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Hello, and welcome to PC Connection, Inc. 2026 Annual Meeting. [Operator Instructions]

I would now like to hand the conference over to Tim McGrath. You may begin.

Well, good morning, everyone, and welcome to the PC Connection, Inc. 2026 Annual Stockholders Meeting. I'm Tim McGrath, President and CEO for PC Connection, Inc., and I'll be presiding over this meeting. At this time, I call the meeting to order.

We have again this year, supplemented our in-person meeting with a courtesy dial-in for stockholders who have submitted their proxy in advance of the meeting and wish to listen to the meeting remotely rather than attend in person. Only stockholders who are here in person may vote in person or otherwise.

I would now like to introduce the members of our Board and our company officers as well as our representatives of Deloitte & Touche LLP, our external auditing firm; and WilmerHale, our external Corporate Counsel.

Representing our Board of Directors is the Chair of our Board, Patricia Gallup; our Vice Chair, Jay Bothwick; David Beffa-Negrini, Barbara Duckett, Jack Ferguson and Gary Kinyon. Also with us today is our CFO and Inspector of Elections, Tom Baker, as well as a number of our senior members of management. Brian Hicks, David Hall, Jamal Khan, Tom Dion, Dennis Riseman, Scott Sova, Mariano Dy-Liacco X, and Kyle Reeb. In addition, representing WilmerHale is partner, Lillian Brown; and representing Deloitte & Touche is partner, Christopher Smith, both of whom are joining remotely.

At the conclusion of our meeting, we'll be available to answer any questions that any stockholder may have. Each of you should have checked in at the registration desk prior to entering the meeting. In order to conduct an orderly meeting, we'll ask that you follow the rules of conduct for the meeting, copies of which have been provided.

I will now commence with the formal part of the meeting. I have received an affidavit from Broadridge Financial Solutions certifying that the notice of the annual meeting and proxy statement were sent to all stockholders of record as of March 16, 2026. This affidavit and the list of stockholders entitled to vote at this meeting are available for inspection by any stockholder.

Our first order of business at the meeting is to determine whether or not the shares represented at this meeting, either in person or by proxy, are sufficient to constitute a quorum for the purpose of transacting business.

Mr. Tom Baker has been appointed to act as Inspector of Elections. Tom has reported to me that there are present at this meeting in person or through representation by proxy, a total of at least 23,700,691 shares of common stock. Since more than a majority of the outstanding shares of capital stock are represented at this meeting, I hereby declare that a quorum exists.

Turning now to the items to be voted on at the meeting as indicated in the notice of the meeting and the accompanying proxy statement, which were distributed to all stockholders, our agenda today consists of two items: number one, to elect six directors to serve until the 2027 Annual Meeting of Stockholders; and number two, to ratify the selection by the Audit Committee of Deloitte & Touche LLP as our independent registered public accounting firm for the year ending December 31, 2026.

The polls for these matters will open following a brief discussion of these matters and will remain open until I announce that the polls are closed. No ballots, proxies or revocations thereof or changes thereto will be accepted after the polls are closed. I will announce the preliminary results of voting immediately following the tabulation of the voting.

Are there any stockholders present who wish to vote in person because they either have not submitted a proxy or have submitted a proxy but wish to revoke their proxy or change their vote?

The first matter to be voted on by the stockholders is the election of directors to serve until the 2027 Annual Meeting of Stockholders and until their successors are duly elected and qualified. The nominees for election are: Patricia Gallup, David Beffa-Negrini, Jay Bothwick, Barbara Duckett, Jack Ferguson and Gary Kinyon.

The second and final matter to be voted on by the stockholders is the ratification of the selection by the Audit Committee of Deloitte & Touche LLP as our independent registered public accounting firm for the current fiscal year. Are there any questions or any other discussion on any of these proposals before we proceed to vote?

This concludes the business items on the agenda for the meeting. I hereby declare that the polls are now open for each matter to be voted upon today. Are there any ballots to be collected?

No.

In that case, the polls are now closed. The votes will now be tabulated and we'll announce the preliminary results of the voting. Mr. Baker has prepared and provided to me a preliminary report of the voting on each matter. The final vote results will be included in the Form 8-K that will be filed within 4 business days after this meeting.

On the motion to elect directors, a plurality of the votes cast at the meeting has been voted in favor of each of the nominees to be elected. On the motion to ratify the selection by the Audit Committee of Deloitte & Touche LLP as our independent registered public accounting firm for the current fiscal year, a majority of the votes cast at the meeting has been voted in favor of the ratification. Therefore, I hereby declare that the nominees have been duly elected as directors and Deloitte & Touche LLP has been duly ratified as our independent registered public accounting firm for the current fiscal year.

I now instruct the Secretary of the company to include in the minutes of the meeting the precise number of shares voted on each proposal. As there is no further business -- excuse me, as there is no further business to come before the meeting, I declare the formal portion of the meeting adjourned. Thank you for your time and attention.

We'll now be available to answer any appropriate questions that any stockholders may have.

As there are no questions, I will declare the meeting closed. Thank you very much.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.

Good afternoon, and welcome to the First Quarter 2026 Connection Earnings Conference Call. My name is Josh, and I will be the coordinator for today. [Operator Instructions]

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.

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 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 first quarter 2026 comparisons are being made against the first quarter of 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, President and CEO. Tim?

Thank you, Samantha. Good afternoon, everyone, and thank you for joining us today for Connection's Q1 2026 Conference Call. I'll begin this afternoon with an overview of our first quarter results and highlights of our performance. Tom will then walk us through a more detailed look at our financials.

We're pleased to announce a solid start to 2026 as we continue to execute with discipline and agility despite ongoing supply challenges and a dynamic economic landscape. Our Business Solutions and Enterprise Solutions segments delivered strong growth and consistent execution. Each improved both net sales and gross profit performance. The increase in net sales was driven by growth in endpoint devices, networking, services and software, including cloud and security. This performance helped offset the expected year-over-year decline in our Public Sector business and highlights the resilience and diversification of our model. As we discussed in our call last quarter, Public Sector results reflected the impact of a large non-repeating project that straddled both Q4 2024 and Q1 2025.

On a consolidated basis, gross billings grew 4.3% to $1 billion compared to $978.9 million in the prior year quarter. We also delivered total net sales of $721.9 million, representing a 3% increase year-over-year. Gross profit increased 4.3% year-over-year to $132.7 million. Gross margin expanded by 20 basis points to 18.4%. This reflects our disciplined pricing strategy and strong execution in navigating this dynamic cost environment, along with favorable shifts in both product and customer mix.

Industry-wide memory constraints and related price increases have been widely discussed across the market, and we began to see an impact in the first quarter. In response, we proactively engaged in comprehensive planning sessions with our partners and customers, positioning ourselves to navigate these supply chain constraints effectively. We saw a range of customer responses, including advanced purchasing in some cases, while others took a more measured approach given budget considerations and project timing. As expected, the impact varied for each sales segment, which we will discuss in detail as we progress through the call.

With that, let's turn to our segment performance. Business Solutions delivered another solid quarter. Net sales increased 6.6% to $275.6 million, while gross profit rose 3.2% to a record $67.5 million. Gross billings grew 9.3% to $446 million. Gross margin declined by 80 basis points year-over-year to 24.5% due to a shift in customer mix.

The Business Solutions segment experienced double-digit growth across net/com and software, including cloud and security solutions. While some customers pulled orders into Q1, others were impacted by product availability constraints. Overall, we believe these dynamics had little net effect on our business.

