CNXN Q4 Deep Dive: Cloud, Security, and Cost Discipline Offset Public Sector Weakness

IT solutions provider Connection (NASDAQ:CNXN) missed Wall Street’s revenue expectations in Q4 CY2025, with sales flat year on year at $702.9 million. Its non-GAAP profit of $0.91 per share was 5.8% above analysts’ consensus estimates.

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StockStory’s Take

Connection’s fourth quarter results were marked by flat sales, falling short of Wall Street’s revenue expectations, but the company surpassed analyst estimates for adjusted profit. Management attributed segment-level strength to growth in cloud, cybersecurity, and endpoint device solutions, especially within business and enterprise customers. CEO Timothy McGrath highlighted that the public sector segment lagged due to a non-repeating project and delayed rollouts, but “strong execution across our business solutions and enterprise solutions segments drove gross profit performance.” Management also pointed to disciplined pricing and an improving customer mix, which supported gross margin expansion even with top-line pressures.

Looking forward, Connection’s strategy centers on expanding its solutions-led business, with an emphasis on AI, cloud, and cybersecurity services. Management expects customer demand to remain robust as organizations modernize IT infrastructure and adopt AI-driven technologies. McGrath emphasized, “We continue to see strong customer engagement as organizations modernize their infrastructure and invest in AI-driven technologies.” The company is also focused on maintaining cost discipline, leveraging productivity gains from operational improvements and targeted headcount reductions to support profitability. While near-term timing of demand may fluctuate due to supply chain constraints, management believes long-term trends remain favorable.

Key Insights from Management’s Remarks

Management attributed Q4 performance to strong demand for cloud, security, and endpoint devices in business and enterprise segments, while public sector revenue was negatively impacted by project timing and non-recurring contracts.

• Business Solutions momentum: The business solutions segment posted double-digit growth in desktops, notebooks, networking, and software, with cloud and cybersecurity solutions leading the gains. This contributed significantly to gross profit and margin expansion.
• Enterprise Solutions growth: Enterprise customers drove robust top-line growth, especially in advanced technologies and endpoint devices. However, changes in subscription license programs and product mix modestly pressured the segment’s gross margin.
• Public Sector headwinds: The public sector segment experienced a sharp decline due to a large contract not repeating and project rollouts being delayed. Management anticipates these headwinds will dissipate as the year progresses.
• Cost optimization actions: Connection executed a voluntary retirement program and headcount reductions, which are expected to generate $7–8 million in ongoing annual savings. These actions are part of a broader effort to align expenses with strategic priorities, while investing in growth areas.
• Capital returns ramped up: The company increased its quarterly dividend by 33% and authorized an additional $50 million for its share repurchase program, reflecting a continued commitment to shareholder returns alongside investment in core business areas.

Drivers of Future Performance

Connection expects ongoing demand for AI-driven and security-focused IT solutions, along with operational efficiencies, to shape performance in the coming quarters.

• AI and cloud adoption: Management believes that accelerating customer adoption of AI-enabled endpoints and cloud services will drive demand, especially in business and enterprise markets. They noted that 61% of endpoint sales are now AI-enabled, indicating a shift toward higher-value solutions.
• Operational efficiency gains: Cost savings from recent restructuring and productivity improvements—partly enabled by AI—are expected to enhance operating leverage. Headcount is expected to remain stable, with further reductions unlikely barring major shifts in demand.
• Supply chain and inflation risks: Management cited memory supply constraints and inflation as ongoing risks that could influence project timing and customer purchasing patterns. Some customers may accelerate orders to avoid price increases, while others could delay spending, creating near-term variability.

Catalysts in Upcoming Quarters

In the quarters ahead, StockStory analysts will watch (1) whether business and enterprise momentum continues to offset public sector softness, (2) the pace of AI and cloud solution adoption across customer segments, and (3) the realization of cost savings and margin improvements from recent restructuring. The impact of supply chain constraints and inflation on IT project timing will also remain an important area of focus.

Connection currently trades at $60.24, in line with $60.19 just before the earnings. At this price, is it a buy or sell? Find out in our full research report (it’s free).

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