CDW Corp Q3 FY2025 earnings call

• Chris Leahy began with a high-level overview of third quarter financial and strategic performance, noting customer priorities like security enhancements, client device upgrades, and AI trials driving growth in cloud, software, and services.
• Highlighted the balanced portfolio of diverse customer end markets, with 5 U.S. sales channels and strong U.K. and Canadian operations. Each channel is a $1 billion-plus business annually.
• Emphasized the breadth of full stack full life cycle offerings, with hardware, software, and services each having distinct performances. Services was a standout, growing 9% and contributing 9% of total top line.
• Discussed strategic investments, including embedding AI into core operations to provide enterprise-grade AI solutions for customers, as seen in a project with a national service company.

Consolidated net sales in the third quarter were $5.7 billion, up 4% year-over-year. Gross profit was $1.3 billion, up 5%. Non-GAAP operating income was $531 million, down 1%; non-GAAP net income per share was $2.71, up 3%; adjusted free cash flow was $209 million. Small Business delivered double-digit growth in top line and gross profit, powered by cloud and client device solutions. Corporate had mid-single-digit top line growth and low single-digit gross profit, with strength in security and cloud gross profit and top line, and client devices also a priority. Public team delivered 1% top line growth with low single-digit gross profit, government net sales increased 8%, state and local had double-digit net sales and gross profit growth offsetting federal decline. Education net sales declined 9%, but gross margin benefited from K-12 mix shift and cloud/software growth. Healthcare gross profit grew faster than 7% top line growth, driven by cloud solutions. U.K. and Canadian operations (other) increased net sales by 9%, profitability growth faster than sales. Hardware top line increased 3%, software 4%, services up 9% top line, contributing 9% of total CDW top line this quarter, with professional and managed services seeing double-digit top line and profit increases.

Maintains prudent full year outlook with U.S. IT market growth expected in low single digits on customer spend basis and CDW growth premium of 200 to 300 basis points. Considers government shutdown impact as conservative in Q4 outlook. Expects 2025 full year IT market low single-digit growth, low to mid-single-digit gross profit growth, second half gross profit contribution slightly above first half but lower than historical split, and full year non-GAAP net income per diluted share to grow low single digits year-over-year.

Potential impact of government shutdown on federal results and other end markets like healthcare and education. Economic uncertainty, higher inflation, increased geopolitical unrest, and outside changes to announced tariffs. Health care clients relying on Medicare payments facing potential funding shifts causing customer hesitancy.

Q: Amit Daryanani from Evercore ISI asked about the impact of the current shutdown on the guide and whether lost dollars from shutdown will be caught up eventually.

A: Christine Leahy said the teams have navigated well but Q4 is conservative with assumption of shutdown persisting, noting history shows sales are timing issues but it's a traditional scenario.

Q: Keith Housum from Northcoast Research inquired about PC/endpoint market future and government funding contribution to education and healthcare.

A: Christine Leahy said healthy demand for PCs to continue over next couple of quarters with drivers like Windows 10 end-of-life transition and GenAI productivity, and discussed federal funding dynamics for education and healthcare.

Q: Erik Woodring from Morgan Stanley asked about environment complexity impact on gross profit dollar growth and return to high EPS growth.

A: Christine Leahy attributed to volatility; Albert Miralles said sustaining gross profit growth, progressing on gross margin, and achieving operating leverage are needed to return to high EPS growth.

Q: Samik Chatterjee from JPMorgan asked about services growth, AI deployments, and M&A thoughts.

A: Albert Miralles said strong services growth with data, AI, security, and cloud as focuses, and continues to evaluate M&A opportunities.

Q: Harry Read from Rothschild & Co. questioned SG&A growth and Q4 gross profit outlook.

A: Albert Miralles explained comparison to prior year incentive compensation and expected parity between gross profit and expense growth.

Q: David Vogt from UBS asked about healthcare impact and margin trends.

A: Christine Leahy said healthcare has been strong but monitors funding shifts; Albert Miralles noted near-term margin stability and potential improvement from services growth.

Q: Adam Tindle from Raymond James inquired about 2026 planning cycle and services value creation.

A: Christine Leahy said focuses on high-growth, relevant services offerings, continues to invest in services, and monitors M&A opportunities.