Hello, everyone. Thank you for joining us and welcome to CDW First Quarter 2026 Earnings Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. 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 Morales, our chief financial officer. Our earnings release was distributed this morning and is available on our website, investor.cdw.com, along with supplemental slides that you can use to follow along during the call. I'd like to remind you that certain comments made in this presentation are considered forward-looking statements under the Private Securities 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 refurnished 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 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 8K. 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've made changes to reflect our updated go-to-market structure, which are reflected in our earnings materials on the website. We also released an 8K 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. and we'll provide additional detail on our results, our capital allocation priorities, and further perspective on our 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 securing supply and capturing demand for AI investment and ongoing infrastructure modernization. For the quarter, consolidated net sales increased 9% year-over-year. Growth 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 customer 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 were lower customer priorities in the quarter the built-in 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 or deleted share and strong cash flows. Let's take a closer look at the quarter. There were three 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 three U.S. segments, commercial, government, and education. In our commercial segment, teams are organized around three customer channels, corporate, healthcare, 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 UK 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 and market exposure, again, served us well, with strong results in commercial, state and local, K-12, and international. professional, more than offsetting market-specific challenges in federal and higher education. Commercial had an excellent start to the year, up 10 percent. 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 increased 5 percent. State and local's 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 three percent with k-12 strength primarily driven by client device purchasing in advance of price increases offsetting extended decision making by higher ed customers in our uk and canada operations which we report together as other the teams executed with focus and speed and together delivered 18% growth in US dollars UK 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 US 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 three percent 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 continued to invest in productivity, collaboration, and security platforms. License growth was 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 prioritized hardware investment services top line was flat in the quarter solid performance in professional and managed services was offset by declines and 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 strengths 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 co-workers 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 co-worker AI fluency, deeper data integration and platform readiness, and productivity gains from tools such as agentic rsp capabilities during the quarter we furthered our progress embedding ai into our go-to-market motions with our cw assist super agent which helps sales professionals prioritize opportunities and engage customers more effectively through insight driven ai supporting 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 arises 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 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 co-location 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 eight-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 shifts 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 and markets and sizes small mid-market and enterprise and expands 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 as 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 environments and the data center driving smarter orchestration monitoring and optimization as customers embed ai into existing platforms they are upgrading not re-architecting 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 customers choose to consume an ai adoption reinforces what differentiates 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 USIT 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 two 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 wild cards such as recessionary conditions or meaningful changes in a known ongoing exogenous factors which include elevated geopolitical risks and more extreme 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 a bit 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 dollars was up six percent 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 its 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 focused more of 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 market 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 netcom, servers, and storage, alongside infrastructure software strength, all up double digits. Underneath the surface of commercial, corporate, healthcare, and financial services, we're all contributors to our year-over-year growth, with our corporate and healthcare customers leaning into 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 five percent driven by state and local federal activity resumed post the fourth quarter shutdown but 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 uk 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 served 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 geared for growth effort which chris referred to in 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 multi-year 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 co-workers, Geared for Growth investments are beginning to translate into real productivity and 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 to 200 million dollars 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 co-worker count ended at approximately 14 700 and customer facing co-worker count was 10 400 100, 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 two million dollars year over year driven by lower debt levels our non-gap effective tax rate was slightly below the low end of our targeted range at 25.2 non-gap net income was 295 million dollars in the quarter up 3.1 percent on a year-over-year basis with first quarter weighted average diluted shares of $129.5 million non-GAAP net income per diluted share was $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 dollars with cash plus revolver availability the three month average cash conversion cycle was 16 days slightly below our targeted range of high chains below 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 assure 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 class cash flow with 251 million dollars this reflects 85 percent of non-gap net income for the quarter within our stated rule of thumb of converting 80 to 90 percent of non-gap net income to cash we utilize cash consistent with our 2026 capital allocation objectives during quarter including returning 201 million dollar million dollars in share repurchases and 81 million dollars in the form of dividends this combined 282 million dollars return to shareholders is 112 percent of adjusted free cash flow currently well ahead of our 2026 target returning 50 to 75 percent 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 ensure we have the right capital structure in place. We ended the first 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 M&A and share repurchases remain important drivers of shareholder value. We continually evaluate M&A opportunities that could accelerate our three-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 was 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 are pleased with our strong start, but the environment is still very dynamic and thus continued prudence is warranted. We know customers are balancing the risk of supply chain and pricing volatility, macro and geopolitical wildcards against their AI roadmaps 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.