In Public Sector Solutions, net sales were $99.8 million, down 31% from a year ago, mostly due to the large federal contract that we've discussed. Excluding this nonrecurring item, underlying performance remains stable, and we expect conditions to improve as we progress through the balance of 2026. Gross billings were $135.7 million, reflecting a 21.2% decline year-over-year. Notably, gross margin expanded 140 basis points to 15%, driven by favorable shifts in customer and product mix.

Enterprise Solutions delivered outstanding top line growth, with net sales increasing 16.3% to $346.5 million, driven by strong demand for endpoint devices. Gross profit grew 18.7% to $50.2 million, while gross billings increased 10.3% to $439.6 million. Gross margin was 14.5%, up 30 basis points year-over-year, reflecting changes in product mix.

Enterprise Solutions was the most affected by supply chain dynamics this quarter. Some customers moved orders into the quarter, while a portion chose to delay ordering during Q1 due to their own fixed IT budgets. Overall, we believe that the pull-in benefited Enterprise revenues in the low to mid-single digits on a percentage basis.

We also had other Enterprise customers make aggressive commitments to secure supply ahead of their needs. And while not affecting our revenue and profit, this resulted in increases in inventory. Enterprise Solutions also ended the quarter with a record backlog, positioning us well for continued momentum throughout the year.

I'll now turn the call over to Tom to discuss additional financial highlights. Tom?

Thanks, Tim. In the first quarter, SG&A declined modestly year-over-year, driven by lower marketing costs due to timing of activities and a decrease in payroll expenditures, partially offset by higher variable compensation. We continue to operate with a high degree of expense discipline [Technical Difficulty] executed over the past 2 quarters, including a net reduction of headcount by 3% year-over-year. At the same time, we've been deliberate in reallocating those savings, maintaining targeted investment in our highest priority growth areas.

We took action at the end of January to further streamline our cost structure, resulting in a $3.1 million severance charge. These actions further align our expense structure with our strategic priorities and position us to drive enhanced operating leverage as demand continues to build. SG&A was 15.2% of net sales, down 50 basis points year-over-year, reflecting our continued focus on efficiency and scale.

Operating income increased by 39.3% to $20.2 million. Excluding severance expenses and other charges, operating income increased 33.4% to $23.3 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 2.8% compared to 2.1% last year. Excluding severance expense and other charges, operating income improved to 3.2%. Interest income for the quarter was $3.4 million compared to $3.9 million last year, primarily a function of a lower interest rate environment. Our effective tax rate for the quarter was 27%, down from 27.1% in the prior year.

As a result, net income for the first quarter increased 27.8% to $17.2 million year-over-year. Excluding severance expense and other charges, net income increased $3.8 million or 24.6% compared to last year. Diluted earnings per share were $0.68, an increase of 33.4% or $0.17, while adjusted diluted earnings per share was $0.77, an increase of 28.3% or $0.17 compared to the prior year. On a trailing 12-month basis, adjusted EBITDA was $132.3 million compared to $123.1 million a year ago, an increase of 7% resulting from improved earnings.

During the quarter, we continued to return capital to shareholders through both dividends and share repurchases. We paid a quarterly dividend of $0.20 per share and repurchased approximately 42,000 shares at an average price of $57.70 per share for a total cost of $2.4 million. As of today, we have $81.2 million remaining for stock repurchases under our existing stock repurchase program, providing ongoing flexibility. We also announced today that our Board of Directors declared a $0.20 per share dividend. The dividend is payable on May 29, 2026, to shareholders of record as of May 12, 2026.

Turning to the balance sheet and cash flow. Operating cash flow for the first quarter was $14.3 million, reflecting targeted working capital investments to support growth. This included a $50.7 million increase in inventory and a $13.7 million increase in accounts receivable, partially offset by a $58.1 million increase in accounts payable. The increase in inventory was planned as we strategically procured ahead of anticipated price increases and to ensure continuity of supply in support of customer deployments. The increase in accounts receivable was primarily due to the timing of customer deliveries.

Cash used in investing activities totaled $3 million, driven by $54.3 million of new investment purchases and $2 million of purchases of property and equipment, partially offset by $53.2 million in investment maturities. Cash used in financing activities was $8.2 million, reflecting our ongoing share repurchase activity of $2.5 million and dividend payments of $5 million to shareholders. We ended the quarter with strong liquidity position, $411.4 million in cash, cash equivalents and short-term investments, providing significant flexibility to execute on our strategic priorities and continue returning capital to shareholders.

I will now turn the call back over to Tim to discuss current market trends.

Thanks, Tom. Our momentum was evident in Q1 across our key vertical markets. In retail, net sales grew 20% and gross profit increased 17% year-over-year, driven by investments in productivity, operational efficiency and security. In healthcare, net sales and gross profit grew 15% year-over-year as health systems prioritize scalable infrastructure, services and cost efficiencies. In financial services, net sales were up 17% and gross profit increased 12% year-over-year, reflecting continued investment in modernization and security.

The value we deliver continues to be recognized by our strategic partners, and we're proud to have been named a 2026 Dell Technologies Titanium Black Partner, the highest designation within Dell's Partner Program. In addition, Americas Rising Star Partner of the Year for 2025 for VMware by Broadcom, highlighting our accelerating momentum in this critical ecosystem, and Zebra Technologies 2025 Partner of the Year for top revenue growth among national solution providers.

We're executing with discipline against our 3-part business strategy: data center modernization, digital workplace transformation and supply chain solutions. We remain focused on accelerating our solutions-led business, deepening customer relationships and driving profitable growth in cloud, cybersecurity, AI and integrated solutions. We continue to see strong customer engagement as organizations modernize infrastructure and increase investments in AI, data and security-driven technologies, areas where we differentiate and where demand and pipelines continue to build.

While some timing variability may persist due to supply chain uncertainty, we are partnering closely with our suppliers and customers to minimize its impact. Importantly, the long-term trends supporting our business remains strong and we believe position us well for sustained growth. Our confidence in the business is underpinned by key technology trends driving pipeline and customer activity. The PC refresh cycle continues through 2026 as customers modernize aging fleets and adopt AI-enabled solutions that deliver higher performance, stronger security and better user experiences.

Data center modernization remains a core priority as customers optimize hybrid environments to improve cost predictability, enhance security and increase performance while reducing energy consumption. AI-driven demand is expanding across endpoints, data center, edge and security as customers shift from experimentation to adoption, creating significant opportunities for integrated solutions. We continue to expand our technical services organization to support end-to-end customer needs, and we are investing in training and tools to ensure our teams are fully equipped to guide customers through AI adoption and next-generation architectures at scale.

As we move forward, our backlog is at its highest level since mid-2022, providing a positive outlook for our future. We will continue to invest in sales capability, integrated solutions delivery and systems to capture this demand while maintaining strong cost discipline. 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 today's AI-driven IT environment, demand is accelerating as customers advance refresh and modernization initiatives, driving infrastructure growth and security remaining as a top priority. As customers rethink how they deploy and manage technology, our strategy meets them where they are. We help them navigate the complexity, modernize with purpose and make confident, informed decisions that drive real business outcomes.

In a world where technology changes fast, expertise wins, and that's where Connection continues to differentiate. We'll now entertain your questions. Operator?

[Operator Instructions] Our first question comes from Adam Tindle with Raymond James.

Tim, I wanted to start, kind of the end of the comments there. You mentioned how backlog is, I think, the highest since mid-2022. And I wonder if you might just double-click on why you think that's the case right now?

And the reason that I'm asking is there's some concern. If you rewind back to 2022, there was a lot of orders being placed by customers across the entire channel. Some may have been double orders and things like that. I wonder if you've seen any evidence of that going on that might describe the backlog trends?

