AI PCs drive record backlogs while public sector stabilizes
- CNXN is a value-added IT reseller with more than 2,500 suppliers and over 460,000 products.
- Q2 2026 commercial demand hit record backlogs, with Enterprise sales up 13.4% and Business Solutions up 17.3%.
- Public Sector sales stabilized to flat year over year, recovering from a sharp 31.0% drop in the first quarter.
- As of early 2026, nearly 70% of endpoint devices sold were AI chip-enabled, up from less than 40% a year earlier.
- Gross margin in the Business Solutions segment fell 50 basis points, showing some pressure from a shift toward lower-margin hardware.
AI refresh meets margin questions
CNXN has a real growth tailwind from the AI PC refresh cycle. Organizations are moving beyond basic experimentation and into enterprise-wide AI adoption. In early 2026, almost 70% of endpoint devices bought by customers had AI chips, compared with less than 40% a year before. This hardware cycle is bringing software attachments like Copilot along for the ride.
The commercial engine is doing the heavy lifting and showing strong pipeline visibility. Enterprise Solutions ended Q2 2026 with record backlogs, and Business Solutions hit a three-year high. These massive commercial pipelines help mute earlier fears that first-quarter sales were just pulled forward from the back half of the year.
The Public Sector also stopped its freefall, posting flat revenue in Q2 after a brutal 31% decline in Q1. While this stabilization removes a major immediate threat to the thesis, profitability is still a mixed bag. The core Business Solutions segment saw gross margins drop 50 basis points in Q2 due to a shift toward lower-margin laptops and a less favorable customer mix.
Finn's view is balanced. Financial health looks excellent, but the stock needs proof that management can convert these record backlogs without sacrificing pricing power, especially in the crucial small and medium business segment.
A neutral IT shopping desk
CNXN makes money by selling IT products and services. It works with more than 2,500 suppliers, including Apple, Cisco, Dell, HP, and Microsoft. Because it is product-neutral, it can mix hardware, software, and services from many vendors for each customer without being tied to one manufacturer.
The core sale is simple: a business, school, or agency needs notebooks, desktops, software, networking gear, or support. CNXN sources those products, helps pick the right setup, and may add services through its Technology Solutions Organization and integration center.
The higher-margin opportunity is services and software. Some software sales are recognized on a net basis, meaning CNXN records only the fee as revenue but at 100% gross margin. That can lift reported gross margin even when hardware units are under pressure.
The model can break if vendors go direct, if price competition squeezes invoice margins, or if customers delay upgrades. The 2026 memory shortage adds a new twist: higher component prices can lift revenue per device, but they can also reduce the total number of units a budget can buy.
From laptops to AI services
Notebooks and mobility
This was 37% of Q1 2026 net sales. It is the main place where the AI PC refresh is showing up.
Desktops
Desktops were 12% of Q1 2026 net sales. They still matter for office refresh cycles, but mix and pricing can move margins.
Software
Software was 11% of Q1 2026 net sales. Net-recognized software can boost gross margin because the fee is recorded at 100% gross margin.
Accessories
Accessories were 11% of Q1 2026 net sales. They attach to device sales and help CNXN cover more of each IT order.
Networking and communications
Net/com products were 7% of Q1 2026 net sales. Demand can vary with larger technology projects and customer budgets.
Servers, storage, and services
Servers and storage were 6% of Q1 2026 net sales. CNXN Helix and AI services give this area a longer-term growth angle.
Commercial strength, public drag
Segment mix is from the three months ended June 30, 2026. The commercial segments power the bulk of the revenue, while the Public Sector represents a smaller slice.
What could break the case
Business Solutions margin squeeze
Medium impact · High oddsBusiness Solutions typically has the highest segment gross margin, but it fell 50 basis points in Q2 2026 following an 80 basis point drop in Q1. Management tied the drop to unfavorable customer mix and lower-margin notebooks. If that mix does not reverse, profit growth will trail sales growth.
Backlog conversion risks
Medium impact · Medium oddsWhile Enterprise and Business segments exited Q2 with record backlogs, macroeconomic headwinds and supply chain constraints remain real. If customers delay taking delivery or cancel orders due to budget freezes, those strong pipelines might not translate into actual second-half revenue.
Public Sector lumpiness
Medium impact · Medium oddsPublic Sector sales fell 31.0% in Q1 2026 before flattening out in Q2. Management notes underlying performance is stabilizing, but government and education buying can be highly unpredictable. Further declines here could offset commercial growth.
Memory inflation hurts units
Medium impact · Medium oddsA global DRAM and NAND shortage is expected throughout 2026. Higher memory prices can raise revenue per device, but they can also push customers to buy fewer units. If unit declines outrun price gains, the AI PC refresh could look weaker than expected.
Vendor and price pressure
Medium impact · Medium oddsCNXN depends on major technology vendors and competes in a price-sensitive resale market. If a large vendor changes terms, pushes more sales direct, or if rivals cut prices, CNXN's invoice margins can fall. Product-neutral advice helps, but it does not remove this risk.
In one breath
What does PC Connection actually do?
PC Connection is an IT reseller and solutions provider. It helps organizations buy and manage hardware, software, and services from many technology vendors.
Why is AI important for CNXN?
AI is pushing customers to refresh PCs sooner because newer devices have AI-ready chips. In early 2026, nearly 70% of endpoint devices sold by CNXN were AI chip-enabled.
Why did Public Sector revenue fall in early 2026?
Public Sector sales fell heavily in Q1 because a few large federal orders from the prior year did not repeat. By Q2, the segment stabilized with flat year-over-year revenue.
