CNXN — Q2 2026 Financial Report Analysis

Laptops did the heavy lifting: sales up 12.4%, profit up a third

PC Connection (which trades as "Connection") resells computers, software and networking gear from makers such as Apple, Dell, HP, Lenovo, Cisco and Microsoft to businesses, large companies and government buyers, and layers installation and support services on top. In the second quarter of 2026 (April–June) its net sales rose 12.4% to $854.0 million, and net income rose 33.8% to $33.2 million, or $1.31 per diluted share against $0.97 a year earlier. Notebooks and other mobile devices supplied $77.7 million of the $94.3 million sales increase, and because costs grew more slowly than sales, more of each extra dollar reached profit.

At a glance

• $854.0 million in net sales, up 12.4%. Roughly four-fifths of the growth came from one product category, notebooks/mobility, which rose from 34% to 40% of everything the company sold.
• 5.0% operating margin, up from 4.1%. Operating margin is the share of revenue left after paying for the products and running the business, before interest and tax. For a reseller this thin, a 0.9-point gain lifted operating income 39.2%, to $43.0 million.
• –$49.5 million of operating cash flow in the first half, against $50.4 million of net income. Profit went into unpaid customer invoices and a 43% build in inventory since December, which management says was partly to secure supply during a memory-chip shortage.

The numbers

Gross margin is what's left of each sales dollar after the cost of the products sold. SG&A is selling, general and administrative cost: salaries, marketing, offices.

For the first half (January–June), net sales rose 7.9% to $1,575.9 million and diluted EPS rose 34.5% to $1.99 from $1.48. That means the first quarter was slower: subtracting Q1 from the half-year totals, Q1 sales were about $721.9 million, up about 3.0% from about $701.0 million.

How the three customer groups did

Connection splits its business by who the customer is: Enterprise Solutions (medium-to-large corporations), Business Solutions (small and mid-sized businesses) and Public Sector Solutions (federal, state and local government and schools).

Segment operating income is the company's own segment figure, after each segment's share of headquarters costs.

• Business Solutions grew fastest and earns the most. Sales rose $50.7 million, of which notebooks/mobility was $48.6 million and networking/communications gear $7.9 million; server/storage sales fell $8.2 million. Its gross margin slipped 50 basis points (0.5 points) "primarily as a result of a shift in product mix to sales of lower-margin notebooks/mobility." Even so, it produced $31.7 million of the three segments' $46.7 million combined operating income, because its gross margin (23.0%) is far above Enterprise's (14.9%).
• Enterprise grew 13.4% and widened its margin by 30 basis points. Notebooks/mobility added $25.3 million, displays and sound $8.5 million and software $8.0 million. The filing attributes the margin gain mainly to more software recorded on a "net basis" (explained below) and better margins on other hardware and services from customer mix. Its SG&A fell to 10.8% of segment sales from 11.4%, so segment operating income jumped 46%.
• Public Sector was flat on the surface, with two opposite moves underneath. Sales to the federal government fell $6.8 million, or 24.7%, while sales to state and local governments and schools rose $6.8 million, or 6.0%. Over the half-year the federal drop is much larger: down $48.9 million, or 57.4%, "primarily due to a few large orders in the prior period that did not repeat." The segment roughly broke even in the quarter, a $2.0 million improvement, helped by a 130-basis-point gross margin gain from better notebook margins and more net-basis software.

What the headline numbers hide

Cash conversion was poor. Over the first half, the business used $49.5 million of cash in operations while reporting $50.4 million of net income. Accounts receivable (money customers owe) rose $80.6 million and inventory rose $61.5 million; on the balance sheet, receivables went from $648.0 million in December to $726.8 million (+12.2%) and inventory from $143.6 million to $205.1 million (+42.9%), while first-half sales grew 7.9% year on year. Management attributes the receivables change to "timing of collections" and the inventory build to "customer rollouts and management's decision to secure supply." Days of inventory on hand rose to 27 from 20, and the cash conversion cycle (how many days cash is tied up between paying suppliers and collecting from customers) lengthened to 49 days from 44. Cash plus short-term investments fell to $340.7 million from $406.7 million at year-end. The company has no borrowings on its balance sheet, so this is not a solvency issue, but it is cash the profit figure doesn't yet show.

The memory shortage cuts both ways. The 10-Q flags "the ongoing global memory shortage (DRAM and NAND)" as a risk that could raise inventory costs and squeeze margins, and notes customers "may accelerate or delay purchasing." Some of this quarter's laptop demand may be customers buying ahead of expected price rises, which would borrow from later quarters; the filing doesn't quantify this, so treat it as a risk to watch rather than a known effect.

Part of the margin gain is accounting, not pricing. Some software (and similar products) is recorded "on a net basis": only Connection's commission counts as revenue, at 100% gross margin. More of these sales raises the margin percentage without the company earning more on any given box. You can see it in the gap between gross billings (everything invoiced) and net sales: billings grew 14.0%, net sales 12.4%, and net sales fell to 73.0% of billings from 74.0%. The filing cites net-basis software as a margin driver in Enterprise and Public Sector. The total gross margin gain was only 0.3 points, though; most of the profit improvement came from operating leverage: SG&A rose 7.1% ($7.6 million) while sales rose 12.4%.

EPS growth came from the business, not from buybacks or tax. Diluted share count fell just 0.7% (25.34 million vs 25.52 million). The tax rate was essentially unchanged (27.2% vs 27.3%), and interest income actually fell, to $2.5 million from $3.2 million, on lower cash balances and rates. Buybacks have also slowed sharply: $2.4 million of stock repurchased in the first half versus $60.9 million a year earlier, while the quarterly dividend went to $0.20 per share from $0.15.

One-offs: none in the quarter. The first half included $3.1 million of severance from workforce reductions (versus $2.9 million a year earlier), all booked in Q1. There are no adjusted (non-GAAP) figures in the 10-Q; all numbers here are as reported.

Guidance: the 10-Q gives no numerical outlook.

Takeaway: Connection's profit jump is real and mostly came from the business itself: 12.4% more sales on an SG&A bill that grew 7.1%, with no help from buybacks or tax. But it rests on one product cycle, laptops (82% of the sales increase), and the cash hasn't followed yet: first-half operating cash flow was –$49.5 million against $50.4 million of profit, as inventory and receivables swelled.

What to watch next

• Does the inventory turn into sales? The $61.5 million inventory build was partly a bet on supply during the memory shortage. If the third quarter shows inventory falling and operating cash flow turning positive, the build was deliberate positioning; if inventory keeps climbing while laptop growth slows, margins are at risk if prices fall or stock ages.
• Can laptop demand hold? Notebooks/mobility rose from 34% to 40% of net sales in a year. The comparison gets harder from here, and the filing warns customers may "accelerate or delay purchasing" around the memory shortage.
• Federal sales. Federal revenue was down 57.4% in the first half on non-repeating large orders. State, local and education grew modestly; a federal recovery would be the swing factor for a segment that currently breaks even.
• New operating leadership. In an 8-K filed October 14, 2026, the company said Matthew Zafirovski, previously CEO of technology solutions provider Tusker, joined as President and Chief Operating Officer on October 12; Timothy McGrath gave up the President title and remains CEO.

Our read: the quarter showed how much profit a low-margin reseller gains when volume rises faster than overhead. The 5.0% operating margin compares with 4.1% a year ago and about 2.8% in the first quarter of 2026 (derived from the half-year figures), so it depends on laptop volume holding up. Watch third-quarter cash flow as closely as third-quarter earnings.