CNXN Q2 Deep Dive: Mixed Revenue Progress and Margin Pressures Amid IT Demand Shifts

IT solutions provider Connection (NASDAQ:CNXN) missed Wall Street’s revenue expectations in Q2 CY2025 as sales rose 3.2% year on year to $759.7 million. Its non-GAAP profit of $0.97 per share was 7.2% above analysts’ consensus estimates.

Is now the time to buy CNXN? Find out in our full research report (it’s free).

StockStory’s Take

Connection’s second quarter results drew a negative reaction from the market as the company missed Wall Street’s revenue expectations, despite delivering year-over-year sales growth and non-GAAP profit above analyst estimates. Management pointed to continued momentum in mobility and desktop categories, driven by Windows 11 refresh cycles and demand for AI-enabled PCs, but acknowledged that changes in partner subscription licensing programs weighed on gross margins. CEO Timothy McGrath noted, “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.”

Looking ahead, Connection’s management is cautiously optimistic, citing a strong sales pipeline and record backlog heading into the second half of the year. The company is focused on supporting ongoing PC refresh cycles, expanding technical solutions in edge computing, and investing in tools to address AI-driven customer needs. CFO Thomas Baker stated that gross margins are expected to remain stable, with only minor variations, despite lingering impacts from subscription licensing changes. Management also highlighted continued investments in sales resources and AI initiatives to position the business for long-term growth.

Key Insights from Management’s Remarks

Management attributed the quarter’s mixed results to strong demand in certain product categories, offset by margin pressures from changes in software licensing and ongoing sector shifts.

• Mobility and Desktop Sales Growth: The company experienced notable growth in mobility and desktop categories, driven by Windows 11 refresh cycles and increased enterprise demand for AI-enabled PCs, which contributed significantly to top-line performance.
• Advanced Technologies Momentum: Sales of advanced technologies—including server storage, networking solutions, and edge computing—rose as customers pursued data center modernization and server consolidation, reflecting customer appetite for infrastructure upgrades.
• Subscription Licensing Impact: Changes in partner subscription licensing programs led to a decline in gross margin percentage, particularly affecting the Business Solutions and Enterprise Solutions segments. Management indicated the impact was largest in this quarter but expects less effect going forward.
• Public Sector Weakness: The Public Sector Solutions segment underperformed due to lower sales to K-12 educational institutions, partially offset by stable demand from federal and some higher education customers. Management attributed the drop to the timing of large rollout projects completed last year.
• Ongoing Operating Investments: Connection continued to invest in sales platforms, productivity tools, and AI-focused initiatives aimed at improving the effectiveness of its sales teams and supporting customers’ evolving technology needs.

Drivers of Future Performance

Management expects stable gross margins and sees future performance hinging on sustained IT modernization trends and execution in targeted verticals.

• PC Refresh and AI Demand: The ongoing PC refresh cycle and growing demand for AI-enabled endpoints are expected to drive sales, particularly among enterprise clients seeking productivity gains through updated technology infrastructure.
• Vertical Market Expansion: Management is optimistic about opportunities in retail and manufacturing sectors, citing planned projects and increased customer engagement for the second half of the year, while continued investment in sales resources should aid expansion.
• Tariff and Supply Chain Dynamics: Shifting supply chains and changing tariff exposure—such as more devices being sourced from Vietnam and Mexico—are expected to reduce some pricing pressures, though management remains watchful for any volatility that could affect inventory strategy and working capital.

Catalysts in Upcoming Quarters

Going forward, the StockStory team will monitor (1) the pace of recovery in public sector sales, particularly in K-12 and higher education, (2) execution of large customer rollouts tied to staged inventory and price sensitivity from tariff shifts, and (3) the impact of new investments in AI and sales productivity tools on sales effectiveness and gross margin stability. The evolution of customer demand for AI-enabled solutions and supply chain adjustments will also be important signposts for business momentum.

Connection currently trades at $62.76, down from $64.01 just before the earnings. In the wake of this quarter, is it a buy or sell? Find out in our full research report (it’s free).

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