Earnings call transcript: CDW Corp beats Q2 2025 earnings expectations

CDW Corp, a prominent player in the Electronic Equipment, Instruments & Components industry, reported its financial results for Q2 2025, surpassing Wall Street expectations with an earnings per share (EPS) of $2.60, compared to the forecasted $2.49. The company’s revenue also exceeded predictions, reaching $5.98 billion against an anticipated $5.51 billion. Following the announcement, CDW’s stock price rose by 2.88% in pre-market trading, reflecting investor confidence in the company’s performance. According to InvestingPro analysis, CDW is currently trading slightly below its Fair Value, with analysts setting price targets between $200 and $235.

Key Takeaways

• CDW Corp’s EPS of $2.60 beat the forecast by 4.42%.
• Revenue reached $5.98 billion, an 8.53% surprise over expectations.
• Stock price increased by 2.88% in pre-market trading.
• Strong growth in software and cloud services.
• Cautious outlook due to uncertainties in federal and education markets.

Company Performance

CDW Corp demonstrated robust performance in the second quarter of 2025, with consolidated net sales increasing by 10% year-over-year to $6 billion. Growth was driven by significant gains in the commercial, healthcare, and international markets, although offset by declines in the federal and education segments. The company continues to benefit from its diversified portfolio and strong international presence, particularly in the UK and Canada. InvestingPro data reveals a Financial Health Score of 2.27 (FAIR), with particularly strong profit metrics, though the company faces challenges with its gross profit margin of 21.86%.

Financial Highlights

• Revenue: $6 billion, up 10% year-over-year
• Earnings per share: $2.60, up 4% year-over-year
• Gross profit: $1.2 billion, up 5%
• Non-GAAP operating income: $520 million, up 2%
• Adjusted free cash flow: $210 million

Earnings vs. Forecast

CDW Corp surpassed analysts’ expectations with an EPS of $2.60, exceeding the forecast by 4.42%. The company’s revenue of $5.98 billion also outperformed the expected $5.51 billion, marking an 8.53% surprise. This performance continues a trend of exceeding market expectations, demonstrating the company’s operational strength.

Market Reaction

Following the earnings announcement, CDW’s stock price rose by 2.88% in pre-market trading, reaching $170. This increase reflects positive investor sentiment, driven by the company’s strong financial performance and growth prospects. The stock’s movement contrasts with broader market trends, highlighting CDW’s resilience and market position. InvestingPro notes that CDW generally trades with low price volatility, with a beta of 0.94, though the stock has experienced a significant 8.17% decline over the past week. Discover 10+ additional exclusive ProTips and comprehensive valuation metrics with an InvestingPro subscription.

Outlook & Guidance

CDW Corp maintains its full-year 2025 outlook, expecting low to mid-single-digit gross profit growth and a low single-digit increase in non-GAAP net income per share. The company remains cautious about the federal and education market dynamics and is monitoring macroeconomic factors such as inflation and geopolitical tensions. Notable strengths include CDW’s consistent dividend history, having raised dividends for 12 consecutive years and maintained payments for 13 years, demonstrating strong commitment to shareholder returns despite market uncertainties.

Executive Commentary

"We are at an inflection point with customers around AI," said Chris Leahy, CEO of CDW. He emphasized the company’s strategic focus and disciplined execution, stating, "Our strategy is working, and our teams are energized and executing with discipline and purpose." Leahy also highlighted the company’s commitment to precision in operations: "We will focus on what we can control and execute with precision."

Risks and Challenges

• Uncertainties in federal and education markets could impact future growth.
• Macroeconomic pressures, including inflation and geopolitical tensions, remain concerns.
• Potential supply chain disruptions could affect product availability and costs.
• Increased competition in the IT sector could pressure pricing and margins.
• Dependence on international markets exposes CDW to currency fluctuations.

Q&A

During the earnings call, analysts inquired about the adoption of AI PC and infrastructure AI technologies. CDW’s management explained gross margin dynamics and addressed potential mergers and acquisitions strategies. The outlook for large enterprise deals was also clarified, with management expressing cautious optimism amid market uncertainties.

Full transcript - CDW Corp (CDW) Q2 2025:

Carly, Call Coordinator, CDW: Good morning all and thank you for joining us for the CDW Second Quarter twenty twenty five Earnings Call. My name is Carly, and I’ll be coordinating the call today. I’d now like to hand over to our host, Steve O’Brien. The floor is yours.

Steve O’Brien, Earnings Call Host, CDW: Thank you, Carly. Good morning, everyone. Joining me today to review our second quarter twenty twenty five results are Chris Leahy, our Chair and Chief Executive Officer Al Morales, our Chief Financial Officer. Our earnings release was distributed this morning and is available on our website, investor.cdw.com, along with supplemental slides that you can use to follow along during the call. I’d like to remind you that certain comments made in this presentation are considered forward looking statements under the Private Securities and Litigation Reform Act of 1995.

Those statements are subject to a number of risks and uncertainties that could cause actual results to differ materially. Additional information concerning these risks and uncertainties is contained in the earnings release and Form eight ks we furnished to the SEC today and in the company’s other filings with the SEC. CDW assumes no obligation to update the information presented during this webcast. Our presentation also includes certain non GAAP financial measures, including non GAAP operating income, non GAAP operating income margin, non GAAP net income and non GAAP earnings per share. All non GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules.

You’ll find reconciliation charts in the slides for today’s webcast and in our earnings release and Form eight ks. Please note all references to growth rates or dollar amounts changes in our remarks today are versus the comparable period in 2024, with net sales growth rates described on an average daily basis unless otherwise indicated. Replay of this webcast will be posted to our website later today. I also want to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast without specific written permission from the company. With that, let me turn the call over to Chris.