It might be also helpful for Tom to weigh in on some of the policies that you guys have on backlog. Is it cancelable? Could customers be double ordering? Just double-click on that aspect of the demand environment.

Well, thanks, Adam. So we've been looking at that very closely. And as you know, compared to 2022, our suppliers and us, we all have better tools and really much better visibility into our markets. And I don't think there's any evidence of all of double orders. I do think that customers are being a little aggressive on the ordering side, trying to get ahead of the potential future shortages and potential future price increases. I'll let Tom talk to our policy. Tom?

Yes. So Adam, typically, this works across the business. We are going to require non-cancelable POs before we make a commitment for product and unless we can return the product. So I think we're -- historically, we have always been pretty well insulated from that. And I think we continue down to deploy those same policies. If you go back to 2022, we have virtually no issues. I don't see a reason why this shouldn't be any different.

When you look at the elevated backlog, in our Business Solutions Group, there were some orders that we couldn't fulfill just because of availability. And as we said in our prepared remarks, we think there was probably -- it's a little harder to figure out than Enterprise, but we think there probably was a little bit of pull-in of demand. So we kind of said, "Hey, that's close to a net neutral."

On the enterprise side, we did see people committing more. We took in the POs. We got the backlog. In some cases, we brought in the inventory, and that will roll out through the year. So we -- as we said in the remarks, we think the impact of that was low to mid-single digits of Enterprise revenue in the quarter in terms of net pull-ins.

Got it. That's helpful. Tim, I think you also alluded to price increases, which I think we're hearing across the board and is understandable. Probably an impossible question, but just wondering if there's any way to characterize like how much is already kind of embedded in what you're seeing right now? How much is still to come in terms of additional price increases from here? And any observations on elasticity dynamics? As the price increases are rolling through, what's happening to unit trends as those price increases happen?

And just a quick follow-up for Tom. How do you think -- as Tim describes this and as you think about backlog and everything that you have, how this plays out in the back half of the year? I know you're not providing formal guidance for that, but we're just trying to figure out if we might see a difference in growth trends into the back half of the year.

Thanks, Adam. Those are really good questions. So I'll give you my best thinking at the time. Throughout the year, it is subject to change. But as we meet with our customers and our suppliers, it's really clear that the memory shortage is going to continue to drive inflation. And what we're seeing with that inflation is that the price is going up, and in some cases, the unit counts are going down. However, the inflated prices are little more than offset the reduction in units, at least at this time.

But more than that, we made comments about transformation into more AI. Customers are putting AI into productivity. A great example would be Q1 a year ago, a little less than 40% of our endpoint devices were AI chip-enabled. Today, our customers is purchasing just a little under 70% AI chip-enabled.

And what we're seeing is that our customers are all adopting -- I wouldn't say all -- many of them are adopting AI on-premise, they're using Copilots, they're using other AI tools because they realize that it's just the inflection point around AI is so great that they can't outrun it. They can't wait it out, especially if their competitors are engaging in these technologies that are offering efficiencies.

And so very hard to sweat the asset, again, because of the AI capabilities that are needed. And we're seeing our customers really lean in with us and plan to upgrade just based on these technology changes. But I'll ask Tom to give us a little more.

Yes. I think in terms of rolling out the backlog, I think between Q2 and Q3, some of that backlog will come down. And some of the inventory will certainly come down as we roll out some of these customer commitments. I think we're kind of at the point where we're not confident enough yet to say, "Hey, '26 is going to be a lot better in total than we had thought."

So our current thinking is maybe there's a little bit of softening in the back end of the year. But it's really hard to predict because these pricing dynamics are fluid all the time. And frankly, we're getting a range of speculation from suppliers and partners on how long this whole memory shortage is going to persist. Some people are saying through -- even into '28, '29, and others are saying through '26. So I think it's a little bit of a wait and see.

And finally, just to give you a little more color on customers' AI adoption and usage. Copilot, for example, which is just one measure, is approaching triple-digit growth for us in the quarter. So clearly, customers are adopting the technology and using the technology.

Our next question comes from Anthony Lebiedzinski with Sidoti.

Nice to see the better-than-expected start to the year. So I guess, just to follow up on the previous question in regards to pricing. I know there's a lot of moving parts, but any way to frame as far as what pricing versus unit volumes was in the first quarter? Just wondering about that.

Yes. So Anthony, we definitely did see an increase in pricing. Obviously, I think that's pretty pervasive across the board. And yes, we did see a decline in unit volumes. We haven't really gone out and disclosed that at this point. So that's what we're seeing.

In terms of the dynamics, every partner is handling this a little bit differently in terms of giving us windows in which our customers can commit inventory and the windows by which time they have to take delivery or also become subject to another -- a potential pricing adjustment at that point. Some windows are 14 days, some windows are a month. So it's kind of a little bit all over the place. But in general, what we're seeing is prices are up and unit counts are coming down.

That's very helpful context. Okay. And then in terms of the PC refresh cycle, where are we in terms of that? I mean, how do you guys think this will play out as you look at the balance of the year?

Anthony, thanks. So I appreciate your comments. We saw in 2025, the refresh was a little underwhelming. It was a little below industry expectations. And so that refresh is going to continue into 2026.

Obviously, with the inflation in price due to the memory shortage, customers have to think through the timing of that. But by and large, our customers are coming to a realization that sooner is better than later because the back half of the year promises continued inflation in price. And so I do think we're going to see the PC refresh continue through most of 2026. I think a little more weighted toward the front end of the year if we have our way.

Understood. Okay. And then switching gears to SG&A. So I know you guys did some restructuring in the quarter. But just overall, how do we think about the dynamics between your gross profit and your SG&A? I mean here, we had overall gross profit up more than 4%, and your SG&A was down slightly. So how do we think about that as we look to update our models for the rest of the year?

Yes. I think, Anthony, this quarter, we were benefited. I think I said in our prepared remarks, we had lower marketing and advertising and MDF expenses in the quarter. That's just due to the timing of some events. So that was a bit of a tailwind for us.

I think -- believe it or not, salaries overall were down because our headcount was down, and then that was somewhat offset by increase in variable comp due to the gross profit. So I think as a percentage of gross profit, you might see a small uptick for the rest of the year, but it's not going to be hugely significant.

Thank you. I would now like to turn the call back over to Tim McGrath for any closing remarks.

Well, thanks, Josh. 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. 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.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

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. [Operator Instructions]

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. 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-K 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 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, President and CEO. Tim?

Thank you, Samantha. Good afternoon, everyone, and thank you for joining us today for Connection'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 nonrepeating project that straddled both Q4 2024 and Q1 2025. In addition, there was a delay in several K-12 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 freight. Gross billings increased by 2.9% to $1.06 billion compared to $1.03 billion 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 $135.6 million. 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 $702.9 million, down 0.8% from last year due to the Public Sector challenges previously mentioned. Excluding these headwinds, underlying sales were healthy, especially in software, including cloud and security, endpoint devices and displays.

Now let's take a look at the segments. Business Solutions delivered a standout quarter with broad-based growth and meaningful margin expansion. Net sales increased 4.2% to $273.5 million, while gross profit rose 11.4% to $69.8 million. Gross billings grew 4.7% to $430.3 million, and gross margin expanded by 160 basis points year-over-year to 25.5%. These results reflect double-digit growth across desktops, notebooks, net/com and software, including cloud and cybersecurity solutions.

