CDW Corp (CDW) September 8, 2026 Conference Transcript

Good morning, everyone. My name is Asiya Merchant. Welcome to Citi's TMT conference. I lead the hardware sector here and the tech supply chain. So happy to kickstart at least my sessions here with CDW, Chris Leahy and Al Morales. Chris here is CEO, Al here is CFO. This is going to be an interactive fireside session. We have a bunch of questions here outlined. If you do have any questions, though, please do raise your hand. we'll give some time for that. So good morning and thank you for coming, you know, to our conference. It's always a great, it's always great to see you both. So I'm going to start you off here. You know, Chris, AI, I mean, we talked about it last year. It's been loud, much more loud here. You know, I obviously covered Dell and HPE. Those numbers have been staggering. And even the storage guys, to be honest, like they've been growing PCs. You know, everybody was talking about doomsday, but obviously that's still been growing from a revenue perspective, and we're starting to see some of that. So maybe just at a high level, when you think about AI and everything that's happened over the last couple of years, starting with hyperscalers where you don't necessarily participate, but now we're starting to see it more broader, what does it mean for an opportunity now as you think about it for CDW?

Well, Asiya, it's great to be here. Thank you again for having us. And if I just zoom out for minute and take a step back and we think about the way that ai is massively reshaping demand yes it started with the hyperscalers building capacity obviously and then enterprise organizations have been next in line so to speak now what we've seen we focus primarily on the mid-market size companies those who have the same kind of needs and challenges as enterprise but do not have the resources and expertise to understand the best ways to implement and put AI to work. We also have a number of verticals where we bring differentiated capabilities, health care, federal, state and local education. And we focus on those enterprise areas where we can bring something different, in which case we have seen, you know, strenuous growth. As we think forward, the need to have an end-to-end strategic technology partner who can turn our customers' ambitions into outcomes is never more important. The gap between acquiring technology and putting it to use is getting bigger. The complexity, the number of choices, the impact that it has on an organization's health and growth is just magnifying. So when we think about the opportunity for CDW, particularly in these verticals and then into the mid-market, we see nothing but growth and opportunity ahead. And in particular, across the entire lifecycle, as I said, end-to-end is a very important value that our customers lean into and pay for. And that means helping them from the advisory through the integration and the implementation and ultimately to managing. So we just recently did an acquisition last week of Lovelytics, and that's a great example of us investing behind our mission-forward growth strategy to add the services that are critical to put AI to work. We all know data is still the gating factor for AI, frankly, and I think 12% of organizations say they're ready, their data is ready, and that includes large enterprises, by the way. We have lots of customers in large enterprise sprites who are still dealing with this issue. So Lovelytics gives us a capability, 500 engineers, data scientists, who can help us with that tip of the spear, if you will, that front end of need and value for AI implementation. So the opportunity for us is the capacity is being implemented. How do we help our customers adopt, then consume, and deliver an outcome that gets them the goals that they're looking for?

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

Yeah, so I would say it this way. When I think about the imperatives that a customer has, there's preparing for AI. So you think about AI infrastructure ready for AI at scale. You think about AI data foundations ready to scale your data. You think about AI in the SaaS applications that customers already have. And then you move to now what do we do with that? And it's how do we apply agents? How do we automate? How do we secure and how do we govern? And then how do we make sure that we are optimizing for the economics? And then through all of that, there's a continuous innovation with our customers to drive more and more use cases. So the opportunity is across every component there. Wherever our customers need us, we will be welcomed in that environment and then spread from there. The other thing I would say, which is a significant opportunity for us, is our ability to have what I'll call a flywheel of experience, expertise, and learning. So because of our vertical capabilities, we are able to identify successful patterns and then codify them, then package technology services and expertise together in a way that we can then replicate in repeatable solutions into the mid-market or into other verticals and drive recurring revenue. So it's across the board. It's across the life cycle, wherever it's needed. It's obviously the purchasing, but it's also the ability to package solutions in a way that drives velocity and value for our customers.

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

So a couple of examples where we can do repeatable solutions. Let's take the healthcare industry, for example. You know, a larger enterprise system that buys patient room next from us, which is a proprietary solution to drive clinical outcomes. It reduces the, it prioritizes work for the nursing staff, for example, and it directs them to the right places. Now, in one particular case, we saw the productivity go up by 25 percent. We actually saw a reduction in turnover. So turnover went down by 25 percent. That is a replicable solution that we take from that system, that health care system, and bring to a number of our health care systems, including the mid-market, the rural health care systems and the smaller health care system. Another one, which is one of my favorites, is when I think about municipalities and the citizen services like the EMT service, you know, the life-saving services. And we have a circumstance where we took the 911 calls down to 15 seconds from like a minute and 30 seconds. And that was basically reorganizing the process. It was adding agentic workflows and redirecting unnecessary calls so that the emergency calls got to the right place. We take that, we package it, and we go to all the municipalities and we can help them reduce the time to receipt of a 911 call. Those are the ways that we actually take ideas from idea to outcome and then broadly across our customer base.

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

Yeah, well, I would start with the fact that CDW is deployment agnostic, if I can say it that way. You know, there are so many choices to be made, which plays to our favor. So whether it is in the cloud, whether it is on-prem, whether it is hybrid, whether it's on the edge, whether you're using a neocloud or a co-location, it's all about optimizing for something, optimizing for speed and latency, optimizing for performance, optimizing for security, optimizing for data gravity. The bottom line is where should the workload be best served? And so for CDW, that's our sweet spot, helping our customers understand that and then purchase, implement, and adapt accordingly. So neutral as to what our customers' decision is, very invested in their success. That's why customers stay with us so long. And we would get paid in all of the circumstances, including from a professional services perspective, from a purchase perspective, a resale perspective, from a consumption perspective, and ultimately from a managed perspective if we actually manage their workloads for them.

