IT solutions provider Connection (NASDAQ:CNXN) announced better-than-expected revenue in Q1 CY2025, with sales up 10.9% year on year to $701 million. Its non-GAAP profit of $0.60 per share was 44.6% above analysts’ consensus estimates.

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Connection (CNXN) Q1 CY2025 Highlights:

Revenue: $701 million vs analyst estimates of $646 million (10.9% year-on-year growth, 8.5% beat) Adjusted EPS: $0.60 vs analyst estimates of $0.42 (44.6% beat) Adjusted EBITDA: $22.84 million vs analyst estimates of $17.9 million (3.3% margin, 27.6% beat) Operating Margin: 2.5%, in line with the same quarter last year Free Cash Flow was -$54.1 million, down from $55.68 million in the same quarter last year Market Capitalization: $1.79 billion

StockStory’s Take

Connection delivered revenue and profit above Wall Street expectations in the first quarter, driven by accelerated customer purchasing ahead of anticipated tariffs and ongoing device refresh cycles. CEO Tim McGrath highlighted that some customers fast-tracked investments, particularly in AI-enabled PCs and infrastructure, while others remained cautious due to macroeconomic uncertainty. McGrath noted, "Our team remains focused on delivering extraordinary value through integrated IT solutions and customer service," and pointed out notable growth in public sector, finance, and healthcare verticals.

Looking forward, management outlined a cautious stance as tariffs and broader economic concerns weigh on customer spending plans. McGrath described the current environment as "a mixed bag," with mission-critical projects such as server consolidation and AI initiatives moving forward but discretionary investments facing delays. Management expects cost savings from recent workforce reductions to support margins in the coming quarters, and sees mid- to high-single-digit revenue growth for the full year, contingent on stabilization in customer demand.

Key Insights from Management’s Remarks

The quarter's financial performance was shaped by early customer purchases related to tariff concerns, ongoing device refresh activity, and a focus on internal cost reductions. Management attributed revenue outperformance to both large project wins in public sector and increased demand for AI-ready computing platforms.

Tariff-Driven Customer Behavior: Management reported that certain customers accelerated technology purchases to avoid expected price increases from tariffs, while others held off on spending until economic conditions became clearer. Device Refresh Cycle: Significant year-over-year growth in notebooks and desktops reflected customer investment in endpoint devices, with roughly 40% of endpoint sales attributed to AI-enabled PCs as organizations prepare for more AI-driven workloads. Segment Performance Divergence: Public sector sales benefited from large project rollouts, especially in federal government contracts, but at lower-than-average margins. Finance and healthcare verticals also contributed to top-line growth through project-driven demand. Cost Reduction Initiatives: The company implemented workforce reductions and other cost-saving measures during the quarter, incurring severance expenses but positioning for approximately $5 million in annualized savings. These actions are intended to support operating margins going forward. Inventory and Backlog Strategy: Connection increased inventory levels to safeguard against anticipated supply chain disruptions and price hikes, resulting in elevated working capital usage. Management noted that the quarter ended with the highest backlog in nearly two years, signaling potential for sustained order flow.

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Drivers of Future Performance

Looking ahead, Connection’s outlook is shaped by customer caution around tariffs, ongoing investment in AI and data center modernization, and an emphasis on operational cost control to protect profitability.

Tariff and Economic Uncertainty: The prospect of new or increased tariffs is prompting customers to accelerate or delay purchases, creating unpredictability in demand. Management believes customer sentiment will be a key determinant of revenue trends in the next few quarters. Cost Savings Realization: Recently announced cost reduction initiatives are expected to generate annualized savings, with most benefits yet to be realized. Management plans to keep SG&A growth below revenue growth to maintain margin stability. Opportunities in AI and Edge: The company is investing in advisory and implementation capabilities around AI PCs, data center refresh, and edge computing, anticipating these areas will drive customer spending as organizations seek productivity improvements.

Top Analyst Questions

Adam Tindle (Raymond James): Asked about patterns in customer purchasing behavior and whether certain verticals or product categories were more likely to accelerate or delay spending. CEO Tim McGrath explained the mix was varied, with federal, finance, and healthcare verticals showing project-driven growth and endpoint sales seeing strong demand for AI-capable devices. Adam Tindle (Raymond James): Inquired about expected growth for the year given the strong backlog. McGrath forecasted mid- to high-single-digit growth, noting continued market unease and that cost savings from SG&A reductions would become more visible in upcoming quarters. Adam Tindle (Raymond James): Requested clarification on operating expense trends. CFO Tom Baker indicated SG&A growth would be kept below revenue growth, and that most cost reduction benefits would materialize in the next quarter. Anthony Lebiedzinski (Sidoti): Sought details on intra-quarter demand trends and the influence of tariffs. McGrath said March was the strongest month, with a clear impact from pre-tariff buying and customer comfort improving late in the quarter. Anthony Lebiedzinski (Sidoti): Asked about the company’s appetite for acquisitions in the current environment. McGrath reiterated that Connection remains ready for tuck-in deals to expand capabilities but is mindful of interest rate impacts on deal terms.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be watching (1) whether pre-tariff buying patterns continue or subside as customers adjust to new pricing, (2) the impact of cost reduction efforts on operating margin as savings become more visible, and (3) the pace of recovery or further delays in discretionary IT spending, especially within enterprise and public sector. Execution on AI, edge, and data center initiatives will also be important signposts for sustained growth.

Connection currently trades at a forward P/E ratio of 20.2×. Is the company at an inflection point that warrants a buy or sell? The answer lies in our free research report.

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