CDW Corp. Stock

Hello, everyone. Thank you for joining us, and welcome to the CDW Third Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Steve O'Brien with Investor Relations. Steve, please go ahead.

Thank you, Joel. Good morning, everyone. Joining me today to review our third quarter 2026 results are Chris Leahy our Chair and Chief Executive Officer; and Al Miralles, 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 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 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.

For instance, non-GAAP operating income, non-GAAP operating income margin, non-GAAP net income and non-GAAP earnings per diluted share, non-GAAP selling and administrative expenses and non-GAAP effective tax rate. Net sales on a constant currency basis, free cash flow and adjusted free cash flow. 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 made available on our website and in our earnings release. Please note, all references to growth rates or dollar amounts changes in our remarks today are versus the comparable period in 2025 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.

This conference call is 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.

Thank you, Steve, and good morning, everyone. I'll begin with an overview of our third quarter performance progress and outlook. Al will then provide detail on the financial results, capital allocation and expectations for the balance of the year.

The team executed with precision and delivered record performance in a dynamic technology environment shaped by prioritization of infrastructure monetization and AI adoption. For the quarter, net sales increased 18% to $6.8 billion. Gross profit was $1.4 billion, 10% above last year. Expense efficiency delivered operating leverage and non-GAAP operating income increased by 17% to $620 million, while we continue to invest in our coworkers industry specialization and AI capabilities.

Opportunistic share repurchases contributed to 20% growth in non-GAAP net income per diluted share of $3.26 and disciplined working capital management converted performance into adjusted free cash flow of more than $500 million. These results demonstrate the power of our model capture demand wherever it is most impactful to our customers and convert it into profitable growth.

Meeting customer priorities drove record quarterly sales in both hardware and software with both contributing to double-digit gross profit growth. Momentum in AI enterprise adoption drove strong infrastructure investment, propelling hardware growth ahead of software. This delivered significant profit dollars today and opportunities for solutions and services over time.

Capturing demand where it matters most to customers means mix will vary quarter-to-quarter. We expect that. What does not change is the underlying trajectory. Our strategy is driving stronger economics over time. Over the past 5 years, gross profit has increased at more than twice the rate of net sales. This quarter's performance reflects the power of strong execution and value of our deep industry and technology expertise.

Let's take a look at the 3 drivers of performance this quarter. The breadth and depth of our customer end markets, our full stack full life cycle portfolio and our growth strategy, which underpins our value proposition in an AI forward world.

First, our customer end markets. Our 3 U.S. segments are commercial, government and education our U.K. and Canadian operations are reported as Other. Within each, we align resources by customer type, size and complexity. Our unmatched scale powers this level of segmentation. Customer breadth sharpens our view of where demand is moving, and our deep specialization turns that insight into precise execution for each customer end market.

With hundreds of thousands of customers, we had a unique view of technology priorities and how they are evolving. And what we see is convergence. Customers are modernizing and optimizing their foundations, advancing their AI priorities and demanding measurable returns on technology investments.

We also see a familiar pattern in technology adoption. AI is starting with infrastructure for large sophisticated customers expanding across the stack and then out to the mid-market, small business and public sector. Across those markets, customer priorities are consistent. What differs is the outcomes customers are solving for. You see that in this quarter's broad-based growth, commercial top line increased 21%, international 26%; government 10% and education, 8%.

For commercial, capacity and productivity drove investment. Corporate customers built more resilient, scalable environments to support increasingly complex workloads, driving investment across infrastructure modernization, cloud, AI readiness and more capable client devices.

Small businesses emphasize productivity, cost control and security. For Financial Services, it was speed with control, investing to act on data faster, strength and resiliency and improved decision-making while maintaining security, governance and cost discipline. For Healthcare, doing more with constrained resources remain the top priority, investments centered on improving clinical workflows and operating efficiency while managing continued reimbursement and funding pressures.

For government, technology investment was tied directly to mission. Federal and state and local customers prioritized operating efficiency and control of critical data and infrastructure. Education institutions invested to secure learning environments, improved student outcomes and ensure responsible AI adoption with K-12 extending device lives and higher education emphasizing optimization, security and greater value from data. And international reflected many of these same priorities, modernization, resilience and efficiency drove more than 20% growth in both the U.K. and Canada.

Success addressing distinct end market priorities underscores the value of our second performance driver, our full stack full life cycle portfolio which delivers multiple paths to growth. Investments in modernization and AI prioritization pulled through demand across the technology stack, driving excellent performance across hardware and software. Availability of product and delivery conditions showed signs of normalizing with fewer surprises than earlier in the year.

Hardware increased 21%, driven by modernization, including AI-related investments from foundational infrastructure to significant AI factory deployments. Data storage and servers more than doubled while NetComm increased 9%, investments that create follow-on opportunities across the life cycle.

Client device performance was also strong, up 19%. Customers invested in greater processing power, memory and security to support evolving workloads and extend device lives. Although unit volumes declined, higher average selling prices more than offset the decline, reflecting both price increases and demand for more capable configurations.

Modern technology environments are inherently hybrid, spanning hardware, software, cloud and services. And these environments become more interconnected, customer investment increasingly extends across multiple parts of the technology stack. You see this in our software and cloud performance. Software increased 14%, driven by double-digit growth across network management, virtualization and operating systems. Cloud delivered stellar growth, reflecting broad demand across SaaS and ID solutions and workloads. Services lead, enable and extend the technology life cycle.

Professional and managed services returned to growth, up 2%. Performance continued to reflect the timing of large deployments with services opportunities following as deployments move through the technology life cycle. Our ability to capture opportunities across the full technology life cycle is underpinned by our third performance driver, our growth strategy.

Our growth strategy is anchored in our North Star, relevance. Relevance defines how we win. Scale sustains it with reach and insight. Specialized expertise turns that insight into action and repeatable solutions extend our impact. And today, relevance matters more than ever. Today's technology decisions are business decisions and mission decisions. As the stakes rise and AI investment grows, decisions are more consequential than ever. And getting those decisions right starts with the right foundation, data.

Turning enterprise data and context into trusted intelligence is essential to scaling AI. AI adoption is creating an explosion of data, much of it fragmented across applications, cloud and infrastructure. trusted, secure and usable information is essential. Our recent addition of Lovelytics deepens the expertise we bring to this foundational work across data strategy and engineering, analytics, generative AI and machine learning and data migration and modernization.

AI is in a consequential phase of its acceleration. The market is shifting from experimentation and task level productivity to production, workflow, redesign and performance. As it moves from fulfilling more tasks to changing how work gets done, AI unlocks greater productivity, capacity, speed, innovation, better decision-making and results, realizing that potential starts with the outcome.

CDW's AI-first perspective puts outcomes first, then builds the strategy around what must connect across both the technology and the organization to deliver it. Customers will move at different speeds and from different starting points, but the 6 AI imperatives are the same.

Enterprise data needs to become trusted intelligence. Infrastructure must be ready. AI needs to move into applications and workflows and security, governance and economics must keep pace. Bringing those elements together is at the heart of what CDW does, we orchestrate environment, connecting across the technology stack to deliver outcomes.

Our position at the center of the technology ecosystem makes this orchestration possible. No single vendor can address every requirement. We connect partner innovation and customer needs, bringing together the right technology expertise and services. Few providers can bring it all together, CDW can.

Significant AI capacity has been built. Return on that investment depends on adoption and sustained consumption. We know how to drive both. Our cloud performance demonstrates our success connecting innovation to customer needs and turning partner capacity into sustained consumption. AI is broader and more complex making our role even more valuable.

AI momentum is building across the enterprise market, and we are selectively serving customers in this space, including those at the cutting edge, while staying disciplined on economics and returns. Now the next phase of adoption is underway, broadening into the mid-market, small business and public sector.

Across these markets, teams are accelerating adoption and turning it into sustained consumption. Here's a customer example that shows what that looks like in practice. A major international airport goal was clear: [ move is ] critical terminal transportation system toward near 0 outages. The team developed a solution that seamlessly brings together AI, computer vision, LiDAR, telemetry, machine learning and advanced infrastructure. This integrated solution continuously monitors the entire system and identifies potential issues before they disrupt operations, enabling corrective actions sooner.

The outcomes matter. Greater system reliability, reduced downtime, more efficient use of maintenance resources and better experience for the millions of passengers who rely on one of the world's busiest airports. And for CDW, related production monitoring and cloud analytics opportunities total about $2 million.

This is orchestration in action, connecting technology, services and expertise to deliver a critical business outcome. It's also a great example of how we are turning what was once bespoke into repeatable solutions and what is repeatable into scalable outcomes. We built an AI IoT solution that is extensible across multiple operational environments from transportation systems to water and power infrastructure.

This is how our AI flywheel works, solve, learn, repeat and scale across industries, customer sizes and stages of adoption. Because for our customers, the larger AI opportunity is not simply doing tasks faster, the opportunity isn't changing how customers operate to deliver meaningful outcomes. Helping customers achieve this quickly and efficiently requires even more than a broad portfolio and the ability to connect technologies that requires the scale to turn insight into precision to deliver faster, more cost-effective time to value. And our scale is a compounding advantage that extends well beyond AI.

As technology change accelerates across the ecosystem, our deep customer understanding positions us to capture demand wherever customers invest. That leads me to our outlook. Current market conditions remain constructive. Customer engagement and written demand remained healthy. Writings continue to outpace invoicing and backlog is building, particularly in enterprise infrastructure.

Given this backdrop, we are increasing our full year outlook. We now expect the U.S. IT addressable market to grow at a high single-digit rate in 2026 on a customer spend basis and we see 300 to 400 basis points of CDW outperformance compared to the market.

The opportunity ahead is significant. Technology is undergoing tectonic change. In an AI forward world, we translate customer investment into outcomes and partner innovation into adoption and sustained consumption. Demand will shift, technology will evolve what endures is our relevance, powered by advantages that compound, unmatched scale, deep customer relationships, specialized expertise and a unique position at the center of the technology ecosystem. That gives us confidence in our strategy, the opportunity ahead and the forward earnings power behind today's dividend increase. With that, let me turn it over to Al.

Thank you, Chris, and good morning, everyone. I'll begin with details on our third quarter performance, move to capital allocation priorities and then finish with our outlook for the remainder of 2026. As Chris mentioned, this quarter, demand was strongest in AI-driven hybrid infrastructure and data center modernization, particularly in servers, storage and cloud, and we're also seeing those investments pull-through opportunities across networking, data governance, security and services.

The AI market is increasing both the scale and complexity of customer technology environments. Customers are evaluating how infrastructure, cloud, data, application security and endpoints work together in a secure, governed and cost-effective architecture reinforcing the value of CDW's full stack full life cycle model.

Third quarter gross profit of $1.4 billion increased 10.3% year-over-year. This is well above our expectation for a mid-single-digit year-over-year increase. Spending is increasingly tied to measurable efficiency gains, data governance and cost optimization with focus on ROI.

Third quarter gross profit gross margin was 20.5%, down 140 basis points year-over-year, but up 40 basis points from the second quarter. As we've discussed in prior quarters, gross margin will vary with changes in product and end market mix. In the current environment, our mix continues to be weighted towards large infrastructure projects, which carry higher hardware content.

We experienced meaningful growth in cloud, SaaS and IaaS solutions which are transferred at a point in time where CDW is aging, also known as our netted down business. Demand also remains strong among large enterprise and financial services customers, making significant investments in hardware infrastructure, particularly servers and storage. These large projects generated meaningful gross profit dollars and helped to drive upside to that end in the third quarter. Over time, they also create opportunities for additional solutions and services.

Netted down revenue streams increased 17.1% year-over-year and accelerated from the second quarter growth. They represented a record 38.2% of gross profit, up 220 basis points year-over-year and 230 basis points quarter-over-quarter. Professional and managed services returned to growth in the quarter, while continuing to be impacted by deployment timing and customer prioritization of hardware and cloud investments. As infrastructure, security and AI projects through from procurement, implementation, integration and ongoing management, we continue to expect services opportunities to follow.

Turning to expenses for the third quarter. Non-GAAP SG&A totaled $766 million, up 5.6% year-over-year. The increase is primarily incentive related reflecting higher performance-based compensation tied to stronger gross profit growth. As expected, we began to capture benefits associated with our geared for growth efforts. As a percentage of gross profit, non-GAAP SG&A was 55.3%, an improvement of 240 basis points year-over-year and 260 basis points from the second quarter, consistent with our prior expectation for improvement on both a year-over-year and sequential basis.

Keep in mind that Geared for Growth's long-term objective is durable operating leverage which incorporates both expense efficiencies and savings used for reinvestment. Seasonality impacts the expense leverage ratio, so improvement will not always be linear on a sequential basis.

Coworker count totaled 14,600, while customer-facing coworker count was approximately 10,500. Our head count in the quarter reflects the addition of approximately 600 new coworkers from the Lovelytics acquisition. We remain laser-focused on our goal to balance growth, expansion of capabilities and exceptional customer experience with greater efficiency and cost leverage from our broader operations.

Non-GAAP operating income was approximately $620 million, up 16.8% year-over-year demonstrating strong operating leverage. Notwithstanding the lower gross margin profile of the business compared to the prior year, non-GAAP operating income margin was solid at 9.2%, highlighting the flexibility of our operating model.

Net interest expense was in line with our expectations at $66 million. This year, interest expense has been influenced by higher average borrowings under our revolving loan facility and lower interest income on cash balances. Our non-GAAP effective tax rate was within our range at 26%. Non-GAAP net income was $410 million, up 14.8% year-over-year. Third quarter non-GAAP net income per diluted share was $3.26 up 20.4% year-over-year, well above our expectation for growth at the high end of high single digits, impacted by the strong operating performance combined with our opportunistic share repurchases through 2026.

Moving to the balance sheet. At period end, net debt of $5.6 billion and liquidity was $3.4 billion with cash plus revolver availability. During the quarter, we issued $1.5 billion of new senior notes. We will use the net proceeds to repay our $1 billion December 2026 senior notes at maturity with the remainder used to fund the Lovelytics acquisition.

The 3-month average cash conversion cycle was 20 days, within our targeted range of high teens to low 20s. We continue to believe our target cash conversion range remains the best guidepost for modeling working capital longer term. Adjusted free cash flow was $506 million in the quarter or 123% of non-GAAP net income driven by profit growth and disciplined working capital management.

That brings year-to-date adjusted free cash flow to $785 million or 73% of non-GAAP net income, slightly below our stated long-term rule of thumb of converting 80% to 90% of non-GAAP net income to cash, but demonstrating significant progress towards this annual role.

We have line of sight towards achieving our cash flow objectives. This year, we've been focused on managing these objectives in a way that supports our customers and drive shareholder value even as ongoing hardware-driven growth has warranted investing in working capital.

In the quarter, we utilized cash consistent with our 2026 capital allocation objectives. Returning $108 million through share repurchases and $79 million through dividends. Year-to-date, we've returned approximately $892 million to shareholders or 114% of adjusted free cash flow, well ahead of our 2026 target of returning 50% to 75%. Year-to-date, share repurchases of $653 million already matched our total for all of 2025. We have repurchased a total of 5.3 million shares this year at an average price of approximately $123 per share.

That brings me to our capital allocation priorities moving forward. Our first capital priority is to increase the dividend in line with non-GAAP net income growth. Today, we announced approximately 8% increase in our quarterly dividend to $0.68 per share or $2.72 annually, our 13th consecutive year of an increase. We continue to prudently manage our dividend with respect to the growth environment and target a roughly 25% payout ratio of non-GAAP net income.

Our second priority is to ensure we have the right capital structure in place. We ended the third quarter at 2.5x net leverage within our targeted range of 2 to 3x. We continue to proactively manage liquidity while maintaining flexibility.

Finally, our third and fourth capital allocation priorities of M&A and share repurchases remain important drivers of shareholder value. On September 25, we completed the acquisition of Lovelytics, a leading data and AI services firm for $525 million. Lovelytics expands our capabilities and our services and solution offerings in modern cloud, data and AI. And while we remain active in the M&A market, we will also continue to be opportunistic or towards share repurchases with approximately $1 billion remaining under authorization.

Now turning to our outlook. Budgets remain concentrated on the areas of greatest strategic importance including infrastructure modernization, security and resiliency, cloud adoption and optimization, AI-ready data and applications and targeted device investments, healthy written production and an elevated backlog support our view that underlying demand will remain durable in Q4.

At the same time, we remain balanced given the complex and rapidly evolving technology landscape. Factoring in these variables, we now expect gross profit to grow at a mid- to high single-digit rate for the full year 2026, up from our prior expectation of mid-single digits. This leads to a first half versus second half split in the range of 48% to 52%, which is aligned to historical half -- second half weighted seasonality.

Based on the anticipated mix of products and end markets, we continue to expect full year 2026 gross margin to be down compared to the full year 2025. The outlook for net interest expense is now higher in the range of $255 million to $260 million, driven by the $1.5 billion notes issuance during the third quarter.

Finally, we now expect full year non-GAAP net income per diluted share growth to be in the low double-digit range year-over-year, up from our prior expectation for a high single-digit growth. Please remember, we hold ourselves accountable for delivering our financial outlook on a constant currency basis. On that note, our expectation is for currency to be relatively neutral to reported growth rates for the full year.

Moving to modeling thoughts for the fourth quarter. We anticipate gross profit to increase at a mid-single-digit rate year-over-year, which equates to a seasonal low to mid-single-digit decline sequentially. Moving down the P&L, we expect fourth quarter non-GAAP SG&A to increase at a low single-digit rate year-over-year and sequentially. Non-GAAP operating expense as a percentage of gross profit will demonstrate continued efficiency improvement on a year-over-year basis, driven by our geared for growth efforts.

Finally, we expect fourth quarter non-GAAP net income per diluted share to increase to a low double-digit rate year-over-year. With that, I want to thank our coworkers for an exceptional quarter of execution. Our performance reflects the strength of our customer relationships, the power of our business model and our ability to help customers navigate increasing complexity. This concludes the financial summary. I will now ask the operator to open up for questions. And we would ask each of you to limit your questions to one with a brief follow-up. Thank you.

[Operator Instructions]. Your first question is from David Vogt with UBS.

Appreciate all the detail. Maybe Chris and Al, can you talk to the demand drivers in the quarter? I know you mentioned a lot of infrastructure programs and projects in the quarter. But can you maybe speak to a little bit more granular what you're seeing from a pricing backdrop, a supply chain backdrop and sort of a demand backdrop.

For example, like how much of the strength that you're seeing in server stores, networking infrastructure is price-driven versus demand driven? And are you shipping -- or are you able to satisfy the demand that you see out there? Are there any sort of supply constraints that are maybe potentially impacting your ability to convert that demand into revenue?

David, thanks for the question. And I'd start by saying that we're seeing demand remain resilient. And when you think about what's been driving in it. Obviously, pricing is impacting results. But look, there are needs that the customers are leaning into that we've been seeing very high on the list.

So think AI readiness, I think data growth, network modernization, cybersecurity, resiliency and hybrid architectures, all really in the in the preparation stage for utilizing AI. And what we are seeing is working with customers to make trade-offs in their budgets, in some cases, move to fewer units and higher capacity. But at the end of the day, we see the durability of that demand continuing. In terms of the pricing itself, I'll let Al address that.

Yes. Thanks for the question, David. I would say that the market is still driven by supply variables as well as pricing. But if we look across our different product set, the growth was substantially driven by units, and I'll give you one exception in a second. So if we look at the areas of greatest strength, server storage, definitely strong unit growth strong volume of customer spend coming through. While those buyers are influenced by price, that was not the driver of our growth. It was more so on the unit side.

Now the one stand out in that regard, no surprise would be client devices, that is client devices grew at a nice clip at 19%, units were down and ASPs were up. But I will just note as well on clients. The one kind of kick for us is the ASPs were up partially because customers are choosing to move to more richer configurations. So it's not just price movement.

Great. And maybe just as a quick follow-up. So if I just take your comments around pricing on quant devices units and your netted down mix. Maybe you can flesh out where you saw a little bit of margin pressure. Is it just the configurations within server storage at lower margin or the infrastructure, other infrastructure assets? I'm just trying to get a sense because it looks like your product gross margin ex netted down, maybe ticked down slightly sequentially in the quarter?

Yes. Happy to take that, David. So first, like Chris said, the demand was broad-based across all of our end markets. That being said, our results reflected significant upside relative to our expectations. A good piece of that overperformance came from our enterprise customers and our financial services customers focused on infrastructure. That was not a phenomena of like-for-like margin compression, more a function of mixing strong into particular products and mixing strong into particular end markets like those 2 noted, will have an impact on your margin.

And we do believe that, that is part and parcel to where we are in the adoption cycle with AI. And so at the end of the day, we are most guided by how do we drive gross profit growth, how do we get operating leverage. And so while we care about kind of where we stop the gross margin, it's not the only variable for the quarter.

Your next question is from Amit Daryanani with Evercore.

Congrats on a nice set of numbers here guys. Chris, I just sort of talk about the high single-digit IT spend expectation for the year you talked about. Can you just talk about how the mix been hardware and software sort of tracking? And when you talk to your vendors, you sort of share that sentiment that, hey, demand is much ahead of supply right now, and you sort of echo that as well.

Does that suggest that these high single-digit IT spend growth rates could persist beyond [ down ] to '26? Just trying to get a sense of the durability of the goodness we're seeing over here, especially if demand seems to be in a crisis supply.

Amit, thanks for the question. And yes, look, as I mentioned in the last question, the demand that we're seeing is based on a number of factors, all of which are our customers are not choosing not to purchase. They're just getting really disciplined in what they're buying and how they're buying.

But at the end of the day, the data explosion, the need to be ready for cybersecurity risks that are exponentially expanding and the need for optimization across hybrid infrastructure. We're just finding that to be durable is what I would say. As I think forward, I don't want to project too much forward, but the bottom line is they're evaluating what they need based on the component parts of sorry, being successful in AI. We don't see that dampening any time soon. So I don't want to project into 2027. But what I -- what we see now is strength. We think the underlying demand drivers will continue, and we would expect to take advantage of those in 2027.

And then just a follow-up. I think your gross margin first profit dollars are up 10% year-over-year. Your operating income dollars that were up like 17%. So clearly, some fairly impressive OpEx leverage in the model in the quarter. Can you just talk about what exactly is driving that? Is that the Geared for Growth perhaps ahead of track? You could update us on that. Or were there other factors that helped that OpEx leverage in the quarter?

Yes, I'll take this. Yes, substantially, what you're seeing there in terms of the operating leverage is our Geared for Growth efforts kicking in and those savings coming to fruition in the quarter. So we had previously given indications of what that run rate expense base could look like as we go into 2027, to go into 2028. I would say we are at or above expectations in terms of the progress there in.

The one caveat I would give you is a great print for us in that regard in terms of that SG&A ratio at 55%. But there will be variability in terms of when the savings land relative to our reinvestment. And so therefore, I'll take you back to our commitment is year-over-year improvement in our operating leverage. That does not mean that every quarter will be perfectly linear with respect to the SG&A ratio, but super pleased with our progress to date.

Your next question is from Keith Housum with Northcoast Research.

In terms of the Lovelytics acquisition that just closed here, I guess you got some deep dive a little bit deeper into it in terms of the acquisition you're making in terms of how you guys are going to manage them and integrate within the existing CDW portfolio and the type of revenue synergies that we can expect going forward from the acquisition.

Yes, sure. I'll start. Look, Lovelytics, we're very excited about the acquisition. It's not just a great company. It's a great team of people. And as we've said, it really expands our modern cloud data analytics and AI capabilities that are very much at the front end of AI adoption.

Look, in terms of the integration, we are doing our greenhouse approach, and we've shared that with investors. Before with a company like Lovelytics, the size that they are, the capabilities they have, we like to operate them almost separately for a period of time in CDW as a channel.

The reason is, look, we don't want to overwhelm them. We want to keep the growth going, and we want to be really disciplined about the opportunities from our broad base of customers that we bring to Lovelytics. So far, so good. It's worked in the past, and we're really looking forward to growing that business and utilizing their skill sets across our broad customer base.

And maybe, Keith, I'll just add to your question on how does that get baked into our outlook. Like Chris said, super excited about this business. Our focus, particularly in Q4, is getting off to a great start with respect to our integration and scaling the business.

Our incorporation of Lovelytics in the Q4 outlook is measured, as you would expect from us. And as we look into 2027, we will certainly provide more in terms of what we think the contribution effect is. But you should think of this business as smaller relative to the obvious overall scale of CDW, but growing very fast. And so we're really excited about the prospects of what the future holds here.

Great. If I could just follow up on that. In terms of the financial profile, is it accretive to margins? Or is it a case of more it's a rounding here, and I won't be able to see it?

Gross margins, for sure, accretive, right? It is a professional services business. So the margins are quite rich. Our focus is going to be how do we help them to continue to scale. So we get all of the advantages of those richer margins.

Your next question is from Ruplu Bhattacharya with Bank of America.

The first one is on gross margins. You've talked about AI several times. What percent of revenue or what percent of gross profit were AI infrastructure sales are margins lower on the AI sales? And beyond that, did vendor incentives or competitive pricing have any influence on gross margin? And I have a follow-up.

Ruplu, let me start on that one, and let me zoom way out to start. So when we think about AI, it's not a single product category. It's a multiyear opportunity and a full stack solution. So it's a great question. But if you look at the growth in infrastructure, whether you take a single piece of the hardware or a single GPU, yes, that can be dilutive to our underlying business margins of 21%. But we look at it in the context of our customers' broader imperative to get value out of AI and what's required to deliver on their outcomes.

So we don't think about it as just selling a single component, but selling solutions across the entirety of the infrastructure, data, application layer, workflows, security, and economics. And we are so well positioned with our full stack full life cycle to help our customers connect and orchestrate the spectrum of technology, services and expertise [indiscernible] to help them and to ensure that they work within the confines of their current environment. So that's how we think about bringing value to our customers and ultimately richer economics to the business.

Okay. Chris. For my follow-up, can I ask you raised your target for customer spend to 300 to 400 bps premium to U.S. IT growth, what is driving that more? Is that data center equipment? Or is that on the client devices side? And is any of that -- could any of that be related to a pull forward of purchasing because of fears of component availability or higher pricing going forward? Or do you think that client budgets are actually going up?

Yes, it's a great question. I'd say this. it's both, but more heavily weighted to infrastructure. And we know historically, when we have very, very strong hardware performance that we outperformed the market by several hundred basis points versus our typical 200 to 300 million, and we expect to do the same here.

In terms of pull forward, immaterial, frankly, because when we look at all the leading indicators, we look at writings, we look at invoicing, we look at backlog, we are not seeing what I would say is a flush or pull forward. So we feel confident in our -- in the numbers that we've put out there.

Your next question is from Guy Hardwick with Barclays.

Most of my questions have been answered, but perhaps you could just give a little bit more color as to see tremendous performance in double-digit GP growth at only mid-single-digit growth in SG&A. Just wondering to what extent was the RIF material to that?

And at what point do you guys have to think you've stopped reinvesting in the business? It seems that you guys are net hiring in terms of other roles into some more advanced roles, maybe AI skills, et cetera. So these people will generally be more expensive than perhaps people who have left the organization. So maybe you can give us sort of a few quarters forward-looking outlook in terms of how kind of investments in the business versus the Geared for Growth program.

Yes, happy to take that. So in the quarter, just a reminder, geared for growth is focused on broad productivity incorporation integration of AI in our work processes, looking deeply at our quote-to-cash efforts to figure out how do we kind of create a better experience and streamline the work we do and drivers of efficiency there in.

All of those efforts are in played out with respect to Q3, there certainly is a coworker component that drove some of those savings. I won't parse out all of the details, but I think you can get a sense from that as you unpack the coworker count. So our coworker count was 14,600, about 600 of that is from Lovelytics, so you can get a sense for just the impacts vis-a-vis productivity.

Importantly, and you noted it, we are investing back in the business. And a couple of things I'd note, and Chris may jump in here as well. We are investing in our services capabilities, including deepening our data and AI practice areas, and you saw that with the Lovelytics acquisition. We continue to hone and improve upon our go-to-market engine. And then again, I'll just say that we're focused on our end-to-end customer experience both to cash and how do we really make a better experience for our customers. So -- there are some of the big areas that we've been focused on investing. Some of those are coming to fruition, but expect them to accelerate as we look into 2027.

Yes. The only thing I would add is that these efforts are not purely cost lowering accounts. We're basically changing the way that we operate the business to create durable capacity, to both invest on a continued basis back into the business and to provide returns to our shareholders. So the focus is both on growth overall and efficiency.

Your next question is from Joseph Cardoso with JPMorgan.

Maybe for my first one, I wanted to touch on the commentary around order intake outpacing invoicing and how that's translating into backlog? And maybe more importantly, your visibility. Just curious, given all the dynamics you're seeing if that is driving a greater visibility and how we then historically and how that's translating -- and should we be thinking about that translating to something more multi-quarter in nature and where maybe that backlog build is happening as it relates to the portfolio? And then I do have a follow-up.

Yes. First, on the visibility, I would say, consistent with last quarter, visibility continues to improve. We feel like order times and delivery are largely within reason. There's always exceptions, but for the most part, it's operating in a pretty orderly fashion. So there's that supply chain element.

In terms of just the balance of written orders, invoicing, backlog, here's what I'd say, because the supply chain environment continues to be reasonably orderly. We had good conversion of the backlog during the quarter, but we replenished that backlog with stronger written orders. That is, and Chris mentioned this written orders are exceeding invoicing, which means that our backlog continues to grow. And so things are operating as we'd expect. Those health metrics, we view is very positive and a really good indication of both customer engagement and spend potential as we look forward.

Got it. And then maybe as my follow-up, it's good to see the services return to growth here. But I think, again, pointing to this deployment dynamic, maybe can you just help us think through the timing about a potential services catch-up? Or should we really be thinking about this more longer in the tooth in nature, just given kind of you guys pointing to like more of the life cycle and maybe the addressable opportunity over that?