Chris Leahy, Chair and Chief Executive Officer, CDW: Thank you, Steve, and good morning, everyone. I’ll begin with a high level overview of our second quarter financial and strategic performance and share some thoughts on the balance of the year. Al will take you through a more detailed look at our results, capital strategy and priorities and outlook for 2025. We’ll move quickly through our prepared remarks to ensure we have plenty of time for questions. Second quarter results underscore the power of our full stack, full life cycle solutions.

In a dynamic and complex environment, the team delivered double digit top line growth even as federal and education markets faced evolving headwinds. As a result, that reflects not only strong execution, but also the strategic advantage of our diversified portfolio of products, services, solutions and customer end markets. For the quarter, consolidated net sales were $6,000,000,000 up 10% over last year. Gross profit was $1,200,000,000 up 5%. Non GAAP operating income was $520,000,000 up 2%.

Non GAAP net income per share was $2.6 up 4%, and we delivered adjusted free cash flow of $210,000,000 The team was focused and determined, staying true to our value proposition and customer centric approach. Customer focus was similar to the first quarter and remained squarely on must dos versus wants with two key priorities. First, client devices, which reflected a baseline replacement cycle amplified by the Windows 10 end of life transition and a heightened focus on productivity initiatives. Second, mission critical infrastructure projects, which were particularly strong across enterprise customers in our corporate channel. The team’s success addressing customer priorities delivered gross profit growth of 5%, which exceeded our expectations.

Let’s take a closer look at how customer priorities and market dynamics shaped performance across our end markets and portfolio in the quarter. As always, there were three main drivers of our results, our balanced portfolio of customer end markets, the breadth of our products, services, and solutions, and relentless execution of our three part growth strategy. First, our balanced portfolio of diverse customer end markets. We have five U. S.

Sales channels: corporate, small business, health care, government and education. Each channel is $1,000,000,000 plus business annually. Additionally, our U. K. And Canadian operations together delivered sales of 2,500,000,000.0 US dollars last year.

Our scale allows us to segment our business into customer end markets with dedicated sales professionals, industry experts, and technical resources who deeply understand the unique priorities of each market. When end markets behave differently from each other, the diversity of our customer base serves us well. The benefits of our scale and diverse end markets was evident once again in the second quarter with strong performance in commercial, health care, and The UK and Canada, offsetting expected federal and education declines. Commercial performance, which includes corporate and small business, was strong and balanced. Both teams did an exceptional job pivoting to customer shifting needs and areas of focus, with corporate net sales up 18% and small business up 13%.

Greater enterprise market penetration in corporate drove excellent hybrid infrastructure growth, and both teams also delivered strong client device growth as they leveraged our comprehensive suite of client solutions and services to help customers meet their priorities to both enhance workplace experience and productivity. Small business also continued its success helping customers use SaaS to drive efficiency and flexibility and delivered strong double digit cloud performance. Public increased two percent as the team helped customers navigate a dynamic environment marked by changes in funding streams and protocols. Once again, health care was a standout performer with net sales up 24% as they continue to help our customers address clinical continuity. Education posted an 11% decline in top line.

K 12 declined by double digits, driven by both changes to federal funding rules and expected changes in funding stream, which included the expiration of stimulus funds. Results also reflect the expected impact of Chromebook buying during the first quarter ahead of anticipated price increases, which we previously identified. Higher ed posted a modest decline as institutions assess the impact of new regulatory and funding pressures, including grant freezes and student visa uncertainty. Despite these challenges, projects continue to move ahead, most notably network upgrades vital to student satisfaction. Government increased 3%.

Mid single digit state and local growth more than offset an expected decline in federal. Many state jurisdictions move ahead on critical projects as they closed out their fiscal years and the 2025 budget cycle. Services continues to be a focus area for state and local, up by significant double digit. Federal performance reflected the impact of new administration priorities with mixed performance across the various agencies. Some civilian agencies paused purchases and others moved forward.

With the evolving funding mechanisms and shifting rules of engagement, the team worked with customers to help them prioritize spend and best addressed mission critical needs, further deepening relationships and cap capturing opportunities where budget exists. Standout performance was delivered by our UK and Canadian operations, which we reported other. The UK team capitalized on client device demand and captured full stack opportunities with public sector customers, while our Canada team drove meaningful growth despite tariff related macroeconomic uncertainty. This exceptional execution by both teams delivered a combined top line increase of 12% on a reported basis, each up high single digits or better in local currencies. Clearly, second quarter results demonstrate the power of our balanced portfolio of customer end markets.

Results this quarter also demonstrate the power of our second driver of performance, the breadth of our full stack, full life cycle offering. The team’s ability to address customers’ top priorities drove strong performance across software, hardware, and services. Hardware increased 9% driven by significant increases in infrastructure solutions, notably NetComm storage and servers as well as client devices. NetComm and servers both increased top line by meaningful double digits, while storage increased by high single digits. Client devices increased 12%.

ASPs held strong and unit growth was solid. Software increased by 16% with excellent growth across all end markets except k 12. Growth was driven by telephony, application suites, network management, and backup disaster recovery. Cloud spend increased by double digits with growth driven by security, productivity, data storage and recovery, and collaboration. Services had another excellent quarter, up 8% in total with CDW professional managed top line up 13%.