In Public Sector Solutions, net sales were $90.8 million, down 36.8% from a year ago for the reasons previously mentioned. While the Public Sector business experienced some headwinds this quarter, we believe conditions will improve later in 2026. Gross billings declined 23.7% to $170.7 million. Even with lower revenue, gross margin expanded 400 basis points to 19.4% due to changes in customer and product mix.

Enterprise Solutions delivered robust top line growth with net sales increasing 11.9% to $338.7 million, driven by strong demand for advanced technologies and endpoint devices. Gross profit grew 7.1% to $48.2 million, while gross billings increased 16.1% to $457.8 million. Gross margin was 14.2%, down 70 basis points year-over-year, reflecting changes in subscription license programs and product mix.

We continue to focus on operational efficiencies and expense management. In the quarter, we executed a voluntary retirement offering for our tenured employees. These associated charges are reflected in the severance expenses and other charges in the income statement. This, in addition to severance charges in the quarter totaled $3.1 million.

Operating income was up 4.2% to $23.6 million. Excluding severance expenses and other charges, operating income was up 17.8% to $26.7 million compared to the prior year, underscoring our strong expense discipline while continuing to invest in areas of our business that will drive future growth. Diluted earnings per share were $0.82, an increase of 5.1%, while adjusted diluted earnings per share was $0.91, an increase of 16.7% compared to the prior year.

Looking ahead, our strategy remains clear and unchanged, expanding our solutions-led business, deepening our customer relationships and driving profitable growth in cloud, cybersecurity, AI and services. We continue to see strong customer engagement as organizations modernize their infrastructure and invest in AI-driven technologies. These are several areas where we deliver differentiated value and where we expect sustained momentum.

While funding cycles and project timing can impact quarter-to-quarter results, the long-term trends supporting our business remain firmly intact. With improved gross profit, expanding margins and a growing base of reoccurring and solutions-driven revenue, we enter 2026 with confidence and strong strategic positioning.

I'll now turn the call over to Tom to discuss additional financial highlights from our income statement, balance sheet and cash flow statement. Tom?

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 the gross billings provides 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 $3.1 million 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 $3.6 million compared to $4.8 million 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 $20.7 million year-over-year. Excluding severance expenses and other charges, net income increased $2.3 million or 11.3% compared to last year.

Diluted earnings per share were $0.82, up $0.04 year-over-year, while adjusted diluted earnings per share were $0.91, an increase of $0.13 year-over-year, highlighting the strength and underlying stability of our earnings profile. On a trailing 12-month basis, adjusted EBITDA was $126.4 million compared to $118.9 million a year ago, an increase of 6%.

In addition to the Q4 voluntary retirement offering previously mentioned, we completed additional targeted headcount reductions at the end of January. These actions are expected to result in total charges of $5.9 million to $6.2 million over Q4 2025 and Q1 2026, of which $3.1 million was recognized in Q4. Together, these initiatives are expected to generate approximately $7 million to $8 million in ongoing annual cost savings split between both SG&A and cost of goods.

During the quarter, we continued to return capital to shareholders through both dividends and share repurchases. We paid a quarterly dividend of $0.15 per share and repurchased approximately 179,000 shares at an average price of $59.53 per share for a total cost of $10.7 million. In 2025, we repurchased over 1.2 million shares at an average price of $62.64.

In 2025, between the share buyback of $76.1 million and dividends paid of $15.3 million, we returned $91.4 million to shareholders. At the end of the year, we had $33.6 million remaining for stock repurchases under our existing stock repurchase program. But as we announced earlier today, our Board of Directors authorized an additional $50 million to be added to our existing share repurchase program. We also announced today that our Board of Directors has declared a $0.20 per share dividend, a 33% increase. The dividend is payable on March 6, 2026, to shareholders of record as of February 17, 2026.

Turning to the balance sheet and cash flow. Operating cash flow for the year ended 2025 was $65.4 million. This reflects working capital investments, including $48.5 million increase in inventory and a $38.4 million increase in accounts receivable, partially offset by $38.1 million increase in accounts payable. The increase in inventory was intentional as we procured ahead of the anticipated price increases and support customer rollouts. The increased accounts receivable was primarily due to the timing of customer deliveries.

Cash generated from investing activities totaled $42.8 million, driven by $108.8 million in proceeds from the sale of investments and $205.6 million in investment maturities, partially offset by $264.1 million of new investment purchases. Cash used in investing activities was $93.4 million, reflecting our ongoing share repurchase activity of $76.3 million and dividend payments of $15.3 million to shareholders. We ended the quarter with strong liquidity position, $406.7 million in cash, cash equivalents and short-term investments, which we believe provides significant flexibility to support our strategic priorities and continued shareholder returns. We believe our disciplined approach to capital allocation, continued focus on margin execution and targeted strategic investments position us well for 2026 and beyond.

I will now turn the call back over to Tim to discuss current market trends.

Thanks, Tom. Let me take a moment to walk through how our key vertical markets perform. 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.

Healthcare grew net sales 19%, while gross profit improved 18% year-over-year. Connection 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're building for the future, advancing our 3-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're 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 experiences.

Data center modernization continues as customers are taking a more balanced approach to hybrid IT, optimizing workloads across on-prem and cloud environments to improve cost predictability, enhance security and unlock the benefits of server consolidation and infrastructure efficiency. AI-driven demand is expanding across the edge, security and intelligent endpoints. Customers are moving from experimentation to execution, creating meaningful opportunities for integrated solutions that combine hardware, software and services.

We continue to expand our technical services organization to help customers design, implement, migrate and manage their IT environments end-to-end. We are investing in training and tools to ensure our teams are fully equipped to guide customers through AI adoption and next-generation architectures with confidence. As we move into 2026, our backlog remains strong. In fact, it ended Q4 at its highest level since 2022. We feel confident about where we're headed and we're continuing to invest in sales capability, service delivery and systems while remaining disciplined around cost management and productivity.

We are positioning Connection for sustained long-term growth, and we expect to outperform the U.S. IT market by 200 basis points this year. As customers rethink how they deploy and manage technology, our strategy meets them where they are. We help them navigate the complexity, modernize with purpose and make confident informed decisions that drive real business outcomes. In a world where technology changes fast, expertise wins, and that's where Connection continues to differentiate.

We'll now entertain your questions. Operator?

[Operator Instructions] Our first question for today will be coming from the line of Adam Tindle of Raymond James.

Tim, I think you just kind of wrapped up by saying you expect to outgrow the U.S. IT market 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 -- I know that's a hard question because we've got a bunch of prognosticators trying to figure out what that market growth is. But when you look internally at your customer conversations and what budget trends are at the customer and sales quotas and sales force, what does growth look like internally from a budget perspective as well would be helpful.

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 demand continuing for AI at the edge. We also see edge 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. So we're really trying to balance that equation.

Okay. I mean as I think about those growth numbers, those are pretty healthy. And then on this call, you talked about some restructuring essentially, voluntary early retirement as well as additional actions that you took in January. I guess maybe just double-click on those decisions. If the IT market environment is healthy, 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 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 wanted 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. So I think we're in a pretty good place right now.

Tom, anything to add?

Yes. I mean I think if you look at the quarter, right, BSG grew gross profit 11.4% Enterprise grew their gross profit at 7.1%. I mean that's pretty healthy. The one issue we had was we had a very large public sector contract last year that did not renew. So that was almost a $30 million headwind for us this quarter, and it's going to be an almost $40 million headwind for us next quarter. However, those other businesses performing the way they are, we can look at the quarter -- next quarter is kind of going to look a little like this quarter, flattish on revenue, probably low to mid-single-digit increase in gross profit. And the way we're managing our costs, we're going to 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 how the business is looking. Enterprise is adding a bunch of new customers, and that's just going to ramp throughout the year.