And maybe just as a second part to this, just curious, is the higher hardware prices making services look maybe a little bit softer from a comparison purpose? And any -- and if we ignore that kind of dynamic, is there any underlying change in terms of the level of attach you're seeing from a hardware perspective, just given maybe a distortion on the pricing side?

Yes. Joe, let me take that. Let me just start with the end, which is where customers are focused and therefore, where we are focused. And you're right, I mean, customers have been allocating their budgets to infrastructure, hardware, cloud and just the foundational needs to become AI-ready. So that's where the budgets have been going, and that's obviously where we help our customers. We follow them where they need to go. And that does impact the timing to some extent of services.

But look, services did return to growth, and we're happy to see that. It was earlier than we expected on the professional services side. So delighted to see that good job by the team. And what I would say is we are continuing to see constructive engagement and pipeline around implementation around optimization, security, governance, data and just ongoing operations. So the full life cycle.

I mean, it is just the nature of life cycle that procurement and deployment and implementation occur at different stages. And when you think about the broader consulting integration and managed services needs, those tend to come in the middle and at the end of the projects. I would think about this over the course of several quarters.

I think you said long in the [indiscernible], it won't be an immediate catch up. It will just be the natural unfolding of the life cycle. I mean if I just give you a tangible way to think about it, and I'll use Lovelytics data, on the front of an engagement there, we're going to do advisory services, and that might include AI and data strategy and an assessment around maturity and a road map build and use case prioritization, et cetera.

That's great. That's strategic. But then we move into the implementation, and that will be more when we are actually deploying. An example would be to migrate legacy data warehouses. That's in the implementation and deployment stage and then ultimately, operating to keep the environment secure, you'll see managed services for example, with FinOps to be a single point to monitor and control cost. So that is the way that the life circle cycle of services flows out, and we expect it to be that as we move forward. And as I said, we're happy to see we're back to growth, albeit modest, but still ahead of what we expected.

I will now turn the call back to Chris Leahy, CEO, for closing remarks.

Thank you very much. And let me close by recognizing the dedication and hard work of our nearly 15,000 coworkers around the globe. Their commitment to serving our customers is what makes our success possible. Thank you to our customers for the privilege of helping you achieve your goals and to our partners for their continued collaboration as we bring the best of the technology ecosystem together for our customers. And thank you to those listening for the time and continued interest in CDW. We look forward to speaking with you next quarter.

This concludes today's call. Thank you so much for attending. You may now disconnect.

Good morning, everyone. My name is Asiya Merchant. Welcome to Citi's TMT Conference. I lead the hardware sector here and the tech supply chain. So happy to kick start at least my sessions here with CDW, Chris Leahy and Al Miralles. Chris here, CEO; Al here, CFO. This is going to be an interactive fireside session. We have a bunch of questions here outlined. If you do have any questions, though, please do raise your hand. We'll give some time for that.

So good morning, and thank you for coming to our conference. It's always great to see you both.

So I'm going to start you off here. Chris, Al, I mean, we talked about it last year. It's been loud, much more loud here. I obviously cover Dell and HPE. Those numbers have been staggering. And even the storage guys, to be honest, like they've been growing. PCs, everybody was talking about Doomsday, but obviously, that's still been growing from a revenue perspective, and we're starting to see some of that.

So maybe just at a high level, when you think about AI and everything that's happened over the last couple of years, starting with hyperscalers where you don't necessarily participate, but now we're starting to see it more broader. What does it mean for an opportunity now as you think about it for CDW?

Well, Asiya, it's great to be here. Thank you again for having us. And if I just zoom out for a minute and take a step back and we think about the way that AI is massively reshaping demand. Yes, it started with the hyperscalers building capacity, obviously. And then enterprise organizations have been next in line, so to speak.

Now what we've seen, we focus primarily on the mid-market sized companies, those who have the same kind of needs and challenges as enterprise, but do not have the resources and expertise to understand the best ways to implement and put AI to work. We also have a number of verticals where we bring differentiated capabilities, health care, federal, state and local, education, and we focus on those enterprise areas where we can bring something different, in which case we have seen strenuous growth.

As we think forward, the need to have an end-to-end strategic technology partner who can turn our customers' ambitions into outcomes is never more important. The gap between acquiring technology and putting it to use is getting bigger. The complexity, the number of choices, the impact that it has on an organization's health and growth is just magnifying.

So when we think about the opportunity for CDW, particularly in these verticals and then into the mid-market, we see nothing but growth and opportunity ahead and in particular, across the entire life cycle. As I said, end-to-end is a very important value that our customers lean into and pay for. And that means helping them from the advisory through the integration and the implementation and ultimately to managing.

So we just recently did an acquisition last week of Lovelytics, and that's a great example of us investing behind our mission forward growth strategy to add the services that are critical to put AI to work. We all know data is still the gating factor for AI, frankly. And I think 12% of organizations say they're ready. Their data is ready, and that includes large enterprises, by the way. We have lots of customers in the large enterprise space who are still dealing with this issue.

So Lovelytics gives us a capability, 500 engineers, data scientists who can help us with that tip of the spear, if you will, that front end of need and value for AI implementation. So the opportunity for us is the capacity is being implemented. How do we help our customers adopt, then consume and deliver an outcome that gets them the goals that they're looking for.

And if you think about this AI journey, right, where initially, it's like where do I begin? Then you start saying, okay, I'm beginning here. I don't know, maybe AI PCs was the start, maybe it was something else. As you think about that journey from decision, consulting to, okay, let's start in one department, let's optimize, let's implement, then we are actually consuming it managed services. Can you walk us through like CDW's opportunity, how you see that spending moving from I'm just going to hire CDW for some consulting to now I'm actually hiring them for implementation to now I'm actually doing hybrid like we talked about earlier. So how do you see your growth opportunity across those various scenarios?

Yes. So I would say it this way. When I think about the imperatives that a customer has, there's preparing for AI. So you think about AI infrastructure ready for AI at scale. You think about AI data foundations ready to scale your data. You think about AI in the SaaS applications that customers already have. And then you move to now what do we do with that? And it's how do we apply agents, how do we automate, how do we secure and how do we govern and then how do we make sure that we are optimizing for the economics.

And then through all of that, there's a continuous innovation with our customers to drive more and more use cases. So the opportunity is across every component there wherever our customers need us, we will be welcomed in that environment and then spread from there.

The other thing I would say, which is a significant opportunity for us is our ability to have what I'll call a flywheel of experience, expertise and learning. So because of our vertical capabilities, we are able to identify successful patterns and then codify them, then package technology services and expertise together in a way that we can then replicate in repeatable solutions into the mid-market or into other verticals and drive recurring revenue.

So it's across the board. It's across the life cycle, wherever it's needed, it's obviously the purchasing, but it's also the ability to package solutions in a way that drives velocity and value for our customers.

Yes. That was my next question. Like you talked about these repeatable use cases that you could then deploy across various verticals. If you could just maybe take it down a layer so that investors here can appreciate when you're talking about across your customer base, you're doing these repeatable, scalable use cases and how it then flows into CDW from, I don't know, GP dollars and OpEx operating growth?

So a couple of examples where we can do repeatable solutions. Let's take the health care industry, for example, a larger enterprise system that buys Patient Room Next from us, which is a proprietary solution to drive clinical outcomes. It prioritizes work for the nursing staff, for example, and it directs them to the right places. Now in one particular case, we saw the productivity go up by 25%.

We actually saw reduction in turnover. So turnover went down by 25%. That is a replicable solution that we take from that system, that health care system and bring to a number of our health care systems, including the mid-market, the rural health care systems and the smaller health care system.

Another one, which is one of my favorites is when I think about municipalities and the citizen services like the EMT service, the life-saving services. And we have a circumstance where we took the 911 calls down to 15 seconds from like a minute and 30 seconds. And that was basically reorganizing the process. It was adding agentic workflows and redirecting unnecessary calls so that the emergency calls got to the right place. We take that, we package it, and we go to all the municipalities, and we can help them reduce the time to receipt of a 911 call. Those are the ways that we actually take ideas from idea to outcome and then broadly across our customer base.

And then obviously, at this conference and what we just heard from the OEMs that just announced earnings, it was only a week ago, hearing a lot more about on-prem versus just on-prem deployments, whether it's tokenomics or what is driving that, maybe there's more workloads here. Walk me through, does that tip it more in favor for CDW? And how would CDW participate? It was more of an on-prem deployment versus a hybrid or maybe it was a totally consumption-based cloud deployment for AI?

Yes. Well, I would start with the fact that CDW is deployment agnostic, if I can say it that way. There are so many choices to be made, which plays to our favor. So whether it is in the cloud, whether it is on-prem, whether it is hybrid, whether it's on the edge, whether you're using a Neocloud or a colocation, it's all about optimizing for something, optimizing for speed and latency, optimizing for performance, optimizing for security, optimizing for data gravity.

The bottom line is where should the workload be best served. And so for CDW, that's our sweet spot, helping our customers understand that and then purchase, implement and adopt accordingly. So neutral as to what our customers' decision is, very invested in their success. That's why customers stay with us so long. And we would get paid in all of those circumstances, including from a professional services perspective, from a purchase perspective, a resell perspective, from a consumption perspective and ultimately from a managed perspective, if we actually manage their workloads for them.

And if you were to allocate dollars internally, like where do you generally -- like do you see them equally allocating? I mean complexity also means you have to invest on your part as well. Al has to allocate where am I spending dollars and OpEx per employee. So when you see the complexity increase on your customer base, how are you then thinking about how you want to allocate your OpEx dollars?

So we think about it in terms of driving outcomes for our customers, okay? And so the areas that are most important to doing that right now are integrating services, integrating workloads and AI capabilities into existing systems. That's critically important right now. So that's one. A second one would be security. Security is obviously a dynamic and concerning area, and so security would be another one. But the bottom line, I would say, where we are going and where the market is pushing us is adoption, in whatever form that looks like.

So lots of capacity has been created and will continue to be created. What those providers, the OEMs, the chip providers, the hyperscalers, the Neoclouds, what they need is they need customers to use the capacity. That's how they get the return on their investment. So we help our customers adopt and consume to deliver the outcome. Whatever that looks like and wherever that resides in the most economic and optimized way, that ultimately drives more investment in use cases, which drives more demand, which drives more capacity. So it's a virtuous cycle with our partner ecosystem, but really specifically driven in the future by adoption and consumption.

I'm going to tip back to the recent acquisition Lovelytics. Talk to me about -- I mean, you already talked about a little bit about data, right, why it's important. You talked about the coworker, the data engineers they bring, the verticals that they have. Why was this the right time to get them? I mean, obviously, there's lots of areas that you could have invested in and purchased. Why was this one something that really you went for?

We see data as the tip of the spear in terms of the ability to put AI to work. And we know Lovelytics well. We've worked with them in the past, and they're a leader in their field. They're an extraordinary organization, and this was all about speed to capability. It's a tip of the spear capability and scaling our capability quickly was at the very top of our priority list as we looked at potential partnerships and acquisitions.

Okay. And just walk us through, I think there were some questions from investors earlier in one of the groups about how is the sales to motion here? Like are they -- how will -- how will the acquisition by CDW help them?

Yes. So the way that we run an acquisition like this, we call it a greenhouse. And they'll be stand-alone for a period of time. And we operate like a use CDW as a channel, okay? So they are in a position to continue to grow their business, hire for their business and just keep the trajectory going because they're high growth, high margin, high profitability. At the same time, we put mechanisms in place to bring opportunities from our much broader customer base into them.

So when I think about where they focus now, they're primarily enterprise players in a variety of verticals, energy, retail, health care, financial services, areas that are very complementary to ours. So we'll be able to bring those current skills into our enterprise customers. Equally, we'll be able to take back to the learning expertise flywheel, we'll be able to take much of the built for products and convert those into products that are appropriate for various players in the mid-market. So we see this as really a twofold, threefold growth. Current growth of their current customer base, enormous opportunity in our enterprise space and an enormous opportunity in the mid-market at speed and profitably.

Okay. Fair enough. I'm going to switch a little bit to what you guys just reported. It's not been too long. I mean you guys had pretty great numbers, right, relative to the start of the year. You guys are obviously outperforming that. When you look at the demand and how that's shaped out from the start of the year to the last quarter that you just reported and the outlook that you provided for the back half, what were some of the positives that you saw that were surprising and maybe some of the takes on the other hand that maybe surprised a little bit as well?

Yes. I'll start and I would just say that it's been constructive, constructive demand and probably broader than we expected when we went into the year, frankly. The other thing is while we expected to have a strong mix into hardware infrastructure, in particular, at the front end of the year, it was stronger than we expected, which muted some of the other areas of our business just in terms of mix. But it's been robust. The signals continue to be strong in terms of engagement with customers, written business, our backlog, et cetera. So that continues to be very strong.

Yes. Maybe just to add the Chris' comment about the enterprise mix. So that had some impact on our gross margin, but we also view it as a very encouraging trend in terms of enterprises getting on with their AI journeys. And then maybe just walking down the P&L, we had talked about inflecting in Q2 and beyond on the operating leverage front. So while we did not see benefit from Geared for Growth in Q2, the efforts were happening behind the scenes. We had some operating leverage just from kind of good old-fashioned discipline.

As we work towards the back half of the year, our Geared for Growth efforts will accrue benefits, and therefore, we'd expect to see additional operating leverage. And then finally, on the capital allocation front, we've been opportunistic on buybacks as well. So that helped us to get to double-digit EPS.

Okay. And if I can, on the Geared For Growth, right? I mean, investors have been very focused on this OpEx to GP ratio. Maybe you can just provide us an update, remind us again where you are on that journey for Geared for Growth? How much has been done? What innings are we on in that Geared for Growth initiatives and how much more to go to kind of get to your -- and what would be the sweet spot then in terms of SG&A to GP?

So just a reminder, Geared for Growth is a multiyear effort. It's focused on effectiveness and efficiency. And just as the name suggests, it's just as much about the -- how do we scale our top line, but also make sure that our cost base is geared for that growth, if you will. So those efforts began in earnest at the end of last year, the beginning of this year. And again, Q2 did not see significant benefit, but we do expect that the back half of the year, those benefits will begin to accrue.

The focus areas for Geared for Growth include AI productivity, end-to-end automation and efficiency of our operations, ensuring that we have productivity all the way from our kind of sales professionals down through our coworkers across the organization. And then as well just optimizing our spend, including our own tech spend. In some respects, we are customer 0 in that regard. So it's going to play out over the next few years. I would say the original expectations we gave in terms of benefits for Geared For Growth, we're at or better than those levels.

But importantly, we are going to reinvest. And it's important that we reinvest back in the business, including our services capabilities, including assisting and supporting our sellers on the front end of the curve and our own coworkers capabilities and AI productivity. So we're pleased with the progress we've had so far. And what you can expect to see is not only gross profit growth sustaining over time, but also that commitment to operating leverage as well.

Okay. That's great. You guys raised your outlook for the rest of the year when you updated it as part of earnings. And I think you now expect, I guess, the U.S. IT market to kind of grow mid-single digits, CDW always outperforming that 200, 300 basis points. But you did bake in some second half prudence. I think you talked about various end markets. I think the word that was used was prudence. Now a couple of months later and having just seen those numbers from some of the OEMs that have just posted results a week ago, how is prudence looking?

I'll start. So again, a reminder, beginning of the year, we did take a tack that we expected the IT market to grow low single digits. And in our typical mode, right, we wanted to see the signals and the data points come through before we increased our outlook. And that's just what we've done over the last 2 quarters. If we look out over the remainder of the year, I would say underlying our expectation of demand and growth is consistent and consistent with what we've seen. That being said, we're still operating in a very dynamic environment, right, whether that's supply chain, price variability, kind of typical macro factors, but also importantly, the fact that we're seeing strength of enterprise, there is a timing effect of some of those enterprise spend items. And for those reasons, we have some caution baked into the back half.

So for that to play out in a more positive way, all of those factors would go in a more positive direction. And on the downside part of things, I would say the risk would be that supply chain becomes more a disruptor, that the macro becomes a bit harsher than what we've seen and so forth. But as we sit here today, we feel really good about the outlook, the direction of spend and the engagement with customers.

Yes. I would just add generally that the indicators we're seeing now, in particular, what releases last week suggest optimism, particularly around demand. Demand has remained resilient, and we expect that to continue.

I think one of the -- earlier on, when I would go marketing, a lot of investors would push back and say, where is the budget coming from for these massive investments, not just PCs, it's servers, it's storage, it's networking, it's services like you talked about consulting. As you sit back and you think about, I mean, the price increases that these OEMs have put through as a result of higher component pricing and that's being reflected in the end demand, where are you seeing the budget dollars coming towards IT and the areas that you participate in? Where are they coming from? And are they just upping -- is everybody just upping budgets?

I would say a couple of things. Number one, they're managing budgets so that, for example, if there's a hyper focus on hardware in second quarter, they might -- they're preserving their dollars for services in the third quarter for implementation, et cetera. But I think the more important trend is that IT costs are being assigned more and more to kind of the labor budget.

So the fully loaded cost of individuals now is taking on what is their agentic use, what is their Copilot use? What does it cost to have a coworker at our organization, taking into account specifically all those elements of AI. And that's where we are seeing -- it's quiet, but it's absolutely happening. We're seeing functional budgets move into the IT spend bucket.

And so would that sort of when you play that out, would that sort of have a negative perhaps impact on some of the categories that you participate in? Or generally, the spend is still constructive.

It's still constructive. The question comes up about PCs and PCs in my mind have just become more important because they're not just a productivity tool, but they're now part of the infrastructure assessment, if you will, inference at the edge and certain personas that require much more powerful PCs. So I don't see that as changing the demand for the product sets that we sell. I do see it as kind of an entry into the labor market TAM, if you will, for technology.

And then the pushback also you will hear the demand is just so strong, right? I mean, excluding just the hyperscalers or maybe the new cloud providers, but even from the enterprise side, what we've been hearing, and I think you're talking a little bit about the mid-market here as well. I mean, at the same time, CIOs are looking at reading the same stuff. Prices are going up. Like why would -- what gives you confidence that this is durable, right? And not just folks just trying to get space in line by putting orders in, when you look at your own backlog?

Well, when we look at the backlog, the backlog is significantly elevated. So that gives us confidence as we move forward. And then just back to the durability of demand generally, this is a revolutionary change, right? And so we're talking about a technology that is here to stay, and the winners are going to be those who figure out how to put it to work. once you have the capacity, the capacity is going to be translated into outcomes, whether it's productivity, whether it's new products, whether it's new experiences, new use cases are going to start, I think, picking up very quickly as we round the corner into next year because that is the path to success.

And I'll just add -- we began the year trying to quantify what the pull-forward effect is. I think when we got to Q2, you've got maybe some level of customers moving with urgency, but at the same time, our written production is in front of our invoice growth. So it becomes hard to even decipher is there a pull forward or not? I think underlying all of that is that the engagement, the interaction, the activity with our customers is just as robust, if not more, which gives us really kind of confidence in the path forward. We are not seeing double orders. We're not seeing cancellations. So all of the health metrics would point to healthy future.

Right. And I also remind all investors that things are still supply constrained. So it's not like stripping everything. So that's why the backlog is also very good. All right. Just a little bit about your competitive position, right? I mean you've always talked about outgrowing the market here, more complexity means better for CDW. We also hear a lot about security issues with a lot of these models. Just help us understand like where are you seeing the greatest share gains? And maybe has anything changed in how you go about and your own view on where your share strength could sustain?

Yes. Our position as an end-to-end provider, we are finding that to be more significant than ever. Customers are facing the power of this new technology and the complexity. And we're talking about high-risk, high-impact decisions that they're making. So having a trusted partner who can take them not just from architecture and design and security concerns to procurement deployment, integration in a way that works, governance to keep data safe, cost management through FinOps and ultimately taking some of the work off their plate through managed services, we're finding that, that value proposition is resonating incredibly well across the mid-market and in those verticals that I mentioned, equally actually in small business, where small businesses are wanting to put AI to work and they want to do it seamlessly. They want to do it affordably. They want to do it securely. They want to do it so they can scale.

And so that becomes a hotbed for us with our digital capabilities and also an acquisition muscle for us. So those are the areas we're seeing. And I would just say that, look, everything -- every conversation has AI in it and security. It's the 2 things that come into play and then cost optimization.

All right. A little bit on gross margins. I think initial reaction when CDW posted results was, oh my God, gross margins declined. I think you kind of talked to investors through understanding what was it around mix shift. So as you think about strength in enterprise hardware and then maybe mid-markets picking up some of these other verticals, can you talk to us about how you think about gross margins?

Sure. First, in Q2 and year-to-date, the gross margin effect was really a mix component. It was a stronger mix into enterprise and a bit lighter growth on the services side of things. Look, we view that again as an encouraging trend that enterprise is coming strong and that we ultimately see that rolling down the curve to markets and small for sure.

As we look forward, our expectation with the outlook is that enterprise will probably continue to be strong. At the same time, we are seeing strength in cloud and SaaS. So that helps to bolster gross margins as well. Really importantly, as we look forward because we don't obsess about a single quarter on gross margin. And in this case, we don't see it as a driver of kind of less economics or a degradation of elasticity of demand, we look at it over the continuum, and we look over that continuum and we think about the lifetime value we can provide to our customers, you're going to see services attach kick in. You're going to see cloud and SaaS continue to kind of bring strong growth, and all of that should ultimately lead to kind of up into the right on our gross margin.

Services. We talked about it a little bit. I think there were some people were trying to understand the dynamics that played out in 2Q. I know we talked about it quite a bit on the callbacks as well. But just I think I've heard a few times you think services will pick up. And within services, you have cloud, you have managed services. Just walk us through what part of services do you see picking up? Is there some sort of implementation timing lag that we should think about it from hardware to services and sort of what's played out and what is playing out sort of in your second half?

Yes, I would say that the -- some of our implementation services on the larger enterprise engagements that we have were delayed when our customers were focused on buying the hardware. And we would expect those to play out, and we see it in the backlog playing out as we get close to the end of the year. As we move forward, look, I think where you're going to see services pick up, particularly as AI is adopted into the mid-market at a faster pace is going to be the professional services that we offer, which is architectural services, design services, data services, et cetera, all the way through implementation and integration, but then managed services.

So the very front end of the value chain and the back end of the value chain, I think, is where you're going to see us start to grow those services and they become more and more relevant to our customers. And the beauty of professional services at the very tip of the spear and managed services is they both give us insight, visibility and insight into other opportunities where we can serve our customers. We see other opportunities for engagements, other opportunities to help them deliver better outcomes.

I'm going to have -- just see if there is something in the audience. We have one question here.

If I didn't ask you a question. So the question -- and you touched a little bit there at the end about cloud and SaaS kind of picking up for you. But I'm curious, as you're bringing these particularly mid-market customers towards AI, how have your vendor partnerships changed? Like is it the same ones you've always worked with? Or are there new vendors you're working with and some are dropping? How does that because not all of them are going to offer what they need?

Yes, it's a great question. As we think about driving AI relevance, it requires ensuring that we've got the partner ecosystem that is equally relevant. So our partner ecosystem has expanded, as you can imagine. So with the AI labs, for example, we have partnerships with them, with the data fabric providers, we have partnerships with them. With the chip providers, are those partnerships have grown even more strategic because they want to drive consumption.

So as we always do, we evolve with the market and those partnerships evolve as well. Now what I would tell you is if you take any of our partners, every single one of them is very excited about the reach, our customer reach and in particular, the reach into the mid-market. They know that's our legacy. They know we know how to do that, and they are all really supportive of us, both in terms of alignment and investment and execution to help drive business into the mid-market.

I'm going to ask one about a CFO replacement update. Like Al is going to be here for a long time. I get this. But sort of what's the Board sort of looking for for the next chapter?

Yes. Look, first of all, Al has been a great partner to me, the Board and the business. And a lot of the qualities that he's brought to bear are qualities that are critically important to the next CFO. So obviously, you want a tremendous financial executive, but really, you want a business executive. We're looking for a business executive who brings a commercial mindset, a creative mindset, who knows how to partner with the CEO and the Board and equally with the business. And Al has been just that. So it's really think of a commercial business executive, not just a finance executive.

You want to call now.

We flow now. Yes, there we go.

All right. Maybe as we wrap up here, Chris and now, like what do you think investors are sort of missing out about the CDW story? I mean you guys have done super well. I think there was always this question on double-digit EPS growth. When do we start returning to that as a compounder that investors were sort of used to. As you sit here and given the performance that you guys have shown in the first half of this year, like what do you think investors are still not appreciating about CDW story?

Yes. I guess I would just want to remind investors, we've been through a number of evolutions in the technology space. And it's a simple but not easy formula. It's adapting to the new space and staying ahead of it with our customers, and we're doing the same thing here. The first wave of this AI technology has been capacity building, but the next wave is putting AI to work. And that is where we play.

And so when you think about the benefits of scale that we bring to bear for our customer base, the logistics, the portfolio, the pricing leverage and you think about the intimacy that we also can bear, the depth of technology and industry expertise, there are a number of advantages that can't be matched and the wave is coming and it's coming soon.

Awesome.

And I'll just add the -- look, financial results will follow, and you're seeing that in our results as we speak. When we think about the AI journey and that really getting going in earnest, customers need a partner that can help cut through the complexity. There is no better in CDW.

All right. Well, thank you. That wraps up this call or this meeting.

Hello, everyone. Thank you for joining us, and welcome to the CDW Second Quarter Earnings Call. [Operator Instructions]

I will now hand the conference over to Steve O'Brien with Investor Relations. Steve, please go ahead.

Thank you, Joel. Good morning, everyone. Joining me today to review our second quarter 2026 results are Chris Leahy, our Chair and Chief Executive Officer; and Al Miralles, 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 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 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, for instance, non-GAAP operating income, non-GAAP operating income margin, non-GAAP net income and non-GAAP earnings per diluted share, non-GAAP selling and administrative expenses, non-GAAP effective tax rate, net sales on a constant currency basis, free cash flow and adjusted free cash flow.

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 made available on our website and in our earnings release. Please note all references to growth rates or dollar amount changes in our remarks today are versus the comparable period in 2025, 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. This conference call is 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.

Thank you, Steve, and good morning, everyone. Before we begin our review of the quarter, I want to briefly address the announcement we issued this morning regarding Al's plan retirement. We share that Al plans to retire in 2027 after an extensive career following the completion of an orderly transition. He will remain in his current role until his successor is appointed, and he will then continue to serve an advisory capacity to ensure continuity. The search for his successor is currently underway. On a personal note, I want to thank Al for his many contributions to CDW's success. He has been a trusted partner to me, an exceptional leader for our coworkers and a driving force behind the growth and evolution of our company. I'm grateful that we will continue to benefit from his expertise as we execute a seamless transition.

With that, let me turn to the second quarter performance, strategic progress and outlook. Al will then provide additional details on our financial results, capital allocation priorities and expectations for the balance of the year.

The team delivered strong results this quarter through disciplined execution and a clear focus on the priorities driving customer demand. Together, they delivered net sales of $6.6 billion, up 10%, gross profit of $1.3 billion, up 6% and non-GAAP operating income of $556 million, up 7% and non-GAAP earnings per diluted share of $2.91, up 12%. Net sales, gross profit and non-GAAP earnings per share set new all-time quarterly records.

These results demonstrate the strength and resilience of CDW's business model and a dynamic technology environment shaped by growing AI complexity, pricing volatility and ongoing memory challenges.

Demand remained healthy with AI increasingly influencing customer activity despite cautious and deliberate customer spending. Customer investment in AI readiness and modernization drove strong infrastructure demand. By bringing together the right technology, expertise and execution the team delivered double-digit top line growth with substantial gross profit dollars. Strong gross profit, combined with operating leverage and disciplined capital allocation, drove 12% non-GAAP earnings per share growth.

Today, AI infrastructure implementation is most advanced among our largest customers, which is typical of a major technology transformation cycle. Infrastructure investment comes first, followed by services software and life cycle opportunities as adoption expands, deployment activities broaden across customers of all sizes.

What shapes demand may change from quarter-to-quarter, but technology remains essential and increasingly complex. Technology changes, customer priorities change, CDW's rule does not. That enduring relevance is the foundation of our value proposition.

Let's take a deeper look at how we met customer priorities this quarter. There were 3 primary drivers of performance, our balanced portfolio of customer end markets, the breadth of our full stack capabilities and our growth strategy, which sustains our relevance.

First, our diversified customer portfolio. The diversity of our customer end markets is one of the defining strengths of our business model. Today, we operate across 3 U.S. segments: Commercial, Government and Education. Commercial serves customers through dedicated corporate, health care and financial services teams, within each end market, we align resources by customer size, enterprise, mid-market and small business.

Government is aligned around state and local and federal customers, while Education serves both K-12 and higher education institutions. Our other segment represents our combined U.K. and Canadian operations. Each market has dedicated sales teams and deep industry and technical expertise.

Let's take a look at how they performed this quarter. Commercial delivered another strong quarter with net sales increasing 9%. Corporate increased 11%, driven by the demand for infrastructure modernization, cloud and AI-readiness initiatives. Healthcare remained a standout performer, growing 9%, driven by demand for mission-critical outcomes, including AI-enabled claims management and clinical documentation. Financial Services increased 2% with continued healthy customer demand.

Government net sales increased approximately 14%, driven by improving federal demand and continued momentum across state and local customers. Clients prioritize infrastructure, software life cycle management and productivity initiatives.

Education net sales increased by approximately 1%. K-12 demand remains healthy with a strong mix of software services and life cycle offerings despite fulfillment timing shifts. Higher education continued to operate in a constrained funding environment.

International once again delivered exceptional growth. Net sales increased approximately 23%, led by a record quarter in Canada and continued strong momentum in the U.K. Demand remained healthy across hardware, software and cloud categories with both the U.K. and Canada delivering mid-teens or better local market growth.

The second driver of our results this quarter is the breadth of our full stack full life cycle offering, which enables us to capture demand across evolving customer priorities and technology trends. During the quarter, success addressing healthy demand for modernization, AI readiness and resilience drove a 10% increase in hardware revenue. Servers, storage and NetComm all delivered very healthy double-digit growth.

