PC Connection (NASDAQ:CNXN) reported mixed fourth-quarter 2025 results, as record gross profit in its Business Solutions and Enterprise Solutions segments offset a sharp decline in Public Sector Solutions tied to project timing and the absence of a prior-year contract. Management also introduced a new operating metric, gross billings, and outlined cost actions intended to improve operating leverage heading into 2026.
Quarterly results: gross profit rises as sales dip
CEO Tim McGrath said the company delivered “record growth profit” in both Business Solutions and Enterprise Solutions, while results in Public Sector Solutions were “disappointing and below prior year levels.” McGrath attributed the public sector shortfall primarily to “a non-repeating project that straddled both Q4 2024 and Q1 2025,” along with delays in several K-12 rollouts.
Operating income increased 4.2% to $23.6 million. Excluding severance expenses and other charges, operating income rose 17.8% to $26.7 million. Diluted earnings per share were $0.82, up 5.1%, while adjusted diluted EPS was $0.91, up 16.7% year over year.
New disclosure: gross billings up 2.9% to $1.06 billion
Beginning this quarter, the company disclosed gross billings, defined as the total dollar value of goods and services billed during the period (net of returns and credit memos), excluding applicable sales or other taxes, and including agency fees and freight. McGrath said gross billings rose 2.9% to $1.06 billion compared with $1.03 billion a year ago, calling it evidence of overall customer demand despite public sector pressure.
CFO Tom Baker said gross billings is used internally to evaluate segment sales performance by capturing the total value of transactions, and that management believes it provides similar insight to investors.
Segment performance: strength in Business and Enterprise, sharp public sector drop
Business Solutions posted what McGrath described as a “standout quarter,” with net sales rising 4.2% to $273.5 million and gross profit increasing 11.4% to $69.8 million. Gross billings grew 4.7% to $430.3 million, while gross margin expanded 160 basis points to 25.5%. McGrath cited double-digit growth across desktops, notebooks, Net/Com, and software, including cloud and cybersecurity.
Public Sector Solutions net sales fell 36.8% to $90.8 million. Gross billings declined 23.7% to $170.7 million. Despite the revenue decline, gross margin expanded 400 basis points to 19.4% due to changes in customer and product mix. McGrath said the company believes conditions in the segment will improve later in 2026.
Enterprise Solutions delivered net sales growth of 11.9% to $338.7 million, driven by demand for advanced technologies and endpoint devices. Gross profit rose 7.1% to $48.2 million, and gross billings increased 16.1% to $457.8 million. Gross margin was 14.2%, down 70 basis points year over year, which management attributed to changes in subscription license programs and product mix.
Cost actions, margins, and capital returns
Management highlighted a focus on operational efficiency and expense management. In the quarter, the company executed a voluntary retirement offering, and together with other severance actions recorded $3.1 million in severance expense and other charges. Baker added that the company completed additional targeted headcount reductions at the end of January, with total charges expected to be $5.9 million to $6.2 million across Q4 2025 and Q1 2026. He said these initiatives are expected to generate approximately $7 million to $8 million in ongoing annual cost savings split between SG&A and cost of goods.
SG&A increased 1.7% year over year, driven primarily by higher variable compensation tied to higher gross profits. Baker said headcount declined 2% year over year, which helped keep total payroll costs flat while the company continued investing in priority growth areas. SG&A was 15.5% of sales, up 40 basis points, reflecting variable compensation and sales mix. Operating income margin improved to 3.4% from 3.2%, and to 3.8% excluding severance and other charges.
Interest income was $3.6 million versus $4.8 million a year ago, which Baker attributed to lower average cash balances and a lower interest rate environment. The effective tax rate was 23.7%, down from 24.1%. Net income was flat at $20.7 million; excluding severance and other charges, net income increased $2.3 million, or 11.3%.
On capital returns, the company paid a $0.15 per share quarterly dividend and repurchased about 179,000 shares at an average price of $59.53, totaling $10.7 million in Q4. For full-year 2025, the company repurchased more than 1.2 million shares at an average price of $62.64 and returned $91.4 million to shareholders through $76.1 million of buybacks and $15.3 million in dividends. At year-end, $33.6 million remained under the existing repurchase program, and the board authorized an additional $50 million. The board also declared a $0.20 per share dividend—an increase of 33%—payable March 6, 2026, to shareholders of record on Feb. 17, 2026.
For 2025, operating cash flow was $65.4 million, reflecting working capital investments that included a $48.5 million increase in inventory and a $38.4 million increase in accounts receivable, partially offset by a $38.1 million increase in accounts payable. Baker said the inventory increase was intentional to procure ahead of anticipated price increases and support customer rollouts, while the rise in receivables was driven by delivery timing. The company ended the quarter with $406.7 million in cash, cash equivalents, and short-term investments.
Demand signals and 2026 outlook themes
McGrath pointed to strong performance in several vertical markets during Q4, including net sales growth of 22% in retail, 28% in financial services (with gross profit up 13%), and 19% in healthcare (with gross profit up 18%). He attributed healthcare strength to large enterprise deployments tied to electronic health record management and security.
In the Q&A, McGrath said the company is working with a blended estimate of about 4% U.S. IT market growth for 2026 and expects to outperform the market by 200 basis points. He also said roughly 61% of the company’s endpoints are AI-enabled and that it continues to see demand for AI at the edge and growth in cloud.
Baker noted a notable Q4 cadence shift, with December representing over 38% of the quarter’s revenue versus a typical “35-ish%,” citing some budget flush behavior and some customers pulling forward orders to get ahead of price increases. McGrath said the company saw some price increases in Q4 but did not view memory supply constraints as an issue during the quarter; however, he said the company is advising customers to order as soon as possible as it expects constraints to persist through the year.
Looking ahead to near-term comparisons, Baker said a large public sector contract that did not renew represented “almost a $30 million headwind” in Q4 and is expected to be “almost a $40 million headwind” in the next quarter. He suggested next-quarter results could look similar to Q4, with flat revenue and “low to mid-single digits” gross profit growth, before the public sector headwind eases later in the year.
About PC Connection (NASDAQ:CNXN)
PC Connection, Inc (NASDAQ: CNXN), now operating under the trade name Connection, is a value-added provider of information technology solutions founded in 1982 and headquartered in Merrimack, New Hampshire. The company offers a broad portfolio of hardware and software products sourced from leading technology vendors, alongside professional services designed to help organizations design, deploy and maintain IT environments.
Connection’s product offerings encompass desktop and notebook computers, servers and storage systems, networking and cybersecurity solutions, as well as cloud and virtualization technologies.