And that brings us to the final performance driver for this quarter, the impact of our customer driven strategic investments, which for the past six years has been focused on expanding the breadth of our services capabilities, capabilities that are integral to delivering full stack end to end outcomes and are key point of differentiation in the market. Today, our comprehensive services portfolio spans the full life cycle from advisory to implementation to orchestration and managed, services that include cybersecurity readiness, infrastructure planning and execution, strategic IT road mapping, data managing, DevOps, and twenty four seven three sixty five managed services for infrastructure security, cloud, and digital experience. Capability is critical to our ability to help our customers thrive amid the ever evolving landscape. A great example of this in action is our AI center of excellence, a comprehensive approach that helps transform AI from concept to execution. Powered by a multidisciplinary team of data engineers, architects, and analysts, our experts deliver structured workshops to identify use cases, establish governance and security frameworks, and define ROI.

From there, our proof of concept services provide a scalable path to validate and deploy AI solutions. Rapid prototyping follows where we accelerate adoption and impact using our deep vertical expertise and infrastructure ready solutions across cloud, edge, and hybrid infrastructures. Finally, our AI managed services operationalize AI at scale, tackling the unique challenges of AI workloads with consulting guidance and purpose built tooling. As you can see, CDW AI solutions provide comprehensive support across the entire AI life cycle, solutions that deliver fast, secure, and ROI driven innovation, innovation that leads to measurable outcomes for our customer and further deepens our relationship. Let me highlight two examples that demonstrate how our services investments are driving meaningful customer outcomes.

First, a rapidly scaling apparel company needed to improve the efficiency of their IT support operations. By integrating our cloud foundation managed services for AWS with our generative AI expertise, we delivered a solution that leverages historical ticket data to streamline workflows. As new tickets arrive, the AI agent references past cases and recommends resolutions in real time. The 6 figure engagement included knowledge transfer documentation, infrastructure setup, agents development, testing, and integration, and most importantly, transform the customer support operations, freeing engineers to focus on strategic initiatives. The second example is a comprehensive security solution we are delivering to a leading North American transport company.

Their legacy security operation center was one size fits all and did not meet their evolving operational needs. What began as a strategic advisory engagement evolved into a full scale identity and access management initiative, ultimately leading to a multiyear managed services engagement with count $10,000,000 total contract value, an engagement that includes twenty four seven managed security operation across across their entire technology stack, including multi vendor firewalls, security information and event management systems, endpoint detection and response, vulnerability scanning, third party risk management, and identity and access management across each platform. It also includes continuous enhancement through penetration testing, purple team assessments, and embedded automation. Two great examples that underscore our differentiated approach as a trusted partner invested in our customers’ long term success. They also demonstrate how our strategic investments deepen customer relationships and how they drive sustained growth, industry leading margins, and strong cash flow.

And that leads me to our expectations for growth for the remainder of the year. We are maintaining our 2025 outlook, which calls for US IT market growth to be in the low single digits on a customer spend basis with a CDW growth premium of 200 to 300 basis points, a view supported by what we are seeing and hearing in the market underpinned by a continued level of prudence. Market dislocation in government and education is expected to continue for the balance of the year. Armed with insights into evolving protocols, funding mechanisms, and budget allocations, our teams are drawing on their deep industry expertise and trusted customer relationships to both formulate strategies to navigate this period of change and to emerge even stronger, outcomes only possible by our scale and unique ability to verticalize. The wildcards we spoke about last quarter, including recessionary conditions, higher inflation, increased geopolitical unrest and outsized changes to announced tariffs, still exist.

We will keep a watchful eye on market conditions and as in our practice as is our practice, update our view as we move through the year. As we look ahead, our priorities remain clear. We will focus on what we can control and execute with precision. We will maximize the strength of our business model and leverage our competitive advantages, including our full stack full life cycle solutions to help customers navigate complexity and achieve their goals. Our commitment to delivering customer value is unwavering.

Our strategy is working, and our teams are energized and executing with discipline and purpose. Now let me turn it over to Al.

Al Morales, Chief Financial Officer, CDW: Thank you, Chris, and good morning, everyone. I will start my prepared remarks with details on our second quarter performance, move to capital allocation priorities, and then finish with our 2025 outlook. Second quarter gross profit of $1,200,000,000 was up 5% year over year. This was above our expectations of low single digit growth as our teams captured increased demand for software and infrastructure solutions hardware alongside continued growth in client devices and services in this complex and dynamic environment. We did not see any meaningful levels of pull forward this quarter related to tariffs or other factors.

Gross margin of 20.8% was below Q2 twenty twenty four, driven by the impact of a higher contribution from large customer corporate customers, which tends to carry lower rates as well as a lower mix of netted down revenues. Gross margin is sensitive to changes in both customer and product mix. This quarter, these changes were notable and gross margin was down a 100 basis points year over year. Corporate small business and health care customers focused on hardware upgrades, including client devices, which together with meaningful spend on network and data center solutions through prioritization away from sales transferred at a point in time where CDW is agent, also known as netted down revenues. This led to a lower relative mix of netted down sales compared to last year and a lower percentage of contribution to gross profit at 32.9%.

Netted down revenues continue to represent an important and durable trend within our business, alongside our professional and managed services listed as transferred over time or CDW’s principal, which continued their strong growth trajectory, increasing 13% year over year and reflecting investments we’ve made in the business over the last six years. Consistent with recent trends, commercial customers prioritized mission critical hardware investments that could not be postponed, and public customers dealt with shifts in government priorities and funding. Given the unique dynamics impacting several of our end markets, our sales and gross profit performance demonstrate the power of our diverse end markets and how we are meeting our customers where they need us most. I want to thank our teams for navigating this environment and delivering above our expectations. Turning to expenses for the second quarter.