Notebook and desktop increased a combined 10%, reflecting strong execution and customer willingness to invest in mission-critical technology despite pricing pressures. Higher average selling prices more than offset lower unit volume.

Software, cloud and security, all delivered healthy top line and gross profit growth. Software increased by low double digits driven by security, application suites and storage and network area management software. Robust cloud growth reflected continued prioritization of application modernization AI evaluation and hybrid environment optimization. Memory price inflation also contributed to cloud adoption as some customers thought help finding alternatives to hardware expenditures.

For security, both top line and gross profit increased double digits, driven by demand for both protecting advanced technology architectures and strengthening governance and compliance capabilities.

Services increased 1%. Just like every part of the business, services demand follows customer priorities. This quarter, customer focus on hardware and cloud investments, combined with deployment timing, influence the mix of services demand. We expect a pick up in life cycle and professional services as customers move from procurement to implementation to management.

The third performance driver, our growth strategy is crucial to sustaining our relevance. Our strategy is built around an enduring reality. Technology will continue to evolve, but the need for a trusted partner remains constant. As AI adds complexity across the technology landscape, that need has never been greater.

Customers increasingly recognize that AI is not a point solution, it's an architectural challenge. AI workloads span on-premises, public cloud, edge and hybrid environments. And as AI scales, organizations must integrate complex technology environment while managing security, governance and risk.

Accomplishing this requires a partner that can orchestrate the resources required and deliver the execution needed to turn AI investments into tangible outcomes. CDW is that partner. We bring together the right technology, expertise and execution as we help customers deploy AI with confidence, scale faster and realize value sooner.

The strategic implication is straightforward. AI increases our relevance because it increases complexity. And as customers move from AI experimentation to pilots to implementation, to scaling, we are capturing opportunities today across infrastructure, security, data integration and ongoing life cycle support.

Let me share a couple of recent examples that illustrate the role CW is playing across customers' AI journeys. A Western states technology office has made substantial progress in its AI journey, launching an AI Sandbox, advancing state-wide AI literacy and incentivizing agency adoption. As AI activity accelerates, the state faces a challenge common across many organizations, a growing patchwork of AI initiatives without a consistent way to manage, govern and scale them.

Through our AI 360 framework, we designed a solution that is helping the state move from isolated AI projects to a cohesive operating model that integrates strategy, governance, infrastructure, security, data and application development. By bringing together the right technologies, partners, expertise, we are creating a scalable framework for evaluating, deploying and governing AI across agencies, enabling the state to accelerate adoption while maintaining security oversight and ensuring measurable outcomes. This multiyear, multimillion dollar engagement demonstrates the scalability of our model, and we will drive recurring services revenue.

We are now productizing the solution to deliver highly relevant and proven AI-driven outcomes at scale to state and local governments across the country.

Another engagement, one with a large financial services company demonstrates the broader services opportunity that is emerging as frontier AI innovation accelerates. Like many enterprise organizations, our customers dealing with a growing gap between the volume and complexity of new AI-driven threats and the ability of security teams to remediate them quickly and consistently. They need a more coordinated, scalable approach to managing vulnerabilities across their entire technology estate.

Through our Claude Mythos AI Security Vulnerability program, the team brought in CDW expertise across security, observability, cloud DevOps, systems engineering, hybrid infrastructure and global delivery to design a more automated approach to identifying and remediating vulnerabilities at scale. This multimillion dollar engagement demonstrates the power of CDW's integrated capabilities. By bringing together expertise from across the organization, we are solving complex customer challenges and delivering mission-critical outcomes.

Two great examples of how we are helping customers deliver AI-driven outcomes today. And the opportunity broadens from here, as inference moves closer to users and devices, AI deployments will require a wider range of technologies and services, creating additional opportunities for CDW to deliver customer outcomes, capture share and drive profitable growth.

The same objective driving customer AI adoption that our business and mission outcomes is shaping how we are leveraging AI within CDW. Our approach is straightforward, deploy AI to create measurable value, to improve customer experience and outcomes, increase coworker productivity and generate operating leverage. CDW Assist Super Agent, our AI-powered sales tool delivers on all 3. It supports account planning, opportunity identification, customer engagement and workflow automation.

CDW Super Agent is just one example of how we are putting AI to work. We are embedding AI throughout the business from sales and finance to operations, AI is simplifying processes, improving consistency and increasing efficiency. We are moving with discipline and speed supported by strong governance and security. AI is strengthening how we operate today while creating a meaningful opportunity to drive productivity and profitable growth over the long term. And that leads me to our full stack to our full year outlook.

Current market conditions remain constructive. Infrastructure demand is strong. Cloud consumption trends are favorable. Customer engagement is healthy and AI-related activity continues to expand across industries and customer segments. Written demand, shipping activity and backlog trends remain robust, with writings exceeding invoicing and backlog significantly elevated.

Operating excellence and expense discipline remain priorities, and we expect continued improvement in our operating leverage as we move throughout the year. Given this backdrop, we are increasing our full year outlook. We now expect the U.S. IT addressable market to grow in the mid-single digits in 2026 on a customer spend basis, with 200 to 300 basis points of CDW outperformance.

In an environment where technology decisions are becoming more consequential, CDW has never been more relevant. Our scale, broad capabilities, deep industry and technical expertise and full staff full life cycle model ensure that our success is not tied to any single technology category. We help customers maximize the value of their technology investments and capture opportunity wherever demand emerges.

Customers rely on us to simplify complexity and translate technology investments into tangible outcomes. Partners rely on us to accelerate adoption, extend the reach of their innovation and bring their technology to market at scale. Our position between customers and partners in the part of the technology ecosystem reinforces our confidence in the durability of our business model, the strength of our competitive position and the opportunity ahead. Technology evolves, customer priorities change, our value proposition endures.

With that, let me turn it over to Al for a more detailed review of our financial performance. Al?

Thank you, Chris, and good morning, everyone. It has been a privilege to serve as CFO of CDW for the last 5 years. I'm proud of what our team has accomplished and how we've continued to help our customers achieve meaningful outcomes all while transforming our own business and delivering growth and profitability for our shareholders. I am committed to supporting a smooth transition and will ensure the company is well positioned for continued success.

Turning to our results. I will begin with details on our second quarter performance, move to capital allocation priorities and then finish with our outlook for the remainder of 2026.

Second quarter gross profit of $1.3 billion was up 6.3% year-over-year. This was modestly above our expectation for a mid-single-digit year-over-year increase. The performance reflected solid demand with customers continuing to prioritize technology investments that support AI, productivity, workplace modernization, infrastructure needs and security.

Second quarter gross margin was 20.1%, down 70 basis points year-over-year. As we've discussed in prior quarters, gross margin is sensitive to changes in both customer and product mix. In the second quarter, margins reflected the contribution from large hardware infrastructure opportunities tied to modernization and AI readiness and particularly associated with enterprise customers. To a lesser extent, gross margins also reflected a lower relative contribution from services year-over-year.

As Chris mentioned, we view these spending patterns as consistent with the early stages of a technology adoption cycle where infrastructure investment by large enterprise clients often leads followed over time by services, software, security and life cycle opportunities. Importantly, within the quarter, these profitable engagements generated meaningful gross profit dollars and strengthen our position in the AI market.

The strategic point is that AI is increasing complexity across the technology stack. Customers are evaluating infrastructure, cloud, security, data and end point investments as part of broader modernization programs, and that complexity reinforces the value of CDW's full stack full life cycle model.

Consistent with recent trends, customers navigated a dynamic technology and macro environment. Demand remains stronger where technology investments are tied to operational necessity, productivity, infrastructure and workplace modernization and security.

With this being said, netted down revenue streams were up 16.1%, picking back up again this quarter as we expected. They represented 35.9% of gross profit, up 300 basis points year-over-year and 140 basis points quarter-over-quarter.

Professional and managed services were impacted this quarter by deployment timing and customer prioritization of hardware and cloud investments. We continue to build our pipeline as customers move modernization, security and AI projects from procurement into implementation, which supports our expectation that the current wave of infrastructure investment will lead to future services growth.

Turning to expenses for the second quarter. Non-GAAP SG&A totaled $764 million or 57.9% of gross profit, down 20 basis points year-over-year and down 410 basis points quarter-over-quarter. This was consistent with our expectation that the expense ratio would continue to decrease as we approach the second half of the year.

Looking forward, we expect our geared for growth efforts to pay dividends in the second half of the year and further improved expense efficiency thereafter as initiatives scale across the organization.

Coworker count ended at approximately 14,700, and customer-facing coworker count was 10,300, both down modestly year-over-year and quarter-over-quarter. Our ongoing goal is to balance growth, expansion of capabilities and exceptional customer experience with greater efficiency and cost leverage from our broader operations.

Non-GAAP operating income was approximately $556 million, up 7% versus the prior year, delivering some incremental leverage as we expected, and that compared to 6.3% gross profit growth. Non-GAAP operating income margin was 8.5%.

Net interest expense increased approximately $3 million year-over-year driven by higher average borrowings during the quarter. And our non-GAAP effective tax rate was within our target range at 26%. Non-GAAP net income was $370 million in the quarter, up 7.8% on a year-over-year basis. Second quarter non-GAAP net income per diluted share was $2.91, up 11.9% year-over-year. This double-digit EPS growth was above our expectation for high single-digit growth year-over-year.

Moving to the balance sheet. At period end, net debt was $5.5 billion. Liquidity stand at $2 billion with cash plus revolver availability. The 3-month average cash conversion cycle was 21 days, within our target of high teens to low 20s. This cash conversion metric reflects a combination of timing, market dynamics, higher hardware sales and proactive inventory positioning to support customer urgency to secure products amid a dynamic environment. We continue to believe our target cash conversion range remains the best guidepost for modeling working capital longer term.

Adjusted free cash flow year-to-date was $278 million or 42% of non-GAAP net income for the first half, below our stated rule of thumb of converting 80% to 90% of non-GAAP net income to cash.

We continue to expect cash flow conversion to normalize over the balance of the year, and have line of sight towards achieving our expectations. We've been focused on managing working capital in a way that supports our customers and drive shareholder value even as ongoing hardware-driven growth and the inflationary price environment has warranted investing in working capital.

We've also effectively utilized cash consistent with our 2026 capital allocation objectives during the quarter, including returning $344 million in share repurchases and $80 million in the form of dividends. Through the first half of 2026, we've returned approximately $545 million to shareholders in the form of repurchases compared to $653 million over the entirety of 2025 and $500 million in each of the years 2023 and 2024.

This brings me to our capital allocation priorities moving forward. Our first capital priority is increase the dividend in line with non-GAAP net income growth. We've increased the dividend for 12 consecutive years through 2025. We continue to prudently manage our dividend with respect to the growth environment and target a roughly 25% payout ratio of non-GAAP net income going forward.

Our second priority is to ensure we have the right capital structure in place. We ended the second quarter at 2.5x net leverage within our target range of 2 to 3x. We continue to proactively manage liquidity while maintaining flexibility.

Finally, our third and fourth capital allocation priorities of M&A and share repurchases remain important drivers of shareholder value. We continually evaluate M&A opportunities that advance our capabilities and extend our reach and relevance to customers.

While we remain active in the M&A market, we have been opportunistic towards share repurchases. With the additional $1 billion authorization announced in the second quarter, we have more than $1.1 billion remaining capacity under our share repurchase program.

Now turning to our outlook. Our first half performance was driven by strong underlying demand as customers build out infrastructure for their AI use cases, secured their networks and innovated at the edge. Importantly, while customers acted with urgency around hardware procurement, our written production and backlog trends support our view that the strength we are seeing reflects healthy and durable underlying demand for modernization, security, resiliency and AI readiness.

At the same time, we remain prudent in how we view the remainder of the year given the complex variables in play. Factoring in these variables, we are raising our full year outlook and expect gross profit to grow mid-single digits for the full year 2026. This leads to a first half versus second half split that is more aligned to historical second half-weighted seasonality than we originally expected.

Based on the anticipated mix of products and end markets, we expect second half gross margins to be below second half 2025 levels. This means full year 2026 gross margin would be modestly below the full year 2025, although well above the levels from 3-plus years ago.

Finally, we now expect full year non-GAAP net income per diluted share growth to be at the high end of high single-digit range year-over-year, reflecting our expected gross profit performance increasing operating leverage from our gears for growth initiatives and disciplined execution of our operational and capital allocation priorities.

Please remember, we hold ourselves accountable for delivering our financial outlook on a constant currency basis. On that note, our expectation is for currency to be a slight benefit to reported growth rates for the year.

Moving to modeling thoughts for the third quarter. we anticipate gross profit to increase at a mid-single-digit year-over-year growth rate. Moving down the P&L, we expect third quarter non-GAAP SG&A to be lower than the second quarter driven by our geared for growth program benefits. This will result in non-GAAP operating expense as a percentage of gross profit that is down both year-over-year and quarter-over-quarter.

Finally, we expect third quarter non-GAAP net income per diluted share to also be at the high end of high single-digit growth year-over-year.

With that, I want to thank our teams for delivering another strong quarter of execution. Our performance reflects the strength of our customer relationships, the resiliency of our business model and the ability of our coworkers to help customers solve complex technology problems in a changing environment.

This concludes the financial summary. As always, we'll provide updated views on the macro environment and our business on our future earnings calls. I will now ask the operator to open up for questions. [Operator Instructions] Thank you.

[Operator Instructions] Your first question is from Adam Tindle with Raymond James.

Okay. Congrats AI on the announcement. Chris, I wanted to start on AI, those examples that you gave were helpful. I just wonder the customers that are adopting AI, understanding that it's sort of in that larger cohort, maybe you can give investors sort of a view on what the impact is to CDW when those customers are deploying AI. Maybe more specifically, what happens to their spend with CDW? And if you could touch on any updates on the AI line card business model, a little bit more flushing out of the AI potential tailwinds to CDW. That would be helpful.

Yes, sure, Adam. And first, I want to start with the -- well, we see the technology pick up most strongly first in the enterprise space, as I mentioned. We absolutely are seeing it broaden across all of our industries and customer segments. And we're at the point where we are taking use cases that are proven and working in various industries and scaling them in repeatable offerings for customers.

In terms of what they're doing to our business, look, we're not sharing dollars per say, but we perceive that AI is a part and parcel of most of what we're selling from the hardware itself to the software implementation and certainly in the services that we're bringing to bear. So it's really a full stack approach to the technology movement.

In terms of customers and where they are in their journey, have they moved from pilot to obviously implementation, I would say here's what we're observing, which our customers are working hard now on the return on investment and being more deliberate and thoughtful about the analysis around that, which, of course, is played to our strength with the variety of services and analysis in the solutions that we bring to bear.

What we are seeing is real focus on those use cases that move the needle in the various industries. So when you think of health care and claims assessment and training tools. If you think of retail with demand forecasting and turn projection, if you think of financial services, obviously, fraud detection, but also trading speed, we really are starting to see use cases come to bear in ways that are going to scale more quickly than they have in the past in our view.

So I'd simply say it's a full stack opportunity for us, we think we're incredibly well positioned because CDW has never been about one technology or one part of the stack, it's been about bringing those things together so that they work together and AI is a great opportunity for us to do this. We're delighted to see the traction across all of our customers taking off, frankly, in a really positive way, and we see lots of tailwinds to continue the acceleration in services and the hardware components.

Great. Maybe just a quick follow-up for Al. That I acknowledge that operating income grew faster than gross profit dollars in the quarter. And it looks like we're starting to get at a turning point to get CDW back to the business model that I think investors came to know and love over the years. I guess the question would be what do you think drove that trend in the quarter, that kind of inflection in better operating leverage? And any learnings that you're having from geared for growth or any updates on that $100 million to $200 million of savings that I think you outlined on the last call.

Yes. Sure. Thanks, Adam. I appreciate your comments. As we said on the last call, we thought that we would see operating leverage inflect in the second quarter. That was more a result of really kind of good old-fashioned discipline around expenses and just broader efficiency efforts, less contribution at large from geared for growth. That being said, Adam, our efforts on geared for growth through the first half have been significant. And our plan had always been that we'd see those benefits start to pay off in the back half of the year.

I would say we are at or beyond our expectations in terms of how those efforts are progressing and likewise with respect to the benefits. So as we approach the back half of the year, those benefits will start to play out, and we would expect both our operating leverage and likewise, our expense ratio to improve on a sequential basis in the back half and certainly into 2027.

Your next question is from Erik Woodring with Morgan Stanley.

Al, can we maybe just dig down quickly into the non-netted down gross margin trends. So I know you alluded to earlier, some spending from large enterprises, some big deals in infrastructure. I want to maybe be a little bit more pointed and ask were there any instances in the quarter where you weren't able to kind of price on a cost-plus basis because of customer feedback to pricing or anything like that. And did you see -- and therefore, did you see any kind of like-for-like margin pressure year-over-year, whether we're looking at services or storage or PC or servers, whatever it may be? And then a quick follow-up, please.

Sure. Thanks for the question, Erik. First, I would just say the answer is no, in terms of like-for-like pressure. We operate in a competitive environment, but we were deeply focused on ensuring we had this pricing discipline and that we were effectively passing through price increases. So that was not a factor in the core of our business. The driver was mix. It was mix into infrastructure products. It was mixed at larger dollar tier orders. And then as you noted, with more enterprise customers.

And as Chris referenced in her prepared remarks, very common that we see that in early stages of tech adoption really beginning with some of these larger clients and then making its way down to the middle market. And that's part of our encouragement as we are seeing that play out as we speak. That being said, kind of in the current period and potentially in the near term, you could see more of these larger orders, and they just naturally come at slightly lower margins.

And Erik, I would also just add, at the same time, our mix into services was less so. So I guess maybe further, I would just note on the more positive side, our netted down revenues, really, really strong, grew 16%, 36% of our gross profit. And again, we felt really good about the core of our business, maintaining healthy margins, upholding our cost-plus regime in this dynamic environment.

Okay. That feedback is incredibly helpful. And then maybe just a quick follow-up. If I just take some of your modeling thoughts on 3Q, some gross margin pressure year-over-year, but gross profit flat sequentially into 3Q, it would imply that revenue is down maybe mid-single digits sequentially in 3Q. That's historically worse than seasonality. So just relative to your qualitative comments on backlog or pipeline or breadth of spend, that feels quite prudent. Could you maybe add some kind of granular commentary just making sure we're thinking about that 3Q, right? And maybe why we would see a below seasonal quarter relative to some of the strength of spend you're alluding to? And that's it for me.

Sure. Thanks, Erik. Look, I would say you have it right, mid-single digits, it would be kind of flattish sequentially. That's really a function of us while certainly more optimistic given the health trends we're seeing, we continue to layer in a level of prudence. And so spend is there. Our pipeline is there. Through July, our rig production really, really strong and continues to exceed our invoicing leading to a higher backlog. So the underlying metrics are really, really strong.

We just want to be a bit cautious as we typically are. And so while we raised Q3, Q4 with respect to gross profit, we're at mid-single digits. And so there's a bit of a level of prudence there. And likewise, like Q2, what I'd say all of the elements are there for us to outperform, and that's what we're focused on.

Your next question is from Asiya Merchant with Citi.

Just I can dig down a little bit on AI deals that you talked about. I understand initially the adoption is largely with larger organizations. But just help us understand, like as you're thinking about this services adoption to follow the infrastructure deals that you're talking about, maybe how we should think about the services attach rate as we progress through this year and as we think about next year?

And then in general, would we expect this to be margin accretive or these AI-specific deals accretive or margin neutral over time?

Yes, sure, Asiya. Well, let's -- let me start with, obviously, what's going on right now, which is we're seeing a lot of demand. And as I mentioned, with in the areas of infrastructure, cloud, security and data foundation, so across the full portfolio. But when you think about the adoption curve, which is going to be multiyear and not a single product, that requires readiness. It requires deployment. It requires integration. It requires optimization and ongoing operations. And services is in every single component of those requirements.

So when you say attach rate, I would say there's attach rate opportunity, but more importantly, our services are embedded at every stage of the need around AI. Adoption is definitely broadening right now, as I mentioned, beyond large enterprise into, as you heard me say, healthcare, education, commercial and into smaller businesses as well. That's the productization that we're working on in the mid-market and smaller businesses that we can create AI solutions that are scalable and proven in the real world.

I'd also say that when you think about inference near users and the data edge is next, and there will be incremental demand for edge infrastructure, networking, security endpoints. And in all of those instances, again, services are critical to the design, deployment and management. Across the whole spectrum, you can expect to see from us continuing growth, particularly across the managed services and the recurring nature of that business. So we see it as being an increasingly meaningful contributor to our profit growth over the next several years, and we're building a durable engine to achieve that.

Great. And if I can just a quick follow-up. Like earlier in the year, of course, there was a lot of concerns around availability of hardware, memory, inflation, et cetera. How would you characterize what's changed here? It seems like the backlog still remains pretty elevated for you guys. But how would you just characterize availability now of product to help meet this backlog?

Thanks, Asiya. I would call the environment a bit more normalized. There is definitely continued urgency from customers. And I think that speaks to their needs, particularly in the AI side of things, but they've now been at this for 3 quarters. And so I would say things have become more normalized, and that's both from a standpoint of expectations vis-a-vis pricing as well as supply chain needs.

The backlog does reflect that there are still delays in product delivery. But I would say the level of consistency and hitting delivery dates has been better. There is not a level of double orders, cancellations and all of those phenomena. So when we add that all up, we would say the markets become more orderly in our space and more normalized and customers have adapted to the environment. So -- and to that end, those variables did not influence our results for the quarter from any meaningful way with respect to pull forward or the like it's become more orderly.

Your next question is from David Vogt with UBS.

So maybe Chris and Al, just a question about demand and elasticity. I understand that you saw relatively strong growth in server storage, netcomm and some other categories. Can you speak qualitatively to feedback or maybe conversations you're having with customers around their tolerance, if you will, for pretty meaningful price increases across large technology platforms? And the reason why I'm asking it doesn't sound like pull forward in the quarter or any sort of degradation in demand. But I just would love to kind of get your thoughts in terms of what the feedback has been, given that a lot of the OEM partners that you work with have expressed it sounds like continued price increases as we move through not just the first half of this year but into the second half of this year? And then I have a follow-up.

Yes, sure. I'll start the answer. You're right, we have not experienced, what I would say, is a meaningful pull forward in the quarter. In terms of customer engagements and discussions look, nobody likes it when prices go up. But I would say that our customers are engaging us more frequently and more detailed discussions around analyzing their choices. They're being really rigorous around this because they still have mandates within their organization to deliver on, whether it's a mission outcome or a business outcome. And so customers are still purchasing technology. There's still spending to their budget. And we're actually seeing in cases where budget from other functions within an organization are being reallocated to technology because of the essential nature across their businesses. So it gives us an opportunity with our customers to shine, frankly.

And so when you look at -- I'll give you an example, PCs. PCs were very strong in terms of growth this quarter. because customers were willing to make the mission-critical investments, notwithstanding the pricing. So I think we're going to continue to see that approach from customers and working more and more with CW to identify areas where they can cost optimize across their entire technology estate.

And David, maybe I would just add, if you look across our end markets, there's probably a little bit of diversity in practice. Obviously, at the enterprise end of things, that have very, very dedicated technology teams. They're very much on top of what's going on in the pricing market, supply chain market. And the implications for them are significant because their purchases can be bigger dollar amounts. As you move down the curve in the mid-market, small education, it's not for a lack of sophistication, but the level of awareness and then acting on things is a little bit different pace than at the enterprise level. I do think that, that has evolved over the last several quarters and you're seeing that play out. And I would say -- and that's why we feel encouraged by the opportunities in front of us as this rolls down the curve, and customers look to kind of at scale, take advantage of opportunities in the market to move forward, particularly around their AI needs.

Great. And maybe just as a follow-up. And Chris, you touched on it briefly in your other answer to my question. But when you think about prioritization, I think you mentioned, Chris, that customers are looking from pulling spending from other sort of initiatives internally. Is that -- did I hear you correctly? And are you seeing within your own portfolio a shift away from more discretionary programs and products, I think, as AI just pointed out, more mission-critical. So does that mean that sort of the services vertical for at least the foreseeable future, probably suffer some reprioritization relative to hardware in your portfolio. Is that the right way to think about it?

Yes. No, I wouldn't think about it that way. Let me start with the reallocation of budgets. And this has been a quiet trend for the last couple of quarters where technology budgets have been increasing a little bit in different areas because the initiatives that they support are specific to functions and CFOs are now saying, well, that now becomes technology spend. So this hasn't been discussed a lot, but it certainly is happening.

In terms of services versus hardware, what we're seeing is just the natural uptake of new technology, and we see the infrastructure spend happening right now. But again, there's no component of what we're doing for customers where services are not going to be critical to what they're buying from us. So there's -- I wouldn't think of it as an air gap going forward. I would think of it as the trigger, the start of increasing demand for the services that we bring to bear across the full spectrum of needs.

Your next question is from Amit Daryanani with Evercore.

I have 2 as well. I guess, maybe the first one to start with AI infrastructure, obviously becoming a big investment area for your customers. I was wondering if you could talk about, a, are you starting to see an uptick in engagement with the frontier model companies as they perhaps look to gain exposure to your customer base? And maybe in this contract, how is that engagement different from the hyperscale vendors when they started doing this?

And then maybe on the second part on this, are you seeing customers, especially the enterprise customers evaluate and repatriate workloads back on-prem to optimize the token cost? And is that a better option for CDW versus running things in a public cloud and a frontier model?

Thanks for the question. I'll start. In terms of engagement with the AI labs, et cetera, we've made great progress there. And we've been through this cycle before where new partners come on board and they have to kind of sort through the value of the channel. I would say that the AI labs have found very quickly that the channel is a friend, and it's a great route to market for them. So we have seen terrific progress in partner programs in relationships and building investment from them, et cetera, to bring their capabilities to the market, particularly mid-market is a significant focus from a scale opportunity perspective. And our vertical segment is also a very significantly attractive customer end market for the AI labs.

In terms of the second question, which was...

On-prem.

Yes. We are seeing repatriation, but this is what I would say, Amit. I don't -- it's not better or worse for us. We're going to help our customers optimize wherever their workload should be. We certainly are seeing larger customers now starting to test in the cloud, et cetera, because of easy access, but getting more rigorous around optimizing cost and therefore, bringing some workloads back to on-prem. We are seeing some small businesses, for example, heavily leaning into the cloud because they can't afford or get access to the hardware.

But the bottom line is, as is always the case with technology, it's about optimizing, optimizing for cost, optimizing for security, optimizing for quality, optimizing for output. And so it's not if or it's how do we do this together to deliver -- to achieve our outcomes in the more cost-efficient secure quality way. And that is where we sit. And so we see this as a positive opportunity across the board.

Perfect. And Alex, I can just have you clarify this a bit. Free cash flow is fully muted in Q2, I think, at $27 million, and free cash flow as a percent of net income, I think, is at 45%, 46% for the first half. Can you just walk me through what needs to happen in the back half of the year for you to actually get to this 80% to 90% free cash flow conversion? And where would this uptick come from?

Yes. Sure, Amit. Really timing effect through the first half and particularly in Q2. So we had mentioned in Q4, we would expect in this environment from a pricing and supply chain perspective that we would likely be making working capital investments and we've done just that, right? That is the standing by our customers and ensuring that they get the product they need at the price that they can afford.

And so that is what we've been doing to deliver for our customers. That being said, Amit, like that you just boil it down, you do have kind of some moving parts with AR and AP. But if I had to boil it down, we have about a $400 million increase in our inventory since the end of the year. And as we sit here now, we start to see an environment that's become more normalized, we would expect that we will rerationalize and ratchet back a bit in that regard. And so it's a bit of a kind of intraperiod movement that you're seeing now, but we're super focused on delivering free cash flow, and we know the flywheel effect that has. And so the biggest variable will be on the inventory front between here and the end of the year.

Your next question is from Joseph Cardoso with JPMorgan.

Maybe for my first, it's great to see the hardware momentum over the past 2 quarters, along with the signals that it's continuing into the back half. Maybe just given kind of the momentum on the infrastructure side, it sounds like there's a confluence of drivers here, we're hearing, project accelerations as customers take actions given the pricing trajectory demand being stimulated by Mythos and then AI inferencing I was just hoping if you can help contextualize what you guys are seeing from your customers on the ground around each of those.

And of course, if I'm missing anything. And maybe just share how you're thinking about those in terms of materiality and timing? And then I have a follow-up.

Okay. Joe, could you just characterize the serious categories that you just hit you went quickly and covered a lot of things, and I want to make sure that I answer your question, just give me the highlights.

Yes, sure. So basically trying to understand what's the demand drivers here and timing of them as it relates to project acceleration due to pricing dynamics demand stimulated by Mythos and then investments more specifically on AI inferencing?

Okay. Got you. Okay. So pricing, yes, we said all along, pricing is driving some level of demand, but I would not hover on that too much because as you see, the underlying demand is strong and durable given our written and invoicing and backlog and how that's all working together. It's certainly a factor, but it's not the biggest factor.

regarding Mythos. Yes, that's an important driver right now because -- and just more broadly, I would say what we're seeing from a security perspective and the models hacking going on that has peaked everybody's interest around security and certainly is driving our security services, consulting and assisting with our customers to try and secure at scale their environments.

And then the third one was...

AI inferencing.

Well, yes, AI interesting. This is an interesting one because with token economics, I come back to, it's all about optimizing for our customers. And as you know, we will serve customers regardless of where work was reside, et cetera. And so we are actually seeing with customers of all sizes, a pickup -- significant pickup in engagement around token economics and the ability -- and how to optimize for models, how to optimize for locations. And so I would call that a significant driver of services for us.

And then ultimately, obviously, that is how the -- that is how the hyperscalers in the model, the mom makers achieve their return on investment dollars that they're investing now. So CDW will continue to support adoption and consumption and our partners obviously are embedding in us doing that. That's the biggest growth vector or growth catalyst right now, I would say.

Got it. I appreciate the color there. And then maybe as my follow-up and turning on to services which you just mentioned. You touched on it a bit now. But I guess if I can ask in another way, how should we think about the timing of the catch-up that you're pointing to. And do you have visibility into these services? And is it just a dynamic around delayed, for example, due to the installations of all the infrastructure being procured and surfaces are basically going to be stacked on once the infrastructure is installed? Or is there another dynamic at play that makes transparency around timing less granular .

