The Channel Wire

July 31, 2009

PC Connection surprised Wall Street yesterday by posting second-quarter revenue of $377 million, down 16.1 percent year-over-year, but up 16 percent sequentially and higher than analysts' expectations.

That typically might be good news, but the Merrimack, N.H.-based solution provider's gross margin declined to 11.75 percent, below estimates. PC Connection blamed the fall on "aggressive price competition" across all of its business segments, evidence that end users are still delaying purchases and solution providers are willing to sacrifice some profit to win the deal.

"In commercial sales, the weak demand we experienced in the quarter reflects the industrywide slowdown in purchasing patterns," CEO Patricia Gallup said on a conference call with analysts on Thursday.

Interestingly, sales of notebooks and PDAs fell 22 percent, while desktop computers and servers declined only 13 percent.

PC Connection noted that the notebook/PDA category was especially hard hit by declining average selling prices, particularly as netbooks become more popular. The lower-priced netbooks accounted for 7 percent of all notebook sales, up from 1 percent from the year-ago quarter and 5.5 percent from the first quarter, said Jack Ferguson, executive vice president, treasurer and CFO, on the analysts call.

PC Connection's results, combined with those of distributor Ingram Micro, which also announced results Thursday, indicate that IT spending has, at best, stabilized and an economic recovery will not come quickly. Ingram Micro, for example, noted that it may get more aggressive to win business now that it has certain tools and programs in place.

For PC Connection, even the SMB space, which typically rebounds quicker than enterprise markets, is struggling. The solution provider's SMB sales fell 25 percent year-over-year, but company executives said VARs in the large enterprise segment were also aggressive on pricing.

PC Connection didn't detail any outlook for its current (third) fiscal quarter.