crucial for understanding the company's financial outlook.

How are you thinking about year-end and Q4 as a typical budget flush period? - Adam Tindle (Raymond James & Associates, Inc., Research Division)

2025Q3: We're seeing early signs of budget flush in our Enterprise segment, which is building momentum for Q4. Business Solutions segment also forecasts a good Q4. The wildcard remains our Public Sector business, where recovery timing is uncertain. - Tim McGrath(CEO)

What is the outlook for the second half of the year and demand trends this quarter? - Adam Tyler Tindle (Raymond James & Associates, Inc., Research Division)

2025Q2: We're optimistic about opportunities in retail and manufacturing for the back half of the year. Front half performance was stronger in finance and health care, but health care had some year-over-year comparisons due to large rollouts from a year ago. - Timothy J. McGrath(CEO)

Contradiction Point 2

Backlog and Revenue Growth Expectations

It involves differing views on the factors contributing to the backlog and expectations for revenue growth, which are important indicators for the company's performance.

What caused the record Q3 backlog—supply chain issues or customer project delays? - Adam Tindle (Raymond James & Associates, Inc., Research Division)

2025Q3: The majority of our backlog is customer-driven due to customer delays. - Tim McGrath(CEO)

Can you provide context for the second half of the year and discuss demand trends for the quarter? - Adam Tyler Tindle (Raymond James & Associates, Inc., Research Division)

2025Q2: Our backlog is at a record level, and there's a pickup in activity. While the first half of 2025 was slower than expected, optimism is now driven by technology and solution-based discussions. Our pipeline continues to show strength and growth. - Timothy J. McGrath(CEO)

Contradiction Point 3

Gross Margin Expectations

It involves changes in financial forecasts, specifically regarding gross margin expectations, which are critical indicators for investors.

What are your expectations for gross and operating margins moving forward? - Anthony Lebiedzinski (Sidoti & Company, LLC)

2025Q3: We expect mid-single-digit sales growth in Q4, with gross margins potentially flat due to a different software and cloud mix. Spending may be slightly higher than Q3. - Thomas Baker(CFO)

Moving into the second half of the year, will gross margins stay at Q2 levels, or is there directional guidance available? - Anthony Chester Lebiedzinski (Sidoti & Company, LLC)

2025Q2: Gross margins should remain fairly stable, give or take 10-15 basis points, as the impact of licensing fee program reductions has largely been accounted for. - Thomas C. Baker(CFO)

Contradiction Point 4

IT Spending Trends

It involves differing perspectives on the trends in IT spending, which is crucial for understanding the company's growth prospects.

What's your outlook for IT spending next year? - Adam Tindle (Raymond James & Associates, Inc., Research Division)

2025Q3: We expect mid-single-digit growth for 2026, with continued growth in data center, cloud, and cybersecurity. AI PC refresh could level off but will still deliver strong results. - Tim McGrath(CEO)

Which customer types or verticals accelerated purchases versus those that held back, and were specific product categories involved? - Adam Tindle (Raymond James)

2025Q1: Many customers are concerned about cost containment and expense reduction, preparing for economic uncertainties and tariffs. Some customers are realizing that technology can drive productivity and are moving forward with projects. - Tim McGrath(CEO)

Contradiction Point 5

Public Sector Sales and Federal Government Impact

It pertains to differing expectations regarding the timing and impact of a federal government shutdown on sales, which could affect revenue projections.

How did the government shutdown affect your Q4 results? - Anthony Lebiedzinski(Sidoti & Company, LLC)

2025Q3: The shutdown is affecting our ability to ship products, which is a concern. We hope the situation resolves soon, allowing us to catch up on demand. - Tim McGrath(CEO)

Can you discuss the expected impact of tariffs? - Anthony Lebiedzinski(Sidoti & Company, LLC)

2024Q4: Public Sector was down about 15%. And it was really just a matter, as we talked before, of the timing, was it going to be drilled down and the number of days out as we got to the end of the quarter, that we just really couldn't get the product out there. - Thomas Baker(CFO)