And our next question is coming from the line of Anthony Lebiedzinski of Sidoti.

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 any notable budget flush in 4Q?

Yes, Anthony. So we definitely saw a market increase in December revenue this quarter. It typically bumps along 35-ish percent of the quarter. I think it bumped to over 38% this quarter. And being that we saw a couple of things. We did have some customers that were 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 2 things together I don't know if it was incredibly material, but it definitely did affect the quarter.

Got it. Okay. And then Tim, I believe you mentioned earlier about the memory supply constraints that you called out, which is certainly something that's been talked about. Was that an issue in the fourth quarter? Or was that comment more about your concern for '26?

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, they moved orders up. And those price increases, of course, are inflationary. And at this point, we're advising all our customers to order 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 we're thinking for the first quarter, again, that will actually spike some demand, and we think that will kind of level out throughout the year.

Got you. Okay. And then with the cost reductions 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.

Yes. I mean, obviously, it's going to help us. We talked about $7 million to $8 million of net cost reduction for the year. And when I say net, that means some of those people that took retirement, we are going to have to replace some of them, maybe 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, I think the operating leverage is definitely going to improve. And we want to move much closer to the 3.7%, 8%, 9% is kind of where we think we can get to this by the end of the year.

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. I'd also like to thank those of you who are listening to our call this afternoon. Your time and interest in Connection are appreciated. Have a great evening.

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

Good afternoon, and welcome to the Third Quarter 2025 Connection Earnings Conference Call. My name is Marvin, and I'll be the coordinator for today. [Operator Instructions] On the call today are Tim McGrath, President and Chief Executive Officer; and Tom Baker, Senior Vice President and Chief Financial Officer.

I'll now turn the call over to the company.

Thank you, [indiscernible], 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, 2024, and which is on file with the Securities and Exchange Commission as well as in other documents that the company files from 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 third quarter 2025 comparisons are being made against the third quarter of 2024. 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.ir.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 Connection's Q3 2025 Conference Call. I'll begin this afternoon with an overview of our third quarter results and highlights of our performance. Then Tom will walk us through a more detailed look at our financials. I'm pleased to share that our third quarter was another solid 1 for the company. We continue to execute well, delivered record gross profit and expanded our margins despite some expected headwinds in parts of the business. Our overall results this quarter highlight our success in higher-value solutions deeper customer relationships and consistent operational execution.

Let's start with the overall results. Gross profit increased 2.4% and year-over-year to $138.6 million, the highest in our company's history. Gross margin expanded 90 basis points to 19.6%, and driven by strong growth in cloud software, cybersecurity and services, all recognized on a net basis.

Our Business Solutions and Enterprise Solutions segments both performed well, with gross profit of 7.8% and 3.4%, respectively. As anticipated, the public sector business experienced some challenges this quarter given the timing of some large federal projects and ongoing funding uncertainty at the federal state and local levels. We believe the budget issues have caused a temporary pause, not a shift in our long-term demand. Total net sales were $709.1 million, down 2.2% from last year. The decline is largely the result of the decrease in net sales in the Public Sector Solutions segment, driven by large federal projects previously mentioned that did not repeat in Q3. If you exclude those, underlying sales were healthy, especially in cloud, storage and services.

Now let's take a look at the segments. In Business Solutions, we saw another strong performance. Net sales grew 1.7% to $256.8 million while gross profit increased 7.8% to $68 million. Gross margin reached a record 26.5%, up 150 basis points year-over-year. These results reflect the continued strength of our cloud and cybersecurity offerings, 2 areas in which we built recurring profitable revenue streams.

In Public Sector Solutions, net sales were $132.5 million, down 24.3% from a year ago. The decline was driven by the timing of federal projects and reduce funding at the federal state and local level. Even with lower revenue, gross margin increased 230 basis points to a record 17.2%. The thanks to a higher mix of cloud and cybersecurity solutions sales. Once funding cycles normalize, we expect this segment to rebound. And in Enterprise Solutions, net sales grew 7.7% to $319.8 million, led by strong demand for advanced technologies and endpoint devices. Gross profit was up 3.4% to $47.8 million. Gross margin came in at 14.9%, down slightly due to changes in subscription license programs and software mix. The important takeaway is that we're continuing to win business in high-growth areas, particularly in AI infrastructure, data center modernization and edge computing.

Turning to profitability. Operating income was flat year-over-year, showing good cost discipline despite continued investments in areas of our business that will drive future growth. Net income was $24.7 million compared with $27.1 million last year, which included a onetime legal settlement and higher interest income. Diluted earnings per share came in at $0.97, down $0.05, while adjusted diluted earnings per share was also $0.97, flat from the prior year. another sign of earning consistency despite the challenges in the public sector environment.

Looking ahead, our strategy remains clear. We're focused on expanding our solutions-led business deepening customer relationships and driving profitable growth in cloud, cybersecurity, AI and services. We're seeing strong engagement from customers who are modernizing their infrastructure and investing in AI-driven technologies. These are areas where we bring real customer value and where we expect to see continued momentum. While funding cycles and project timing can affect quarter-to-quarter results. We believe the long-term trends are all moving in the right direction. Our record gross profit, expanding margins and growing base of recurring and solution-driven revenue give us confidence as we finish the year and head into 2026.

I'll now turn the call over to Tom to discuss additional financial highlights from our income statement, balance sheet and cash flow statement. Tom?

Thanks, Tim. In the third quarter, SG&A expenses increased 2.9% year-over-year, primarily driven by higher personnel-related costs. We continue to take a disciplined approach to expense management. Notably, our head count is down 2.8%, which has enabled us to keep our total payroll costs flat compared to last year. As a percentage of sales, SG&A increased 80 basis points to 15.3% of net sales compared to 14.5% in the prior year quarter reflecting both the impact of higher benefit costs and sales mix dynamics. Operating income margin improved slightly to 4.3% compared to 4.1% last year. reflecting continued focus on profitability despite cost pressures. Interest income for the quarter was $3.7 million compared to $4.9 million last year, mainly due to lower average cash balances and lower interest rates during the period.

Our effective tax rate for the quarter was 27.1%, up from 26% in the prior year. As a result, net income for the third quarter was $24.7 million compared to $27.1 million last year, a decrease of 8.6%. Diluted earnings per share were $0.97, down $0.05 year-over-year, while adjusted earnings per share remained flat at $0.97, demonstrating the underlying stability of our earnings profile. On a trailing 12-month basis, adjusted EBITDA was $122.7 million compared to $123.6 million a year ago, essentially flat year-over-year, reflecting continued operational consistency. During the quarter, we returned capital to shareholders for both dividends and share repurchases, we paid a quarterly dividend of $0.15 per share and repurchased approximately 84,000 shares at an average price of $61.21 per share for a total cost of $5.1 million.

Year-to-date, we've repurchased over 1 million shares at an average price of $63.7 for a total cost of $65.4 million. At quarter end, $44.3 million remain available under our existing share repurchase authorization, providing continued flexibility to return capital to shareholders. We also announced today that our Board of Directors declared quarterly dividend of $0.15 per share payable on November 28, 2025, to shareholders of record on November 11, 2025.

Turning to the balance sheet and cash flow. Operating cash flow for the first 9 months of 2025 was $38 million. This reflects a $40 million increase in inventory and a $6.5 million increase in accounts receivable, partially offset by an $11.9 million increase in accounts payable. The increase in inventory was intentional tied to our decision to stage inventory earlier in the year to support customer rollouts, and we continue to work that inventory down. The increase in accounts receivable was primarily due to the timing of customer payments. Cash generated from investing activities for the first 9 months of 2025 totaled $49.3 million driven by $108.8 million in proceeds from the sales of investments and $101.3 million in investment maturities partially offset by $155.6 million of new investment purchases.