Non GAAP SG and A totaled $722,000,000 up 7.2% year over year. This increase was primarily driven by commissions related to higher gross profit achievement and the impact of higher other performance based expenses. For the second quarter, the efficiency ratio of non GAAP SG and A to gross profit was 58.1%, down 230 basis points compared to the first quarter, representing the expected leverage on seasonally greater profit dollars, but up a 130 basis points year over year. We continue to we continue to structurally align our business for stronger future expense leverage. Coworker count at the end of the quarter was approximately 15,000, with customer facing coworker count at 10,700, both slightly down year over year.

Our goal is to balance growth, expansion of capabilities, and exceptional customer experience with greater efficiency and cost leverage from broader operations. Non GAAP operating income was approximately $520,000,000 up 1.8% versus the prior year. Non GAAP operating income margin of 8.7% was up 20 basis points from the first quarter, but down 70 basis points from the prior year second quarter level of 9.4%. Net interest expense was $4,500,000,000 $4,500,000 higher year over year, impacted primarily by lower interest earned on cash balances and higher average interest rates on our long term debt. Non GAAP net income was $344,000,000 in the quarter, up 1.4% on a year over year basis.

With second quarter weighted average diluted shares of a 132,400,000.0, non GAAP net income per diluted share was $2.60, up 3.9% versus the prior year second quarter. Moving to the balance sheet. At period end, net debt was roughly $5,200,000,000 roughly flat with the prior year. Liquidity remains strong with cash plus revolver availability of approximately $1,700,000,000 The three month average cash conversion cycle was sixteen days, below the low end of our targeted range of high teens to low 20s. This cash conversion reflects our effective management of working capital, including disciplined management of our inventory levels even as solutions hardware sales accelerated and client device growth continued.

As we’ve mentioned in the past, timing and market dynamics will influence working capital in any given quarter or year. We continue to believe our target cash conversion range remains the best guidepost for modeling working capital longer term. Adjusted free cash flow was $210,000,000 in the quarter, bringing us to roughly $460,000,000 year to date. This reflects 73% of non GAAP net income, slightly below our stated rule of thumb of 80% to 90% of non GAAP net income, but in line with our expectations given the role timing plays throughout the year. We utilized cash consistent with our 2025 capital allocation objectives during the quarter, including returning approximately 150,000,000 in share repurchases and $82,000,000 in the form of dividends.

As a reminder, we target returning 50% to 75% of adjusted free cash flow to shareholders in 2025. So we are clearly ahead of pace through the second quarter at 112%. That brings me to our capital allocation priorities. Our first capital priority is to increase the dividend in line with non GAAP net income growth. We’ve increased the dividend for eleven second consecutive years through 2024.

We continue to prudently manage our dividend with respect to grow the growth environment and target a roughly 25% payout ratio of non GAAP net income going forward. Our second priority is ensure we have the right capital structure in place. We ended the second quarter at 2.4 times net leverage with our targeted range of two to three times. We will continue to proactively manage liquidity while managing flexibility as evidenced by our 2024 debt refinancing and redemption actions and the subsequent drawdown of our twenty twenty five senior notes this quarter. Finally, our third and fourth capital allocation priorities of M and A and share repurchase remain important drivers of shareholder value.

We continually evaluate M and A opportunities that could accelerate our three part strategy for growth. Likewise, we remain committed to our target to returning 50% to 75% of adjusted free cash flow to shareholders via the dividend and share repurchases in 2025. Now turning to our outlook. We came into 2025 with an appropriately prudent view of the year. And despite the strong first half, we believe this environment calls for continued prudence.

Last quarter, we shared that we’ll be laser focused on controlling what we can control and supporting our customers only as we know how to do in this dynamic environment. This has not changed. Our outlook assumes continued frictional impacts in the government and education segments and a level of general economic uncertainty and caution, but it does not factor in recessionary conditions, higher inflation, increased geopolitical unrest, and outsized changes to announced tariffs. As always, as the landscape changes, we will provide you with updates each quarter. With these factors in mind, we are holding our full year 2025 view of low single digit growth for the IT market.

We continue to target market outperformance of 200 to 300 basis points on a customer spend basis. Based on the anticipated mix of products and solutions, we now expect low to mid single digit gross profit growth for the full year 2025, contemplating our strong first half along with our prudent view on the remainder of the year. We continue to expect second half gross profit contribution to be slightly above the first half, but lower than the historical split of forty eight and fifty two percent respectively. And we continue to expect 2025 gross margins to be roughly consistent with 2024 levels and to remain well above rates from three plus years ago. Finally, we expect our full year non GAAP net income per diluted share to grow low single digits year over year as we focus on profitable growth, exceptional customer outcomes, and effective execution of our capital allocation priorities.

Please remember we hold ourselves accountable for delivering our financial outlook on a constant currency basis. On that note, we expect currency to be a slight tailwind through reported growth rates for the year. Moving to modeling thoughts for the third quarter. We anticipate gross profit to grow at a low single digit rate year over year and to be flat to slightly above the second quarter level. Moving down the p and l, we expect third quarter operating expenses to increase slightly quarter over quarter, aligned with gross profit and combined with some investments back into the business.

This will result in non GAAP SG and A as a percentage of gross profit levels to be higher than in the 2024, but consistent with q two twenty twenty five levels. Keep in mind that operating expense levels in ’24, particularly in the 2024, benefited from lower performance based attainment and thus the reversal of incentive compensation accruals, which will compare unfavorably to 2025. Finally, we expect third quarter non GAAP net income per diluted share to be flat to modestly up year over year and quarter over quarter impacted by the aforementioned factors. That concludes the financial summary. As always, we will provide updated views on the macro environment and our business on future calls.

