Good morning, all, and thank you for joining us for the CDW South Court of the 525 Ironings Call. My name is Carly, and I'll be coordinating the call today. If you'd like to register a question during the call, you can do so by pressing the star flow by 1 on your telephone keypad. Remember, you can suffer our questioning, star flow by 2. I'd like to hand it to our host, Stephen O'Brien of Investor Relations. The floor is yours.

Thank you, Carly. Good morning, everyone. Joining me today to review our third quarter 2025 results are Chris Leahy, our Chair and Chief Executive Officer, and Al Morales, 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 in Form 8K 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 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 in Form 8K. Please note all references to growth rates or dollar amount changes in our remarks today are versus the comparable period in 2024 when 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 third quarter financial and strategic performance and share some thoughts on the balance of the year. Al will take you through a more detailed look at our results, capital strategy, and priorities in 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 lifecycle 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. dollars. 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-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 pre-production 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 market dynamics shaped performance across our end markets and portfolio in the border as always there are three main drivers of our results our balanced portfolio of customer end markets the breadth of our products services and solutions and relentless execution of our three-part strategy first our balanced portfolio of diverse customer end markets. We have five U.S. sales channels, corporate, small business, healthcare, government, and education. Each channel is a billion-dollar-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 many 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 and security and cloud gross profit and top line client devices also remained a priority increasing mid single digits and top line and double digits and gross profit the team's success addressing these priorities offset lower demand for infrastructure solutions the public team executed well within unsettled and markets delivering one percent top line growth with low single digit gross profit government net sales increased eight percent state and local deliver 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 growth profit growth despite the decline in net sales similar to education healthcare growth profit grew faster than its seven percent 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 four quarters. We are watching for signs of customer hesitancy caused by changes in funding, particularly among healthcare clients relying on Medicare payments, which can constitute up to 30% of their cash flow. Standout performance was delivered once again by our UK and Canadian operations, together reported as other, which increased net sales by 9%. Both teams executed extremely well under unsettled conditions. UK 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 and 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 three percent 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 netcom and servers partially offset by 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 with a standout performer up nine percent top line and contributing nine percent of total cdw top line this quarter up from five percent 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 one-third 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 on CDW.com that enhances product discovery and improved sales conversion to intelligent agents that streamline pre-sales 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 co-worker 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 CW 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 standout 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 USIT market growth to be in the low single digits on a customer spend basis, with CEW 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 healthcare and education at the same time the wild cards 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 strengths 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 financial performance al thank you chris and good morning everyone i will start my prepared remarks with details on our third quarter third quarter performance move to capital allocation priorities and finish with our remaining outlook for 2025. third quarter gross profit of 1.3 billion dollars was up 4.6 percent 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 netcom 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 percent was up 10 basis points over the prior year's third quarter, back in line with our overall expectations of roughly flat the 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 of client 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 continue to be strong at 14%. This can be seen in net sales transferred over time for 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 where CDW is 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, meaningfully from 32.9% in the prior quarter. customers across and 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 work practices on the solutions front software and netcom 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 out outlook section our teams navigated this dynamic environment for both 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 expectation 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 expenses 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 percent representing progress back towards our sweet spot in the 55 to 56 percent 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 dollars down 0.6 percent versus the prior year our non-GAAP operating income margin of 9.2 percent was up 50 basis points from the second quarter but down 50 basis points from the prior year's third quarter of 9.7 percent net interest expense was relatively flat year over year our non-GAAP effective tax rate was marginally below the low end of a range at 25.1 percent non-GAAP net income was 357 million dollars in a quarter up 0.6 percent 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 two dollars and 71 cents up three percent 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. The quantity remained strong with cash plus revolver availability of approximately $1.8 billion. The three-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 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 $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 utilize 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're 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 2.5 times net leverage within our targeted range of two to three times. we will continue to proactively manage liquidity while maintaining flexibility finally our third and fourth capital allocation priorities of mna and share repurchase remain important drivers of shareholder value we continue to evaluate mna opportunities that could accelerate our three-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 percent 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 as we only know how to do in this dynamic market. Given the recent government shutdown, we believe our continued prudence is warranted a 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 geopolitical unrest and outside change outside 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 expectation 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 percent. And we continue to expect 2025 gross margins to be roughly consistent to 2024 levels and remain well above rates from three-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 tail end to reported growth rates for the year moving the 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 of a 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. We'd ask each of you to limit your questions to one with a brief follow-up. Thank you.