Cash used in financing activities for the first 9 months of 2025 was $77.8 million, reflecting our ongoing share repurchase activity of $65.5 million and dividend payments of $11.5 million to shareholders. We ended the quarter with a strong liquidity position, $399.2 million in cash, cash equivalents and short-term investments, which we believe provides ample flexibility to support our strategic priorities and shareholder returns going forward. Overall, we remain confident in the strength of our balance sheet, the resilience of our business model and our ability to execute with discipline. While we continue to manage through a dynamic cost environment, our focus remains on driving sustainable growth, improving operational efficiency and creating long-term value for shareholders. We believe our continued commitment to prudent capital allocation, margin discipline and strategic investment positions us well for the remainder of the year and beyond.

I will now turn the call back over to Tim to discuss current market trends.

Thanks, Tom. We executed well on our 3-part growth strategy, driving data center modernization, digital workplace transformation and supply chain solutions against the backdrop of a challenging economic environment. Let me take a moment to walk through how our key verticals performed.

In retail, we saw another strong quarter. Net sales grew 25% and gross profit was up 42% year-over-year. Retailers are really leaning into improving customer experience and several large brands chose connection because of our proven ability to deliver tailored vertical market solutions. In Financial Services, net sales were up 23% and gross profit increased 19% year-over-year. The focus here remains on modernizing infrastructure and improving resiliency. -- areas where our solutions and expertise continue to resonate. Manufacturing grew 8% in net sales and 28% in gross profit year-over-year. This segment continues to navigate a lot of macro challenges from trade dynamics and inflation to workforce shortages and higher input costs. We've heard from many of our customers that these pressures are affecting demand and future outlooks. That said, manufacturers are turning to connection as a trusted partner to help modernize their operations upgrade their legacy systems and adopt AI, cybersecurity and new infrastructure solutions that their in-house teams may not be equipped to manage on their own.

As we look ahead, we're encouraged by several technology trends driving our pipeline and customer activity. The PC refresh continues as customers gradually replace their aging systems with higher-performing AI solutions. Data center modernization is gaining momentum, especially as customers repatriate workloads from the public cloud to get more cost predictability, better security and the benefits of server consolidation. AI-driven demand across the edge, security and smart endpoints continue to expand. Unstructured data at the edge is fueling demand for next-generation storage solutions. We're continuing to grow our technical services organization, helping customers design, implement, migrate and manage their IT infrastructure end-to-end. And we're investing in training and tools to ensure our teams are fully equipped to guide customers through AI and next-generation architectures.

As we move into the fourth quarter of 2025, our backlog remains strong. In fact, it ended Q3 at its highest level in nearly 2 years, largely driven by our Enterprise business. We feel confident about where we're headed, and we're continuing to invest in projects and programs that strengthen our sales capabilities, service delivery and systems all while maintaining disciplined about cost management and productivity. We're positioning connection for sustained long-term growth, and we believe we can outperform the U.S. IT market by 200 basis points for the rest of the year. Our strategy remains tightly aligned with how customers are evolving and the way they deploy, consume and manage technology. We help them navigate the complexity, modernize their infrastructure and make confident informed decisions. In a world where technology changes fast, expertise wins and that's where Connection continues to differentiate.

We'll now entertain your questions. Operator?

[Operator Instructions] And our first question comes from the line of Adam Tindle of Raymond James.

Okay. I just wanted to start with some of those last comments there, Tim, where you were talking about some of the forward indicators that looked very positive here. I just wonder how you're thinking about year-end and Q4 being a typical budget flush year. What you're seeing here in the first month of Q4 relative to what you experienced in Q3? And is there a case to be made here that we might return to growth on the top line in Q4?

Well, thanks, Adam. So yes, in our Enterprise segment, there's for the first time in many quarters, there is talk of budget flush. We do see our pipeline building there in a number of projects and opportunities that could well pass through the fourth quarter. So enterprise has some good solid momentum. Also, I think our Business Solutions group has some good momentum and forecasting a good Q4. The wildcard remains our public sector business. The question really becomes when will that recover, we know that's going to happen. The timing, though, is still a big question mark.

Got it. Okay. And I wanted to ask about the backlog. I think you talked about Q3 backlog was the largest in years. I wonder just what's leading to that. Is this something -- I would imagine you would have liked to have shipped more, obviously, in the quarter. if I look at sort of the revenue numbers. So is this something that -- that backlog is building because of incremental supply challenges or is it more the customers putting off projects and not wanting to accept delivery? Just some of the rationale for why that backlog build is happening, and when you think it ultimately or unentangles here?

Well, thanks, Adam. I'll start and I'll let Tom come in behind me. But clearly, the majority of our backlog is all customer-driven I think it's solid. I don't feel there's any risk in our backlog, but it's absolutely customer-driven and the delays on the customer side.

Adam, I'd tell you a couple of things. One, when you look at our revenue line, we had a lot of software and cloud in our numbers this quarter. And while that's a real headwind for the revenue line, obviously, it came through in the gross margins, we're over 19.5%. So I think when you look at the gross profit line growing 7.8% for PSG was pretty good and enterprise numbers up as well. So I feel like things are better maybe than you look at the first -- revenue line with the notable exception of the public sector, which we had a really large rollout last year, and some of that will fall into the next quarter as well. So we're thinking sales mid-single digits next quarter year-on-year. That's kind of how we're thinking.

Okay. That's super helpful. Yes, and that makes sense to kind of disaggregate and look at gross profit dollars. I guess maybe just last one for me real quick. And this is probably way too early to tell. But as you start to hear back from your vendors and your sales force and sort of the early indications on 2026. Tim, you mentioned PC refresh continuing. I think there's some fear that that's going to create some difficult comparisons in 2026. And just as we think about the year in total and budgets, sort of the moving parts and how your early take is on what IT spending will look like next year?

Thanks. So to begin with, we talk a lot about gross profit being a better indicator just based on the amount of solutions that are delivered on a net basis. But clearly, 2025 didn't prove out to be the year that the analysts and the pundits anticipated. And if we begin with the PC refresh, the latest numbers show that in terms of conversion to Windows 11, about 60% of the population have made that conversion. So we think the refresh will still continue, but definitely at a lower pace. We just didn't see Windows 11 get the adoption and the time lines that we did see with Windows 10. But still a case for refresh continues.

And as you know, the productivity around the newer technology clearly makes that case. And the same is true when we think about the data center server consolidation, for example, many of our customers are looking at the ability to take 10 servers and bring them down to 2 or 7 servers and bring them down to 1. The power savings alone offset a lot of that expense and the productivity gains and the improvements in security really make that a very strong value proposition. So for 2026, we see continued growth in data center, continued growth in cloud, in cyber, and we see certainly AIPC, perhaps leveling off, but we'll continue to deliver some good results for us.

So overall, we're thinking about mid-single digit for 2026 with the understanding that could go well above that as things start to normalize.

Our next question comes from the line of Anthony Lebiedzinski of Sidoti.

Nice to see the record performance for gross profit. So, first, maybe if you could just comment on the cadence of your sales during the quarter. And I know there was some noise obviously with the netting as well. But just overall, maybe can you speak about the demand trends that you saw as you went from July through September?

Yes. July was like 34-ish percent, 33%, August was down a bit, and then September proved to be the best of the quarter. I think 35%. So I think that's pretty typical, Anthony when I look back at the past few years.