And with that, I will ask the operator to open up for questions. We would ask each of you to limit your questions to one with a brief follow-up. Thank you.

Carly, Call Coordinator, CDW: Thank you very much. We’d now like to open the lines for Q and A. Our first question comes from Eric Woodring from Morgan Stanley. Eric, your line is now open. Great.

Good morning, guys.

Eric Woodring, Analyst, Morgan Stanley: Thank you so much for taking my questions. Chris, I just wanted to maybe go with you first. And you guys have strung together three consecutive quarters of nice outperformance versus your stated expectations. You are still telling us though that you expect to outperform IT market spend by 200 to 300 basis points. And so is the outperformance we’ve seen from CBW over the last, let’s call it, nine months, really just entirely market driven?

Because otherwise, I’d expect you to gain more than 200 to 300 basis points of share. That was kind of a commonality over the last decade. So maybe can you just help us understand if you are outperforming your expectations by such a degree, why that wouldn’t lead to more outperformance versus the market? And then I have a follow-up, please. Thank you.

Chris Leahy, Chair and Chief Executive Officer, CDW: Yeah. Sure, Eric. When I look at the performance over the last three years and as we look forward for the rest of this year, we are expecting to outperform the market by a 200 to 300 basis premium. And given where the market seems to be residing, we feel very confident that we’ve been on we’ve been delivering that over the past several quarters and will for the full year. When you look at customer spend in particular, that’s what we compare our growth to in the market.

And remember, we’re looking at low single digit growth in the market this year. It would be our take based on a variety of factors, and then, you know, our growth would be two to 300 basis points over that. I think this quarter, in fact, actually underscores the degree which with which we are delivering a premium to market and, in fact, taking share.

Eric Woodring, Analyst, Morgan Stanley: Okay. I appreciate that. Thank you, Chris. And then maybe as a follow-up, if we think about your biggest product segments on the hardware side, client devices, net comm, servers and storage, I think this was the first quarter in a while where we kind of heard unanimously positive commentary across all of those end markets, especially relative to last quarter where I think net common storage were declining. Based on your conversations with customers and what you see in your pipeline, can you maybe help us all better understand where we are in the cycle for each of these respective end markets and how that influences your views as we look out against six to eighteen plus months in advance?

Thanks so much, guys. Good luck.

Chris Leahy, Chair and Chief Executive Officer, CDW: Thanks, Eric. Yeah. Let me zoom out a little bit. I’ll just start with the overarching, perspective of where we are because, obviously, the cycles are impacted by the macro environment. So

Eric Woodring, Analyst, Morgan Stanley: I

Chris Leahy, Chair and Chief Executive Officer, CDW: would say if we think about the hardware cycle, client in particular, you know, we’ve been seeing a a strength in client over the past several quarters. C d w’s team has been doing a tremendous job delivering, and capturing opportunity given the breadth of client devices and services that we provide. We probably say we’re mid cycle in that refresh. So if you think forward, think about it that way. With regard to the infrastructure hardware, you know, this is seems to be on an up uptick, and that’s not unusual vis a vis the timing of endpoint devices, networking, and then infrastructure.

So, again, though, I have to note that it’s going to bounce around as it always does based on specific budgets and based on the priorities within end markets. For example, higher ed, which has been, you know, has been, fueling some of the, impact from the federal funding changes, is still investing heavily in network and campus divide campus networking because it is a key differentiator for student, students who are going there. So it’s gonna bounce around based on the end market that we’re that and what their needs are. I’m gonna have Al dive into each of the categories a little more specifically.

Al Morales, Chief Financial Officer, CDW: Yeah. Thanks, Chris. Eric, just a few things that I note. As you know and Chris noted, for six quarters, we’ve seen client device growth, and that’s been quite positive. And I’d say most of the strength on hardware to date has been in more of the transactional front, specifically client.

We’ve been saying for a while, with respect to solutions, it’s a matter of when, not if. And while this is a single quarter, I would say somewhat encouraging that we did see a turn, on that front for solutions. Now, it’s one quarter, number one, and two, I would say the comps were negative, so that certainly helps the equation. But I would say there’s, some indication there that customers are showing resiliency and needing to get to move forward with some of their refresh initiatives. So, again, early days in that, but for this quarter, solutions actually outperformed transactions.

And so that’s, somewhat encouraging to us, and we’re watching it closely.

Carly, Call Coordinator, CDW: Thank you very Our next question comes from David Voigt from UBS. David, your line is now open.

David Voigt, Analyst, UBS: Great. Thanks guys for taking my question. So maybe Chris and Al, can you maybe just expand upon sort of the strength that you saw in the quarter? Obviously, corporate was incredibly strong. But I think you also noted that there wasn’t a dramatic or you didn’t see an impact from pull forward.

Can you kind of just maybe expand upon kind of what was sort of the motivating factor kind of what got the corporate market to be a little bit more to be healthier than maybe in the past couple of quarters? I know the comp wasn’t that much easier. And then I’ll just give you my follow-up. And so Al, obviously, talked about a smaller percentage of netted down in the quarter. If I kind of just take the numbers really quickly, it looks like there’s a little bit of product gross margin.

Is that just reflective of the larger corporate size in the quarter, which I think you referenced in your prepared remarks? I just wanted to make sure if there was anything else kind of going on under the surface. Thanks.

Chris Leahy, Chair and Chief Executive Officer, CDW: Yeah. Thanks, David. You know, in terms of corporate, I’d say it’s a couple, things. Number one, we know there’s been pent up demand, particularly in the enterprise space, and there are projects that just had to move forward. I think our customers in the corporate space are getting a little more comfortable with the, with the with the bouncing around that’s happening across the macro environment and making investments in those things that they perceive to be mission critical.