Yes. No, I would -- 2 things. It is really purely timing and implementation timing. So as we look forward over the next quarters, we're feeling very confident in the engagement with customers, we have good visibility to where those needs are given the time line of engagement to execution, it will take a little time for us to see that pick up significantly. But by the time we get through the end of the year around in the corner, we'll see the fruits of the labor that we're looking at right now.

At this time, I will now turn the call back to CEO, Chris Leahy for closing remarks.

Thank you, Joe. And let me close by recognizing the incredible dedication and hard work of our coworkers around the globe, their ongoing commitment to serving our customers is what makes us successful. Thank you to our customers for the privilege and opportunity to help you achieve your goals and thank you to those of you listening for the time and continued interest in CDW. I look forward to talking to you next quarter.

This concludes today's call. Thank you for attending. You may now disconnect.

Good morning, everyone. Thank you for being here. I have the pleasure of hosting the fireside chat here with CDW and pleasure of hosting Chris Leahy and Al Miralles. So Chris Leahy, CEO; Al Miralles, CFO. Thank you both for coming to the conference, and thank you to the audience as well.

Chris, we've been discussing AI all through this conference. So I think predictably, a lot of my initial questions are going to be focused on that, and I'm sure you're answering those questions all day here today. Investors want to really focus on CDW as a leader in this industry, how do you participate in AI in sort of this new world order that includes a lot of AI workloads, how does CDW participate in it with your customers?

Yes. Well, thank you, Samik, and thank you for having us. We're happy to be here and happy to answer the questions. If I could just zoom out for 30 seconds and then zoom back in. Obviously, we're all operating in an environment where technology complexity is exploding, frankly. And this is where CDW plays well. This is who we are in terms of helping our customers navigate the complexity.

I think we can be clear that customers are no longer in the experimentation stage of AI, but they're asking us how to implement AI safely, economically and at scale. And that takes not just accessing a model or through a product, it takes the entire infrastructure stack from server, networking, data, storage, governance, cloud security, all those things along with change management working together. And CDW is uniquely positioned with our full stack capabilities and the ecosystem of diverse customers that we have to deliver against that.

The Q1 results that you've seen illustrate the strength in the infrastructure and software area where we're seeing customers continue to progress their AI spend and continued modernization. And I would just say as this complexity continues to increase, our scale, our technical resources, our partner reach and our trusted advisory role becomes even more important. Now at this moment in time, we are pairing that with sharper operating discipline and a clear accountability for reinvesting back into the growth areas of the business.

So we've talked about our AI-powered modernization across the enterprise. We call it geared for growth, and it's how we're going to simplify CDW's operations. We're going to decomplexify the work. We're going to modernize our workflows and embed AI across the whole of the enterprise.

The goal is obviously to have clear financial commitments regarding this work. So don't think of this as a cost program. This is a program to ensure that we are delivering better experiences and outcomes to our customers, to our partners, to our coworkers and ultimately to the business. The goal is to translate productivity into operating leverage and then have a disciplined methodology to translate that operating leverage into reinvestment and shareholder value.

Now with regard to AI and the areas that we are seeing at the moment, I'll give you a couple of examples. We've already said that people are moving to production. A couple of areas where CDW play would be AI factories as an example, where we're providing for enterprises and large companies and neoclouds as well, full stack solutions, including design work all the way to the procurement.

And in many cases, we're landing on a managed service, GPU as a service, which is good for the customer and great for us. Other areas we're helping customers with are optimizing workloads across the hybrid environment. So those are just a couple of examples of where we're currently working with customers.

Maybe on that front, the private AI factory that you've talked about recently as well. Can you just help us understand what the pipeline dynamics are behind deals like those? How long is a typical sales cycle from initial engagement to production? And do you feel you're at a point where that's a repeatable process across your customer base?

Yes, that's a great question. And I'd just say that customers are at all different stages and whether they need a kind of quick assessment or if it's a longer-term project, we have projects that can be a month long, can be 6 months long, can be 3 months long. So those are -- they can be very, very much varied.

But you're right, the exciting thing for us and for customers, particularly in the verticals is the engagements end up being repeatable. So the architectures that we're co-designing with our partners are ones that are patterns that we can use again. So we are absolutely at the point where the solutions that we're bringing to market are solutions that we can replicate and deliver at a higher and higher margin.

Okay. Interesting. Maybe let's take a step back. The last few years have been anything but predictable. And you've had tariffs, government shutdowns, everything to sort of navigate. And now you're looking to navigate AI as well. When you look back at how CDW did during that dynamic period, what are the lessons you would take forward to what you now have to execute in this sort of world where everyone wants to deploy AI and wants your help to help deploy AI?

Yes. I think you described it very well, Samik. So I think these past few years have reminded all of us that we have to stay focused on those things that we can control and that resilience and adaptability are more important than precision in forecasting, et cetera, but being resilient and adaptable.

And for us, our takeaway is that our services-led model is very important. It's a strategic engine for the company going forward, and it helps us perform across all cycles. So I'd say that's number one. Number two, strong balance sheet has been a real benefit for flexibility in a world of uncertainty. So we lean into our strong balance sheet.

And then lastly, I'd say customer-led approach. You know CDW has been very much customer at the center of everything we do since our beginnings 42 years ago. This has been really important during this period and a reminder going forward that we are investing in where demand is real and not theoretical, because there's a lot of theory out there.

So when you think about AI, that fits naturally into these things that I've just identified. And AI is a real platform shift. CDW has been through many technology shifts throughout our time period. And so staying resilient, staying customer-led and continuing to scale the services that are high relevance, high growth, AI first puts us in a great position as we move forward.

Okay. Great. AI deals, you mentioned margin accretive, higher-value services attached and some recurring revenue streams as well. Just maybe help us dimensionalize the level of attach that we should expect associated with the AI deal versus what a similar sort of traditional deal would look like? How are we thinking about sort of the higher services as playing out on an AI deal itself? And how does that become sort of a tailwind for the company over a multiyear period?

Yes. When I think about the services associated with AI engagements with customers, you think design and readiness assessments, you think security and governance, you think deployment, you think orchestration. We also very much focus on managed services. So if you step back and think in totality, AI as a technology is putting our customers in a position where they value more services from CDW, okay? They -- particularly the mid-market.

But needing more advice, design work, et cetera, and then actually implementing on the blueprint. And so we see AI as an opportunity to add a higher magnitude of services around what we're selling at a higher margin with more recurring revenue opportunities through our managed services.

You announced the Boost Run partnership to offer GPU as a service to customers. How do you think about or how should we think about the economics of that model for CDW versus traditional on-prem infrastructure sale?

Yes. So this is really interesting, and it's a very strategic partnership where we provide -- where we sold, we actually implementing for Boost Run their NeoCloud. But equally, that gives us access, in many ways, inventory for us to bring to our customers in a supply-constrained time when it comes to AI compute and access. So it is a demand driver. It is -- it's an access to the supply constraints.

And it allows our customers to drive to an outcome and solution more quickly because you've got cloud capacity, you've got on-prem, but because of the supply constraints, the ability to have a neocloud where they can go and put workloads and speed to production is becoming more and more important. But if you don't have supply, you can't do it.

Is this a shift in how CDW monetizes not only AI infrastructure, I mean that looks to be the case that you can think about that. But even traditional in the future, like how do you think about moving from a transactional to more recurring revenue by changing the go-to-market with even the traditional side of your business on this?

Yes. Well, we're seeing that with the traditional side as well. When you think about as-a-service, for example, most of -- much of the hardware that we sell, we also have very sophisticated as-a-service offerings. Great example would be for the 2028 Olympics we're doing Device as a Service. That's a massive production for the Olympics. Every device that anybody touches at those games, they will have been prepared and delivered and managed and secured by CDW. So across the entire stack, there is more and more opportunity to provide as-a-service recurring revenue.

The other thing is with AI, and I think you were getting to this point, when we think about the economics and how we get paid, there is services upfront, there is resale, there is managed services on the back, but there's also consumption. All of our OEMs, all of our partners are interested in adoption and consumption. That is the next wave of growth, and we are well positioned to help them and help our customers drive consumption.

What the customers come to CDW for is to make sure that when they're making choices, they're optimizing. They're optimizing where they put a workload based on cost, based on performance, based on scalability and flexibility, based on compliance, based on security. These are all vectors that customers have to take into consideration and make trade-offs around, right? And with AI now, it's making those even harder to do. So lots of opportunity going forward in the consumption and adoption area and in helping our customers optimize from the get-go what they're spending and where they're spending.

Chris, maybe just take a sort of slight digression here in terms of rate of demand, but also you're seeing supply constraints. How does CDW add value to customers when you particularly run into a supply-constrained world like we are starting to see now?

Yes. Well, I think it's pretty straightforward in that we are the largest scale. We have the largest leverage with our partners, and our partners really do turn to us to -- when we need that and where customers need that. So in this situation that we're finding ourselves in now, we have been able to garner information about price increases and have access to inventory in time for many of our customers to purchase or get their purchase orders in well in advance of price increases.

So I think the benefits we bring are information, and it's relative information, what's happening at each of the OEMs, what's the relative cost changes, timing, when is it going to increase, clarity on supply, where it sits, can we actually get it in. And the team did a really phenomenal job to the extent where we were able to deliver on a lot of product that's not even yet going to be implemented. So they just want to get a hold of it.

Pricing, I mean one of the questions we run into often is supply is constrained, pricing is going up. What are you seeing sort of from your customers and in terms of response to those price increases? Any views on that front?

Yes, I'm happy to take it, Samik. Chris mentioned in her opening comments that this is where we're at our very best. That is in dynamic environments, volatile environments with respect to pricing and supply. We sit in the middle. We sit in the middle of vast OEM universe and a big customer base. And so that's just what we've done. And while at the beginning of the year, we saw quite a bit of price variability and lots of talk about supply constraints, we've helped customers navigate through that.

We certainly have seen OEM by OEM movements in pricing and had to help our customers navigate through that. I would say, as we exited Q1 and into Q2, it's more of an orderly environment. We continue to work closely with kind of both universes populations that is partners as well as customers to figure out how do we supply -- how do we get the supply, how do we fulfill demand and we make sure that customers are getting the most for their buck.

Okay. So maybe let's do a bit of deep dive into the Geared for Growth initiative. You're targeting $100 million in savings -- run rate savings by 2027, $200 million by 2028, with roughly half of that reinvested in the business is, I think, what you outlined. Any more texture around what are the areas you're targeting? Where do those savings come from?

Yes. Let me start, and Chris may have something in there, Samik. So in terms of the major drivers, so first, you should think about this, Chris said the -- this isn't just cost cutting. This is structural for us. This is how do we actually sustainably improve our cost base, but also end-to-end experience for customers, partners, coworkers.

The areas that we're focused on include looking at workflow and process. So how do we actually make process end-to-end more seamless, frictionless, faster moving, easier decisions. So think like quote-to-cash processes from end-to-end, looking at our supply chain. So obviously, we're a big direct procurer and indirect procurer. So how do we use data and AI to forecast demand, forecast supply, make sure that we're getting kind of cost of goods sold for the best possible price.

We're customer zero in terms of looking at our own tech spend and using AI to determine the -- how do we optimize our tech spend, make sure we're getting the right ROI. And then just classic traditional looking at our operating model. How do we move faster? How do we find the places to centralize? How do we find the places to do things differently in terms of our operating model and do them in a most efficient manner? So that's -- they're the core areas, and we continue to learn as we go, but we are fast at work on those fronts.

I would just add to be clear that our ultimate goal is to drive productivity that translates into operating leverage that allows us to reinvest in the growth areas of the business and obviously return value to shareholders.

Maybe just following up on that. I mean, what's the confidence that the reinvestment component that you have drives a better ROI rather than just helping you maintain the ROI where it is? Like how do you provide confidence into that?

Samik, what I would say is that we are committed to, as Chris said, getting back to operating leverage and getting our SG&A ratio back to that sweet spot, 55%, 56%. So as you can imagine, there's always pulls on demand for reinvestment, and we have a rigorous process to look at ROI and make sure that every dollar we're putting back in, in the way investment is going to get a compounding return. So that's how we're looking at it. And I would say we're in the process. We're in the thick of it, and we feel really good about what the outlook looks like.

Think about the investment buckets as in the sales organization, sales capabilities, not just people, but tools, technical industry capabilities in the areas that are revenue producing and margin expanding.

Okay. Maybe just to sort of then look at what you can do beyond what you've announced already, if some of the plan that you've announced already with the revenue growth that you see on that front doesn't meet up to your ROI expectations? Is there opportunity to scale out more broadly the Geared for Growth program? Do you already sort of have some level of visibility in terms of what a plan B or more extension of that plan would look like?

We do -- look, while we are in full force on these efforts, we definitely -- we view this as multiyear. So we're going to learn as we go. The targets we gave, we feel really good about achievability, but we expect that we're going to be able to amplify further, right? We have nothing to say today in terms of changing those targets, but I think the upside is real there and feel good about the path we're on.

Got it. Al, you did mention SG&A-to-gross profit, the ratio being above sort of 55% to 56%, you want to guide it down to that level. What should investors look for? Is the second half a good comparison to then look for in terms of proof points that you start to get closer or with Geared for Growth being more focused on 2027, is 2027 when we start to look at that?

Sure. So look, we've been going on this. I'd call Q2 inflection point in terms of those savings beginning to flow, but sequentially will improve as the year plays out. And so we've said that the back half of the year is where you really would see savings coming online, and you start to see sequential improvement of that SG&A ratio. As we go into '27, we'd expect that will continue to improve.

Importantly, Samik, I would just say the -- seeing the improvement on the expense base and the SG&A ratio, but also seeing from our investments, our top line and our gross profit continue to grow, right? So we've made a lot of investments. We've got a strong go-to-market engine that's running. We are focused on services at scale. So it should not only be focused on seeing the expense base movement, but also getting the top line acceleration, which will further drive operating leverage and SG&A ratio improvement.

Okay. So on that front, on the call, you did express confidence that the netted down revenues do revert to a more normal level in the second half of the year. What is driving the confidence on that outcome?

A couple of things. First of all, what we saw in Q1 on the hardware front was pretty extreme, right? We had customers moving with urgency, particularly in solutions hardware given the price movement and the supply movement. And our outlook calls for that continuing through Q2. As we sit here now and what we talked about on the Q1 earnings call, order activity continued to be strong. So there's a possibility you could see hardware continuing that path and the growth continuing. But our outlook as we sit here now calls for that balancing out.

And therefore, on the back half of the year, netted down revenues kind of playing a more equal part in the allocation. That confidence on netted down revenue is driven by a couple of things. Number one is the durability of SaaS and cloud. They've got really good line of sight to that element of our business. A lot of that business is recurring and reoccurring. And we just think that from a customer perspective in terms of decision-making and allocation of spend, you're going to see balancing out as the year plays out.

The -- so you mentioned the hardware, the likelihood that it stays strong even in the back half. Are you seeing customers trying to pull ahead to get ahead of the price increases or avoid supply constraints? And -- it doesn't seem like that's in your base case for the second half that you have a lot of pull forward if you're assuming netted down revenue mix improves?

So in the first quarter, pull forward was around $100 million, but really important that I note that the build of our backlog in Q1 into Q2 was even higher than that. So in Q2, we would expect a bit more pull forward, but it's conceivable you could continue to see the backlog continue to build as well. So while our outlook is still cautious in terms of hardware spend really continuing to sustain in the back half, when we report Q2, we'll give more information in terms of could that possibly extend knowing the pull forward, but also that backlog build.

Okay. Okay. Got it. You faced some challenges related to services growth in the quarter. Can you just walk us through the drivers there? What happened in the quarter related to services?

Yes. With regard to the services performance in the quarter, that was really customer timing decisions. Hardware was shipped and received and not implemented. So services will follow. There's nothing structural from a demand perspective. And we just expect that long-term opportunity, services will continue to be a robust provider of growth.

Okay. Okay. Let me just check if anyone in the audience has a question.

Given the -- I don't know if you sat in the lunch today, but given the amount of effort that's taking place in many companies to incorporate things like Claude and other types of capabilities, are you having any view on how software sales are going to start playing out from your experience and your conversations with clients?

The conversations with clients are reflecting an upward tick in demand for software. We are seeing that, and we're seeing more and more companies who are wanting to explore multiple LLMs and the models. They're looking to us to help them understand how to, again, back to the optimize and not end up with too much spend across multiple models. So we are seeing an uptick.

You play both sides of this aisle, the services and the hardware. And you talked about being in the mid-market, which is a wonderful place probably for this type of service. Are you seeing also then a pull-through -- an increased pull-through on the hardware side by engaging on the services side business? Like in essence, has it lifted? Or are you just seeing -- you're getting the same amount of business in the hardware side?

Yes. No, I would say that's the beauty of the model, which is full stack, full life cycle. And we are always seeing whether it's we start with hardware with a customer because they have a particular need and attaching services or start with services, it's naturally going to pull through the hardware. And we continue to see that flywheel really work quite well, add AI into that and the ability to drive that flywheel with more intelligence, more speed, more accuracy, I would just expect that to get better and better.

Did you have anything that's on the specific nature in terms of a specific uptick or a lift that you've been seeing as a result of playing both sides of this or prior to having deep penetration into the services business?

I don't think so. I'm not -- there's nothing that I'm particularly pointing to. The reason I say that is because when you think about a solution, a solution involves everything. It is rare today that there's a point product unless it's a replacement and they're buying it on our digital site. But it's typically going to include services, software, hardware and some element of cloud in everything.

It's a matter of where we start and the journey from, for example, advisory services and where that takes us into a cloud migration, for example, and then managed services or it might be a refresh of a device that takes us well beyond the refresh of the device because we're identifying other opportunities and bringing in our experts around AI and productivity and suddenly, it turns into an expanded engagement.

I didn't get [ times. ] So one last question because you talked about the SG&A, and it looks like it hit a level where you finally said, hey, we have to do something about and get involved with Geared to Growth -- Geared for Growth. But were there other things taking place in the business that were triggering you in advance of that, sort of like warning signs or like something was a little out of kilter in some respects that you needed to address the overall issue of probably the cost of complexity in the business?

Yes. Here's what I would say. Obviously, you look back over the last number of years, nobody would debate the unprecedented times we've seen from a tech perspective, including AI. We called 2025 really a transitional year. We had made significant investments in our go-to-market engine and acknowledge that as we entered into 2026, really important we get back to operating leverage and that we see improvement in that SG&A ratio back to what we'd call our sweet spot, kind of 55% to 56% of gross profit.

We have done a lot of just expense reduction over the last 3, 4, 5 years as we've had kind of demand moderations, ups and downs. What's different about Geared for Growth that it is structural. It's really kind of reengineering, rethinking how we operate, how do we get down to the core. And the timing is great from an AI perspective because we can really reimagine process from end-to-end. So that was the impetus for it. And we think as we think about going forward, the potential for amplifying our profitability, it's an important component.

As you see your customers kind of in early stages of trying to figure out how to leverage AI, do you see -- are you seeing more DIY activity where they would adopt a certain LLM and integrate it to their back-end data? Or are you seeing more of a willingness to adopt like the Agenta capabilities of an existing software vendor? So you mentioned software activity is upticking. It sounds like a lot of that is adopting LLMs, but is it both? Is it one more than the other in terms of deciding, do we want to just leverage an off-the-shelf third-party application vendors, agentic solution versus building your own? I'd be curious on that.

Yes. No, it's a great question. And there's a wide spectrum depending on the size of the company, the enterprise, the industry, the use cases available, et cetera. So you certainly have a large number of smaller companies trying things. But as we've moved from this experimentation stage into much more production, what we're seeing is more clarity around use cases and then decisions being made to optimize for the outcome of that use case.

So it's hard for me to say, is it one or the other because it's everything. It's just like we're in a hybrid world. Most organizations are going to have cloud workloads, AI workloads in the cloud, on-prem, colo, et cetera. It's the same thing in terms of the usage of which models, the LLMs, small language models, how they're integrating it with their own data. It is a wide spectrum. It just really depends on the use case.

Maybe if we take a step to a different topic, which is your changes in the reporting segments recently and what was the motivation behind that? Particularly, I think you are now disclosing financial services as a stand-alone vertical where you've highlighted that as a stronger performer in terms of AI inferencing driven server and storage demand as well.

So just help us think through rationale of the resegmenting that you've done? And does the Financial Services segment become sort of more of a proof point of what you're seeing relative to customer demand on the AI side?

Yes, I'll start, and Chris may add here. First, Samik, our criteria, right, thinking about segments is the -- is it a segment that appropriately reflects our verticalization strategy, check on financial services? Is it a segment that has critical mass, critical scale and a good depiction of our overall business checks? So they are the things that we look at.

We think about our Financial Services segment and buying centers there. It's a diverse set of customers, but we do have an allocation there on the enterprise space. So they are very sophisticated buyers. They are very focused on AI and inferencing intensity, and they are very focused on kind of having the broad array of capabilities to support them with AI. So I think security, latency, compliance, et cetera. So timely in terms of the disclosure, in terms of fitting for what we think is important for segmentation, but also the critical theme on the AI front.

Okay. So maybe to wrap up, one, let's look 2, 3 years out, the Geared for Growth initiative, if that works out as planned, what's the right earnings algorithm for CDW? Do you get back to the double-digit earnings growth that it's like every investor wants to see that at this point. So how should we think about that probably being the end goal here? And do you see that as a realistic target?

I'll start, and then Chris will definitely jump in on this. So look, if we look at the investments we've made, they've been meaningful to really bolster our business and build out our capabilities. So really starting with last year and before getting our go-to-market engine humming, including verticalization from a business perspective, creating a services business that scales meaningfully and takes advantage of AI, really, really important investments we've made there.

And then just the benefits of the diversity of our end markets, right, which we think is really important in terms of the integrity of our business. If you add all of those components, they are compounders to our growth, then add Geared for Growth. That is then add assuring that we can get to operating leverage that we will get our SG&A ratio back to the sweet spot.

All of those elements on top of our capital allocation, including our willingness and opportunity to lean into our stock when it's weak, like what I would say right now is our stock is dislocated, we're taking advantage. We will use that to both make smart capital allocation decisions, but also drive EPS accretion. All of those elements, Samik, get us back to confidence that we can return to double digits on EPS growth.

I guess the only thing I'd say in rounding out is, obviously, we've got the levers in place. We've got the structural tailwinds, and we're committed to getting there.

Maybe just the last question then to wrap up. You did mention the buyback and that being sort of tracking as planned. But when does it become -- I mean, you clearly have visibility into earnings growth being better, the stock is dislocated, as you mentioned, you have free cash flow. When does it become compelling enough to take a more aggressive stance on the buyback?

It is definitely compelling enough. Look, we were leaning into the stock last year. We leaned into buying back the stock in the first quarter. We think our stock is dislocated as we sit here now. So we view it as very compelling. Obviously, we had recent news that we increased our share authorization by $1 billion. So if you take where we were at Q1 plus the $1 billion, we have $1.4 billion of capacity there, and we expect that we're going to use it in '26 and into '27. There are lots of options with your capital allocation. Right now, I'm not sure there's anything better than buying back our stock.

Great. I'll wrap it up there. Thank you. Thanks for coming to the conference. Thank you to the audience as well.

Thank you.

Hello, everyone. Thank you for joining us, and welcome to CDW First Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Steve O'Brien with Investor Relations. Steve, please go ahead.

Thank you, Samantha. Good morning, everyone. Joining me today to review our first quarter 2026 results are Chris Leahy, our Chair and Chief Executive Officer; and Al Miralles, 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 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 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 8-K 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 the webcast.

Our presentation also includes certain non-GAAP financial measures, for instance, 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 8-K. Please note, all references to growth rates or dollar amount changes in our remarks today are versus the comparable period in 2025. Our net sales growth rates are described on an average daily basis unless otherwise indicated.

As a reminder, we made changes to reflect our updated go-to-market structure, which are reflected in our earnings materials on the website. We also released an 8-K filing last Friday, which provides quarterly financial performance for 2024 and 2025, aligned to our new segment structure. We will talk through these new reported segments now and in the future. Replay of this webcast will be posted to our website later today. This conference call is 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.

Thank you, Steve, and good morning, everyone. I'll begin today's call with an overview of our first quarter performance, strategic progress and provide thoughts on the balance of the year. Al will provide additional detail on our results our capital allocation priorities and further perspective on their outlook. The team delivered a strong start to the year in a complex and fast-moving environment. excellent top line performance reflected agility both in security supply and capturing demand for AI investment and ongoing infrastructure modernization. For the quarter, consolidated net sales increased 9% year-over-year. Gross profit grew 6%. Non-GAAP operating income increased 2%. Non-GAAP net income per diluted share grew 6%, and our adjusted free cash flow totaled $251 million. .

Across all sizes and industries, customers navigated the operational challenge of moving AI from exploration into real production environments. Customers also navigated memory supply and pricing constraints which reshaped budget priorities in this quarter. Teams responded quickly by leveraging our partner relationships, full stack capabilities and balance sheet strength to help customers secure product and identify alternatives. Once again demonstrating their unmatched execution and yet another challenging supply market. Our ability to address the shift in near-term customer priorities and meet ongoing AI hardware infrastructure investment fueled strength across networking, storage, servers, power and cooling, which drove heavier infrastructure hardware mix in the quarter.

Consistent with typical patterns, services, warranties and software assurance, which carry higher gross margins or lower customer priorities in the quarter. The built and flexibility of our model helped support the resulting gross margin impact, enabling record first quarter gross profit and solid gross profit growth. While discretionary investments and seasonal expense patterns dampened non-GAAP operating income, disciplined capital management drove record first quarter non-GAAP net income for diluted share and strong cash flows.

Let's take a closer look at the quarter. There were 3 performance drivers: our balanced portfolio of customer end markets, the breadth of our full stack offering and relentless execution of our growth strategy. First, our balanced portfolio of diverse customer end markets. Today, we operate across 3 U.S. segments: commercial, government and education. In our Commercial segment, teams are organized around 3 customer channels: Corporate, health care and financial services. Government teams are aligned to state and local and federal customers while education teams are focused on K-12 and higher education.

Separately, our other segment represents our combined U.K. and Canadian international operations. To maximize our ability to address the unique needs of customers based on size, within each end market, we further align our teams by customer size, enterprise, mid-market and small, each covered by dedicated sales professionals, industry strategists and technical resources. Against this quarter's complex backdrop, the diversity of our customer end market exposure, again, served us well with strong results in commercial, state and local, K-12 and international, more than offsetting market-specific challenges in federal and higher education.

Commercial had an excellent start to the year, up 10%. Growth was broad-based across all sizes of customers driven by demand for infrastructure hardware and software, reflecting both AI demand and the desire to manage supply constraints. Government [indiscernible] 5%. State and local double-digit increase more than offset a low single-digit decline in federal, which was impacted by budget timing and procurement delays stemming from last year's shutdown. Education increased 3% with K-12 strength, purely driven by client device purchasing in advance of price increases, offsetting extended decision-making by higher ed customers.

In our U.K. and Canada operations, which we report together as Other, the teams executed with focus and speed and together delivered 18% growth in U.S. dollars. U.K. delivered high single-digit local currency growth driven by private sector demand, while Canada was up double digits in local currency with balanced growth across end markets, reinforcing the scalability and relevance of our model beyond the U.S. The team's ability to address customer priorities was underpinned by the second driver of our performance, our comprehensive services-led full stack end-to-end offering, which includes hardware, software and services.

Hardware increased 10%. Growth was led by infrastructure with networking servers and enterprise storage each up more than 20%. Underlying client device demand was strong, but reported growth was 3%, reflecting difficult year-over-year comparisons driven by tariff-related pull-ins in the prior year, particularly in K-12 as well as shipment delays this quarter that pushed orders and elevated backlog. Software increased 11% as customers continue to invest in productivity, collaboration and security platforms, license growth strong and focused on AI readiness and standardized core workloads. Cloud customer spend growth continued at a healthy pace but slowed compared to prior quarters as customers prioritize hardware investment.

Services top line was flat in the quarter. Solid performance in Professional and Managed Services was offset by declines in warranties, reflecting an infrastructure heavy revenue mix and normal timing between equipment purchases and installation. Notably, professional and managed services gross profit contributed nearly 15% of total gross profit growth, underscoring the strategic and financial value of higher-margin services. Once again, customers across our end markets leaned on CDW to help them navigate complexity and optimize their IT investments with speed and confidence. Sustaining that level of value consistently and at scale requires excellence in both how we go to market and how we operate.

And that brings us to the third driver of our performance this quarter, our growth strategy. At the core of our growth strategy is a clear shift we are seeing from customers moving beyond interest in AI to a focus on how to put it to work in real environments at scale and with measurable business impact. That shift plays directly to CDW's strength and sits at the center of our AI forward full stack strategy. We are building CDW to be AI first and outcome obsessed. And at the center of that is our coworkers who every day turn complexity into real outcomes for our customers and partners.

To achieve this, AI is an operating capability at CDW, not a bolt-on, and it is being embedded across how we operate, how we sell and the solutions we deliver. AI-driven enhancements across how we sell and operate include Coworker [indiscernible], deeper data integration and platform readiness and productivity gains from tools such as Agentic RFP capabilities. During the quarter, we furthered our progress in bedding AI into our go-to-market motions with our CDW assist super agent, which helps sales professionals, prioritize opportunities and engage customers more effectively through insight-driven AI-supported workflows.

At the enterprise level, AI is being embedded across our core systems and end-to-end workflows under our AI-powered modernization initiative, which we call geared for growth. Geared for growth is translating AI-enabled productivity into operating leverage, supporting margin discipline while providing investment capacity to sustain scalable growth. We expect the benefits from Geared for Growth enterprise initiatives to begin flowing through in the back half of this year, building over time. Customers are focused on the same opportunity, turning AI's promise into practical, secure and measurable outcomes. AI adoption is a compute-intensive shift that increases both services intensity and hardware relevance. It reshapes how customers build, operate and secure their environments, requiring them to connect data, embed AI into existing systems, balance cost and performance and govern usage at scale, all while continually optimizing infrastructure.