Got you. Okay. And then -- and just thinking about the public sector, obviously, it was down here in the quarter. As far as it relates to the federal government shutdown, did that have -- is that having an impact on your fourth quarter numbers now? Or how do we think about the potential impact that may have?

Anthony. So thanks. Obviously, the federal government being shut down, does affect the quarter, and we're trying to forecast when we think that will change. But for right now, we clearly have orders and products that we can't ship because there's nobody there to receive them. And the longer this goes on, the more of that will challenge the public sector business in the quarter. So we're hoping this gets resolved. And when it does, we're hoping that we have that demand catch-up, and we finish back on plan. But for right now, it's a big concern.

Understood. Okay. And I know, Tim, you also talked about your expectations for the fourth quarter and a little bit for next year. That was more on -- I guess, on the revenue side. As far as just thinking about gross margins and your ability to leverage expenses? How do we think about just overall profitability as it relates to gross margins and operating margins here going forward?

Yes. So the caveat of public sector is a little bit of a wildcard. We're thinking kind of mid-single digits year-over-year next quarter for growth. The margins, the gross margins, I don't think will be as high as they were this quarter because I don't see all the same mix of cloud and software revenues coming through that could net it down. So I think probably year-on-year margins will be about flat. And then spending next quarter, depending on how the revenues, they'll probably be a little bit higher than this quarter in terms of G&A.

Okay. Got you. And then lastly for me. As far as just thinking about your strong cash position, are you still looking at potential acquisitions? How do we think about that?

Well, thanks. So there's a lot of activity out there. We continue to look at tuck-in acquisitions that would enhance some of our solutions capability. And so we've got our eye out there. We're looking, but at this point, nothing to report.

This concludes the question-and-answer session. I would now like to turn it back to Tim McGrath for closing remarks.

Thank you, Marvin. So I'd like to thank all of our customers, vendors shareholders for their continued support and, once again, our coworkers for their efforts and extraordinary dedication. I'd also like to thank all of you listening to the call this afternoon. your time and your interest in Connection are appreciated. Have a great evening.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Good afternoon, and welcome to the Second Quarter 2025 Connection Earnings Conference Call. My name is Liz, and I will be the coordinator for today. [Operator Instructions] 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. 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, 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 second quarter 2025 comparisons are being made against the second quarter 2024.

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.ir.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 Connection's Q2 2025 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.

The second quarter marks our fifth consecutive quarter of year-over-year revenue growth. We executed well in this dynamic technology landscape, and we remain focused on driving extraordinary value through the delivery of integrated IT solutions and outstanding customer service. Net sales were $759.7 million in the second quarter, an increase of 3.2% over last year. We continue to see momentum with the mobility and desktop categories as our sales increased 6% year-over-year and 5% on a sequential basis, driven by Windows 11 refresh and demand for AI PCs.

Revenue for advanced technologies and integrated solutions increased by 3% due to sales of server storage and networking solutions as customers are investing in data center refresh, server consolidation and edge computing. Gross profit increased to a record $137.8 million, while gross margins were down to 18.1%, 40 basis points below last year. Gross profit was favorably affected by an increase in sales. However, the gross margin percentage declined due to changes in partner subscription licensing programs. Despite these changes, operating income remained flat at $30.9 million year-over-year.

Net income for Q2 was $24.8 million, down 5.2% compared to $26.2 million in the prior year.

We will now look a little deeper into our segment performance. In our Business Solutions segment, Q2 net sales were $293.2 million, an increase of 5.4% compared to the prior year. Gross profit increased by 3.8% to $68.8 million. Gross margin decreased 30 basis points compared to the prior year quarter to 23.5%. The decline in gross margin was due to the reduction in subscription licensing programs.

In our Public Sector Solutions business, Q2 net sales were $140.5 million, 11.9% lower than a year ago. Sales to the federal government increased by $1.9 million, while sales to state, local government and educational institutions decreased by $20.9 million. Sales to state and local government and higher education institutions increased modestly, offset by a decrease in K-12 sales. Gross profit for the Public Sector segment was $21.3 million, a decrease of 11.9% compared to Q2 '24. Gross margin remained flat at 15.2% for the quarter compared to the prior year.

In our Enterprise Solutions segment, Q2 net sales grew 9.1% to $326 million compared to last year. The increase in net sales was driven equally by advanced technologies and endpoint devices. Gross profit for the Enterprise segment was $47.6 million, 3.4% higher than the prior year. Gross margin decreased by 80 basis points to 14.6% for the quarter. The margin decrease was the result of changes in subscription license programs and netted software sales.

I'll now turn the call over to Tom to discuss additional financial highlights from our income statement, balance sheet and cash flow statement. Tom?

Thanks, Tim. In the second quarter, SG&A increased by 1.6% over the prior year. The increase in SG&A was primarily due to an increase in professional fees associated with matters that we believe will be resolved in the second half of the year. On a percentage of sales basis, SG&A decreased 20 basis points to 14.1% of net sales in the quarter compared to 14.3% last year.

Operating income as a percentage of sales decreased slightly to 4.1% in the second quarter compared to 4.2% in the prior year. Interest income for Q2 amounted to $3.2 million compared to $4.7 million last year. The decrease was due to both lower cash balances and lower interest rates. Our Q2 effective tax rate was 27.3%, up from 26.4%. Net income for the quarter was $24.8 million, a decrease of 5.2% from $26.2 million in the prior year quarter.

In Q2 2025, diluted earnings per share was $0.97, down $0.02. Adjusted diluted earnings per share was $0.97, down $0.03. Our trailing 12-month adjusted earnings before interest, income taxes, depreciation and amortization or adjusted EBITDA was $122.5 million compared to $125.4 million a year ago, a decrease of 2%.

In the second quarter, we paid a $0.15 per share quarterly dividend. We repurchased approximately 255,000 shares at an average price of $60.95 per share for a total cost of $15.5 million, bringing our year-to-date total shares repurchased to 952,000 at an average price of $63.35 per share for a total cost of $60.3 million. At the end of the quarter, we had $49.4 million remaining for stock repurchases under our existing stock repurchase program.

Today, we also announced that our Board of Directors have declared a quarterly dividend of $0.15 per share. The dividend is payable to shareholders of record on August 12, 2025, and payable on August 29, 2025.

Cash flow used in operations for the first half of 2025 was $26.1 million, primarily driven by an increase in inventory of $38.4 million and an increase in accounts receivable of $26.7 million. These outflows were partially offset by $38.3 million in net income and an increase in accounts payable of $3.4 million. The increase in inventory was a result of our decision to stage inventory for customer rollouts in advance of anticipated price increases resulting from tariffs. Our accounts receivable balance increased $26.7 million for the first half of 2025 due to the timing of payments from customers and our accounts payable balance increased $3.4 million for the first half of 2025.

Cash generated from investing activities of $103.1 million during the first half of 2025 was a result of $108.8 million of proceeds from the sale of investments and $50 million of investment maturities, offset by $52.4 million of investment purchases. We used $68.5 million of cash for financing activities during the first half of 2025, primarily for repurchases of $60.5 million of stock and a payment of $7.7 million of dividends to shareholders. We ended Q2 with $346.1 million of cash, cash equivalents and short-term investments.

I will now turn the call back over to Tim to discuss current market trends.

Thanks, Tom. We delivered solid results despite the challenging economic environment, combined with the material reductions in subscription licensing programs. While the impact of these program changes occurred throughout the year, the effect is the largest in Q2. We have successfully implemented several initiatives to diminish the impact. However, we were unable to completely offset the reduction in fees this quarter. We expect less impact in the second half of the year.

