Record Quarter for Net Income and Earnings per Share

THIRD QUARTER SUMMARY:

• Net sales: $693.1 million, down 10.6% y/y
• Gross profit: $131.9 million, down 3.5% y/y
• Net income: $25.6 million, up 10.3% y/y
• Diluted EPS: $0.97, up 10.4% y/y

Connection (PC Connection, Inc.; NASDAQ: CNXN), a leading information technology solutions provider to business, government, healthcare and education markets, today announced results for the third quarter ended September 30, 2023, and that its board of directors has declared a quarterly dividend of $0.08 per share on the company’s common stock, which will be payable on December 1, 2023, to shareholders of record as of November 14, 2023.

“We executed well against our strategic priorities including improving our mix of advanced technologies and integrated solutions. Record gross margins and cashflow, combined with our improved operational efficiencies, enabled us to deliver record earnings per share of $0.97 cents during the third quarter” said Timothy McGrath, President and Chief Executive Officer of Connection.

Quarterly Results:

Net sales for the quarter ended September 30, 2023 decreased by 10.6%, year over year. Gross profit decreased 3.5% while gross margin expanded 142 basis points to a record 19.0%, compared to the prior year quarter. Net income for the quarter ended September 30, 2023 increased by 10.3% to a record $25.6 million, or $0.97 per diluted share, compared to net income of $23.2 million, or $0.88 per diluted share, for the prior year quarter. Earnings per share, adjusted for restructuring and other charges (“Adjusted Diluted Earnings per Share”) ¹, increased to $0.97 cents per share for the quarter ended September 30, 2023, compared to $0.88 cents per share for the prior year quarter.

Net sales for the nine months ended September 30, 2023 decreased by 10.0%, compared to the nine months ended September 30, 2022. Gross profit decreased 4.9% while gross margin expanded 94 basis points to 17.7%, compared to the nine months ended September 30, 2022. Net income for the nine months ended September 30, 2023 decreased by 15.5% to $59.5 million, or $2.25 per diluted share, compared to net income of $70.4 million, or $2.66 per diluted share, for the nine months ended September 30, 2022. Adjusted Diluted Earnings per Share¹, decreased to $2.33 per share for the nine months ended September 30, 2023, compared to $2.66 per share for the nine months ended September 30, 2022.

Earnings before interest, taxes, depreciation and amortization, adjusted for stock-based compensation expense and restructuring and other charges (“Adjusted EBITDA”) ¹ decreased 12% to $127.9 million for the twelve months ended September 30, 2023, compared to $145.5 million for the twelve months ended September 30, 2022.

Performance by Segment:

• Net sales for the Business Solutions segment decreased by 14.8% to $269.0 million in the third quarter of 2023, compared to a $315.8 million in the prior year quarter. Gross profit decreased by 1.0% to $62.7 million in the third quarter of 2023, compared to $63.3 million in the prior year quarter. Gross margin increased by 326 basis points to 23.3% primarily due to a shift in product mix to sales of integrated solutions and advanced technologies, which includes services and software, which are recorded on a net basis during the third quarter of 2023.

• Net sales for the Public Sector Solutions segment decreased by 4.4% to $147.5 million in the third quarter of 2023, compared to $154.4 million in the prior year quarter. Sales to the federal government increased by 9.5% to $26.3 million, while sales to state and local governments and educational institutions decreased by 7.0% to $121.2 million, compared to the prior year quarter. Gross profit decreased slightly by 0.5% to $25.0 million in the third quarter of 2023, compared to $25.1 million in the prior year quarter. Gross margin increased by 67 basis points to a record 16.9% primarily due to a higher mix of software and services, which are recorded on a net basis during the third quarter of 2023, in addition to a shift in product mix to sales of advanced technologies, including networking, software, servers and services.

• Net sales for the Enterprise Solutions segment decreased by 9.5% to $276.6 million in the third quarter of 2023, compared to $305.5 million in the prior year quarter. Gross profit decreased by 8.3% to $44.2 million in the third quarter of 2023, compared to $48.2 million in the prior year quarter. Gross margin increased by 21 basis points to a record 16.0% primarily due to our enterprise customers prioritizing integrated solutions of software and services which are recorded on a net basis.

Sales by Product Mix:

• Notebook/mobility sales decreased 20% year over year and accounted for 32% of net sales in the third quarter of 2023, compared to 36% of net sales in the third quarter of 2022.

• Networking sales increased by 48% year over year and accounted for 12% of net sales in the third quarter of 2023, compared to 7% of net sales in the third quarter of 2022.

• Software sales decreased by 10% year over year and accounted for 11% of net sales in the third quarter of 2023 and 2022.

• Accessories sales decreased by 26% year over year and accounted for 10% of net sales in the third quarter of 2023, compared to 13% of net sales in the third quarter of 2022.

Selling, general and administrative (“SG&A”) expenses decreased in the third quarter of 2023 to $99.8 million from $104.9 million in the prior year quarter. The decrease in SG&A was due, in part, to the realization of on-going cost reduction initiatives we have undertaken this year. SG&A as a percentage of net sales increased to 14.4%, compared to 13.5% in the prior year quarter. The increase in SG&A as a percentage of net sales is primarily due to the decrease in net sales compared to the prior year quarter.