Thank you very much. We'd now like to open the lines for the Q&A. As a reminder, if you would like to ask a question, please signal now. We're pressing star followed by one on your telephone keypad. If you'd like to remove your star followed by two, we'll be star followed by two. So, as a reminder, to raise a question, we start from above 1. Our first question comes from Amit Daryani from Ibercourt ISI. Amit, your line is not open.

Good morning. Thanks for taking my question. 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, you know, do you think the dollars that are lost and 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?

Yeah, good morning, 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 we are um we have taken a conservative view of q4 understanding that we've got some pipeline and backlog going into q4 and some run right business associated with those agencies who are open so q4 is not a zero 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 timeframe 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, you know, Amit, look, I'd say this is just one more curveball in the many curveballs that have hit us in 2025 and the team's managing well.

Perfect. Thank you for that. 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 trend? 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? Thank you.

So, Amit, small business has 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 and 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 uh the rest of the segments unclear you know we i think we need to be a little cautious about that right now just given how resilient small business it 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 uh and the small businesses are hanging tight thank you thank you very much our next question comes from keith hoven from north coast research keith your line is now good morning guys appreciate the opportunity here um in terms of like the pc in 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 two but as you look out to 2026 expectations that that funding will continue for pcs or perhaps shift in their ways or is it going to be a pretty tough headwind for you guys in 26. good morning keith yeah look i characterize it as follows excuse me we continue to see solid demand um we often get asked what inning we're in and and we're in the kind of later stage of the mid-inning 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 would expect that to continue over the next few quarters now look we are we are getting past the end of life cycle. And as we get past that, we tend to see it trickle out. But 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 Gen AI productivity initiatives. And we've 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. Thank you. And then in terms of the government funding, can you remind us how much the federal government perhaps funds education, healthcare, and how that contributes to their spending?

Yeah. Okay. So the Fed funding of education at the K-12 level is generally, you know, 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 two years and helping our customers revert back to the typical funding sources, which is typically state and local. On the high-end side, you know, 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 just say that the technology they're investing in is all about winning the race 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 just say that healthcare systems, as you've seen in the last seven, eight 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.

Thank you. Thank you very much. Our next question comes from Eric Woodring from Morgan Stanley. Eric, your line is now open.

Thank you for taking my questions. Chris, each of the last four earnings you've referred to the spending environment as complex or challenging. And I'd love 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 grow through those past cycles. This year, we're obviously just seeing a bit more muted gross profit dollar growth off 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. Thank you.

Yeah, you know, it's a great question, and if I had to boil it down to one 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, you know, 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 the 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, you know, month to month. There has been a hesitancy to make commitments on some larger pieces of technology. It's, you know, it's been hard to run a business. Now that said, I feel very much now that the leaders of these institutions are kind of getting used to the unpredictability, the unevenness, and just, you know, 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 nine months.

Okay. So, very fair. Thank you for all that detail, Chris. And then, Al, just as a quick follow-up, you know, 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, you know, 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. Thanks so much, guys.

Yeah, good morning, Eric. Thank you for that. Just a couple 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-gap operating income are a bit closer to parity. And I would say that is consistent with this period of transition after a pretty dynamic couple years. To your question, Eric, on 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 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 tax down 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.

Awesome. Thank you, Al. Good luck, guys.

Thank you very much. As a reminder, if you would like to raise a question, please signal now by pressing star flow by one on your telephone keypad. Our next question, Constance. Samit Chatterjee from JP Morgan. Samit, your line is now open.

Hi, thanks for taking my questions. Chris, maybe if we can start on the services side, pretty strong growth there. Maybe if we 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? Can I have a quick follow-up? Thank you.