You under underpin that with, technology is such an important tool for driving all the goals, mission, strategic imperatives of our customers that it is a place that customers prioritize investments. At the same time, I just would say they are, cautious and being very prudent as we move forward. That’s number one. Number two, I’d say that the team’s execution has been very spot on in terms of having worked over the last several quarters with our customers. I think I mentioned before that we were doing a lot of design work and and sorting through with customers’ projects to come.

That relationship, that work is coming to fruition, and we see it in in nice growth this quarter, particularly around, large enterprise deals and across the full stack, full life cycle solution.

Al Morales, Chief Financial Officer, CDW: And, David, maybe I’ll just, provide a little bit more granularity with respect to netted down revenues and gross margin. So to Chris’ point, we were quite pleased with the level of customer spend that we saw broadly across the business, and I would say the breadth and depth of of the end markets. For this quarter with that larger customer spend, it just so happens that a greater share of the wallet went to solutions, and went to clients and maybe less so from a netted down revenue perspective. Now a couple things going on there with net netted down revenues. One, as I just, noted, a bit of kinda dilutive effect there.

Number two, I’d say really strong results on SaaS and IaaS, but comps were quite, difficult, in that space, and therefore, they were kinda coming up against those comps. And then just remember in the netted down revenue space, there are other categories, that will drive the results. And namely, in this case, warranties and commissions and things like that were a bit lighter, so they diluted the netted down revenue contribution effect as well. So, look, I would just caution just like we would not overextrapolate the strength of solutions for one quarter, I would not overextrapolate the effect that we’ve seen on netted down revenue in this quarter.

David Voigt, Analyst, UBS: Great. Thanks, Chris. Thanks, Al.

Carly, Call Coordinator, CDW: Thank you very much. Our next question comes from Amit Daryanani from Evercore ISI. Amit, your line is now open.

Amit Daryanani, Analyst, Evercore ISI: Good morning. Thanks for taking my question. I guess maybe to start with Chris, your guide I think sort of assumes that the back half growth rates on a year over year basis will decelerate a good bit from the first half trend that you saw. Given some of the commentary you’ve had especially an uptick in solutions, can you just talk about why do you think you’re seeing this deceleration in growth in the back half of the year?

Chris Leahy, Chair and Chief Executive Officer, CDW: Yeah. Amit, it’s really we’ve we’ve looked at education and federal, and we’re really, we’re taking into what we think is gonna be a softer back end and and, frankly, unseasonal. You know, when I think about what’s going on with the policy and funding changes and protocols, our our customers are just taking a step back. They’re taking a step back to understand and move through these changes and, you know, and use the budget they can, but also understand where they’re gonna come out on the other side of this. And the good news is, you know, CW is right in the middle helping them do that.

So we’re just being very, we’re being clear eyed in terms of what the next several quarters are gonna bring. We’re confident that, once there’s more clarity and the money is flowing, that we’ll be able to help our customers use it and deliver efficient and effective technology, but it really is driven by that. On the other Amit, with regard to the other, with the other segments, we are still taking a cautious tone. Excuse me. As Al mentioned, we’re we’re being prudent because our customers are being prudent, and we don’t wanna get ahead of our skis.

We wanna really just take it as it comes, and, you know, we’ll we’ll see what happens in q three. But that’s the reason you you see a little bit more softness in the back half of the year.

Amit Daryanani, Analyst, Evercore ISI: Got it. Perfect. And then, Al, maybe just a quick question for you. Free cash flow conversion in June was somewhat subdued, I think, 61%. Can you just touch on kind of what’s happening there?

And then really longer term on a free cash flow basis, what do you think we need to see for CDW to get back to that double digit free cash flow cadence we used to have? Thank you.

Al Morales, Chief Financial Officer, CDW: Sure, Amit. Nothing too extraordinary there in the working capital front. As as you know, timing can have an effect. We’ve seen stronger growth than we would have expected in the first half, and that does draw upon working capital, including inventory. We are super disciplined about how we use our inventory and making sure we’re getting the right returns, but you’re gonna have some timing effect.

So through the first half, we’re in the 73% range, relative to non GAAP net income. And I would expect, Amit, that for the full year, that that will play out right within our range of 89 90%. So pure timing, I would call the second quarter solid, but we’d expect that the second half would be even stronger.

Carly, Call Coordinator, CDW: Thank you very much. Moving on to the next question. Our next question comes from Harry Reid from Rothschild and Co, Redburn. Harry, your line is now open. Hi, good morning.

Thanks for taking the question. Apologies if I misheard, but I think that you said SG and A as a percentage of gross profit will be in line with Q2 and Q3. That’s two ish percentage point compression in adjusted margin year over year. Just wondering where these costs are coming into the model, given you mentioned that co workers were slightly down year over year? And then I guess the follow-up, is that the main driver that’s essentially decelerating adjusted EPS growth from 7.5% in the first half to, I guess, flatten in H2 implied by the guidance?

Thank you.

Al Morales, Chief Financial Officer, CDW: Yes, sure. Good afternoon, Harry. On the SG and A front, you have it right. The that efficiency ratio of non GAAP SG and A relative to GP for q three would be reasonably consistent with q two, which was 58.1% for the quarter. So on an efficiency ratio basis, you know, I would say that kinda like that’s what we’re looking at largely for the back half.