We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your keypad to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality.

If you are muted locally, please remember to unmute your device please stand by while we compile the q a roster your first question comes from the line of maggie nolan with william blair maggie your line is open please go ahead hi thank you you gave several interesting uh 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 services attach rate versus some of your more traditional infrastructure transactions and just

overall should we think about ai as margin neutral or accretive or dilutive over time maggie good morning and thanks for the question uh you know i would say that the ai deals per se um have a couple of components make that make them make margin accretive higher value services is attached and continuing recurring revenues. And overall, that's a larger size 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.

Thank you. And you gave a lot of good color around kind of the expectation expectations for the remainder of the year, but I wanted to dig into the why behind, Al, 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.

Yeah, good morning, Maggie. A couple 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 phenomena 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, and 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.

Thank you. Your next question comes from the line of Samik Chatterjee with JP Morgan. Samik, your line is open. Please go ahead.

Hi, good morning. This is Joe Cardoso on for Samik. Thanks for the questions here. Maybe first, you know, 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 and shipments delays inhibiting your ability to fulfill demand here. Can you maybe just help us think about some of the vectors 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 here now kind of entering the this or through now that we're in the second quarter yeah good morning joe i would say broadly what we have seen in the way of waiting of hardware pricing changes supply friction uh is all in the realm of what we would

have expected um across all of those dimensions so right when we gave our uh original outlook We expected that the first half would be heavily weighted towards solutions, hardware. We've seen that play out. We expected 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 phenomena with respect 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, but we did see a fair amount of written a business that did not get delivered owing to our backlog leading into Q2 being a bit higher. All of those elements lead us to continue 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 will give you, you know, more robust updates as we execute to.

Nope. Got it. Thank you. That's very helpful color. And then maybe just as my second one here, you know, we're 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 derive 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. Thanks for the questions.

Hi, Joe. It's Chris. You know, I'll take that one. We're used to seeing partners change change their programs periodically, and in particular when there are 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 our 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 ahmet darianani with evercore sii ahmet your line is open please go ahead good morning this is uh victor santiago on for ahmet thanks for taking my question uh can you guys talk about the strength you saw on financial services, and how durable is some of that strength here?

Is this just an effect of the previous investments you made in building up the vertical or more of a one-off?

Yeah, thank you for the question. I would say, you know, 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 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 then within those segments, the sizes has been very effective. You saw us do that in healthcare, strong results over time, durable results over time with healthcare increasing profitability. We're seeing the same thing with FSI, and we are expecting it to have these go-to-market market evolution to have positive changes as we go forward and pick up momentum, quite Great.

And as a quick follow-up, can you just talk about what drove that's 40 percent plus sequential increase in inventory? Is that just a function of inventory positioning, as you say, for some of that Q2 written business that Al talked about, or is that just a function of higher ASPs?

Yeah, 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 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 we 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 tyndall with raymond james adam your line is open please go ahead okay thanks good morning uh chris i just wanted to start on the 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 two parts there um you know

first would be uh how you thought about um uh because you just underwent a lot of change in go to market over the past year and implemented that as of January. So, you know, 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 to follow up. Thanks.

