CDW Corporation (CDW) Earnings

Management highlights

- **Leadership Transition Announcement**: CFO Al Morales plans to retire in 2027 after an extensive career. He will remain in his role until a successor is appointed, then serve in an advisory capacity to ensure a seamless transition. The search for a new CFO is currently underway. - **Core Q2 2026 Financial Results**: The quarter delivered all-time quarterly records for net sales, gross profit, and non-GAAP EPS. Net sales hit $6.6 billion (+10% YoY); gross profit hit $1.3 billion (+6% YoY); non-GAAP operating income hit $556 million (+7% YoY); non-GAAP diluted EPS hit $2.91 (+12% YoY). Results reflect the strength and resilience of CDW's business model amid AI-driven market complexity, pricing volatility, and ongoing memory supply challenges. - **Key Performance Drivers**: 1) A diversified, balanced end market portfolio with dedicated sales teams and deep industry expertise across all segments; 2) Broad full-stack, full-lifecycle offerings that capture demand across evolving customer priorities and technology trends; 3) A sustained growth strategy centered on CDW's enduring role as a trusted partner for complex technology integration. - **AI Strategic Positioning**: AI is increasing customer need for CDW's services, as AI adoption is an architectural challenge that spans on-premise, public cloud, edge, and hybrid environments, requiring integration, security, governance, and risk management. CDW is already capturing opportunities across infrastructure, security, data integration, and lifecycle support, with multiple multi-million dollar client engagements demonstrating scalable, recurring revenue AI solutions, which the firm is productizing for broader market delivery. CDW is also deploying AI internally to improve customer experience, boost coworker productivity, and generate operating leverage, with tools like CDW Assist SuperAgent embedded across sales, finance, and operations. - **Capital Allocation Priorities**: 1) Grow the dividend in line with non-GAAP net income growth, targeting a ~25% payout ratio; 2) Maintain a target net leverage range of 2-3x (Q2 2026 leverage was 2.5x, within target); 3) Pursue opportunistic M&A that expands CDW's capabilities and customer relevance; 4) Repurchase shares to deliver shareholder value, with over $1.1 billion in remaining repurchase authorization as of Q2 end. - **Operational Efficiency**: Non-GAAP SG&A as a percentage of gross profit fell 20 basis points YoY and 410 basis points sequentially. The Geared for Growth efficiency initiative is progressing at or above expectations, with benefits expected to materialize in the second half of 2026. Total coworker count ended at ~14,700 (customer-facing count at 10,300), both down modestly YoY and sequentially, as the firm balances capability expansion with cost efficiency.

Guidance

- Management increased the full year 2026 outlook, citing robust underlying demand, strong backlog, and solid Q2 performance. - CDW expects the 2026 U.S. IT addressable market to grow in the mid-single digits on a customer spend basis, with CDW outperforming by 200 to 300 basis points. - Full year 2026 gross profit is expected to grow mid-single digits, with a more second half-weighted seasonality split than originally anticipated. - Full year 2026 gross margin is expected to be modestly below full year 2025 levels (but still well above levels from three or more years ago), with second half 2026 gross margin expected to be below second half 2025, due to current product mix weighted toward lower-margin large enterprise infrastructure deals. - Full year 2026 non-GAAP diluted net income per share growth is expected to be at the high end of the high single-digit range over 2025, driven by expected gross profit performance, increasing operating leverage from Geared for Growth, and disciplined execution. - For Q3 2026, management expects mid-single-digit year-over-year gross profit growth, with non-GAAP SG&A lower than Q2 2026, leading to non-GAAP operating expense as a percentage of gross profit falling both YoY and sequentially. Q3 non-GAAP diluted EPS is expected to grow at the high end of the high single-digit range YoY. - Free cash flow conversion is expected to normalize to the 80-90% of non-GAAP net income target over the second half of 2026, after a lower year-to-date conversion driven by working capital investments for inventory. - Currency is expected to provide a slight benefit to 2026 reported growth rates.