Now just reminder from the last call, when you think about operating leverage, Harry, and comparing to the prior year, in the first quarter, we had very significant operating leverage down the p and l and including on the expense front. And I mentioned there that we expect we would have some asymmetry for the remainder of the year. The most notable component of that, Harry, is that in comparing to 2024, right, where our results were softer and decelerated through the year, we had pretty significant drawdowns of our incentive compensation accrual. And so, really, what you’re seeing here in q two and kind of for remainder of year is just negative compares versus the prior year where those accruals were coming down. The only other factor, Harry, that maybe I would point out is, look, we’ve done, I think, a really nice job being disciplined about our spending.

But the reality is over a number of quarters, our gross profit growth has been a bit lighter than we would have hoped. So we’re at a spot that while we continue to drive for operating leverage and expense efficiency, our current expense base is kinda geared towards a bit higher gross profit growth. Now if we achieve the level of growth that we would hope for, we’re gonna go grow right back into parity with respect to our expense base, and, that’s how we’d see that playing out as we go forward.

Carly, Call Coordinator, CDW: Yeah. That makes sense. Thank you. Thank you very much. Our next question comes from Samik Chatterjee from JPMorgan.

Samik, your line is now open.

Samik Chatterjee, Analyst, JPMorgan: Yes. Hi. Thank you for taking my questions. Maybe for the first one, Chris, curious, I mean, a lot of investors have been asking us about how customers are responding to the provisions under the big beautiful bill and if there is any sort of discussion around access spending from customers to take advantage of some of those provisions like we saw in 2018. Any discussions with customers on that front?

Any insights you can share about how customers are even looking at some of those provisions or reacting to it? And then I have a follow-up.

Chris Leahy, Chair and Chief Executive Officer, CDW: Yeah. Sure, Samik. I think there there are really two buckets when I think about commercial cup customers. Those who, will potentially benefit from the changes in CapEx. And so we are having conversations about that.

That’s a that’s a tailwind in some ways. And then I say on the on the state and local and federal side, it’s, you know, what are they potentially going to be defunded in and where are they going to receive funding? So when I think state and local, for example, you know, we we view some of the funding as shifting from fed to state, and state organizations are gonna have to pick that up. But then you’ve got specific federal agencies that are very much the beneficiary, and we’re focused on those. So it’s really on the commercial side, what are the things that benefit the company.

And in the federal and state, it’s really the the puts and takes of where the funding is going. And those are the conversations we’re having right now with our customers.

Samik Chatterjee, Analyst, JPMorgan: Got it. Got it. And for my follow-up, maybe this is more for Al. Al, more curious about the guide, what’s implied for 4Q earnings because with the first half and your guide for the third quarter, it looks pretty conservative for 4Q earnings and looks like unless you’re down year over year on earnings for 4Q, start to get to a low single digit growth for the full year. Anything to call out there in terms of what impacts 4Q seasonality or what’s driving the conservatism on the implied 4Q earnings, guide?

Thank you.

Al Morales, Chief Financial Officer, CDW: Yeah. Sure, Samik. I wouldn’t point out anything very particular. I would say both q three and q four, we have a level of, conservative conservatism baked in. The most notable, components, as Chris, suggested were are more in the federal and the education space.

The only thing maybe I would add otherwise is, as you know, corporate can be stronger in q four, kinda with the year end push. And, you know, there, we are being more modest than what we’ve seen in the first half. So that may have some effect on Q4 seasonality, but I wouldn’t call anything else out as remarkable.

Samik Chatterjee, Analyst, JPMorgan: Okay, great. Thank you. Thanks for taking my questions.

Carly, Call Coordinator, CDW: Thank you very much. Our next question comes from Assia Merchant from Citigroup. Assia, your line is now open.

Assia Merchant, Analyst, Citigroup: Great. Thank you for taking my questions. Good morning. On the decrease in gross profit margins, I know that’s been happening for a few quarters now. I think you called out data storage servers, NetComm products.

Can you just help us explain like is it a function of pricing that you’re not being able to is competitive environment where you’re not able to pass through pricing? And, you know, where does that kind of bottom out in terms of gross margins on those products? Thank you.

Al Morales, Chief Financial Officer, CDW: Yeah. Good morning, Asiya. So a couple things that I point out. Maybe just I’ll start with quarter over quarter. So I think it is notable, to to indicate that.

Quarter over quarter, when you exclude or isolate the effect of netted down revenues, that non netted down margin was actually up 10 basis points, quarter over quarter. So that’s been a metric we’ve been tracking, Assia, and that was flat to slightly up. So I’d say, somewhat reassuring in that regard after several quarters where that non netted down margin had trailed off. On the year over year, the comparison’s a little bit different. Number one, definitely impacted by the dilution of netted down revenues, and I spoke to that.

But that does that that does have a factor. Let’s remind ourselves that netted down revenues come in a 100% gross margin. So any dilution or drop off of that category will have a pretty profound impact on our gross margin. And then the other factor year over year was with our strong solutions. We saw a significant mix in from enterprise customers and some pretty big deals.

And very commonly, in those cases, they will come out a bit lower margins. And so that had some effect on our gross margin year over on a year over year basis. Again, I would just say caution against over extrapolating while we’re pleased with the spend we saw in solutions and certainly that enterprise customers showing up as more resilient. We’re not overreacting to the margin effect at this point.

Assia Merchant, Analyst, Citigroup: And if I look at that same metric, you know, if I look at it for for the guide for the remainder of the year, should I be expecting those levels to be consistent or tick down for fiscal twenty five relative to fiscal twenty four just given the performance year on year for the first half?

Al Morales, Chief Financial Officer, CDW: No. We are not presuming that you’re gonna see continued degradation. Our guide for gross margin for the full year is still reasonably similar to 2024 levels.

