PC Connection Inc 2026 Q3 Earnings Call

Thanks, 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-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 views 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. Therefore, you should not rely on 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 third quarter 2026 comparisons are being made against the third 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 investor relations section of our website at www.connection.com. I would now like to turn the call over to our host, Tim McGrath, CEO.

Tim? Thank you, Samantha. Good afternoon, everyone, and thank you for joining us today for Connection's Q3 2026 conference call.

I will begin this afternoon with an overview of our third quarter results and highlights of our performance. Tom will then walk us through a more detailed look at our financials. Our team delivered outstanding results in the third quarter, highlighted by record net sales, record gross billings, and record gross profit. Our performance reflects strong execution within our three strategic pillars: digital workspace, modern infrastructure and multicloud, and supply chain and lifecycle. We believe our strategy will become even more relevant as AI continues to reshape enterprise technology investment. It is becoming central to business operations, and customers are seeking greater control over their data, applications, and technology infrastructure while preserving the flexibility to adapt as their needs evolve.

This shift is driving demand for the solutions and the expertise Connection provides, helping customers innovate with confidence and optimize the value of their technology investments. In Q3, net sales were $874.3 million, representing a 23.3% increase year-over-year. The increase in net sales was driven across all product categories, as notebooks, mobility, and desktops grew 26.6%, software increased 23.2%, server storage was up 45.1%, and networking improved by 43.3% in the quarter. Gross billings increased 19.4% to $1.3 billion, compared to $1.1 billion in the prior year quarter. Gross profit grew 16.7% to a record $161.9 million, and gross margin declined by 110 basis points to 18.5%. The margin change was driven by customer mix, including large project rollouts in the quarter and a lower contribution of netted down revenue. Pricing pressures and supply chain conditions continued to influence customer spending during the quarter.

Some customers accelerated purchases ahead of further price increases, while others delayed investments or extended the life of existing assets. Our supply chain and lifecycle capabilities enable customers to effectively manage their costs, protect their technology investments, and maintain business continuity, reinforcing our role as a trusted partner in an increasingly complex market. With that, let us turn to our segment performance. Our Business Solutions segment delivered an outstanding quarter. Net sales increased 27.8% to $328.2 million, while gross profit rose 14.9% to $78.2 million. Gross billings grew 22.1% to a record $522.7 million, and gross margin was 23.8%, compared with 26.5% in the prior year quarter, reflecting changes in customer mix and a lower contribution from software sales recognized on a net basis. Demand remained broad-based across the portfolio with double-digit growth across endpoint devices, servers, netcom, and software. Within Public Sector Solutions, net sales increased 4.6% to $138.6 million.

Gross billings increased 6.8% to $233.3 million. Gross margin declined 30 basis points to 16.9%, reflecting an increase in sales of lower margin endpoint devices and changes in customer mix. Our Enterprise Solutions segment delivered strong growth reflecting continued customer investment in technology modernization and a growing demand for enterprise AI-ready infrastructure. Net sales increased 27.4% to a record $407.5 million, driven by strong demand for endpoint devices, software, servers, netcom, and services. Gross profit grew 26% to a record $60.2 million, while gross billings increased 23.1% to a record $521.2 million. Gross margin declined slightly by 10 basis points to 14.8%. Importantly, Enterprise Solutions ended the quarter with a record backlog. We believe this positions us well for continued momentum into the fourth quarter. With that, I will turn the call over to Tom to review our financial results in greater detail.

Tom? Thanks, Tim. In the third quarter, SG&A as a percentage of net sales was 13.8%, down 150 basis points year-over-year, reflecting our continued focus on efficiency and scale.

SG&A increased 11.5% to $120.9 million year-over-year, driven by an increase in variable compensation due to higher levels of gross profit in the quarter, an increase in marketing costs due to the timing of events, and investments we have made in platform modernization to increase sales of advanced technologies and services. Operating income increased by 35.4% to $41 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 4.7%, compared to 4.3% last year. Interest income declined to $2.5 million from $3.7 million last year, primarily due to lower cash balances.

Our effective tax rate for the quarter was 27.6%, up from 27.1% in the prior year. As a result, net income for the third quarter increased 27.2% to $31.5 million. Diluted earnings per share were $1.24, an increase of 27.8% or $0.27 compared to last year. On a trailing 12-month basis, adjusted EBITDA was a record $155.2 million compared to $122.7 million a year ago, an increase of 26%, resulting from the ongoing earnings growth. 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 $0.20 per share dividend payable on November 27th, 2026, to shareholders of record as of November 10th, 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 for the first nine months of 2026 was $39.8 million, reflecting targeted working capital investments to support growth. This included a $144.8 million increase in accounts receivable and an $83 million increase in inventory, partially offset by a $74.5 million increase in accounts payable. The increase in accounts receivable is primarily due to record net sales and the timing of customer deliveries. The day sales outstanding decreased by two days compared to the end of 2025. The increase in inventory is primarily due to several large-scale deployments we mentioned earlier on this call. Cash used in investing activities totaled $9.8 million, driven by $161 million of new investment purchases and $6 million of purchases of property, plant, and equipment, partially offset by $157.4 million in investment maturities.

Cash used in financing activities was $19 million, reflecting our ongoing share repurchase activity of $2.5 million in dividend payments of $15.1 million to shareholders. We ended the quarter with strong liquidity position, $343.3 million of cash equivalents, and short-term investments, providing significant flexibility to execute on our strategic priorities and continue to return capital to shareholders. We believe our disciplined approach to capital allocation, continued focus on margin execution, and targeted strategic investments position us very well for the remainder of 2026 and beyond. I will now turn the call back over to Tim to discuss current market trends.