Connection (CNXN) Q4 2025 earnings review
Enterprise Resurgence Masks Public Sector Collapse
Connection delivered a mixed Q4 where strong execution in commercial markets was mathematically negated by a freefall in government spending. While Enterprise Solutions accelerated to 11.9% growth (the highest in FY25), the Public Sector segment imploded, falling 37% and dragging total revenue down 0.8%. Despite the top-line stagnation, the 'quality' of revenue improved significantly: a mix shift toward Software (+24%) drove gross margins to 19.3% (+100 bps), allowing the company to keep EPS flat year-over-year despite the volume headwinds.
🐂 Bull Case
Gross margin expanded 100 bps YoY to 19.3%. This structural improvement is driven by a massive 24% surge in Software sales, which now account for 12% of revenue (up from 9% a year ago). The company is successfully shedding empty calories (low-margin hardware) for nutrient-dense revenue.
Enterprise Solutions, the company's largest segment, is not just growing; it is accelerating. Growth ramped from 5.4% in Q1 to 11.9% in Q4, validating management's narrative regarding AI-driven IT modernization in the corporate space.
🐻 Bear Case
The Public Sector segment has turned toxic, deteriorating sequentially from -12% in Q2 to -37% in Q4. While 'project timing' is the standard excuse, a decline of this magnitude suggests a fundamental air pocket in federal/SLED demand that may persist.
Despite the AI narrative, actual hardware sales for Servers/Storage dropped 14% YoY. This contradicts the broader industry trend of data center build-outs and suggests Connection may be losing share in physical infrastructure.
⚖️ Verdict: ⚪
Neutral. The margin expansion and Enterprise acceleration are excellent, but the magnitude of the Public Sector miss (-37%) is alarming. Until government spending stabilizes, the stock is effectively running in place.
Key Themes
Public Sector Drag Intensifies
The deterioration in Public Sector Solutions is accelerating. Revenue fell 36.8% YoY to $90.8M. This segment has swung from a primary growth engine in early 2025 (+55% in Q1) to a massive anchor. Gross profit in this segment fell 20.5%, indicating this isn't just a low-margin volume loss—it's hitting the bottom line.
Software Mix Shift Lifting Margins
Software sales surged 24% YoY, while low-margin categories like Notebooks (-4%) and Servers (-14%) declined. This favorable mix shift is the primary engine behind the 100bps gross margin expansion to 19.3%. Connection is effectively trading revenue volume for earnings quality.
Operating Expense Creep
SG&A expenses rose 1.7% to $108.9M despite flat sales, pushing SG&A as a percentage of sales to 15.5% (vs 15.1% prior year). While partially driven by variable comp on higher gross profit, the company also incurred $3.1M in severance charges, signaling an attempt to right-size the cost structure that hasn't yet fully materialized in the numbers.
Capital Return Acceleration
Management is deploying the balance sheet aggressively. The Board approved a $50M increase to the repurchase program (total available $81.2M) and declared a $0.20 dividend. In Q4, they bought back $10.7M of stock. With $406M in cash/investments and no debt, this floor under the stock price is solid.
Server & Storage Disconnect
A major red flag in the product mix: Servers/Storage sales fell 14% YoY. In an environment where 'AI Infrastructure' is the dominant IT theme, a double-digit decline here suggests Connection is missing out on the heavy iron spend, or their clients are prioritizing cloud (software) over on-premise hardware.
Other KPIs
Down slightly from $442.6M a year ago due to buybacks and working capital timing, but remains a fortress balance sheet representing ~28% of the company's market cap.
Up 7.1% YoY. While sales grew 11.9%, gross profit grew slower, compressing margins by 70 bps to 14.2%. This indicates Connection likely used pricing aggression to win market share in the commercial space.
A new line item related to 'internal cost reduction initiatives.' While this suppresses GAAP earnings now, it implies potential operating leverage improvement in FY26 if revenue stabilizes.
Guidance
Stable/Continuing. The Board added $50M to the program. With $10.7M repurchased in Q4, the company has significant dry powder to support the stock price, representing ~5-6% of current market cap.
Key Questions
Public Sector Bottom
Public Sector revenue has decelerated for three straight quarters to -37%. Is this purely 'funding delays,' or has Connection lost a specific large federal contract vehicle?
Server/Storage Weakness
With Server/Storage sales down 14%, how does this square with the narrative of 'AI-first IT environments'? Are you losing share in the data center infrastructure market?
SG&A Leverage
SG&A % of sales continues to tick up (15.5%). With $3.1M in severance charges taken, when can investors expect SG&A growth to drop below Gross Profit growth?