As complexity rises, customers need a partner who can execute reliably at scale. CDW orchestrates technology across the full stack in a way few others can. Our architectural expertise, expansive partner ecosystem, unmatched delivery scale and services forward model enable customers to adopt AI in ways that align with their environments, risk profiles and strategic priorities. A recent engagement where the customer turned to CDW to design, configure and implement a private AI factory hosted within a colocation environment brings this to life.

Our advisory services team worked closely with the customer, a large financial services company to design an end-to-end solution that included accelerated compute nodes, high-speed fabric-based networking, enterprise switching and supporting compute infrastructure. The team also configured AI orchestration, containerization and workload management software. The comprehensive solution delivered a production-ready platform that provided greater customer control over data, cost and governance and generated a nearly 8-figure deal, which included a significant professional services component.

The hard part of AI is not the model. It's the orchestration. AI increases complexity and value shift from access to execution quality, depth and comprehensive end-to-end solutions, a shift that reinforces the relevance of our model across all of our customer end markets and sizes, small, mid-market and enterprise, and expand our opportunity set, an opportunity further strengthened by our recent go-to-market alignment of resources. Organizations that once self-served or relied on smaller or more narrow partners now face requirements that demand scale, integration and breadth. AI is not only increasing wallet share, it's also bring new customers to CDW.

Unlocking that opportunity requires expanding access with AI infrastructure demand expanding beyond hyperscaler and frontier model builders, the push to deploy AI at scale has driven demand for accelerating compute past available supply, making access, not ambition a crucial restraint. To address this constraint, we have finalized a relationship with provider Boost run to deliver our customers' access to high-performance AI infrastructure through a flexible GPU as a service model, while remaining fully composable of on-premises and cloud environments that may be planned or in place.

When paired with CDW's advisory services change management, governance and adoption expertise, customer AI ambition across all sizes and industries become durable production-ready outcomes. Implementing accelerated compute is not the only way customers are operationalizing AI. AI is increasingly being embedded directly into the technology stack across end user and collaboration platforms, networking and security environment and the data center, driving smarter orchestration, monitoring and optimization. As customers embed AI into existing platforms, they are upgrading, not rearchitecting placing greater demand on execution, meeting those expectations requires a partner with deep expertise and the ability to operate at speed across the full environment that plays directly to CDW's full stack end-to-end model.

Regardless of how our customers choose to consume an AI adoption reinforces with differentiated CDW, our full stack relevance, end-to-end engagement and ability to execute at scale, supporting our durable profitable growth. And that leads us to our outlook. We continue to approach the year with discipline and prudence and are maintaining our view for the U.S. IT addressable market to grow in the low single digits in 2026 on a customer spend basis, with 200 to 300 basis points of CDW outperformance.

Our outlook takes into account 2 countervailing factors. Our near-term visibility into the second quarter, given strong Q1 order activity that flowed into backlog and our prudent view of uncertainty in the second half of the year. It does not factor in potential wildcards such as recessionary conditions or meaningful changes in the unknown ongoing exogenous factors, which include elevated geopolitical risks, and work stream dislocations in pricing and supply. As always, we will provide updated perspectives on business conditions and refine our view of the market as we move through the year.

As AI adoption reshapes customer requirements and the continued uncertainty, expectations for integration, governance and execution are rising, partners with scale full-stack relevance and the ability to deliver outcomes consistently with confidence and speed matter because when complexity rises, CDW's relevance grows.

With that, let me turn it over to Al for a more detailed review of our financial performance. Al?

Thank you, Chris, and good morning, everyone. I will start my prepared remarks with details on our first quarter performance, move to capital allocation priorities and then finish with our outlook for the remainder of 2026. First quarter gross profit of $1.2 billion was up 6% year-over-year. This was at the higher end of our expectation for a mid-single-digit year-over-year increase as our teams help customers navigate a dynamic memory pricing and supply chain environment to capture demand in infrastructure hardware and client devices, alongside increased demand for software licenses.

Importantly, our growth reflects strong execution and broad-based customer demand across our segments. First quarter grew margin of 21%, was down 60 basis points over the prior year's first quarter but remains resilient given the demand environment and mix of the business. The decline was primarily driven by the impact of a lower mix of netted down revenues, as customers focus more on their spend on acquiring solutions hardware in this volatile pricing environment. We do expect netted down revenues alongside professional and managed services to be higher priorities for customers in the second half of the year and to continue to outpace the overall business growth in the longer term.

Taken together, these dynamics were timing and mix driven, and we expect to remain principally within the margin framework we've shared for the full year. The diversity of our end markets served us well this quarter as all of our segments increased sales year-over-year. Our Commercial segment started the year strong, up almost 10%, driven by increased demand in infrastructure hardware across NetComm, servers and storage, alongside infrastructure software strength, all up double digits. Underneath the surface of commercial, corporate, health care and financial services were all contributors to our year-over-year growth with our corporate and health care customers planning in network upgrades and software investments while our financial services customers focused on storage and server purchases to enable AI inferencing.

Government increased sales by almost 5%, driven by state and local. Federal activity resumed post the fourth quarter shutdown that net sales and gross profit were down year-over-year as we expected. Education was up low single digits as K-12 grew despite tough year-over-year compares helped by memory pricing-related urgency. International was exceptional in the first quarter with double-digit growth in the combined U.K. and Canadian business driven by strength across our hardware portfolio. Our ability to remain flexible and meet customer needs where they needed us, combined with the diversity of our portfolio of products and partners also serves us well in the first quarter.

As referenced, demand for infrastructure hardware and software licenses was particularly strong across our commercial customers, while client device demand stood out across international, government and education. As customers primarily focused on hardware and licensed software, the spend growth in cloud, SaaS and professional managed services was more modest. Netted down sales were roughly flat year-over-year, representing 34.5% of gross profit, down from 36.5% of gross profit in Q1 2025. This was largely the result of software assurance and warranty performance which declined amid hardware and software license growth.

Professional managed services spend increased low single digits. The need for and relevance of our cloud and services business remains high, but during this time of dynamic hardware pricing and supply chain concerns, customers have shifted their spend priorities. Turning to expenses for the first quarter. Non-GAAP SG&A totaled $738 million, up 8.8% year-over-year. This was consistent with our expectations of one, a decline in expense dollars compared to the fourth quarter; and two, that the first quarter expense ratio would be the highest of the year.

In addition to the normal level of increased incentives related to higher gross profit achievement and seasonally higher Q1 expenses, we are also investing in productivity enablement in the form of AI tools and training that will lead to an enhanced expense efficiency in the second half of the year and beyond. In that context, I'd like to take a minute to expand on our gear for growth effort which Chris referred to in her remarks. The AI-powered modernization investments we've been making under geared for growth are focused on transforming how we operate and particularly as it supports our long-term, durable and scalable growth.

The program is a disciplined multiyear effort to simplify and rewire our operating model, reducing complexity, modernizing quote to cash and supporting processes and embedding AI to enable faster, better decisions across the enterprise. In addition to improving the end-to-end experience for our customers, partners and coworkers, geared for growth investments are beginning to translate into real productivity improvements across our operations, and will support our commitment to return to our targeted SG&A efficiency ratio and enable greater value creation.

To that end, we have already identified substantial opportunities that will enhance our cost structure and will begin to accrue benefits in the second half of this year. As we look forward into 2027 and 2028, we would anticipate run rate improvements in the range of $100 million to $200 million. These savings will be balanced with some reinvestment back into the business to fuel our broader growth strategy. We will provide you with further updates on the timing of these efforts and the financial impacts as we move forward.

Turning back to the quarter. Coworker count ended at approximately 14,700 and customer-facing Coworker count was 10,400, both down slightly year-over-year and quarter-over-quarter. Our ongoing goal is to balance growth, expansion of capabilities and exceptional customer experience with greater efficiency and cost leverage from our broader operations. Non-GAAP operating income was approximately $452 million, up 1.8% versus the prior year. Non-GAAP operating income margin of 8% was down 50 basis points from the prior year first quarter level.

Net interest expense was down roughly $2 million year-over-year driven by lower debt levels. Our non-GAAP effective tax rate was slightly below the low end of our targeted range at 25.2%. Non-GAAP net income was $295 million in the quarter, up 3.1% on a year-over-year basis. With first quarter weighted average diluted shares of $129.5 million, non-GAAP net income per diluted share of $2.28, up 6.3% versus the prior year period and towards the higher end of our expectation of mid-single-digit growth year-over-year.

Moving to the balance sheet. At period end, net debt was $5.1 billion, up roughly $50 million from the prior quarter and driven by slightly lower cash and cash equivalents. Liquidity stands at $2.5 billion with cash plus revolver availability. The 3-month average cash conversion cycle was 16 days, slightly below our targeted range of high teens to low 20s. The cash conversion metric reflects our effective management of working capital, including disciplined management of our inventory levels even as infrastructure hardware sales were strong, client device growth continued, and we work closely with customers and partners to ensure supply in this dynamic environment.

As we've mentioned in the past, timing and market dynamics will influence working capital in the cash conversion cycle 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 $251 million. This reflects 85% of non-GAAP net income for the quarter within our stated rule of thumb of converting 80% to 90% of non-GAAP net income to cash. We utilized cash consistent with our 2026 capital allocation objectives during the quarter, including returning $201 million in share repurchases and $81 million in the form of dividends.

This combined $282 million returned to shareholders is 112% of adjusted free cash flow, currently well ahead of our 2026 target, return 50% to 75%. This brings me to our capital allocation priorities moving forward. Our first capital priority is to increase the dividend in line with non-GAAP net income growth. We have increased the dividend for 12 consecutive years through 2025. We continue to prudently manage our dividend with respect to the growth environment and target a roughly 25% payout ratio of non-GAAP net income going forward.

Our second priority is to make sure we have the right capital structure in place. We ended the first quarter at 2.5x net leverage within our targeted range of 2 to 3x. We will continue to proactively manage liquidity while maintaining flexibility. Finally, our third and fourth capital allocation priorities of M&A and share repurchases remain important drivers of shareholder value. We continually evaluate M&A opportunities that could accelerate our 3-part strategy for growth. While we remain active in the M&A market, our expected cash flow performance allows us to be opportunistic towards share repurchases as we deem our stock to be attractive at this valuation.

Now turning to our outlook. Our first quarter performance is driven primarily by strong underlying demand as well as customer urgency to get ahead of memory-related price increases and potential supply chain concerns. We came into this year with an appropriately prudent outlook. We're pleased with our strong start, but the environment is still very dynamic and thus, continued prudence is warranted. Customers are balancing the risk of supply chain and pricing volatility, macro and geopolitical wildcards against their AI road maps and related investments alongside compelling needs to address priorities across the full IT stack. We believe that our comprehensive capabilities partner reach and our updated go-to-market structure, we are uniquely positioned to capitalize on opportunities and help our customers navigate the complexity.

With these factors in mind, we are holding to our full year 2026 view of low single-digit growth for our addressable IT market. We continue to target market outperformance of 200 to 300 basis points on a customer spend basis. Factoring in market conditions, our first quarter performance and the elevated backlog entering the second quarter, we now expect gross profit to grow in the range of low to mid-single digits for the full year 2026. We continue to expect the second half gross profit contribution to be slightly above the first half with slightly more weight to the first half than we historically experienced driven by customer urgency we've discussed.

Based on a slightly higher mix of hardware products for 2026 than we originally anticipated, we now expect gross margin to be -- margins to be approximately in line with 2025 levels. Finally, we continue to expect our full year non-GAAP net income per diluted share to grow at the high end of mid-single digits year-over-year, as we focus on operating leverage and effective execution of our capital allocation priorities. Please remember that we hold ourselves accountable for delivering our financial outlook on a constant currency basis.

On that note, our expectation is for currency to be a slight benefit to reported growth rates for the year. Moving to modeling thoughts for the second quarter, we anticipate gross profit to grow at a high single-digit rate sequentially, leading to mid-single-digit year-over-year growth. Moving down the P&L, we expect second quarter non-GAAP SG&A to be modestly higher than the first quarter, resulting in an operating expense as a percentage of gross profit that is seasonally lower than the first quarter level and similar to the prior year's second quarter.

Finally, we expect second quarter non-GAAP net income per diluted share to be up high single digits year-over-year. That concludes the financial summary. As always, we will provide updated views on the macro environment and our business on our future earnings calls. With that, I will ask the operator to open up for questions. We would ask each of you to limit your questions to 1 with a brief follow-up. Thank you.

[Operator Instructions] Your first question comes from the line of Maggie Nolan with William Blair.

You gave several interesting AI examples. And I'm wondering at a portfolio level, how are you assessing whether AI-driven deals differ on a gross margin basis, in terms of the services attach rate versus some of your more traditional infrastructure transactions just overall, should we think about AI as margin neutral or accretive or dilutive over time?

Maggie, thanks for the question. I would say that the AI deals per se have a couple of components that make them margin accretive, higher-value services attach and continuing recurring revenues. And overall, that larger-sized deal typically and a higher margin deal. I think what we're going to see is AI is, as we all know, becoming ubiquitous and embedded across every component of the stack. And so we're very optimistic about how we can capitalize on that to drive margin accretion going forward. .

And you gave a lot of good color around kind of the expectations for the remainder of the year. But I wanted to dig into the why behind how your expectation that netted down revenues and services in particular, should increase in the second half of the year, just given the current dynamics and everything you experienced in the quarter you just reported?

A couple of things. First, we continue to believe that the durability of netted down revenues, namely SaaS and cloud will continue, and there definitely is continued demand, build up demand with respect to customers in that regard. I think the phenomenon that we're dealing with right now is just prioritization of customers around hardware spending and getting in front of price increases, potential supply concerns. And so as that works its way through the funnel in second quarter and beyond, we think we'll see that prioritization balance back to a broader array of product categories, namely those that fall into netted down. Given our continued engagement activity with customers, we have line of sight to see that, that will pick up in the back half and thereafter. .

Your next question comes from the line of Samik Chatterjee with JPMorgan.

This is Joe Cardoso on for Samik. Maybe first, it sounds like you're seeing much stronger hardware revenue than you envisioned 90 days ago. But at the same time, you're also highlighting constraints in shipment delays inhibiting your ability to fulfill demand here. Can you maybe just help us think about some of the factors there around how much of this is elevated demand? How much you guys are seeing pricing potentially running hotter than you previously expected? And if there's any particular areas of the portfolio kind of driving the upside here on the hardware side. And maybe as a second question to that, like how has backlog trended relative to maybe more normalized levels for CDW? Just trying to understand how elevated it is you're now kind of entering the -- or now that we're in the second quarter?

Yes. Joe, I would say broadly what we have seen in the way of weighting of hardware, pricing changes, supply friction is all in the realm of what we would have expected across all of those dimensions. So right, when we gave our original outlook, we expected that the first half would be heavily weighted towards solutions hardware. We've seen that play out. We expect that the price changes, albeit diverse across different subcategories would vary and they have, and we expected that customer engagement and activity would be really strong.

All of that has played out. And I would say maybe kind of bonus for the level of continued customer activity has persisted as we sit here now into the second quarter. The phenomenon we expect to pull forward and backlog. Look, I think in the first quarter, we experienced some level of pull forward, consistent with what we would have expected. And -- but we did see a fair amount of written business that did not get delivered owing to our backlog leading into Q2 being a bit higher. All of those elements lead us to continued expectation of strength in Q2 and potentially beyond. We are reserving some level of uncertainty for the back half as all of that activity kind of makes its way through the funnel and certainly, we'll give you more robust updates as we exit Q2.

No. Got it. That's very helpful color. And then maybe just as my second one here. Are we hearing concerns from investors around OEM partners potentially looking for further cost savings in this inflationary environment and potentially looking to squeeze channel partners to drive some of those savings? Just curious if you guys can share your thoughts what you're seeing across your OEM relationships, how you're thinking about that risk and potentially that dynamic materializing in this macro this year?

Joe, it's Chris. I'll take that one. We are used to seeing partners change their programs periodically and in particular, with our inflection points in technology. And there's nothing different now. What I would say is with the scale and size of CDW, our relationships with our partners tend to always turn out very well for CDW. So we're not experiencing what I would call any kind of constraints or downward pressure in conjunction with the partner programs and the economics.

In fact, they're leaning on us more heavily given the importance of the role in the channel now even more with AI. The orchestration requirements, the integration requirements, those are the bottlenecks in terms of reaching customers. So we're finding that our role, both with customers, but equally with partners is becoming even more compelling and important.

Your next question comes from the line of Amit Daryanani with Evercore ISI.

This is [ Victor Santiago ] on for Amit. Can you guys talk about the strength you saw in financial services? And how durable is some of that strength here? Is this just an effect of the previous investments you made in building out the vertical or more of a one-off?

Yes. Thank you for the question. I would say we consider it to be durable and a number of factors. First of all, FSI tends to be on the leading edge of technology. And indeed, they are when it comes to AI and infrastructure build-out. So those customers are very focused on servers and storage and all things supporting AI inferencing. .

I would also say that the changes that we've been making in our go-to-market more refinement over the last several years to tailor our coverage model to particular customer segments, and within those segments, the sizes has been very effective. You saw us do that in health care, strong results over time, durable results over time with health care increasing profitability. We're seeing the same thing with FSI and we are expecting it to have these go-to-market evolution to have positive changes as we go forward and pick up momentum quite frankly.

Great. And as a quick follow-up, can you just talk about what drove that 40% plus sequential increase in inventory? Is that just a function of inventory positioning as you state for some of that Q2 written business that Al talked about? Or is that just a function of higher ASPs?

Yes. Thanks, Victor. I'll take that. Our inventory indeed was up in the quarter. And I think, look, really a reflection of who we are and how we operate in environments like this where customers have an urgency to get product. We step up, we are often first in line and able to get that inventory, and you saw that come through this quarter. That being said, we have our continued commitments on working capital and delivering free cash flow. So you take a quarter like this where our inventory went up several hundred million and still delivered our free cash flow within the range of expectations relative to non-GAAP net income. .

As it pertains to ASP changes and kind of impacts on that inventory, I mean, certainly, that was the driver of what led to inventory increases, but it didn't have a meaningful impact on the dollar amount of that inventory.

Your next question comes from the line of Adam Tindle with Raymond James.

Chris, I just wanted to start on the new initiative that's being announced today. I think you called it Geared for Growth to simplify and rewire the operating model. I guess just 2 parts there. First would be, how you thought about -- because you just underwent a lot of change in the go-to-market over the past year and implemented that as of January. So doing another program here, how you thought about preventing future or further disruption from the operating model? And then secondly, maybe it's related or maybe it's unrelated. We noticed you hired a new Chief Transformation Officer in the quarter. I wonder if you might just touch on that hiring rationale and key potential initiatives going forward? And I've got a follow-up.

Sure, Adam. Thanks for the question. Geared for Growth, I described it this way. It's really just the next phase in driving the durable success of the business. So go-to-market has been a 2-year process, and we're well in our spot, and it's going very well. When I think about geared for growth, it's really driving efficiency, productivity, coworker empowerment, and it's across all the vectors that you would expect. It's our AI tooling, it's our partner relationships, it's the solutions we're developing and driving efficiency and effectiveness across all of those. .

That is actually a positive to our go-to market. And so we've been very thoughtful and careful about timing, Adam, the go-to-market changes followed by this Geared for Growth on top of the foundational technology stack changes we've made over time. So this has been a 3-, 4-, 5-year process. And so we think we're managing it very well. And we've already seen some great uptick in the sales organizations for the AI tools that we've rolled out.

So when you roll positive tools into the organization that are driving more precision selling, speed to value, things like that. That all helps in terms of the change management, and we're feeling really quite positive about the uptake and how it's going.

The second question, I think, was on Hang Tan, our Chief Transformation and Strategy Officer. We had a movement inside. We moved one of our leaders over to a business environment. And so we had to fill the position of Chief Strategy and Transformation Officer. Hang has been a great add, I think when you look at our business, you look at the speed of change in the world right now, you look at the position that we have in the market as the largest of our kind in the fullest capability is the trusted adviser, having yet another player on the executive team with deep technical relationships, shops, operating experience and frankly, a competitive spirit is going to be one more addition to help us move with speed in the market to maintain our leading position.

Helpful. Maybe just a follow-up for Al somewhat related to this initiative. I think you mentioned $100 million to $200 million run rate savings related to this. And I'm not having a hard time getting back to double-digit EPS growth, which was the algorithm when CDW traded at a much higher valuation multiple. So exciting stuff ahead in terms of that. But I did want to clarify, Al, on that $100 million to $200 million. Is that an annual meaning like per year in 2027 and 2028, or is that a total amount? And then secondly, it sounds like there's going to be some reinvestment any way for us to just kind of handicap it sounds like that may be a gross number, what might be a more reasonable net number?

Yes. So first, amongst the things that Chris mentioned with Geared to Growth and all of the aspects of really improving our end-to-end operations, underpinning Geared for Growth, Adam, is our commitment to return to our targeted efficiency ratio and return to durable operating leverage. So that's probably, actually, the biggest takeaway from a financial perspective for you. As we look forward, first, these efforts have been underway. And in the first quarter, obviously, we had some front-end investments associated with them. But we expect those benefits to come through in the second half, and that's part of what supports our commitment to say operating leverage will happen in the second half of this year. .

So if you scroll that forward, Adam, to 2027, you should think of that $100 million estimate that we gave as a gross annual run rate impact. Now as you noted, some of that will get reinvested, I would say, upwards of half, maybe a little bit less there. But that reinvestment will include an expectation of ROI, so there's a compounding component of this. The $200 million would be what we see in the way of line of sight, if we go further out a year or so and into 2028.

Now Adam, as you would expect, when we provide this type of this transparency and particularly given the stage that we're at, we are often prudent. So we do see pretty meaningful opportunity and what could exceed those levels, but we're giving you now is what we have confidence in, conviction around and line of sight in the way of these opportunities. And so we feel really good about this helping us to return back to that target efficiency level, getting to durable operating leverage and really enhancing our profitability while we're making a better experience for our customers, partners, coworkers.

And it's very much appreciated. I know you guys typically don't go out that far, but to give us a little bit of a road map, exciting stuff ahead. .

Your next question comes from the line of David Vogt with UBS.

[indiscernible] your commentary about strong order growth and the backlog going into the back half. Can you help us square maybe pull back a little bit. Obviously, the supply chain challenges are consideration on believing maybe why backlog ticked up a bit your inability to deliver, but you also talked about uncertainty in the back half. And I would assume that's related to uncertainty around demand following what could potentially be pretty meaningful price increases across the portfolio by your OEMs. Can you kind of help us why you're thinking -- why you're confident enough to take the guide up for gross profit growth and the high end of, I guess, the EPS growth for the balance of the year given those sort of countervailing forces going forward? And then I have a follow-up.

So first, you should think of our outlook as outlook update as more stated in Q2. We are not materially changing our view of the back half. That is an expectation that you might see some demand muting you may see kind of hardware come off a bit in lieu of professional services, managed services, netted down revenues. So what gives rise to our increase in the outlook is, number one, the amount of backlog that flowed into Q2. Number two, the continued order activity written demand that we are processing as we speak and sit here now, and the ongoing engagement and sentiment that we hear from our customers.

So the pickup in our outlook was really steeped in an expectation of stronger results in Q2. Now, David, importantly, as you know, we've been prudent all along this. What we'll be looking for and looking closely at in Q2 is seeing, does that order activity engagement with customers continue that could give rise to more optimism in the back half, but we're going to pause here and make sure that kind of we see that before we further update our outlook in the back half of the year.

Great. That's helpful. And maybe just a follow-up on the backlog. Is there any color or commentary you can help us understand like the composition of the backlog, either by category, duration and what the underlying sort of margin dynamics of said products within the backlog looks like, so we can think about timing of how that, that bot fills a senate maybe into calendar '27, and what the potential margin impact might look like?

What I would share with you is the composition of the backlog looks consistent with the mix of business that we experienced in the Q1, as you would expect, we were heavy on the solutions hardware side of things. So that is a meaningful component of the hardware backlog. But as well on the PC side of the house, we definitely had products that did not get delivered. And that is part of the reason why our growth for Q1 on the PC front looked a bit more muted than you might have expected. .

Your next question comes from the line of Ruplu Bhattacharya with Bank of America.

I've got 2 of them. Al, I'm going to start with another margin-related question. And you gave netted down items as a percent of gross profit. If we take out netted down items, the gross margin of the quarter looks like declined to 25.3%, which is down 115 bps sequentially -- sorry, year-on-year and about 166 bps sequentially. As suppliers are raising prices, are you able to pass that on to end customers, and what drove that decline in margin for the core business? And as you look into the second half, do you see that improving based on mix and your visibility that you have, do you see the core business margin stabilizing higher? And I have a follow-up.

Yes, Ruplu. So let me just summarize where we came out on a gross margin basis for the quarter. So Q1 overall gross margin is 21%, down 60 basis points year-over-year. The high majority of that delta, Ruplu, came from the mix out of netted down revenues, literally, whatever, 50 basis points of that was due to the drop in netted down revenues. Now if we translate to your question with respect to gross margins, ex netted down, we printed a gross margin of 14.8%. That was actually flat year-over-year versus 2025.

If you look at that non-netted down margin relative to Q4, Q3, you will see it is lower. I would just remind you that Q1 is our typical seasonal trough of non-netted down margins. The headline there for you, Ruplu, is that as you would expect, as we get started in the year on our product margins, we don't have full earning out or optimization of all of our channel incentives that attach to products and that's why Q1 seasonality is typically lower. Other variables that maybe I would just note, sequentially, here is that in Q1, we had obviously a drop in our mix of services, which we dilute the margins a bit and maybe a little bit more mix into enterprise business that comes at a slightly lower margins. So overall, we feel really good about the durability of our margins holding up, notwithstanding that netted down revenues came down in the quarter, but we expect that to come back in the back half of the year.

Got it. Can I ask a follow-up, which is a higher-level question. As you look into the second half of the year, what have you factored in, in terms of end market demand destruction as component costs, including memory are going higher? And how can investors get confidence that your guidance is sufficiently derisked for any such lower demand. So is there a way you can quantify what you're expecting for PC growth or server growth? And in terms of like what -- I guess what I'm trying to understand is how much can the economy be weaker? Or how much can demand be lower and you still be able to meet that 200 to 300 basis points of outperformance. Appreciate the color.

Sure, Ruplu. Obviously, what we've seen in Q1 and what we expect in Q2 is an elevated level of solutions hardware, really customers showing an urgency to get this product that could go up in price might be supply constrained. That being said, in the back half of the year, we don't expect that those categories to drop off a cliff. We just expect it to normalize in the environment. And I think what we see in the back half is a more balanced view of our different categories.

That is specifically netted down revenue, SaaS, cloud, professional services managed services to look more balanced relative that solutions hardware. So we would not call that demand destruction. It's really just a normalization and returning back towards what we would call a more healthy regular balance of product allocations.

Your next question comes from the line of Keith Housum with Northcoast Research.

Great. In terms of the second half of the year, I appreciate the cautious tone based on uncertainty and volatility in the markets today. As you think about product shortages and constraints in terms of allocations, how much is that factoring into your conservative stance for the second half of the year?

Keith, not materially. Look, I think what we've seen is definitely an extension of lead times in products, and I talked about backlog, but we're seeing lead times. But I would say, as the year unfolds here, it definitely is becoming more orderly the line of sight to lead times, the actual deliveries versus expectations is settling in. So we are not feeling at this juncture, and we reserve the right to give you the update as we get to midyear. We're not feeling significant concern around being able to get products and the risk that customers would be waiting a very extended amount of time. So again, reasonably orderly improving with time, and would expect that the second half of the year looks much more normalized as things play out. .

Great. And just as a follow-up, I appreciate the color on Geared for Growth. Is the driver of the opportunity for Geared for Growth, is it more of the AI-driven tools and the specification of some of your targeting work there. Is that driving the potential benefits that you see of about $100 million to $200 million? And then is it going to come more from doing more with less, or is it going to be another round of layoffs to [indiscernible] as you go through this process?

Yes, I'll start with that one. I think of it as a wide spectrum. It certainly is focused on driving effectiveness into our sales and customer-facing organizations. But equally, embedding AI across our poor end-to-end processes, which will indeed drive efficiency. In terms of where the specific dollars are coming from, they will be derived both from increased productivity as well as cost savings and having our coworkers leverage their time, skills and capabilities in a more valuable way. So I just would say that geared for growth to us is actually all in service to our customers. At the end of the day, we've done a lot of foundational work over 4 years to get to the point now where we are able to be focused on AI first and our customers' outcomes. And in doing so, surcharge the power of the business through AI.

So we're quite excited about this program in view of the entire context of moving with speed to value for our customers, for our partners and for the development of our coworkers.

We have reached the end of the Q&A session. I will now turn the call back to Chris Leahy for closing remarks.

Okay. Thank you, Samantha. Let me close by recognizing the incredible dedication and hard work of our coworkers around the globe. Their ongoing commitment to serving our customers, that's what makes us successful. Thank you to our customers for the privilege and opportunity to help you achieve your goals. And thank you to those of you listening for your time and continued interest in CDW. Al and I look forward to talking to you next quarter.

This concludes today's call. Thank you for attending. You may now disconnect.

Awesome. So let's get started, guys. Welcome to Day 1 of the Morgan Stanley TMT Conference. My name is Erik Woodring. I lead the hardware research coverage here. I'm delighted to be joined by Al Miralles, CFO of CDW, a long time mainstay here at the conference.

Before we start, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. [Operator Instructions] So Al, thank you very much for joining us today.

Yes. You're welcome. Thanks, Erik.

Awesome. So I think the best place to start is maybe doing a quick look back on last year. And really what I'm hoping to better understand is, some of the challenges that you faced last year, how are you kind of course correcting, whether that's market or micro-related? And then where do you actually see also the opportunities at the company level to lean in 2026, and we can take off from there?