Interest income in the third quarter of 2023 was $2.7 million, compared to $0.3 million in the third quarter of 2022.

Cash and cash equivalents, and short-term investments were $289.4 million at September 30, 2023, compared to $116.2 million at September 30, 2022.

Conference Call and Webcast

Connection will host a conference call and live web cast today, November 1, 2023 at 4:30 p.m. EST to discuss its third quarter financial results. For participants who would like to participate via telephone, please register here to receive the dial-in number along with a unique PIN number that is required to access the call. A web-cast of the conference call, which will be broadcast live via the Internet, and a copy of this press release, can be accessed on Connection’s website at ir.connection.com. For those unable to participate in the live call, a replay of the webcast will be available at ir.connection.com approximately 90 minutes after the completion of the call and will be accessible on the site for approximately one year.

Non-GAAP Financial Information

EBITDA, Adjusted EBITDA and Adjusted Diluted Earnings per Share are non-GAAP financial measures. These measures are included to provide additional information with respect to the Company’s operating performance and earnings. Non-GAAP measures are not a substitute for GAAP measures and should be considered together with the GAAP financial measures. Our non-GAAP financial measures may not be comparable to other similarly titled measures of other companies. A reconciliation to the most directly comparable GAAP measures is available in the tables at the end of this release.

About Connection

PC Connection, Inc. and its subsidiaries, dba Connection, (www.connection.com; NASDAQ: CNXN) is a Fortune 1000 company headquartered in Merrimack, NH. With offices throughout the United States, Connection delivers custom-configured computer systems overnight from its ISO 9001:2015 certified technical configuration lab at its distribution center in Wilmington, OH. In addition, the Company has over 2,500 technical certifications to ensure that it can solve the most complex issues of its customers. Connection also services international customers through its GlobalServe subsidiary, a global IT procurement and service management company. Investors and media can find more information about Connection at http://ir.connection.com.

Connection–Business Solutions (800.800.5555) is a rapid-response provider of IT products and services serving primarily the small-and medium-sized business sector. It offers more than 460,000 brand-name products through its staff of technically trained sales account managers, publications, and its website at www.connection.com.

Connection–Enterprise Solutions (561.237.3300), www.connection.com/enterprise, provides corporate technology buyers with best-in-class IT solutions, in-depth IT supply-chain expertise, and real-time access to over 460,000 products and 2,500 vendors through MarkITplace^®, a proprietary next-generation, cloud-based supply chain solution. The team’s engineers, software licensing specialists, and subject matter experts help reduce the cost and complexity of buying hardware, software, and services throughout the entire IT lifecycle.

Connection–Public Sector Solutions (800.800.0019), is a rapid-response provider of IT products and services to federal, state, and local government agencies and educational institutions through specialized account managers, publications, and online at www.connection.com/publicsector.

Cautionary Note Regarding Forward-Looking Statements

This earnings release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally relate to future events or our future financial or operating performance and may include statements concerning, among other things, financial results, business plans (including statements regarding new products and services we may offer and future expenditures, costs and investments), future liabilities, impairments, competition, and the impact of current macroeconomic conditions on our businesses and results of operations. You can generally identify forward-looking statements by words such as “believe,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “may,” “should,” “will,” or similar statements or variations of such terms, although not all forward-looking statements include such terms. These statements reflect our current views with respect to future events and are based on assumptions as of the date of this report. These statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from expectations or results projected or implied by forward-looking statements.

Such differences may result from actions taken by us, including expense reduction or strategic initiatives (including reductions in force, capital investments and new or expanded product offerings or services), our execution of our business plans (including our inventory management, our cost structure and our management and other personnel decisions) or other business decisions, as well as from developments beyond our control, including;

• substantial competition reducing our market share;
• significant price competition reducing our profit margins;
• the loss of any of our major vendors adversely affecting the number of type of products we may offer;
• virtualization of information technology resources and applications, including networks, servers, applications, and data storage disrupting or altering our traditional distribution models;
• service interruptions at third-partly shippers negatively impacting our ability to deliver the products we offer to our customers;
• increases in shipping and postage costs reducing our margins and adversely affecting our results of operations;
• loss of key persons or the inability to attract, train and retain qualified personnel adversely affecting our ability to operate our business;
• cyberattacks or the failure to safeguard personal information and our IT systems resulting in liability and harm to our reputation; and
• the rate of innovations in the hardware, software and services we offer as well as macroeconomics factors facing the global economy, including disruptions in the capital markets, economic sanctions and economic slowdowns or recessions, rising inflation and changing interest rates have impacted and are expected to continue to impact the level of investment our customers are willing to make in IT products.

Additional factors include those described in this Annual Report on Form 10-K for the year ended December 31, 2022, including under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business,” in our subsequent quarterly reports on Form 10-Q, including under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in our subsequent filings with the Securities and Exchange Commission.

A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances. You should not place undue reliance on the forward-looking statements. Unless required by law, we assume no obligation to update any of these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made.

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