Segment performance

CDW operates across five core customer segments, with the following Q2 2026 net sales performance (year-over-year): 1. **Commercial**: +9% net sales growth. Corporate sub-segment grew 11% driven by infrastructure modernization, cloud, and AI readiness demand; Healthcare grew 9% driven by demand for AI-enabled mission-critical tools; Financial services grew 2% with continued healthy customer demand. 2. **Government**: +14% net sales growth, driven by improving federal demand and ongoing momentum across state and local customers, with clients prioritizing infrastructure, software lifecycle management, and productivity initiatives. 3. **Education**: +1% net sales growth. K-12 demand remained healthy with a strong mix of software, services, and lifecycle offerings despite fulfillment timing shifts; Higher education continued to operate in a constrained funding environment. 4. **International (UK + Canada)**: +23% net sales growth, led by a record quarter in Canada and continued strong momentum in the UK. Both markets delivered mid-teens or better local currency growth, with healthy demand across hardware, software, and cloud categories. By product category: - **Hardware**: +10% revenue growth. Server, storage, and networking delivered double-digit growth; notebooks and desktops grew a combined 10%, with higher average selling prices offsetting lower unit volume. - **Software, Cloud, and Security**: All delivered healthy top-line and gross profit growth. Software grew low double digits driven by security, application suites, and management software; cloud grew robustly driven by application modernization, AI evaluation, and hybrid environment optimization (memory price inflation also pushed customers toward cloud alternatives to direct hardware purchases); security grew double digits on both top-line and gross profit, driven by demand for governance, compliance, and advanced architecture protection. - **Services**: +1% revenue growth, with slower growth driven by current customer focus on hardware and cloud investments and deployment timing shifts.

Risks & headwinds

- Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from current expectations, with additional detailed risk disclosure available in CDW's SEC filings. - The current market environment remains dynamic, with ongoing pricing volatility and memory supply challenges that impact customer spending behavior and product margins. - Higher-than-expected working capital investments in inventory to meet customer demand have reduced near-term free cash flow conversion, though management expects this to normalize over the second half of the year. - Customer AI adoption follows a multi-stage cycle, with near-term mix weighted toward lower-margin infrastructure that temporarily suppresses overall gross margin and services revenue growth, even as it builds future higher-margin services opportunities. - Macroeconomic uncertainty continues to lead to cautious customer spending, even as demand for mission-critical and AI-related technology remains healthy.

Analyst Q&A

• Q: How does AI customer deployment impact CDW's business and what are the key tailwinds for the firm from AI adoption? /

  A: AI adoption is growing first in the enterprise segment and now broadening across all industries and customer sizes. CDW is scaling proven use cases into repeatable offerings across market segments. AI is a full-stack opportunity that impacts nearly all of CDW's hardware, software, and service offerings, aligned with the firm's existing model of integrating disparate technology components for customers. Customers are increasingly focused on ROI analysis for AI projects, which plays to CDW's strength in supporting solution design and delivery. Management expects accelerating tailwinds for both hardware and AI-related services going forward.

• Q: Is there any like-for-like margin pressure from pricing competition, and what drove the current gross margin profile in Q2? /

  A: There is no meaningful like-for-like margin pressure, as CDW maintains consistent pricing discipline and effectively passes through cost increases. The lower gross margin in Q2 is purely driven by product and customer mix: more large-dollar enterprise infrastructure orders (which carry slightly lower margins) and a lower relative contribution from higher-margin services in the quarter. Management highlighted that netted-down revenues grew 16% YoY and now represent 36% of gross profit, demonstrating core business margins remain healthy.

• Q: How should investors think about AI services attach rates and margin impact for AI-focused deals over time? /

  A: Services are embedded in every stage of the AI adoption cycle, from initial readiness and deployment to integration, optimization, and ongoing operations, creating consistent attach opportunity. AI adoption is broadening beyond large enterprise into mid-market and smaller customers, and CDW is productizing scalable AI solutions to capture this demand. As inference moves to the edge, additional demand for edge infrastructure, networking, and security will further increase services demand. Management expects AI services to be an increasingly meaningful contributor to long-term profit growth for CDW.

• Q: How is customer demand holding up amid ongoing price increases from OEMs, and are customers shifting spending away from non-discretionary initiatives? /

  A: Customers are more rigorous in analyzing technology purchases and pricing, but remain willing to spend on mission-critical initiatives, and in many cases are reallocating budget from non-technology functions to technology due to the business criticality of AI and modernization. There is some difference in pace of adoption across customer segments: enterprise customers are more immediately aware of pricing changes and adjust faster, while mid-market and smaller customers adjust at a slightly slower pace. Management does not see services permanently displaced by hardware infrastructure spending; infrastructure investment is the first stage of the AI cycle, with services demand expected to pick up as projects move from procurement to implementation.