Yes. Sounds good. Just playing back the last couple of years, obviously, coming off of COVID growth, we had a number of factors that influenced our -- and impacted our business, which resulted in '23 and '24 being tough, right? So macro environment, a bit of decision elongation, funding cycles in the public sector, a number of factors that caused an air pocket of growth during that time. For 2025, what we're looking for was a sustainable return to growth. We did see that. We felt like we took advantage of take share opportunities and the team executed with precision. So we are right back on a positive path in that regard.

As we look forward, what we're focused on, '26 is going to be interesting and dynamic as well. We're getting used to all of these variable factors that we've got to deal with. What we're focused on for '26 is controlling what we can control. We are the trusted adviser to our customers, and we are the channel choice to the partner ecosystem. We offer a full stack, full life cycle set of capabilities to both. So we're going to take advantage of that. We are uber focused on our execution, and we've had some changes on the go-to-market side of the house that are already paying dividends and feel really positive about the changes there.

And then we will continue to be disciplined about how we use working capital so that we can create sustainable cash flow, use that to our advantage on the capital allocation front. So that's what's really front and center for us right now in '26, and we're excited about it.

Okay. Cool. So we'll kind of touch on all of that in earnest over the course of the next 30 minutes. But maybe let's just start very high level. With -- you talked about 2026 being dynamic to say the least, right? What are you hearing from your customers today? And what does that mean for kind of spending growth? And I'd love if you could just, very high level, kind of first half versus second half? And then we'll go to the product side, but kind of Corporate, SMB, Public, kind of bake that all into that, please.

I would call customers cautious and intentional here. They are definitely engaged. They are not cutting budgets, they are prioritizing budgets, and they are thoughtful about where and how they spend. Again, it plays to our strengths, helping them navigate a challenging dynamic environment that we're living in. If I -- we don't provide outlooks on the individual channels, but if I give you just some sound bites for each, corporate customers, definitely engaged, definitely thoughtful and intentional in their spend. They are very focused on AI and how do they get on with building out the infrastructure to support AI, but it's a cautious environment for corporate customers.

Small business has been a really healthy channel for us over the last year or so. We expect that's going to continue. I think small businesses have shown up as really resilient and able to take advantage of being AI native, cloud native to get things done, that their focus areas have been on security, cloud, client devices.

Healthcare, another strong grower for us. They're going to have some compares in 2026. But it's a great example where our efforts and investments in verticalization have paid off and Healthcare has been a really great performer. And then in the Public sector otherwise, as you know, in '25 and even the years before, it's been uneven, right? So take government, which has been dealing with government shutdowns, DOGE funding cycles, et cetera. While state and local has been strong, federal has been choppier because of those variables. The team has done a great job navigating through that, even with shutdowns, working closely with agencies that remained open, preparing for government opening up to take advantage of growth on the other side. They've played all of those angles to try to take share and to execute with precision, and they've done just that. So really proud of the execution on the government side.

And if we can get in an environment where a little less unevenness and more continuity of the funding environment for federal, I think there's good things on the other side of that. And in Education, obviously, it's been a challenging segment over the last couple of years coming post-COVID. We continue to say that we think that education spending will eclipse pre-pandemic levels, but it's taken some time to make its way through the funnel. We had some good growth in the latter part of the year for education, and we're hopeful that we can return to growth in '26 in earnest on the education front.

Okay. That is super, super helpful. And I'll quickly kind of touch on each of those, or I'd love to. And maybe just starting on SMB and it kind of how -- it sounds to me like as if it's almost the healthiest area of spend, so to speak. Maybe key upside risks, downside risks, so that I can imagine we all kind of might know what the downside risks would be there. But from an execution standpoint and your ability to serve that customer base, how do we think about upside risks this year?

First, I would say, we said for many years, when the economy recovers or the economy is growing, that [ small ] usually leads the way. I'm not sure I'd characterize our growth there as tied so much to the macro. I would say it's a combination of things. It's -- you have customers here that can and are being nimble. And again, kind of think AI native, cloud native. They can move more quickly on things. And so we're seeing agentic workloads in the cloud with small customers that are full on cloud, obviously, not on-prem. So you have that phenomenon.

And then I would just say, look, we know, you know that small mid-market has been historically our sweet spot. We're seeing that come through in spades. The execution of the team has been fantastic. They're turning on the new acquisition engine. They're taking advantage of opportunities in an environment where customers need assistance and -- from small all the way up to large, but in small, there's a lot of complexity and there's a lot of choice, and we're helping those customers see through it.

Okay. I'm going to ask Healthcare in a -- about Healthcare in a second, but I want to touch on kind of double-clicking on the rest of the Public business. Because as you said, there's a lot of kind of headwinds and tailwinds. And I'm just curious, is they're all kind of interrelated somewhat? Is there -- at a very high level, is there kind of clarity emerging in terms of spend for this year and being able to get budgets as we've moved kind of now away from some of the concerns about being able to fund our government? Just help us understand maybe the momentum where we stand today? Because, again, education, state, local, federal, they're all somewhat intertwined with one another.

Sure. So let's start with government first. State and local has been strong. And many, many states have been operating with continuity and consistency and our performance in turn has been really strong in state and local. A few states kind of look like and operate like federal government. And so we've taken advantage of that. And there's clearly tech needs and demand in state and local, and we have done a great job fulfilling those needs of those customers.

On the federal side, likewise, we would say that the demand is there. We work with a variety of different agencies. The shutdowns that we've seen and the pauses in funding have caused more friction. What the team has done is basically navigated around that, double down on the agencies that have been open for business, got prepared for when the shutdowns ceased and we could pick up business with the agencies that were not operating and haven't missed a beat in the process. The unevenness we see is when you have a shutdown and agencies are impacted, that it takes time to rebuild your pipeline. So we said in Q4, with the shutdown, it didn't impact our Q4 results, would have more of an impact in Q1, and therefore, our outlook was more modest in the federal space. But the team has done a great job rebuilding that pipeline and preparing for more continuity through 2026.

Okay. And I want to maybe use Healthcare as a great example of -- as you mentioned earlier, kind of success in verticalizing. What -- is there an opportunity to take what you've learned in your Healthcare practice, which has driven multiple years of outperformance there, and apply it to the rest of this customer base? So where do we stand in that? You talked about go-to-market changes. Where do we kind of stand in that shifting of leveraging where you've had a lot of success in some of these end markets and almost pushing it through and taking that and expanding it?

For sure. Definitely is opportunity to replicate that. And look, we would already say, we have deep verticalization when we think about Education, Government, et cetera. On Healthcare, as an example, just because those investments have been more pronounced over the last number of years. One of the things that we've put in place is this concept of health care strategists that are kind of tip of the spear in terms of working with large health care organizations and helping them navigate in a more broader strategic scale to drive their innovation. And if we think about health care organizations, right, they had, in many cases, dire need to innovate, to try to make their way out of difficult cost pressures, reimbursements, declining revenues, et cetera. So technology has been a lever. So our timing of deeply verticalizing in health care when the industry needed was well placed.

We are playing that same playbook in other areas. So we just talked about our go-to-market changes. We will now report on financial services. It's another area where we are building. We've built verticalization. We have the same concept of those strategists that deeply know the business across financial services and can really build deep relationships that are at a strategic level with these customers.

Okay. And then last one before we get into maybe the end markets and whatnot is, just touching on international. Again, I know it's not the biggest part of your business, but where does your kind of international business stand in terms of the spending curve relative to what you're seeing in the U.S. business?

It's been resilient. And I think for a number of quarters, I have said you can expect that international is likely going to be uneven and probably a bit more volatile. We've been pleased that it's been more consistent and resilient than that. Many aspects of the go-to-the market and just our foundation of how we operate internationally looks much like the U.S. So it's not a tremendously different playbook. But the team has done a great job executing. There are likewise plenty of take-share opportunities in international, and that's both U.K., Europe and Canada, and the teams have done really well. It has shown the benefit of diversification for us, obviously. And we knew that, but we've been quite pleased with the performance.

Okay. Perfect. So let's touch on PCs first. Obviously, a key topic of debate given on -- given you have kind of still Windows 11 refresh demand -- Windows 11 and refresh demand, let's say it. You also have the threat of rising memory prices. We've kind of maybe alluded to perhaps a tale of 2 halves this year, so to speak. But just what are you seeing in terms of PC demand today? What inning of that refresh are we in? What are your customers telling you? What does your pipeline tell you? And kind of how is that factored into your outlook right now?

Sure. First, I would just say, after 2-plus years of pretty solid growth on the PC front, this memory environment, one of the big takeaways you should have is that there is definitely a meaningful demand there on the PC front. And the level of customer activity, engagement, discussions and buying is meaningful. So if there's ever a question of the, has it run its course, I think we can say that it has not. There is still opportunity there.

What -- so where is that showing up? Or kind of where does it manifest itself? Look, there's still Win 11 opportunity there? There is classic generic refresh from units that came out of COVID, and there is a growing interest in AI PCs. And so the demand dimensions are there. Now the memory phenomena, pricing, supply questions has definitely lift that up. And the activity has been fantastic. Our outlook for first half versus second half is predicated on where is the visibility. And right now, we have very good visibility what's right in front of us. We have very good visibility into second quarter. The visibility gets murkier as we get into the back half. That doesn't mean that it couldn't play out more positively. But Erik, you know we are more modest on our outlooks, and where there's a lack of visibility often translates into a level of prudence, and that's what we're doing.

So how does that show up in terms of PCs? Look, with the price increases that we're seeing and the potential for them to go up, it would be probably -- it would probably manifest itself in a muting of demand in the back half with the potential that you could see supply constraints. There's already some supply constraints, but it's pockets. That is the premise, the underlying foundation for the outlook we gave and why we think first half versus second half will be stronger.

Okay. And then what about the kind of enterprise infrastructure side of the world, meaning servers, storage, networking? Where are we in the refresh cycle for each one of those? Because I know they're all kind of on a bit of a different cadence. Similarly, memory has a different impact on each one of them as well. So just your kind of outlook as you look at 2026, and how you've embedded that, what your customers are telling you, et cetera?

Sure. Well, first, if we play back the last year or 2 on infrastructure, it certainly has been softer, more volatile, more uneven than we would have hoped. And I think that part of that was customers elongating decisions, sweating assets a bit on the infrastructure side, optimizing their dollar spend because, obviously, modernizing your data center on-prem spend can be more cash flow intensive than just going to the cloud. And so the last couple of years, we would have expected that would have come to fruition, that spending would have moved along, it has not. To some extent, AI was a factor, but it's not the only factor. Part of it was just an environment with a lot of overhang and a lot of variables and wildcards. Customers have said, I'm not going to put out more cash flow, I'm going to spend my dollars in a different way. And so that has kicked the can on some infrastructure spend.

Now we scroll forward, we've got the memory phenomena going on. It definitely is driving more engagement, activity, discussions on should we get on with our infrastructure spend, number one, because there's a fear for prices moving up, maybe supply being constrained; and number two, there is greater clarity on how customers, and I'll say, namely larger corporate customers might align their capacity to support AI. And more and more, it's clear that will be fulfilled with a combination of on-prem and on cloud. And so early days in terms of infrastructure spend vis-a-vis AI, but we are seeing an inflection point in that regard.

Okay. And let's -- I would love to touch on this point on AI because there's investor debate in the market around whether channel partners like CDW are AI enablers or whether you get disrupted by AI. And obviously, you have a much better insight into what's going on internally at CDW, what you hear from your customers, what you're doing than we do. So I'd love to just maybe hear your side of the world on the spend associated with AI from your customers, the investments you're making to enable that, make sure that you guys remain at the top of that food chain. And maybe address that kind of enabler versus disruptor question, so to speak.

Sure, sure. A couple of things. Number one, many have kind of provided the parallels of cloud to AI. And I do think that there are some parallels there. If you actually look back at cloud, it's been 10-plus years that it's played out and cloud adoption is still sub-50%. AI, we do believe, is going to be more pervasive, more embedded in everything we do than cloud, but make no mistake, in terms of the spend on AI, it's still early days.

Now if I recount where we are and what we've seen in the way of AI monetization, the journey started for us a couple of years ago, and it started with professional services work, workshops, assessments, evaluating the implications, thinking through use cases. So it started there. It moved into helping customers get use of the Frontier AI models, Copilot, ChatGPT, Gemini, Anthropic, okay? So we're seeing that.

We are now seeing AI start to show up across the partner ecosystem in terms of just about any product having some element of AI. And while we'd still say that's early days, it is showing up in those product generations and stuff that we sell as well as AI PCs, right? So from a hardware perspective, you have that phenomenon.

What -- and then I would say cloud. So obviously, I've talked about the -- there are customers that are going straight to cloud with their AI workloads. Small business is a great example, right? They can hit the easy button and say we're going to put these agentic workloads on cloud. So we are benefiting. And when you think about our Mission Cloud acquisition, we are benefiting from an increase of the agentic AI workloads in the cloud.

What has not yet in earnest come to fruition is meaningful infrastructure spend as yet to support AI. But make no mistake, we do think that we're at an inflection point. You heard a couple of stories on our earnings call, including large corporates that we've worked with to build out on-prem capabilities to support AI workloads. And we're seeing and we're hearing a lot more interest in that regard.

The memory, just to bring it back to the memory because we like to do that. The memory phenomena is likely going to be a catalyst to that. That is the, should we get on with these decisions where there might have been a bit of an air pocket. And in decision around how on-prem would support AI, we're seeing that pick up.

And I maybe wanted to touch on that because maybe 2 parts related to memory and this spend. One is just historically, you've had this cost-plus model. There are clearly flavors of input cost inflation that are different than history. Does that change the approach that you have in a cost-plus model when it comes to higher input costs, higher prices, what it does for CDW margins? And then second, related to this kind of catalyst as you're speaking to it, is that catalyzing on-prem spend? Is that kind of what you're saying in the near term because the risk is prices will be higher in the future? Or maybe playing devil's advocate, could that at accelerate a shift to the cloud? I'd just love to know your thoughts on kind of both of those sides.

I think it's going to be balanced, right? And it's going to depend on the end markets and how they adopt to that. I talked about small business and there are more propensity for cloud. But on the corporates, I think it has the potential to catalyze making decisions on how they are going to handle capacity in the cloud. Look, we have this phenomenon where many would say the ultimate economic cost of being on the cloud can be higher than on-prem. I'm not going to kind of tell you the conclusion or kind of our view on that, but there are definitely scenarios where it can be more expensive. And I think it's weighing more and more on corporates and enterprise players that you have to contemplate some workloads being on-prem so you can control the cost. Because on cloud, that cost can escalate and the volume of what goes to cloud can escalate quickly.

And so memory prices, even with the memory increased prices, memory prices are causing more corporates to say, should we contemplate hybrid environment. And I think our view would be, ultimately, particularly for corporates that is going to be the logical environment that support many of these AI workloads.

And it's probably just too early to necessarily know...

For sure. For sure.

Okay. I want to move away from the traditional business and focus on netted down revenue because if you take a big step back and look at CDW, it's been a clear tailwind to margins over time, it's been a clear tailwind to growth. Just the general outlook that you see in that business, where does that stand today? Are there -- is there an opportunity for an inflection anywhere? Or is the mix underlying that business, what you're selling or at least helping customers contract, is that changing at all, whether it's what's going on with memory, the future of AI, et cetera?

It's not changing significantly. I think it's probably 3 years and counting that I have said on our earnings calls that we believe that the durability of netted down revenues will persist and will likely eclipse overall growth of sales. And that has held up during that time. We will let you know if we think we reach an inflection point and that could change, but we don't believe that will be the case in the near term. We've gone from netted down revenues. And I'll just remind you cloud, SaaS, warranty, software assurance, partner-delivered services being mid- to high 20% of our gross profit to well into the 30s. So I think last quarter, you guys can keep me honest, 36% of our gross profit came from netted down revenue, highly weighted in cloud and SaaS. So no surprise in that regard.

And so I think within that SaaS, you've got networking, software, you've got security. You've got a number of flavors in that SaaS bucket, not enterprise applications, it's more infrastructure-related SaaS. But cloud and SaaS, the biggest drivers there. And so it's been a really durable trend. All indications would suggest that, that will continue, including, in 2026. So when we say we think the back half could be a bit more muted, that's notwithstanding that netted down revenues will probably rule the day in the back half, which will drive our gross margins higher.

Okay. And maybe just quickly underlying that because you mentioned cloud and SaaS and the market has been focused on AI disruption risk. Any thoughts related to AI disruption risk within that business, the broader cloud kind of SaaS and...

We don't really play in the enterprise SaaS space and the seat-based application. So ERP and some of the other big kind of enterprise applications, we don't really play there. We are a ServiceNow provider, but think of that as really supporting AI efforts and workflow optimization, operational expertise, et cetera. So that's a different flavor than some of those big enterprise applications. So our SaaS is, like I said, more tied to infrastructure and security.

Okay. Perfect. I want to address cost, and that's -- I think it's a really important point, which is, 2025 year is a year of heavy OpEx spend, some of it related to variable comp payments as you had a lot more success driving revenue growth than in '23, '24, different environment. Can you just help us understand, now that we've moved beyond 2025, what is the trajectory of OpEx? I realize that is a flexible cost base, but maybe the question is, what kind of revenue or top line growth or gross profit dollar growth do we need to see from CDW to kind of return to that operating leverage, that EPS growth that you guys are so well known for?

Sure. First, context matters, right? So '23, '24, we said were tough years from a demand perspective. We did a lot to rightsize our operations and including just our SG&A spend, our coworker account, et cetera. We came into 2025. We knew we were going to have these compares on the variable comp side of the house from those prior years. Our coworker count has been flat. So it's not like we are going and spending outsized amounts. So '25 was a bit of a tweener year getting past those compares. As we come into '26, we feel favorable on the growth trajectory and our opportunities, albeit we've got a modest outlook.

If you look at our outlook, we're calling for low single digits gross profit growth, but mid-single digits, if you work down the P&L. And so the shape of the outlook would say, you can expect operating leverage and it's super important for us. But Erik, make no mistake, we take seriously the importance of continually driving structural savings, streamlining operations, using AI to our advantage as well as reinvesting back in the business, right, because that's what's going to fuel amplification of our growth.

And then the last thing I'll say is the -- with an outlook that we think is modest with low single digits GP growth, if we can take more share, and we think we did a nice job in '25, and we can amplify that top line, that's all for the good in the way of operating leverage and really driving even greater growth down to EPS.

Okay. Perfect. Last 2 questions. Capital allocation, just very quickly. You -- at least at earnings you sounded like you really wanted to lean into buybacks. Leverage is kind of in the middle of your targeted range. So just as we sit here today, maybe tactically, where is the opportunity to take advantage within your capital allocation framework?

Sure. We always balance the strategic with the tactical. So our perfect day is that we're hitting all of the capital allocation priorities and pulling out value at all points. Over the last year -- look, we would view our stock as very attractive and currently dislocated. So areas that are really important to us strategically like M&A, are always on. We're always looking. But the bar is higher with the valuation of our stock as it is here. And so in 2025, we took advantage of that. We returned all of our cash flow to investors, $1.1 billion, in the form of dividends and buybacks. Our stock is still attractive. So we're going to lean into that. That doesn't mean we've turned off M&A. And M&A is an important component. It's just the -- you got to get over the hurdle rate of a valuation on our stock that we deem is very attractive.

Okay. And maybe just quickly touching on that before we wrap up is, maybe what is the market missing in the story? Or maybe what does the market underappreciate or not fully understand as we talk about getting your stock from where it is to where you'd like it to go? What do you want the market to maybe fully appreciate that it doesn't today?

I just want to remind investors the scale and the sophistication of the capabilities that we bring to the table. This environment with memory is a great example. Sometimes, we all have short memories. If you go back to COVID and when supply was constrained and it was whipsawing all over the place and you had backlogs and quarters and months, we excelled. I expect we're going to sell -- we're going to excel, right? So our scale, our sophistication, including with supply chain, really, really important.

Reminder of our efforts and investments to be a services-led technology integrator. Customers need us as their trusted adviser more than ever in this environment. And when we think about the full stack, full life cycle capabilities we bring to our customers, particularly in times like this, it's powerful. And that's why we are seeing the engagement, the activity, the opportunity that we are right now. And then lastly, a reminder and the importance of us being an inherently cash flow-oriented company and generator. No matter what the environment is, no matter how dynamic the demand supply elements are, we are super disciplined about managing our working capital and generating cash, most notably so we can feed the engine on the capital allocation front. And if we do that well and we're smart about being opportunistic on M&A and buybacks, we think the returns are meaningful.

Perfect place to end. Thank you very much, Al.

Thank you. Appreciate it, Erik.

Thank you.

Hello, everyone, and thank you for joining the CDW's Fourth Quarter 2025 Earnings Call. My name is Gabrielle, and I will be coordinating your call today. [Operator Instructions]

I will now hand over to your host, Steven O'Brien with Investor Relations. Please go ahead.

Thank you, Gabby, and good morning, everyone. Joining me today to review our fourth quarter and full year 2025 results are Chris Leahy, our Chair and Chief Executive Officer; and Al Miralles, 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 this call. I'd like to remind you that certain comments made in this presentation are considered forward-looking statements under the Private Securities 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 8-K 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 8-K. Please note all references to growth rates or dollar amount 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 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.

Thank you, Steve. Good morning, everyone. I'll begin our call with an overview of our fourth quarter and full year performance and share some thoughts on our strategic progress and expectations for 2026. Then I'll hand it over to Al, who will take you through a more detailed review of the financials as well as our capital allocation strategy and outlook. We will move quickly through our prepared remarks to ensure we have plenty of time for questions.

The team delivered a strong finish to a complex year, and fourth quarter results exceeded our expectations, results that demonstrate the resilience of our business model, committed execution and power of our strategy. For the quarter, the team delivered net sales of $5.5 billion, up 5%. Gross profit of $1.25 billion, up 9%. Non-GAAP operating income of $503 million, up 1% and non-GAAP net income per share of $2.57, up 4% over 2024.

Customers remain laser-focused on operating efficiency and cost leverage. Must-do priorities also included client devices, servers and security. To help customers address these priorities, the team delivered solutions and services that drew on our deep architectural and technical expertise and drove strong double-digit growth across software, cloud and professional and managed services, higher-margin categories that contributed to our strongest gross margin of the year.

Turning to the full year results. 2025 performance was driven by our clear strategy and disciplined investments delivered in the face of remarkable complexity. 2025 was a year that tested every part of our company. We managed through uncertainty around tariffs, unexpected shifts in education and health care funding, significant changes in government spending priorities and the longest federal government shutdown on record, factors that shaped customer buying behaviors in unconventional ways. We stayed focused, adapted quickly and continued advancing our strategy. The team executed with precision and leaned into their deep end market expertise and durable client relationships to help customers address their unique challenges.

For the year, the team delivered over $22 billion in net sales, up 7% gross profit of nearly $5 billion, up 6%, nearly $2 billion of non-GAAP operating income, up 3% and record non-GAAP net income per share of $10.02, up 5%. Performance that generated $1.1 billion in adjusted free cash flow that we used to fund our capital allocation priorities, including the return of nearly $1 billion to shareholders via dividends and share repurchases as well as a capability-enhancing tuck-in acquisition during the fourth quarter.

Now let's take a deeper look at how meeting customer needs drove our fourth quarter results. As always, there were 3 drivers of performance: our diverse portfolio of customer end markets, the breadth of our product solutions and services portfolio and the relentless execution of our 3-part strategy for growth.

First, our diverse customer end markets. As you know, we have 5 U.S. customer channels: corporate, small business, health care, government and education. Each channel is a meaningful $1 billion-plus per year business on its own. Within each channel, teams are further segmented to focus on customer end markets, including geographies and verticals. We also have our U.K. and Canadian operations, which together delivered sales of USD 2.7 billion in 2025. Once again, the power of our diverse customer end markets was evidenced as strong double-digit performance in both small business and state and local more than offset expected federal headwinds from the government shutdown.

Corporate top line was relatively flat year-over-year, down 1% with strong cloud adoption, offset by slowing hardware solutions and the expected moderation in Windows 11 refresh activity. Exceptional small business growth of 18% was fueled by cloud consumption and related services and continued activity in client device modernization, investments that underpin focus on innovative AI opportunities.

Our international operations, U.K. and Canada reported together as other, delivered high single-digit growth within the challenging markets. In our public business, health care increased by 5% on top of last year's exceptional performance. Government increased by 4% as strong double-digit growth in state and local more than offset the expected decline in federal due to the extended shutdown. K-12's deep customer and partner relationships, combined with our life cycle services capabilities, drove a major Chromebook solutions rollout with New York City Department of Education. This, together with solid growth in higher ed delivered a strong 13% increase in education top line. The diversity of our customer end markets was clearly a driver of fourth quarter performance.

The second driver of performance is our broad and deep portfolio of solutions and services. This quarter, our full stack, full life cycle offering enabled us to meet the diverse customer priorities across our end markets. Portfolio performance was led by cloud and professional and managed services. Cloud remains a major engine of performance, contributing roughly half of the quarter's gross profit growth. Both cloud revenue and gross profit rose at strong double-digit rates, fueled in part by accelerating demand for cloud-enabled AI solutions.

Professional and managed services top line increased double digits, driven by hybrid infrastructure engagements targeting expense savings and budget optimization, implementation of AI-powered customer care and customer experience solutions and agentic AI engagements. Hardware increased by 2% as double-digit increases in notebooks and servers was offset by declines in storage.

Towards the end of the quarter, our teams helped customers navigate memory-related price increases and announced future increases. Client devices showed continued growth, up high single digits. Growth reflected a variety of cross currents with the large education project and modest memory-related pull-in, offset by the expected slowdown in Windows 11 refresh by enterprises and the 43-day government shutdown.

Software performance was excellent. Top line rose by 12% and gross profit even faster, driven by cloud as well as in part by customers renewing software licenses tied to hybrid solutions that extend the life of their existing infrastructure.

Security remains a key priority across all of our customers with top line and gross profit both up single digits. Security services remained strong, led by demand for vulnerability assessments, identity and access management implementations and customer training along with engagements focused on cloud deployment, endpoint and application security and safe adoption of AI. Security solutions showcases how we embed services in every outcome we deliver, services that amplify and accelerate value for customers and partners alike.

During the quarter, just as they did all year, the team did an exceptional job leveraging our deep expertise and broad portfolio of full stack, full life cycle solutions to address customers' most pressing priorities. And that leads to our third driver of results, relentless execution of our growth strategy.

Our investments in high relevance, high-growth areas position CDW to deliver outcomes in a world where technology ecosystems are more dynamic and interconnected than ever. As choices multiply and risk rises, our value to customers and partners only grows and AI plays directly to our strengths. We have the architectural depth, partner reach and delivery scale to lead in the AI era, and our services forward model sets us apart. Our AI offerings span strategy, data modernization, Gen AI integration and automation. And we're rapidly expanding our offerings with repeatable, scalable toolkits.

As always, our portfolio is built around the customer. Our vertical use case is mapped directly to desired end market outcomes from risk and fraud and clinical efficiency to student success, citizen services and merchandising. In parallel, our horizontal solutions address universal priorities such as employee and customer experience, operations, security and automation.

[Audio Gap]

Solutions like deployment playbooks and managed offerings. No matter the model, services are built in from day 1. While still early, AI momentum is building across every market we serve. Let me share 2 recent AI solutions, one from a large enterprise and one for a small business that bring this model to life. First, a large enterprise. A large enterprise wanted to scale advanced AI capabilities within its hybrid data center environment to meet rising performance demands, manage data sensitivity and control the cost of public cloud AI workloads. After a competitive RFP process, we earned the deal with a solution that leveraged our deep partnerships and our full stack, full life cycle approach.

One of the largest enterprise deployments of next-generation accelerated compute, the solution improves total cost of ownership with a potential 90-day payback, dramatically increases developer agility and reduces long-term regulatory and data governance risk. This is the model emerging across our enterprise customers, complex recurring margin-accretive engagements where our integrated capabilities matter.

While we help large enterprises implement full-scale AI stack build-outs, we also deliver solutions for smaller customers that embed AI directly into their workflows as a workforce multiplier. A great example of this in action is the approach we use to help a fast-growing multi-location automobile service business whose lean IT team was struggling to support an expanding footprint. Our solution, a modern IT service management platform that utilizes a generative AI virtual agent as the first line of support. The generative agent instantly resolves common questions, triages tickets and services relevant knowledge in real time.

Governance guardrails ensure safe handling of sensitive data, delivering efficiency gains without added risk. Their IT team is holding headcount while shifting to higher-value work. The kind of productivity-led ROI customers want from AI and the entire engagement was delivered at an accessible price for a cost-conscious customer. Two great client stories that highlight our standout AI solutions. But with AI embedded across the entire stack, a key part of our AI story is that AI is not a discrete contributor, it is a pervasive one with results embedded in our hardware, software and services performance. And that brings us to our expectations for 2026.

Today's technology ecosystems are more dynamic, interconnected and mission-critical than ever. At the same time, we continue to see unique dynamics in the public sector, including lingering impacts of last year's government shutdown as well as economic and geopolitical conditions that continue to drive cautious customer behavior. Against this backdrop, we currently look for the U.S. IT addressable market to grow in the low single digits in 2026 on a customer spend basis with 200 to 300 basis points of CDW outperformance.

Wildcards include meaningful changes in known ongoing exogenous factors, which include public spending dynamics, tariffs and geopolitical risks as well as memory pricing and supply. As always, we will provide updated perspective on business conditions and refine our view of the market as we move throughout the year.

Regardless of market conditions, our priority is clear: deliver sustainable, profitable growth by deepening customer value, sharpening efficiency and deploying capital with discipline, investing where we see the greatest strategic impact and long-term returns. We are operating in a complex yet exciting times. With our full court press on strategy and team with proven execution, we are well positioned to capture share by delivering on our unique value proposition to customers and partners.

Now let me turn it over to Al, who will provide more detail on the financials and outlook. Al?

Thank you, Chris, and good morning, everyone. I will start my prepared remarks with details on our fourth quarter performance, quickly recap 2025 as a whole, move to capital allocation priorities and then finish with our outlook for 2026.