Looking forward, we are encouraged by several key trends in our business. We expect the PC refresh cycle to continue. There are compelling business cases for data center modernization. Demand for solutions, including Edge AI and AI-enabled endpoints is driving pipeline growth. We continue to expand our technical solutions, helping our customers design, implement, migrate and manage their IT infrastructure. We are investing in education and tools to enable our teams to help our customers with AI and next-generation architectures.

Finally, our backlog continues to be strong. And at the end of Q2, it was at its highest level in nearly 2 years. In addition to these positive technology trends, Connection was also recognized by our partner community for growth and innovation. We have been the recipient of a number of awards, including Lenovo 360 Nationals Partner of the Year, Veeam's U.S. Value-added Reseller Growth Partner of the Year, and we achieved the full suite of Microsoft Security Specializations.

As we enter the second half of 2025, we're confident in our strategy and expect business will continue to improve. We'll continue to invest in key projects and programs to enhance our sales, service delivery and systems. We are allocating more resources toward driving long-term growth and strengthening the foundation of our business. In addition, we continue our initiatives to reduce costs and increase productivity.

We're optimistic about our prospects for the balance of the year and believe we can outperform the U.S. IT market growth by 200 basis points. We believe our focus and business strategy remains well aligned with the shifting dynamics of how customers deploy, utilize and consume technology. We continue to connect our customers with technology that enhances growth, elevates productivity and empowers innovation. We help our customers expertly navigate through a complex set of choices within the technology landscape. We help calm the confusion of IT for our customers. We know that in this complex world of technology, change happens and expertise wins.

On that note, I'd like to take a moment to thank our extremely dedicated and valued employees for their continued and extraordinary effort during this rapidly changing environment. We will now entertain your questions.

[Operator Instructions] Our first question will come from the line of Adam Tindle with Raymond James.

Tim, at the end there, you talked about a lot of bullishness around the pipeline that you're seeing into the back half of the year. And I wanted to ask about that, but before I do, maybe just get some context for how we're moving into the back half of the year. So the question would be, if you could just touch on maybe the cadence of the quarter and some trends that you're seeing into July. Is this something that we're seeing sort of acceleration into the month of July? Or how you would characterize the cadence of demand in the quarter?

And then secondly, on that pipeline commentary for the back half of the year, just wonder if you could maybe double-click on that, put any sort of additional parameters to help us understand how much it's increased or how we could kind of think about this relative to maybe where this was prior?

Well, thanks, Adam. So to begin with, I think a good part of our confidence comes from our customers' discussions and planned rollouts for the back half of the year. You heard me say on the call that our pipeline is strong. Our backlog is at a record level. And overall, there's just a pickup in activity. And indeed, that has continued into July with the conversations around the back half of the year.

Adam, as you also know, there's been a lot of optimism around the year. And for the first half of 2025, that was probably a little slower than we thought. You look at all the drivers of growth, we expected, I think, a bigger first half, and that didn't happen. I think the tariff discussions are now taking a backseat to the more technology and solution-based discussions. So that's really what drives my optimism. We still want to be a little cautious with that, but we're excited about the conversations, the pipeline and the backlog.

And you talked about also staging inventory for customer rollouts ahead of price increases or potential price increases, I should say. I just wonder, is that something that customers are asking you to do? Or is this sort of proactive on your part? I wonder if you also might kind of double-click on how you're thinking about timing and magnitude of potential price increases? And maybe Tom can weigh in on the -- how you're thinking about potentially protecting that working capital investment that you're making for those customer rollouts and what that means for cash flow in the back half of the year?

Yes. So I would tell you, Adam, in terms of the rollout, I would say 2/3 of that to -- 75% of that is customer inventory for customers, customer-specific. We did do some buy-ins for a little bit just to try to take advantage of some favorable pricing. I think as we go forward in working capital, the inventory is committed. So we're not -- we're certainly not going to get stuck with anything. But we're going to have to roll it out to -- we'll roll out to the customers over the next 2 quarters would be my guess.

Yes. So we don't see a lot of risk with our current inventory because it is largely solution-based customer-driven. And regarding the tariff price increases in the back half of the year, that is a much bigger question mark. It's just really hard to qualify. Our suppliers are now saying that more than a majority of notebooks are now being coming out of Vietnam. And so the tariffs will be reduced. As you know, the majority of desktops and servers now coming out of Mexico, for example. And so there's so much movement and so much up and down there that we're starting to get a level of confidence that the tariffs will drive some increases, but perhaps less than we thought for the back half of the year.

Okay. And Tom, just thinking about cash flow, I know that's probably a little bit of a tougher question from a timing perspective, but I think we're at a use year-to-date here in the first half. Does that potentially reverse itself in the back half? Or do you think we'll still be kind of like in a use for 2025? And if you could put any sort of ballpark magnitude on that?

So what I would tell you is at the end of December, our inventories were abnormally low. I mean I think they were like $95 million. Typically, they're in the $120 million-ish range. So we've kind of normalized back on that. So I would say it will -- I believe it will reverse, and we will generate positive cash flow for the year. It's probably going to be in the, I would say, in the range of kind of on the same trend we're on now for our operating cash flow is roughly our net income for the quarter this quarter. And I think that trend will probably continue.

Our next question comes from Anthony Lebiedzinski with Sidoti.

Certainly nice to hear the optimism and the bullishness that you talked about. So just curious, as we move into the back half of the year, how do we think about the gross margins? Should we see kind of similar levels as you saw in the second quarter? Or just if you could provide us some general directional guidance in regards to that, that would be great.

Yes. I think, Anthony, those margins will probably hold about where they are, give or take, 10 or 15 basis points. We mentioned a couple of times in the script about the impact of some of the licensing fee programs. And when you look at our decline in gross margins this quarter year-over-year, it's almost entirely due to that. So I feel like things have kind of stabilized absent that one item.

And then just thinking about the different vertical markets that you guys serve, just wondering what are you seeing that -- which markets are you particularly excited about for the back half of the year?

For the back half of the year, there's some optimism clearly with our retail and our manufacturing markets. We have projects and opportunities planned there. For the front half, we did a little better in finance and in health care. Health care dropped off a little in the second quarter, and a lot of that is about a year-over-year compare for some big epic rollouts that we completed a year ago in the quarter. But that said, the vertical market outlook is strong because it's solution driven. And as you know, so many of the newer technologies will drive real productivity gains into those verticals, again, like retail and manufacturing.

Got you. And then Tim, towards the end of your prepared remarks, you said that you guys are continuing to invest more resources to drive long-term growth. So can you give us some examples of things that you're doing? And what do you hope to be able to achieve from those initiatives?

Yes. So we're doing probably a 3-pronged kind of approach there, Anthony. The first is we're investing in good people across the board where we can find them focused, excuse me, on sales and solutions. And so that effort will continue. Secondly, we've invested in our platforms. And so we are doing a lot with productivity packages around solutions and around sales. So we made big investments there, and that will continue for the back half. And then finally, internally, we're investing in some additional AI initiatives, and that should drive a pretty solid ROI. And I'll turn it over to Tom to see what perhaps I've forgotten.

No. I think some of those -- some of the tools that we're investing in to make our salespeople more effective and more productive are spot on. And those are significant investments. And they're starting to -- I mean, they're starting to have an impact. And we had particularly -- some particularly good projects roll out this year because of those. I think we're in large part due to that. So we're going to continue to invest in anything that makes our salespeople more productive.

That concludes today's question-and-answer session. I'd like to turn the call back to Tim McGrath for closing remarks.

Thanks, Liz. So 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. 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 call. Thank you for participating. You may now disconnect.