Assia Merchant, Analyst, Citigroup: Okay. Thank you.

Carly, Call Coordinator, CDW: Thank you very much. Our next question comes from Ruplu Bhattacharya from Bank of America. Ruplu, your line is now open.

Ruplu Bhattacharya, Analyst, Bank of America: Hi. Thanks for taking my questions. The first one for Chris. You had strong growth in client devices and Chris you talked about refresh. Are customers taking this opportunity to upgrade their devices on the client side?

Are they upgrading to things like AI PCs? And are you seeing any AI driven demand on the data center side in terms of servers? So just an overall, your thoughts on how AI is impacting your revenues? And I have a follow-up.

Chris Leahy, Chair and Chief Executive Officer, CDW: Yeah. I will sure. On the PC side, I would say that, the refresh discussion and the Win 10 expiration continues to be the key driver. Conversations in some, and purchasing of AIPCs is picking up, but I think we you know, I’d say we’re middle innings of the client device, refresh, and we’re kinda early innings of the AIPC uptick. On the infrastructure side, yes, those conversations are, in every discussion we have about infrastructure generally, and we’re seeing some good headway there.

Regarding AI, I think you just asked a general question on AI. I tell you that, customers across the board right now feel like, they are moving from experimentation to a higher degree of importance and urgency around AI and the impact it can have from client devices all the way into the infrastructure. So we are seeing those conversations pick up quite a bit. We feel very well positioned to help our customers in those conversations across the full stack. We’ve said before, you know, AI is embedded in every layer of the stack, and our full our full stack approach allows us to have those conversations and help customers design for appropriate AI uses in the future.

The other thing is every part of the life cycle that customers are interested in, whether it is a generative AI, whether it’s agentic AI, whether it is prescriptive or predictive AI, we have consulting services that support our customers there. So the team has been incredibly involved in in customer conversations soup to nuts about what does AI mean. Let’s unpack it. So we’re feeling positive. We are seeing an impact on revenue on the, on the hardware side, just picking up.

But, really, it’s at the front end with the consulting, and it’s starting to pick up in our managed services area. I I just think we’re at an inflection point with customers around AI, and, it’s becoming much more part of the conversation, which excites us.

Ruplu Bhattacharya, Analyst, Bank of America: Okay. Thanks for the details there, Chris. For for my follow-up, if I can ask you, in this environment, do you see scope scope for M and And if so, which areas would you focus on? I think you said your services business is growing strong. So would that be an area or in terms of cloud or any thoughts you can give on the size or any potential thoughts you have in terms of scope or or end markets or or products?

Thank you so much. I appreciate all the details.

Chris Leahy, Chair and Chief Executive Officer, CDW: Yeah. No. Sure, Rupul. I I you know, it’s our our standard approach is still still holds and that we look to grow the capabilities in areas that are high relevance, high high growth, high margin, for our customers. We look at services led capabilities in particular.

It we look at industry vertical, capability. So, you know, you think across the board of technologies, AI, cloud, security, manage, those are all good buckets to think about. When you think about the types of things that, would help us propel our growth, services is at the top of the list. And I’m sure you’ve noticed we’ve just hired a new, executive chief services and solutions officer. We’re quite excited about, we consider services to be a main growth engine of the business.

And so you can imagine that we’re focused on aggressively investing behind that area. So that’s that’s how I think about it. It’s it’s broad based. It’s things that drive relevance, things that drive growth, and things that fuel our full stack, full life cycle positioning in the business.

Ruplu Bhattacharya, Analyst, Bank of America: Okay. Thank you for all the detail.

Carly, Call Coordinator, CDW: Thank you very much. Our next question comes from Keith Housum from Northcoast Research. Keith, your line is now open.

Steve O’Brien, Earnings Call Host, CDW: Great. Good morning, guys. I appreciate it. There’s commentary regarding large deals that probably so I assume the large deals are performing better than, the run rate or the SMB business. Is this a trend that we see kind of developing through the rest of the year that more of the spending is gonna be coming from the large companies?

Al Morales, Chief Financial Officer, CDW: Good morning, Keith. This is Al. I would not anticipate that that’s going to be outsized, right? While it was more significant in the quarter, we’re not factoring that into our outlook. You know, what I would say, maybe leave you with, is we’re pleased that we’re seeing a breadth and depth of end market show up.

Now we have the effect from education and government, but you’re seeing the power of our diverse end markets here, and in this case, enterprise. But I would expect that for the remainder of the year, it’s gonna be more balanced in terms of end market contribution.

Steve O’Brien, Earnings Call Host, CDW: Okay. Great. Actually, that’s all I have. Appreciate it. Thank you.

Al Morales, Chief Financial Officer, CDW: Thank you.

Carly, Call Coordinator, CDW: Thank you very much. We currently have no further questions. So I just like to hand back to Steve O’Brien for any further remarks.

Steve O’Brien, Earnings Call Host, CDW: Over to Chris.

Chris Leahy, Chair and Chief Executive Officer, CDW: Alright. Let me close by once again thanking our eight 15,000 coworkers around the globe for their ongoing dedication to serving our customers. You are our true competitive advantage and the sole and reason why we consistently deliver meaningful value and exceed our customers’ needs and expectations. You are the reason we have and will continue to lead the industry. Thank you to our customers for the privilege and opportunity to serve you and repeatedly earn your trust, and thank you to everyone listening for your continued interest in CW.

Al and I look forward to talking to you next quarter.

Carly, Call Coordinator, CDW: As we conclude today’s call, we’d like to thank everyone for joining. You may now disconnect your lines.

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