Fourth quarter gross profit of $1.3 billion was up 8.6% year-over-year. This was above our expectations for a low to mid-single-digit year-over-year increase as our teams captured growth in client devices alongside increased demand for software and services. While we saw some moderate levels of pull forward in the range of $50 million in net sales, driven by memory-related price increases and supply chain concerns, the overall impact to fourth quarter growth was minor.

Fourth quarter gross margin of 22.8% was up 50 basis points over the prior year's fourth quarter. Gross margin was also up 90 basis points compared to the third quarter, driven by the impact of a higher mix of netted down revenues, improved product margins and a slight mix out of client devices sequentially despite the category's continued solid growth.

The diversity of our end markets also served us well in this quarter. Government increased on the strength of state and local, while federal modestly outperformed our expectations that had factor in a prolonged government shutdown. Small business and international continue to execute at a high level, while education also posted solid growth with both K-12 and higher ed finishing the year strong. Health care also increased year-over-year despite the comparison to a prior year fourth quarter, where sales increased 30%. While corporate was relatively flat year-over-year, this was in line with our expectations and reflected both continued caution towards major capital investments in solutions hardware and customers being further along with their Windows 11 related refresh programs compared to other channels.

The diversity of our portfolio also served us well in the quarter. Demand for licensed software was strong, and we saw robust growth in virtualization, application suites, network management and storage area management software as customers look to extend the useful life of their network and data center assets. The need for and relevance of CDW's professional and managed services continue to grow as reflected by net sales transferred over time where CDW's principal increasing 11% year-over-year.

Cloud, SaaS and security offerings were particularly strong in the quarter. These are offerings included in the category of net sales transferred at a point in time where CDW is agent or netted down sales, which increased 8%. Netted down revenues continue to represent an important and durable trend within our business, representing 36.1% of gross profit, up from 35.8% in Q4 of '24 and up slightly from 36% in the third quarter.

Turning to expenses for the fourth quarter. Non-GAAP SG&A totaled $752 million, up 14.6% year-over-year and were consistent with our expectation at asymmetrical timing compared to 2024 would inflate the year-over-year growth comparison. This increase in expenses was primarily driven by commissions related to higher gross profit achievement and the impact of higher performance-based expenses compared to the prior year. We continue to structurally align our business for stronger future expense leverage, and we expect to make progress towards this in 2026 and deemed 2025 to be a normal baseline for comparative purposes.

Coworker count at the end of the quarter was approximately 14,800 and customer-facing coworker count was 10,500, both down slightly year-over-year and quarter-over-quarter. Our goal is to balance growth, expansion of capabilities and exceptional customer experience with greater efficiency and cost leverage from our broader operations.

Non-GAAP operating income was approximately $502 million, up 0.6% versus the prior year. Non-GAAP operating income margin of 9.1% was down 50 basis points from the prior year fourth quarter level when expenses benefited from lower performance-based compensation and coworker-related costs. Net interest expense was up roughly $2 million year-over-year and $3.5 million from the third quarter as we entered into a new expanded 5-year senior unsecured credit facility. Our non-GAAP effective tax rate was moderately below the low end of our target range at 24.2%. Non-GAAP net income was $336 million in the quarter, up 0.9% on a year-over-year basis. With fourth quarter weighted average diluted shares of $130.6 million, non-GAAP net income per diluted share was $2.57 up 3.8% versus the prior year period and above our prior expectation of down slightly year-over-year.

Shifting gears to briefly review full year results. 2025 was a year of transition and a return to growth. Market demand was relatively in line with what we initially anticipated, while customer sentiment was cautious throughout the year, impacted by the twist and turns of economic policies, geopolitical issues and the early stages of many customers' AI journeys. Through all of that, our teams delivered for our customers, and we're proud of their execution in this environment. We grew net sales 6.8% and gross profit 5.9% during the year, holding gross margins reasonably flat at 21.7%, again showing that even when client devices are higher in the mix and solutions hardware demand is uneven, our margins remain resilient. Our non-GAAP net income per diluted share increased 5.2%, breaking through the $10 per share mark, an all-time record for CDW.

Moving to the balance sheet. At period end, net debt was $5 billion, down roughly $165 million from the prior quarter, driven by increased cash and cash equivalents. Liquidity increased under our new facility with cash plus revolver availability of approximately $2.5 billion. The 3-month average cash conversion cycle was 16 days, slightly below our target range of high teens to low 20s. This cash conversion metric reflects our effective management of working capital, including disciplined management of our inventory levels even as hardware sales were firm and client device growth continued.

As we've mentioned in the past, timing and market dynamics will influence working capital and the cash conversion cycle 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 an excellent $418 million in the quarter, bringing us to $1.09 billion for the full year. This reflects 82% of non-GAAP net income for the year within our stated rule of thumb of converting 80% to 90% of non-GAAP net income to cash. We effectively utilized cash consistent with our 2025 capital allocation objectives during the quarter, including returning $153 million in share repurchases and $82 million in the form of dividends. As a reminder, we began 2025 targeting to return 50% to 75% of adjusted free cash flow to shareholders. We finished well ahead of that target, having returned nearly $1 billion to shareholders or 90% of our adjusted free cash flow.

And that brings me to our capital allocation priorities moving forward. Our first capital priority is to increase the dividend in line with non-GAAP net income growth. We announced on our last earnings call an approximately 1% increase in our dividend to $2.52 annually, our 12th consecutive year of an increase. We will continue to prudently manage our dividend with respect to the growth environment and target a roughly 25% payout ratio of non-GAAP net income going forward.

Our second priority is to ensure we have the right capital structure in place. We ended the fourth quarter at 2.4x net leverage within our targeted range of 2 to 3x. We will continue to proactively manage liquidity while maintaining flexibility.

Finally, our third and fourth capital allocation priorities of M&A and share repurchases remain important drivers of shareholder value. We continually evaluate M&A opportunities that could accelerate our 3-part strategy for growth, as shown by our recent acquisition of the select assets of Lexicon Tech Solutions. This acquisition highlights our strategy of bolstering our end-to-end life cycle capabilities for education customers with the potential to broaden the applicability to our other channels down the road.

For 2026, we are maintaining our target to return 50% to 75% of adjusted free cash flow to shareholders via the dividend and share repurchases. While we remain active in the M&A market, our cash flow performance, both in 2025 and what is expected for 2026 will allow us to be opportunistic towards share repurchases as we deem our stock to be attractive at this valuation.

Customers have compelling needs to address priorities across the full IT stack, but this is balanced against the risk of supply chain and pricing challenges, ongoing geopolitical unrest and general economic uncertainty and caution. A new year does not wipe the slate claim, but it does give us a chance at a fresh perspective.

On that note, ahead of our Q1 2026 earnings call, we'll be updating the reporting of our customer channels. As a brief preview, we've made changes to reflect our current go-to-market structure. With this, you will see more information on government and education, including gross profit and operating income for each. We will continue to disclose net sales for our health care and corporate channels and will additionally disclose net sales for our financial services vertical. These channels will be included in the segment we will be calling commercial. Small business will be integrated within the commercial segment, and we will still maintain the preeminent small business support model in our industry, and our small business teams will also be aligned to the areas of industry expertise.

While we've seen heightened uncertainty in recent years and 2025 was as dynamic a year as any, we believe we have navigated these complex environments with an appropriate level of prudence and precision. We believe that our updated go-to-market structure and the investments we've made to fortify this structure, we are set up for success in 2026 and beyond.

Turning to our outlook. We will continue to deliver for our customers and partners. And as always, as the landscape changes throughout the year, we will provide you with updates each quarter. With these factors in mind, our full year 2026 expectation is for our addressable IT market to grow low single digits, and we target market outperformance of 200 to 300 basis points on a customer spend basis. With this, we expect gross profit to grow in the range of low single digits for the full year 2026, and we expect second half gross profit contribution to be slightly above the first half. Based on the anticipated mix of products and solutions for 2026, gross margin should be slightly higher than 2025 levels and remain well above rates from 3-plus years ago.

Finally, we expect our full year non-GAAP net income per diluted share to grow mid-single digits year-over-year as we focus on operating leverage 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, our expectation is for currency to be neutral to reported growth rates for the year.

Moving to modeling thoughts for the first quarter. We anticipate gross profit to decline at a mid-single-digit rate sequentially, leading to mid-single-digit year-over-year growth. We expect some demand to be pulled forward into Q1 to get ahead of price increases in certain memory-intensive product categories. Separately, our first quarter view reflects an expected slow start to the year for the federal channel as pipeline rebuilds following last quarter's government shutdown.

Moving down the P&L. We expect first quarter operating expenses to be down from the fourth quarter of 2025 on a dollar basis, whereas they are normally flat to up sequentially. However, as we normally see, the first quarter operating margin will likely be at the lowest quarterly level for the year. Finally, we expect the first quarter non-GAAP net income per diluted share to be up mid-single digits year-over-year.

That concludes the financial summary. As always, we'll provide updated views on the macro environment and our business on our future results calls.

With that, I will ask the operator to open it up for questions, and we'd ask each of you to limit your questions to one with a brief follow-up.

[Operator Instructions] Our first question is from David Vogt from UBS.

I appreciate all the details, Chris and Al. So maybe, Chris, for you, Al talked about a little bit of a pull forward in Q4. We're getting a little bit of a pull forward in Q1 from a memory perspective. How do we think about what that means for the balance of the year? I know the guidance talks about an even split from gross profit. But just from a demand perspective, what are your partners telling you in terms of how to think about these memory-sensitive product categories like PCs and servers? And just maybe help us qualitatively think about how the year should progress given where memory prices are today?

Yes, David. Let me try to share as much visibility as we have into the memory impacts from partners and what we're seeing vis-a-vis demand. First of all, I'd say, as we think about the upcoming quarter, it's hard to tell yet what we expect to see from a pull-forward perspective. I think, look, we've quantified it and believe to the best of our ability that we're going to see about the same amount of pull forward in Q1 or slightly more than we actually saw in December. When you think about the various products, I would just tell you that PCs for us, for example, have been strong. We'll probably see decelerating growth this coming year, but we still see strength as we explained in our prepared remarks. It might be a little choppier during the course of the year as a result of memory, but we still see strength there.

What we've done is in the back half of the year, we've really just tamped that down a bit to take into account that we don't have visibility all the way to the back end of the year. But that's how we're thinking about it.

Great. And maybe one for Al as a quick follow-up. You talked about SG&A being sort of a baseline in calendar '25 and working towards operating leverage in '26. And I'm just penciling in really quick math. It looks like just based on your commentary, the SG&A as a percentage of gross profit doesn't really decline that much in '26. Can you kind of talk to that? Is that the right way to think about it? And why shouldn't it decline a little bit more given, obviously, all the investments that you've made in '25 and '26 being a bit of a better year in terms of conversion?

Yes. David, thanks for the question. A couple of things. First, what you're seeing in our outlook, as you typically would beginning of the year is prudent. But what you should take from it is the shape of the outlook that we're providing, right, low single digits in gross profit and then mid-single digits down to EPS. We expect that we are going to have operating leverage and it's a top priority. Obviously, we're past the compares from the prior year. We've got a lot of focus on how do we continue to optimize our cost base here. But you will see kind of that operating leverage kick in and progress through the year. The impact on an SG&A ratio, you will see it, right, but that's going to follow more as the operating leverage progresses and accelerates and particularly as we start to see growth pick up in a more meaningful way.

So our outlook shows the shape of how we'd like it to work. If we can amplify the growth, if we can continue to make progress on optimizing our expenses, David, it's going to be more significant in terms of progress down the P&L as well as that SG&A ratio coming down.

Our next question is from Adam Tindle from Raymond James.

I just wanted to start on the outlook. As I think about 2026, the drivers, presumably, PC mix will come down. You've got, obviously, these memory price increases happening, so potential for inflation hitting. But when I think about the drivers here, it's low single-digit market growth, 200 to 300 basis point outperformance of that and low single-digit gross profit dollar growth. So it seems like the implication here is not much improvement in gross margin despite PC mix coming down and inflation potentially coming through the model. Last time we saw this increase in component costs, it was a benefit to gross margin. I just wonder if you zone into that point, what might be similar or different than a few years ago where we were getting benefits from inflation in this model?

Adam, it's Al. So I'll take that. I do think that we are expecting that we will see gross margin expansion. We'll call it kind of modest pickup, but there is opportunity for that to accelerate. If I give you a little bit more detail kind of what that could look like in the way of the shape of the year, given the landscape we're dealing with in the memory environment, we will likely see stronger hardware growth in the first half. And we will likely then see that fade a bit in lieu of more netted down revenues, software, cloud, et cetera. As well, we would hope that we will see progression through the year on services.

So just shape of the gross margin first half, probably a bit lighter, second half pickup on the factors that I just mentioned. So that's what it looks like. I do think that if that plays out, we would see that drop down into our operating margin. Obviously, you got a lot of moving parts right now, Adam, on these different fronts, but that's the way we see it looking as we sit here now.

Got it. Maybe a follow-up for Chris. I know a lot of the investor conversation recently has been around AI and whether or not that's a benefit or headwind to CDW. Reminds me a little bit of years ago when there was questions around cloud for CDW. And as you mentioned in your prepared remarks, I think cloud is now driving a significant portion of the gross profit dollar growth in this model and clearly was not a headwind.

So Chris, I wonder if you might kind of compare and contrast cloud versus AI in terms of the investor narrative and what you're seeing in the customer behavior. And I remember at the time, you had kind of a landmark where you landed AWS on the line card many years ago, and that was kind of the stopping point to say, hey, cloud is going to be a benefit. Do you see opportunity like that with AI? Is there a strategic partnership with OpenAI, Anthropic, somebody like that, that could potentially materialize? What would be sort of the turning point?

Yes. Adam, thanks for the question. Let me start with the end and work backwards. With the various partners you've named, we've already got relationships with them, as you would expect and smaller companies as well, but all the big players in the AI space, CDW has got partnership -- relationships with, right now. I would say, look, while we're still in the early innings, and you heard me say this, AI momentum is picking up in all of our end markets. And a slight difference from cloud versus the AI revolution now is cloud was just a consumption model and AI is embedded across the entire stack and it's changing the entire platform, so to speak. So when I think about where we sit right now, we're very optimistic about 2026 and beyond. We are seeing customers absolutely move into production stage.

And if I just take a moment on the value proposition that CDW brings to bear, look, organizations don't struggle with access to models. They struggle with making them work to solve problems, real problems. And that's across their full technology estate. And so you think about CDW, that plays to our strengths. And it's structural advantages that we've built over decades. Our clients depend on our expertise for integration and secure deployment of AI-enabled tech solutions. And so customers are looking to us now to really help them adopt and consume. And remember, there's been a lot of investment in capacity for AI. Now that capacity has to be consumed, and we're right there to help them do it.

A neutral party with a deep technical expertise across the entire tech stack, a trusted adviser with intimate knowledge of our customers' complex tech estates and increasingly an expert in identifying how these technologies can be applied. So we bring the ability to orchestrate and optimize across the technology landscape. And we believe that these capabilities, the expertise and our customer intimacy and the customer relationships make us more relevant now than ever. You asked about an inflection point. I think we are at the point of inflection with our customers in AI, and we're seeing that in every component part of our business.

Our next question is from Amit Daryanani from Evercore ISI.

I guess maybe the first one, Chris, with IT budgets growing in the low single-digit range, I would love to kind of understand where do you see customers allocating incremental dollars by category? Just anything in terms of '26 spend across hardware versus solution would be helpful. And I don't think I heard you talk a lot about netcomm and how that's stacking up. So I would love to see where that's in the customer priority list.

Amit, I'll take this and just maybe rattle through kind of our thoughts and what's underpinning our outlook. So as we sit here now, client device growth, we continue to feel good about. Obviously, it's a different landscape we've been in and maybe a little less kind of focused on Windows 11. I think kind of where the focus there would be still plenty of units from COVID refresh as well as we are seeing a pickup on AI PCs. So in this memory-intensive environment, I think we'd expect that client devices could be a little more uneven than usual. But the activity we're seeing and the customer interactions we're seeing suggests there's still plenty of demand on the client front.

Cloud, SaaS, security, kind of those evergreen categories that have been really strong for us, we expect will continue to be really important. And we would say kind of for the full year, those categories will have higher weight. And so we'd expect that netted down revenues will continue to be very durable.

In the solutions space, it's a mixed bag, and it's been a mixed bag. We do, Amit, feel more positive on the network side of things. 2025 was a solid year on networking, and we think that there are reasons and drivers for that to continue. On the server and storage front, a bit more choppy just as it's been. And so kind of our expectations on that front are pretty modest in the way of growth.

Got it. Super helpful. And then, Al, you spoke a little bit about the OpEx dynamics into '26. I was hoping you could maybe expand on this a little bit because the last few quarters, you've seen OpEx growth be ahead of revenue growth by a few hundred basis points. Do you think it's more a reflection of internal investments that you folks are making versus incentives or cost inflation? I'd love to just understand like what happened in the last 6 months. And then as you think about leverage showing up in the model in '26, can you expand on -- do you see that stacking up more across headcount control or incentive comp or inflation? Just I would love to kind of just understand what drives the leverage in '26 as you go forward?

Yes. Happy to tackle that. So in 2025, Amit, you'll remember kind of Q1, we showed the greatest amount of operating leverage, and we indicated, given the shape of the year from the prior year around incentives, we expected asymmetry. The biggest driver of what we saw for the year was just that. It was the volatility variability through the quarters on the expense front relative to gross profit, okay? So there's that.

Number two is, obviously, gross profit for us exceeded expectations. We are still a highly variable model, and therefore, OpEx is going to respond to that higher gross profit, and we definitely did -- we definitely did see that. And then thirdly, I would say, look, we have been investing and continue to invest, and we think it's critical to feed into our strategy. So that would be kind of the third theme. But the first two components really kind of trump the investment.

Now as we move into 2026, we are now, like we said, at a better baseline, more comparable baseline on the variable components of comp. So we're going to have that. We will continue to invest, but we are laser-focused on opportunities to optimize our fixed cost base, and we think there are opportunities with really good line of sight. And so that's what we're going after. You're going to see it first show up in terms of quarterly operating leverage with a progressive kind of level of speed through the year and then it ultimately is going to knock down that SG&A ratio back in towards the range that we'd like it to be.

Our next question is from Erik Woodring from Morgan Stanley.

Chris, I realize this is kind of a backwards-looking question, but it does inform the forward look. And for many years, especially in years where hardware spending was strong, CDW would outgrow U.S. IT market growth by maybe 400 to 500 basis points or even more. In each of the last 3 years, we haven't really seen that only about 200 to 300 basis points of outperformance even in a market like 2025 where hardware spending was robust. So I would just love to understand, is there something structural about the market, perhaps competition or something we're not considering that just makes it harder to outperform in the ways that you used to? Or what can maybe explain that just relative to historical outperformance? And then a quick follow-up.

Sure, Erik. Thanks for the question. As I think about the outperformance and we look at the addressable market in the last couple of years, our outperformance has been in the high end of the 200 to 300 basis point range in our view. In addition, the mix of our business is continued to mix into netted down revenue. So while we have -- while you have less compression on the top line, the more hardware you have, we now have a much greater mix of netted down. So that's going to impact the differential as well. I would say there's nothing in my mind that from a competitive perspective that concerns us. We're still the #1 trusted adviser to our customers. When we look at the various category by category, we will outperform the market.

And look, we're really confident and pleased with the strategy that we've put in place and how that is helping us to drive over-indexed gross margin. And as Al just went through, will give us the opportunity to leverage that down the P&L to amplify earnings. And that's a result of the capabilities that we've built into the system. But we feel very confident about our ability to continue to take share moving forward across every category.

Okay. That's really helpful, Chris. And then just as a follow-up, the last 2 quarters, we've seen a pretty notable divergence in corporate versus small business performance. Obviously, SMB, very strong double-digit growth, corporate, more so inching along. Just what do you think can help to explain this? Is this just kind of differences in where we are in spending cycles for these cohorts? And what does this mean for kind of these 2 cohorts as we think about 2026?

Yes. I'd say a couple of things. We are in a little bit of a difference in the spending cycles. And what we've seen with larger companies over the last couple of years actually, particularly as AI has been introduced, is taking the time to understand how that technology integrates into their estate and how to do that and to do experimentation and testing. So they have been more focused on cost optimization, extending the useful life of assets, the must-dos like client devices, et cetera. And now we are actually seeing a number of larger companies who are starting to move into production and starting to spend more in that area. It's still a cautious time for all of our customers. So we are taking a prudent approach to spend in this coming year.

And as Al said, we expect it to be uneven, but we are at the front end, I think, of an uptick in what we're going to start seeing from the corporate side. Small business is much more nimble in terms of their ability to adopt AI. They're very cloud forward. And so they are at the front end of taking more packaged solutions, applying them for a fast ROI and doing it quickly and now. So I just think you're seeing differences in not just maturity, that's not the best way to describe it, but it's where all of our customers are in the adoption cycle. And the key thing is that we're helping them with both design, but then obviously, is the adoption and then importantly, consumption because all of the capacity that's been built for AI consumption capabilities has got to now be used by our customers, and we are right in the middle of helping them do that.

Our next question is from Ruplu Bhattacharya from the Bank of America.

Al, based on the netted down items as a percent of gross profit, it looks like margins in the core business ex netted down is actually trending well. I mean it was up 70 bps looks like sequentially and year-on-year. Can you remind us as suppliers are raising prices, how does that impact CDW? And can margins in the core business continue to grow? And I have a follow-up for Chris.

Ruplu, non-netted down gross margins, you're right, strong, three things kind of I'd owe that to. Our services growth have been strong. I would say, sequentially, we had a bit of a mix out of client, which aids our margins. And then thirdly, Ruplu, just margins and product margins in general have been resilient. And we've seen that now for a number of quarters. So that certainly feels good.

As we scroll forward and we think about some of the phenomenon we have going on right now with memory, we feel good about margins. I think what we're likely going to see is increases in ASP. But just a reminder that we are a cost-plus provider, and therefore, we are passing through our gross margin. And right, during this period that we're seeing activity already, I think that concept is holding up, and we expect that will hold up. So on the non-netted down margin front for 2026, I would say we expect firmness. And if we see some deceleration of client, there could be some upside as well.

Okay. Thanks for the details there. I appreciate that. Can I ask, Chris, a question? CDW has delivered very strong services growth now for the past many quarters. What type of work are you seeing? And are you engaging more with customers on the AI-related projects? Are you seeing small, medium business, the middle market customers? Are they looking at AI? And is this an area of focus and investment for CDW?

Thanks, Ruplu, for the question. Yes, it absolutely is. And when you think about that customer set that you just mentioned, those are customers that don't have the resources, the breadth of skills and capabilities, the access to the partners and the full kind of end-to-end capabilities. And so CDW has been both investing in over the years, but now highly engaged with customers in the small business space, the mid-market space and the higher end of the mid-market space as well to help on the design stage, the architectural stage, the analytics stage, the workshopping stage and then taking that to the next several stages, which is obviously a migration and deployment. It's actually activating and operating. It's ensuring that the data that fuels all the benefits of AI are governed, they're clean, everything that needs to be done there.

And then more and more, Ruplu, what we are seeing, and you see this in our results is customers turning to us for managing their environments. So operating their environment securely and reliably is an important part of our value proposition, and those customers, in particular, are looking more and more to outsource that. So that's a benefit to us as well.

Our next question is from Keith Housum from Northcoast Research.

In terms of just trying to unpack the memory industry-wide issue going on right now, I'm just trying to understand a little bit further here in terms of comparing that perhaps the chip shortages that we saw several years ago. Is there a thought process here that the increases in prices have started already? And how much of your portfolio is impacted or potentially impacted by what could be rising prices or eventual shortages as well? Just any visibility to where could we actually see shortages and what will be the impact on demand here?

Yes. Keith, thanks for the question. Look, it is quite fluid. What we are seeing kind of across OEM partners and kind of product generations is varying quite greatly. But you're seeing kind of week-to-week, month-to-month price increases flowing through. And what we're seeing is customers -- us helping customers navigate around that. In some cases, with these partners, Keith, there may be certain configurations of machines where they're not seeing as much of the way the price increase and there's less risk of supply. So I'll just say it's very fluid at the time.

Now to your question on supply, what we see right now, very robust customer demand significant customer activity kind of on this front and plenty of written demand that we are experiencing. So far, we are not seeing any significant roadblocks on the supply chain side of things, but we are counting on that you could see that as the year plays out. Our greatest visibility is obviously what's right in front of us for Q1 and to a bit lesser degree, Q2. But when we think about the demand we're seeing and the activity with customers and the supply component, we feel good about the growth prospects in the first half.

Obviously, we look to the second half, the visibility is less, Keith, and we think that, that's where the supply chain challenges could start to come into play. So we have an outlook that is modest in that regard and presumes that we can see deep dampening of growth during that second half of the year.

Okay. Helpful. I appreciate it. So far, like year-to-date, I guess, what are you seeing in terms of like the percentage price increases? Are we seeing single digits? Are we well into the double digits? Any type of context you can provide there?

Yes. I don't know if I have a single answer for you, Keith. Like I said, it does vary greatly by partner, by product, right? So in some cases, it's small single digits. In some cases, it's a bit more. And it is fluid in terms of kind of where it will go. We could see, in some cases, escalation. But just remember, Keith, when we go back to the periods where we've had this before, this is where we excel. This is where we work with our customers and help them navigate both the partner universe and the ecosystem, but also the configurations that might work for them, but also optimizes their cost. And so look, we're right in our sweet spot, albeit it's a challenging time, this is where kind of we bring the most value.

I will now hand back to CDW management for closing remarks.

Thank you, Gabby. Let me close by recognizing the incredible dedication and hard work of our coworkers around the globe. Their ongoing commitment to serving our customers is what makes us successful. Thank you to our customers for the privilege and opportunity to help you achieve your goals, and thank you to those of you listening for your time and continued interest in CDW. Al and I look forward to talking to you again next quarter.

Thank you. This concludes today's CDW's Fourth Quarter 2025 Earnings Call. Thank you for joining. You may now disconnect your lines.

Good morning, all, and thank you for joining us for the CDW Third Quarter Earnings Call. My name is Carlie and I'll be coordinating the call today. [Operator Instructions] I'd now like to hand over to our host, Steve O'Brien with Investor Relations. Floor is yours.

Thank you, Carlie. Good morning, everyone. Joining me today to review our third quarter 2025 results are Chris Leahy, our Chair and Chief Executive Officer; and Al Miralles, our Chief Financial Officer.

Our earnings release was distributed this morning and is available on our website, investor.cdw.com, along with the 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 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 8-K 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 the reconciliation charts in the slides for today's webcast and in our earnings release and Form 8-K. Please note all references to growth rates or dollar amount 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 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.

Thank you, Steve, and good morning, everyone. I'll begin with a high-level overview of our third quarter financial and strategic performance and share some thoughts on the balance of the year. I will take you through a more detailed look at our results, capital strategy and priorities and full year outlook. We will move quickly through our prepared remarks to ensure we have plenty of time for Q&A.

Third quarter results underscore the power of our full stack full life cycle solutions. The team executed well in an extremely dynamic and complex environment. For the quarter, consolidated net sales were $5.7 billion, up 4% above last 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%; and we delivered adjusted free cash flow of $209 million. These results reflect the power of strong execution when coupled with our extensive portfolio of products, services, solutions and diverse customer end markets. They also reflect the power of our deep end market knowledge and strong durable customer relationships.

You see the benefit of this in our government education results, armed with insights into evolving protocols, funding mechanisms and budget priorities, our team drew on their combined deep industry expertise and trusted customer relationships to guide clients through an unprecedented period of change.

During the quarter, customer priorities remained focused on must to-dos, such as security enhancements and client device upgrades that are foundational to enabling modern work. And once again, major capital investments were heavily scrutinized. Corporate and small business customers also prioritized preproduction AI trials to prove out use cases to validate concepts and ROIs. These priorities led to strength in cloud, software and services.

Let's take a deeper look at how customer priorities and unique market dynamics shaped performance across our end markets and portfolio in the quarter. As always, there are 3 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 3-part strategy.

First, our balanced portfolio of diverse customer end markets. We have 5 U.S. sales channels: Corporate, Small Business, Healthcare, Government and Education. Each channel is a $1 billion-plus business annually. Additionally, our U.K. and Canadian operations together delivered sales of $2.5 billion last year.

Our scale allows us to segment our businesses 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 benefit of our scale and end market diversity was evident once again in the third quarter.

Small Business delivered double-digit growth in top line and gross profit as customers continue to lean more into technology in this dynamic environment. Growth was powered by success delivering cloud and client device solutions. While still nascent, we saw an uptick in AI workstations, which are particularly well suited for small businesses.

Functioning as mini AI servers capable of running AI models locally at the network edge, AI workstations enable rapid prototyping and deployment of advanced models, helping small businesses innovate faster.

Corporate delivered mid-single-digit top line growth with low single-digit gross profit. The team's ability to address customer focus on mission-critical priorities drove excellent performance in security and cloud gross profit and top line.

Client Devices also remained a priority increasing mid-single digits in top line and double digits in gross profit. The team's success addressing these priorities offset lower demand for infrastructure solutions. The public team executed well within unsettled end markets, delivering 1% top line growth with low single-digit gross profit.

Government net sales increased 8%. State and local delivered an impressive quarter with double-digit net sales and gross profit growth, which more than offset the anticipated decline in federal. Both teams navigated the post DOGE landscape with agility and precision, with the federal team showcasing our strategic value to their agency customers, laying a solid foundation for future growth.

Growth in higher ed was offset by an expected decline in K-12 and total education net sales declined 9%. Gross margin benefited from a shift in K-12 mix away from Chromebooks coupled with strong cloud and software growth and the teams delivered combined gross profit growth despite the decline in net sales.

Similar to education, health care gross profit grew faster than its 7% top line growth. Growth was driven by cloud solutions that deliver clinical continuity and security, which remain top priorities. The dynamic in the quarter was consistent with the strong performance in the prior 4 quarters.