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 and managed and professional services. So, a couple 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, Samick, I would expect that like netted down revenues, services has the potential to be kind of a outlier in terms of growth contribution. And we feel encouraged by the progress we're seeing at this juncture uh i'll just remind you too just in terms of just spotting our progress here if you go back a few years sonic services was about five percent of our net sales this quarter it was nine percent and so if we can continue on this growth path uh we think it's going to be a meaningful contributor to our top and bottom line okay okay and then uh just curious you made a comment about um 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? Thank you.

Sure, Samak.

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 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 or couldn't we kick the can a bit more thank you thanks for taking my questions thank you very much our next question comes from harry reed from bosh charles and co harry your line is open hi good morning thanks for taking the question.

Just looking at SG&A and the year on year growth rate, both on a one and two year view, it looks like it's accelerating quite a lot. But forgive me if I heard wrong, I think you said that year over year margin should expand in Q4, that's EBIT over gross profit. So just can 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. Thank you.

Good morning, 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, whereas 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 uh 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 uh evenness between gross profit and operating income. Now, I do believe that kind of part of the calculus here is that we've had, you know, obviously very strong growth in the pandemic period, and we had deep reduction flattening for two years. We did make considerable reductions in our expense space, 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 return to operating leverage and again to an efficiency ratio that we would be much more comfortable with in that 55-56 range.

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

Yeah, Harry, so I'm sorry, and I think you might be speaking to the compared to the prior year in that regard, and it looks like we have up considerably. Yeah, and then just looking generally at what it's been on a quarterly basis as a percentage. yeah i don't i don't think if you look back over time it's going to look outsized uh on a on a percentage basis to any other metric but what you are seeing from the prior year is we had a larger equity program uh that came down considerably based on the actual results over a three-year period and so 2024 was aided by the reduction of that equity expense where we don't have that uh happening in 25. so 25 on an absolute basis and ratio basis uh should

look reasonably normalized versus previous years where you didn't have that distortion right thank you thank you very much as a reminder if you would like to raise a question please signal now by pressing star follow-up by one on your telephone keypad our next question comes from david vote from EDS. David, it's your line.

Great. Thanks, guys, for taking my questions. Chris, maybe one for you. Can you help us understand and parse out sort of the impact on healthcare? 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 two 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 one for Al on margin.

Yeah. Morning, David. In terms of healthcare, look, when we look over the last several quarters, healthcare has really been, frankly, on fire. And you'll recall we talked about a number of investments we've made across the healthcare 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 advisor, as a healthcare 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, as I had mentioned before, some funding shifts from, you know, income stream shifts. We just got to keep an eye on that. But we've been through periods like that before. And, you know, you tend to see things like M&A, you tend to see consolidation, 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 healthcare 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 healthcare based on funding. But again, we work hard and know our way around the funding mechanisms.

Great. And then, Al, for you, you know, 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 just wanted to get a sense for how you're thinking about that going forward.

Yeah, 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 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.

Understood thanks Al thanks Chris thank you very much our next question is from Adam Tindall from Raymond James Adam your line is not awesome okay thanks good morning Chris I wanted to start I know you're in the middle of the planning cycle for uh 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 um the services uh 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 uh how that works you know that would it make sense for maybe even larger scale M&A and services would be helpful. Thanks.

Sure. Good morning, Adam. 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 lifecycle, full outcomes approach is, you know, it's like multiple fly worlds 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. Thank you.

Yeah, 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 have 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 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 are a couple minor offsets. That is the, we walk into a quarter so we have a pretty good idea of pipelines and what it's going to take to convert that pipeline and so a couple other channels that would be more favorable contributors would include small business that has very good momentum and then i would i would point out the uk that again has both a very healthy pipeline but has been executing really well so they uh they serve as some offsets to government, but net net, it's a modest takedown for the quarter.

That's helpful. Thank you.

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

Thank you, Carly. 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 a new year.

As we conclude today's call, we'd like to thank everyone for joining. you may have disconnected your land.