Sure, Adam. Thanks for the question. Geared for Growth, you know, I describe it this way. It's really just a next phase in driving the durable success of the business. So go-to-market has been a two-year process, and we're well in our spots, and it's going very well. When I think about Geared for Growth, it's really driving efficiency, productivity, co-worker 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 three four five 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 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 uh the second question i think was on hong tan and 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 hong has been a great ad 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 as the you know the fullest capability as a trusted advisor having yet another player on the executive team with deep technical relationships chops 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 thanks maybe just a follow-up for al somewhat related to this initiative.

I think you mentioned $100 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 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 anyway for us to just kind of handicap. It sounds like that may be a gross number. What might be a more reasonable net number? Thank you.

Yep. Good morning, Adam. 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 the biggest takeaway from a financial perspective for you. As we look forward first, these efforts have been underway. 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 impacts now as you noted some of that will get reinvested I would say you know upwards of half maybe a little bit less there but that reinvestment will include an expectation of ROI so there's compounding component of this the 200 million dollars 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 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 roadmap, exciting stuff ahead.

Your next question comes from the line of David Vogt with UBS. David, your line is open. Please go ahead.

Six in your commentary about strong water growth and the backlog going into the back half. Can you help us square, maybe pull back a little bit? You know, obviously the supply chain challenges are a consideration on maybe why backlog kicked up a bit and 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 square, you know, why you're thinking, you know, why you're confident enough to take the guide up for gross profit growth and the high, you know, the high end of, I guess, EPS growth for the balance of the year, given those sort of countervailing forces going forward? And I have a follow-up.

Good morning, David. So first, you should think of our outlook update as more steeped 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 with 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. 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 backlog fills into the second half of maybe into calendar 27 and what the potential margin impacts might look like? Thanks.

Yeah, 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 product 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. Ruplu, your line is open. Please go ahead.

Hi, thanks for taking my questions. I've got two of them. Al, I'm going to start with another margin-related question. And, you know, you gave netted down items as a percent of gross profit. if we take out netted down items, the gross margin of the core looks like declined to 25.3%, which is down 116 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 margins 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 margins stabilizing higher? And I have a follow-up.

Yeah, good morning, Ruplu. So let me just summarize where we came out on a gross margin basis for the quarter. So 2-1 overall gross margins, 21%, down 60 basis points year over year. the high majority of that delta root blue 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 x netted down we printed a gross margin of four 14.8%. That was actually plus 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, root blue is that as you would expect as we get started in the year on our product margins uh 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 you know 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 margin 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 thanks for the details there 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 uh are going higher and how can investors get confidence that your your guidance is sufficiently de-risked for any such lower demand. So is there a way you can quantify what you're expecting for PC growth or server growth? And, you know, 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 health performance? Thank you. Appreciate the caller.

Sure, Rupelo. So 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'd see in the back half is a more balanced view of our different categories. That is specifically netted down revenues, SaaS, cloud, professional services, managed services, to look more balanced relative to 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.

Okay, thank you for the details.

Your next question comes from the line of Keith Hosom with North Coast Research. Keith, your line is open. Please go ahead.

Great, thank you. And good morning. In terms of the second half of the year, I appreciate the cautious tone based on the 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?

Good morning, 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 mid-year, we're not feeling significant concern around being able to get product and the risk that customers would be waiting a very extended amount of time. So again, reasonably orderly, improving with time, and we would expect that the second half a 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? there's more of the ai driven tools and the um the specification of some of your targeting work there uh is that driving the potential benefits you see about 100 200 million and then is this going to become more from doing more with less or is it going to be another round of layoffs you perhaps have to entertain as you go through this process yeah i'll start with that one i'll think of it as a wide spectrum um it certainly is focused on driving effectiveness into our sales and customer facing organizations but equally embedding ai across our core 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 co-workers leverage their time skills and capabilities in a more valuable way so you know 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 four years to get to the point now where we're we are able to be focused on ai first and our customers outcomes and in doing so supercharge the power of the business through ai so we're quite excited about this uh this uh 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.

Great. Thank you.

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 it's 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