We are watching for signs of customer hesitancy caused by changes in funding, particularly among health care clients relying on Medicare payments, which can constitute up to 30% of their cash flow. Standout performance was delivered once again by our U.K. and Canadian operations together reported as other, which increased net sales by 9%, and -- both teams executed extremely well under unsettled conditions.

U.K. net sales increased by double digits and Canada by mid-single digits. Profitability in both markets grew faster than net sales. Clearly, this quarter's results demonstrate the power of the first driver of our performance, our balanced portfolio of customer end markets. It also demonstrates the power of the second driver of our performance, the breadth of our full stack full life cycle offerings.

The team's ability to address customers' top priorities drove balanced performance across the portfolio. Hardware top line increased 3%. Following last quarter's strong solutions Hardware performance, the lumpiness in enterprise projects we have seen in recent years continued, and growth was more muted with strength in NetComm and Servers, partially offset by a decline in storage.

Consolidated Client Device growth continued at a healthy 7% pace with growth across most end markets, partially offset by declines in K-12 and Federal. Software increased 4% with excellent gross profit performance driven by cloud and security. Beyond security, top customer software priorities included network resiliency, next-generation customer service and support and application suites tied to operating system and device refresh.

Services was the standout performer up 9% top line and contributing 9% of total CDW top line this quarter, up from 5% in 2020. Strong performance was powered by double-digit top line and profit increases in CDW professional and managed services. This quarter, Services delivered nearly 1/3 of our total gross profit growth and bolstered gross margin.

And that brings us to the final performance driver this quarter, the impact of our strategic investments, investments designed to create better outcomes for our business and for our customers, investments that are focused on enhancing our customer-facing capabilities and our internal capabilities, which together drive profitable growth by improving how we operate and how we serve.

During the quarter, we made progress on our company-wide evolution to embed AI into the core of how we operate, serve and grow, a strategy designed to drive productivity and efficiency and empower our coworkers. From conversational AI and cdw.com that enhances product discovery and improved sales conversion to intelligent agents that streamline presales qualification and self-directed agents created by our coworkers, we are embedding AI across the enterprise.

Efforts, while earlier in the adoption cycle, are already translating into better coworker and customer experiences as we scale AI across our business, we are unlocking new levels of agility, efficiency and service quality.

Our AI offerings enable our customers to unlock value as well. As with prior waves of innovation, customers are focused on translating AI's potential into measurable business impact. This is particularly true for customers looking to harness AI to leapfrog traditional barriers and gain a competitive edge. And just like our prior innovation cycles, while eager to accelerate adoption and capture value, many customers don't have time or resources for trial and error and need a trusted partner to guide them. That's where CDW comes in.

With our deep expertise and comprehensive portfolio, we are delivering enterprise-grade AI solutions that are practical, secure and scalable. Whether it's intelligent search, workflow automation or embedded AI powered diagnostics, our solutions unlock real business value without the complexity or cost of building from scratch, while avoiding pitfalls and ensuring long-term success.

A standard example of this is a recent engagement with a national service company, an engagement where CDW designed a comprehensive AI data hardware and software solution. By integrating CDW Advisory Services, development cloud architecture and hardware prototyping, our solution delivers cloud-native architecture, embedded systems and centralized observability tools, all tailored to the customer's unique operational needs.

The solution includes AI-powered diagnostics and real-time performance dashboards, which together create a smarter, more scalable infrastructure. The outcome: data-driven decisions that are enabling smarter operations with greater efficiency, like predictive maintenance and supply chain management and data that unlocks new revenue streams aligned to their business goals.

This project exemplifies our value proposition for customers, deliver enterprise-grade technology and AI capabilities in a way that's accessible, customizable and outcomes driven. This is the heart of our value proposition, driving tangible business outcomes that meet customers where they are. Our value proposition shines in AI where we help customers move beyond the hype to unlock tangible value.

That leads me to our expectations for growth for the remainder of the year. Given our year-to-date performance and current market conditions, we are maintaining our prudent full year outlook, which calls for U.S. IT market growth to be in the low single digits on a customer spend basis with CDW growth premium of 200 to 300 basis points.

Clearly, we are operating under a lot of unknowns, including the duration of the government shutdown which could not only impact federal results, but could have an impact on other end markets, including health care and education. At the same time, the wildcards we spoke about last quarter, including recessionary conditions, higher inflation, increased geopolitical unrest and outside changes to announce tariffs persist.

I know many of you may be wondering what we expect for 2026. As is our custom, we are in the middle of our planning process, and we'll provide our thoughts on our year-end conference call. As we look forward, regardless of market conditions, our focus remains squarely on execution, leveraging our competitive strength to deliver consistent customer value and controlling what we can control.

In a time of unprecedented technological change and uncertain market conditions, our value proposition has never been stronger. Customers are turning to CDW as a trusted partner to help them navigate complexity, unlock opportunity and drive meaningful outcomes. We're confident in our strategy, grounded in our capabilities and committed to delivering results.

With that, let me turn it over to Al, who will share more details on our financial performance. Al?

Thank you, Chris, and good morning, everyone. I will start my prepared remarks with details on our third quarter performance, move to capital allocation priorities and then finish with our remaining outlook for 2025.

Third quarter gross profit of $1.3 billion was up 4.6% year-over-year. This was above our expectation of low single-digit year-over-year growth, as our teams captured increased demand for Software and Services alongside continued growth in Client Devices and NetComm in this complex and dynamic environment.

Similar to the second quarter, we did not see any meaningful levels of pull forward related to tariffs or other factors. Gross margin of 21.9% was up 10 basis points over the prior year's third quarter, back in line with our overall expectations of roughly flat to 2024 levels.

Gross margin was also up meaningfully 110 basis points quarter-over-quarter, driven by the impact of a higher mix of netted down revenues, continued strong growth in services and a slight mix out of Client and Devices sequentially despite the category's continued solid growth.

Every channel grew year-over-year except education, as our customers balance priorities across our diverse portfolio. Demand for CDW professional and managed services continued to be strong at 14%. This can be seen in net sales transferred over time or CDW's principal. Overall, cloud infrastructure, SaaS and security offerings were strengths in the quarter. These are offerings included in the category of net sales transferred at a point in time or CDW's agent or netted down sales.

Netted down revenues continue to represent an important and durable trend within our business, representing 36% of gross profit up from 35.7% in Q3 2024 and up meaningfully from 32.9% in the prior quarter. Customers across end markets outside of Education and Federal continue to invest in client devices, driven by Win 10 end of life and the enablement of modern work practices.

On the solutions front, Software and NetComm growth continued, although storage was softer in the quarter as demand for hardware upgrades in the data center space remains uneven. I would also like to highlight how our small business and international teams are executing exceptionally well in a challenging macroeconomic environment.

Alongside this, our public teams continue to manage shift in government priorities and funding, which I'll touch on a bit more in the outlook section. Our teams navigated this dynamic environment with CDW and our customers delivering results that exceeded our expectations and demonstrated the power of our diverse end markets. Thank you to our team for your efforts.

Turning to expenses for the third quarter. Non-GAAP SG&A totaled $725 million, up 8.7% year-over-year and consistent with our expectations that asymmetrical timing of expenses compared to 2024 would inflate the year-over-year expense growth comparisons in Q3 and Q4 of 2025.

This increase in expense was primarily driven by commissions related to higher gross profit achievement and the impact of higher performance-based expenses relative to the prior year. Notwithstanding the efficiency ratio of non-GAAP SG&A to gross profit for the quarter was 57.7%, representing progress back towards our sweet spot in the 55% to 56% range.

We continually work to structurally align our business for stronger future expense leverage. Coworker count at the end of the quarter was approximately 14,900, down both year-over-year and quarter-over-quarter with customer-facing coworker count of 10,700, down slightly year-over-year. Our goal is to balance growth, expansion of capabilities and exceptional customer experience with greater efficiency and cost leverage from our broader operations.

Non-GAAP operating income was approximately $531 million, down 0.6% versus the prior year. Our non-GAAP operating income margin of 9.2% was up 50 basis points from the second quarter, but down 50 basis points from the prior year third quarter of 9.7%. Net interest expense was relatively flat year-over-year.

Our non-GAAP effective tax rate was marginally below the low end of our range at 25.1%. Non-GAAP net income was $357 million in the quarter, up 0.6% on a year-over-year basis. With third quarter weighted average diluted shares of 131.8 million, non-GAAP net income per diluted share was $2.71, up 3% versus the prior year third quarter and above our expectations of flat to modestly up year-over-year.

Moving to the balance sheet. At period end, net debt was $5.2 billion, roughly flat with the prior quarter. Liquidity remains strong with cash plus revolver availability of approximately $1.8 billion. The 3-month average cash conversion cycle was 11 days, below the low end of our target range of high-teens to low 20s. This cash conversion outcome reflects our effective management of working capital, including disciplined management of our inventory levels, even as Hardware sales remain firm and Client Device growth continues.

As we've mentioned in the past, timing and marketing dynamics will influence working capital and the cash conversion cycle 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 $209 million in the quarter, bringing us to $668 million year-to-date. This reflects 68% of non-GAAP net income moderately below our stated rule of thumb of 80% to 90% of non-GAAP net income, but relatively in line with our expectations given the role timing plays throughout the year.

We expect a seasonally strong fourth quarter free cash flow to move the full year 2025 free cash flow back closer to the rule of thumb. We utilized cash consistent with our 2025 capital allocation objectives during the quarter, including returning approximately $150 million in share repurchases and $82 million in the form of dividends.

As a reminder, we began the year targeting to return 50% to 75% of adjusted free cash flow to shareholders in 2025. Right now, we are clearly ahead of the pace through the third quarter having returned $747 million to shareholders or 112% of adjusted free cash flow.

That brings me to our capital allocation priorities. Our first capital priority is to increase the dividend in line with our non-GAAP net income. We're announcing an approximately 1% increase in our dividend to $2.52 annually, our 12th consecutive year of an increase. We will continue to prudently manage our dividend with respect to the growth environment and target a roughly 25% payout ratio of non-GAAP net income going forward.

Our second priority is to ensure we have the right capital structure in place. We ended the quarter at 2.5x net leverage within our targeted range of 2x to 3x. We will continue to proactively manage liquidity, while maintaining flexibility.

Finally, our third and fourth capital allocation priorities of M&A and share repurchase remain important drivers of shareholder value. We continually evaluate M&A opportunities that could accelerate our 3-part strategy for growth. Given our actions to date in 2025, we now expect to meaningfully surpass our return of capital of 50% to 75% of adjusted free cash flow to shareholders via the dividend and share repurchases in 2025.

While we remain active in the M&A market, our consistent year-to-date cash flow has allowed us to be opportunistic towards share repurchases as we deem our stock to be attractive at these valuations.

Now turning to our outlook. Throughout 2025, we navigated a complex environment with appropriate level of prudence, a view that we've maintained despite our strong results. We've been laser-focused on controlling what we can control and supporting our customers only as we only know how to do in this dynamic market.

Given the recent government shutdown, we believe our continued prudence is warranted. Our remaining 2025 outlook assumes continued frictional impacts in the Government Education segments, potential funding shortfalls for health care customers and a level of general economic uncertainty and caution. It does not, however, factor in recessionary conditions, higher inflation, increased political unrest and outsized changes announced tariffs. As always, as the landscape changes next year, 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. Our expectations for low- to mid-single-digit gross profit growth for the full year is unchanged. We continue to expect second half gross profit contribution to be slightly above the first half, but lower than the historical split of 48% and 52%, and we continue to expect 2025 gross margins to be roughly consistent to 2024 levels and remain well above rates from 3-plus years ago.

Finally, we continue to 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, our expectation for currency is to be a slight tailwind to reported growth rates for the year.

Moving to modeling thoughts for the fourth quarter. We anticipate gross profit to grow at a low- to mid-single-digit rate year-over-year and to be down low- to mid-single digits sequentially, relatively aligned to historical seasonality.

Moving down the P&L. We expect fourth quarter operating expenses to be modestly down quarter-over-quarter, aligned with gross profit, but reflecting some investments back into the business. This will result in non-GAAP SG&A as a percentage of gross profit to be higher than both the fourth quarter of 2024 and the third quarter of 2025.

As a reminder, operating expense levels in 2024, particularly in the second half of the year, benefited from lower performance-based attainment and thus reversal of incentive compensation accruals. This muted the run rate expense load in the second half of last year.

Finally, we expect fourth quarter non-GAAP net income per diluted share to be down slightly year-over-year and down sequentially, impacted by the aforementioned factors.

This concludes the financial summary. As always, we'll provide updated views on the macro environment and our business on our future results calls.

With that, I will ask the operator to open it up for questions. [Operator Instructions] Thank you.

[Operator Instructions] Our first question comes from Amit Daryanani from Evercore ISI.

I guess, Chris, maybe just to start with the public vertical, especially the federal part has been challenging this year. Can you just talk about how much of the current shutdown is potentially impacting your guide, so what are you embedding in December quarter from public federal contribution?

And then do you think the dollars that are lost from shut down right now you end up catching this -- you end up having a bit of a catch-up eventually when the government opens or is that an optimistic scenario?

Yes, Amit, sure. Look, let me first say that the teams have done a really outstanding job navigating in the post-DOGE landscape and building momentum as we went into the shutdown that we expect to pay off on the other side. But all that said, look, we are -- we have taken a conservative view of Q4 understanding that we've got some pipeline and backlog going into Q4 and some run rate business associated with those agencies who are open.

So Q4 is not a 0 quarter, we have plenty of business there. But with regard to the agencies that aren't open, obviously, we're constrained in building that pipeline. But we are there working with customers to make sure we're the ones that they turn to when we get out of the shutdown. So when we think about the guide, I'd say, look, it's conservative for Q4. We think it's smart to be prudent. We presume the shutdown lasts and persists through the quarter and that's what we built into our model.

All that said, as in past shutdowns, you're exactly right, typically, history shows that it's not lost sales, it's just timing. And then when the shutdown ends, the sales have shifted in timing and can take some time, so it's a little bit extended time frame to come back in. But absolutely, we don't view that as an optimistic outlook. We view that as what we would traditionally see and what we've managed in the past. And Amit, look, I'd say this is just 1 more curveball in the many curveballs that have hit us in 2025 and the team is managing well.

Perfect. And if I could just follow up, the small business growth at 14% was really impressive, and I think it actually accelerated by a couple of points versus June even. Can you just double-click on what is driving that strength? And do you think the trends that we see in SMB are a good leading indicator to what should happen to the overall business going forward? Just from a historical perspective, do you think it's a good leading indicator or not?

Yes. So Amit, small businesses been, I would characterize it as incredibly resilient, coupled with outstanding execution by the team. And I'd also observed that over the past year to 18 months, we've seen small businesses leaning even more heavily into technology to try to gain a competitive advantage in like level the playing field.

So there's been a shift, a slight shift, I'd say, in the uptick in demand in the small business arena. And those businesses have just shown to be very resilient. In terms of an indicator for the rest of the segments, unclear, I think we need to be a little cautious about that right now, just given how resilient small business has been and so we're going to keep a watchful eye across all the end markets, but certainly, the team has done a great job and the small businesses are hanging tight.

Our next question comes from Keith Housum from Northcoast Research.

I appreciate the opportunity here. In terms of the PC and the endpoint market, obviously, it's been a really good year for these devices. And it looks like things are going to continue for another quarter or 2. But as you look out to 2026, expectations that, that funding will continue for PCs or perhaps shift in other ways or there could be a pretty tough headwind for you guys in '26?

Yes, look, I characterize it as follows: We continue to see solid demand. We often get asked what inning we're in, and we're in that kind of later stage of the mid innings. So if you had me pin it down, I'd say, sixth inning and probably rounding around to the seventh inning stretch. So we continue to see healthy demand, and we'd expect that to continue over the next few quarters.

Now look, we are getting past the end of life cycle. And as we get past that, we tend to see it trickle out. But we do not -- we don't see it slowing down over the next couple of quarters. So when you think about the drivers, right, we've got replacement of Windows 10 end-of-life transition. We also are seeing heightened focus on GenAI productivity initiatives.

And we said before that AI PCs were not as a large portion of what we are converting. We are seeing that pick up. So that would be another tailwind for PCs. So we feel good about the next couple of quarters.

Great. And then in terms of the government funding, can you remind us how much the federal government perhaps funds, education, health care and how that contributes to their spending?

Yes. Okay. So the Fed funding of education at the K-12 level is generally the subsidies during COVID were big funding mechanisms, but typically, the states are the main funders for the K-12 level. And we've been seeing over the past 2 years and helping our customers revert back to the typical funding sources, which is typically state and local.

On the high ed side, we've got -- we're paying attention closely with our customers on grants that might be canceled and things like that. But they're also in a battle for students. So I'd just say that the technology they're investing in is all about winning the rates for students, and we're seeing that pick up quite nicely. We had a nice higher ed quarter.

And with regard to health care. Look, we're keeping a watchful eye on that because there are some policy potential changes that could impact the income streams for health care systems, and so we're keeping a watchful eye. Again, though, I'd just say that health care systems, as you've seen in the last 7, 8 quarters, have been leaning into technology in a way that I haven't seen in previous years to drive clinical continuity, to drive security and equally to drive competition in their industry.

So we're keeping a watchful eye, but I feel very comfortable and the team feels very comfortable that we will navigate through funding changes, it's part of what we do. We're able to pivot and find where the sources of funding are coming and help our customers through that.

Our next question comes from Erik Woodring from Morgan Stanley.

Chris, in each of the last 4 earnings you've referred to the spending environment as complex or challenging. And if you could just maybe expand a bit on what is so complex about this environment? And I say that just because CDW has seen basically every type of cycle in its long history. You have been able to go grow through those past cycles. This year, we're obviously just seeing a bit more muted gross profit dollar growth of some negative compares.

So really just trying to get your viewpoint on really how this complexity is different from history and how it's impacting your gross profit dollar growth? And then a quick follow-up.

Yes, it's a great question. And if I had to boil it down to 1 thing, I would say volatility. Uncertainty might be the word most people would use. But as I think about this past year in particular, the curveballs that have come at every organization rapidly, and without necessarily a lot of time to adjust, have had technology buyers, business owners, schools, all institutions adjusting to the volatility and, therefore, not having a certainty and predictability to invest, that has been a primary reason it's been so uncertain and helping customers unpack both investments and make decisions around new architectures with AI.

So we've got questions around new technology, AI; funding shifts that can happen month-to-month; there has been a hesitancy to make commitments on some larger pieces of technology. It's been hard to run a business. Now that said, it feels very much now that the leaders of these institutions are kind of getting used to the unpredictability, the unevenness and just starting to really pick up and move forward with mission-critical needs and investing behind technology because they feel like they otherwise are going to get behind.

So it's really that policy bouncing around, the funding changes that we hear about, the geopolitical world that we live in and the macro uncertainty, the uncertainty around inflation and everything that's impacting the economy. But I'll tell you, for me, it really ultimately comes down to this unpredictability that we've been living in for about 9 months.

Okay. Very fair. And Al, just as a quick follow-up. You have been very transparent over the last few quarters about the kind of variable comp headwind you're facing this year. I'm wondering if we take a step back, what type of gross profit dollar growth does CDW have to see to return back to your kind of 10%-plus EPS growth algo of old? Any color there would be super helpful.

Yes. Just a couple of things. First, I would just note for 2025, which we've talked about as a bit of a period of transition for us but also traction and we're seeing that traction above our expectations, so important in that regard. If you actually take the effect of the '24 compare on expenses, and we talked about kind of these incentive compensation accruals from prior year, we would look like our gross profit and our non-GAAP operating income are a bit closer to parity.

So -- and I would say that is consistent with this period of transition after a pretty dynamic couple of years. To your question, Erik, what's it going to take to get the further traction and get upwards of high single digits, double digits on EPS? I think what we need to see is a sustaining of that gross profit growth and the spend, continuation of our progress on gross margin and then importantly, a great focus on profitable growth and getting back to operating leverage.

We believe kind of with those variables in place and getting operating leverage, we will start to see that efficiency ratio come back down towards the sweet spot and then I would say then you're going to see the compounding effects in the P&L. So that's what we're focused on. It's obviously a balancing act with all those things, including investing, but that's what the horizon looks like for us.

[Operator Instructions] Our next question comes from Samik Chatterjee from JPMorgan.

Chris, maybe if we can start on the services side, pretty strong growth there. Maybe if you can dig a bit deeper in terms of the nature of opportunities you're seeing, particularly the ones associated with the AI deployments you're seeing from your customers? And any thoughts in relation to M&A and further consolidating the services opportunity for the company? And I have a quick follow-up.

Yes, Samik, I'll take that. This is Al. Really strong results on Services top line for the quarter. Underneath that 9%, it was 14% growth in Managed and Professional Services. So a couple of themes or practice area details I'd share there.

Number one, data and AI definitely a focus; continued focus on security, as you would expect; and then Cloud has been a really persistent contributor from a Services perspective. We've got a new leader in our Services space. We are very, very focused on refining exactly where we play and where the best growth opportunities are, and we're seeing some of the early benefits from that.

So as we look forward, Samik, I would expect that the life netted down revenues, Services has the potential to be kind of an outlier in terms of growth contribution, and we feel encouraged by the progress we're seeing at this juncture.

I'll just remind you, too, just in terms of just spotting our progress here. If you go back a few years, Samik, Services was about 5% of our net sales; this quarter, it was 9%. And so if we can continue on this growth path, we think it's going to be a meaningful contributor to our top and bottom line.

Okay. Okay. And then just curious, you made a comment about the data center upgrades from your corporate customers, in particular, sort of being uneven. Any thoughts on what's the primary driver there? We understand the macro is challenging. But obviously, in terms of investment, is it really the AI sort of decision-making that's driving this unevenness? Or is it more evaluation of public cloud? What are you seeing on that front in terms of what's sort of causing this lumpiness in those decision-making processes?

Sure, Samik. I would point it more to some of the variables that Chris pointed out that is the overall uncertainty in the environment, the macro and geopolitical trends that we're seeing that are causing a bit of a start and stop in terms of bigger projects. So you saw it over the last couple of quarters, Q2, we saw a bit of a surge, particularly in the enterprise space with bigger projects that aided solutions growth there.

And in this quarter, we saw a pullback in that regard. And I think that while we will continue to say, we think it's inevitable that the refresh and the recovery needs to happen in solutions, it's clear that it's going to be more uneven than we anticipated.

Now to your question on is AI a factor? I think it's probably a variable, but I would lead more with just the overall macro geopolitical environment, the level of uncertainty causing companies to just question the, is this the time to get on with the spend? o could we kick the can a bit more?

Our next question comes from Harry Read from Rothschild & Co.

Just looking at SG&A and the year-on-year growth rate, both on a 1- and 2-year view, it looks like it's accelerating quite a lot. But forgive me if I heard it wrong, I think you said that year-over-year margin should expand in Q4, that's EBITDA over gross profit. So just could we have some clarity on what's driving quite a sharp deceleration on SG&A growth, if you do expect gross profit growth year-over-year to slow a little bit? And then maybe if you could break down if that's largely driven by front office wages or back-office wages?

Harry, it's Al. I'll go back to my comments: The biggest variable is comparing against our compensation and think kind of bonus plans and the like from the prior year post-Q1, from last year, while our gross profit was declining and below our expectations, we were pretty considerably taking down those comp expense items where this year, we don't have that.

So it is more than anything, Harry, to compare of that. Again, I'll go back to my comment that if you adjust for those factors and you look at both this quarter and the full year, we would expect that gross profit and expense growth would be much more at parity. So I call that kind of for the full year evenness between gross profit and operating income.

Now I do believe that kind of part of the calculus here is that we've had obviously very strong growth in the pandemic period and we had deep reduction flattening for 2 years, we did make considerable reductions in our expense base. But in some respects, 2025 is, again, that year of transition where you get back to parity or gearing of our expenses relative to gross profit.

So as we look forward and with the expectation that growth can persist and should persist, then you're going to -- you're going to return to operating leverage, and again, to an efficiency ratio that we would be much more comfortable with in that 55%, 56% range.

Yes, that makes a lot of sense. And then just a short one. It looks like SBC as a percent of GP is kind of hitting the top end of the range of what it's been historically. Just any thoughts in of what that margin could be into Q4 and then the rest of then into 2026?

Yes. Harry, sorry -- and I think you might be speaking to the compare to the prior year in that regard and it looks like...

Yes. I'm just looking at the [indiscernible] in the quarter. Yes, and then just looking generally what it's been on a quarterly basis a percentage.

Yes. I don't think if you look back over time, it's going to look outsized on a percentage basis to any other metric. But what you are seeing from the prior year is we had a larger equity program that came down considerably based on the actual results over a 3-year period and so 2024 was aided by the reduction of that equity expense where we don't have that happening in '25. So '25 on an absolute basis and ratio basis should look reasonably normalized versus previous years where you didn't have that

[Operator Instructions] Our next question comes from David Vogt from UBS.

Chris, maybe one for you. Can you help us understand and parse out sort of the impact on health care? I guess what we're trying to think through is how much of it is sort of the lingering effects of sort of the efficiency efforts over the past year versus the government shutdown? And how do we think about sort of the effects of those 2 different dynamics at play going into 2026, just to get a level set for how we should think about that market growth next year? And then I have 1 for Al on margins.

Yes. In terms of health care, look, when we look over the last several quarters, health care has really been, frankly, on fire. And you'll recall, we talked about a number of investments we've made across the Health Care segment, both in terms of industry experts, innovation centers, et cetera.

And that's really been, in our view, paying off in solidifying our relationship as a trusted adviser as the health care institutions are leaning into technology. As we think about the go forward, look, we're just going to be very, very clear and very watchful about the trickle-down effect that I had mentioned before, some funding shifts from income stream shifts, we just got to keep an eye on that. But we've been through periods like that before you tend to see things like M&A, you tend to see consolidation and you tend to see movements within the industry itself, all of which requires technology support, so that's an area where we think we could see a second order impact from funding changes.

But I'll come back to the notion that what we're doing with our customers in health care right now is not just foundational and optimizing it really is the future of care. And that we believe is sustainable over the long term. So we might see some lumpiness in health care based on funding. But again, we work hard and know our way around the funding mechanism.

Great. And then, Al, for you, it looks like on a profitability basis, if we make an adjustment for netted down, you guys had a relatively strong performance outside of netted-down gross profit. Should we think about that margin sort of accretion going forward as we mix to maybe fewer client devices in the overall portfolio and some more margin-rich solutions going forward outside of the netted down piece? Just trying to get a sense for how that trends? I know you're still in the planning phases for 2026, but you've had relatively good results in traditional gross margin outside of netted down. So I just wanted to get a sense of how you're thinking about that going forward.

Yes. Thanks for the question, David. Look, very near term, and particularly for Q4, I wouldn't expect much of a change there. We have seen stability over the last couple of quarters and so that's certainly encouraging that those non-netted down margins have held up.

As we look forward, David, I think that a mix out of client would marginally benefit there as well. If things play out as we would hope on the services front that will also aid those margins. So I'd say modestly, you could see some tick up, but I'll reserve the right to give you more detail as we get into 2026.

Our next question is from Adam Tindle from Raymond James.

Chris, I wanted to start, I know you're in the middle of the planning cycle for 2026. Just reflect on how this cycle is maybe similar or different than prior years? And curious on the strategic part of that discussion in particular. The Services narrative here is obviously very strong on this call. I wonder how you and the Board think about potentially value creation in the Services business and how that works? Would it make sense for maybe even larger scale M&A in Services, would be helpful?

Sure. Let me just start with the end. When we think about value creation, we think about high growth, high relevance offerings to our customers and what they need now and into the future. So as you know, we've been investing heavily behind our capabilities that are industry-specific and that could be expertise, technology specific. We've been investing heavily in both our professional advisory services and our managed services.

And we view those as integral to the value creation for customers going forward. As we've said now for a couple of years, our full stack, full life cycle, full outcomes approach is it's like multiple flywheels working together. Customers don't buy point products anymore, they buy outcomes, they buy solutions, and Services have now just become part and parcel of those solutions.

So as we go into next year and as we've been doing this year, we keep a close eye on M&A opportunities, but you can certainly continue to see us invest behind services. And I think as Al said earlier, you'll see growth -- overweighted growth in those areas that are particularly relevant and important right now.

Got it. And maybe just a quick follow-up for Al. You talked about Q4 guidance on gross profit dollars being relatively in line with seasonal trends historically, but also talked about some pretty conservative assumptions in the public sector business understandably. I wonder if you could just unpack a little bit more of the buildup, what might be offsetting that weakness in public sector to drive more seasonal trends in gross profit dollar growth and your level of visibility into that?

Yes. Thanks, Adam. A couple of things. First, on the government federal front, just keep in mind that Q4 is low season, so while we did adjust down our expectations for the quarter, we had the fact that it has less weight on the quarter overall, number one.

As Chris suggested, we walked into Q4 with some pipeline, and we have some regular run rate business with agencies that are still open. That being said, we definitely did kind of take out the pen to take down some expectations on government. It's just when you add all those variables, it doesn't end up being an outsized component adjustment, if you will. So that's number one.

Number two, on the question of the, are there any offsets there? There are a couple of minor offsets that is the, we walk into a quarter, so we have a pretty good idea of pipeline and what it's going to take to convert that pipeline. And so a couple of other channels that would be more favorable contributors would include Small Business that has very good momentum and then I would point out the U.K. that, again, has both a very healthy pipeline, but has been executing really well. So they serve as some offsets to government, but net-net, it's a modest take down for the quarter.

At this time, I would like to hand back to Chris Leahy for any further remarks.

Thank you, Carlie. Before we wrap up, I want to extend my sincere thanks to our nearly 15,000 coworkers around the world. Their expertise, dedication and passion are the driving force behind our continued success. I'd like to thank our customers who trust us every day. I also want to thank our more than 1,000 leading and emerging partners for their trust and collaboration in delivering innovative, outcome-driven solutions; and to everyone joining us on today's call, thank you for your time and support. Al and I look forward to speaking with you again in the new year.

As we conclude today's call, we'd like to thank everyone for joining. You may now disconnect your lines.