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

So we think about it in terms of driving outcomes for our customers, okay? And so the areas that are most important to doing that right now are integrating services, integrating workloads and AI capabilities into existing systems. That's critically important right now. So that's one. A second one would be security. Security is obviously a dynamic and concerning area. And so security would be another one. But the bottom line, I would say, where we are going and where the market is pushing us is adoption in whatever form that looks like. So lots of capacity has been created and will continue to be created. What those providers, the OEMs, the chip providers, the hyperscalers, the neoclouds, what they need is they need customers to use the capacity. That's how they get the return on their investment. So we help our customers adapt and consume to deliver the outcome. Whatever that looks like and wherever that resides in the most economic and optimized way, that ultimately drives more investment in use cases, which drives more demand, which drives more capacity. So it's a virtuous cycle with our partner ecosystem, but really specifically driven in the future by adoption and consumption.

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

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

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

So the way that we run an acquisition like this, we call it a greenhouse. And so we, they'll be standalone for a period of time. And we operate like a, use CDW as a channel, okay? So they are in a position to continue to grow their business, hire for their business, and just keep the trajectory going because they're high growth, high margin. high profitability. At the same time, we put mechanisms in place to bring opportunities from our much broader customer base into them. So when I think about where they focus now, they're primarily enterprise players in a variety of verticals, energy, retail, healthcare, financial services, areas that are very complementary to ours. So we'll be able to bring those current skills into our enterprise customers. Equally, we'll be able to take, back to the learning expertise flywheel, we'll be able to take much of the built-for products and convert those into products that are appropriate for various players in the mid-market. So we see this as really a two-fold, three-fold growth. Current growth of their current customer base, enormous opportunity in our enterprise space and an enormous opportunity in the mid-market at speed and profitably.

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

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

Yeah, maybe just add the Chris's comment about the enterprise mix. So that had some impact on our gross margin, but we also view it as a very encouraging trend in terms of enterprises getting on with their AI journeys. And then maybe just walking down the P&L, we had talked about inflecting in Q2 and beyond on the operating leverage front. So while we did not see Benef from Geared for Growth in Q2. The efforts were happening behind the scenes. We had some operating leverage just from kind of good old-fashioned discipline. As we work towards the back half of the year, our Geared for Growth efforts will accrue benefits, and therefore we'd expect to see additional operating leverage. And then finally, on the capital allocation front, we've been opportunistic on buybacks as well, so that helped us to get to double-digit EPS.

Okay. Okay. And if I can, on the geared for growth, right? I mean, investors have been very focused on this OPEX to GP ratio. Maybe you can just provide us an update, you know, remind us again where you are on that journey for geared for growth, how much has been done, what, you know, what innings are we on in that geared for growth initiatives and how much more to go to kind of get to you and what would be the sweet spot then in terms of SGA to GP.

So just a reminder, Geared for Growth is a multi-year effort. It's focused on effectiveness and efficiency. And just as the name suggests, it's just as much about the how do we scale our top line, but also make sure that our cost base is geared for that growth, if you will. So those efforts began in earnest the end of last year, the beginning of this year. And again, Q2 did not see significant benefit. But we do expect that the back half of the year, those benefits will begin to accrue. The focus areas for Geared for Growth include AI productivity, end-to-end automation and efficiency of our operations, ensuring that we have productivity all the way from our kind of sales professionals down through our coworkers across the organization. And then as well, just optimizing our spend, including our own tech spend. In some respects, we are customer zero in that regard. So it's going to play out over the next few years. I would say the original expectations we gave in terms of benefits for Geared for Growth were at or better than those levels. But importantly, we are going to reinvest. And it's important that we reinvest back in the business, including our services capabilities, including assisting and supporting our sellers on the front end of the curve and our own co-workers' capabilities and AI productivity. So we're pleased with the progress we've had so far. And what you can expect to see is not only gross profit, growth sustaining over time, but also that commitment to operating levers as well.

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

I'll start. So, again, reminder, beginning of the year, we did take a tact that we expected the IT market to grow low single digits. And in our typical mode, right, we wanted to see the signals and the data points come through before we increased our outlook. And that's just what we've done over the last two quarters. If we look out over the remainder of the year, I would say underlying our expectation of demand and growth is consistent and consistent in what we've seen. That being said, we're still operating in a very dynamic environment, right? Whether that's supply chain, price variability, kind of typical macro factors, but also importantly, the fact that we're seeing strength of enterprise. there is a timing effect of some of those enterprise spend items. And for those reasons, we have some caution baked into the back half. So for that to play out in a more positive way, all of those factors would go in a more positive direction. And on the downside part of things, I would say the risk would be that supply chain becomes more a disruptor, that the macro becomes a bit harsher than what we've seen. and so forth. But as we sit here today, we feel really good about the outlook, the direction of spend, and the engagement of customers.

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

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

I would say a couple of things. Number one, they're managing budgets so that, for example, if there's a hyper-focus on hardware in second quarter, They're preserving their dollars for services in the third quarter for implementation, et cetera. But I think the more important trend is that IT costs are being assigned more and more to kind of the labor budget. So the fully loaded cost of individuals now is taking on what is their agentic use? What is their co-pilot use? What does it cost to have a coworker at our organization taking into account specifically all those elements of AI? And that's where we are seeing it's quiet, but it's absolutely happening. We're seeing functional budgets move into the IT spend bucket.

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

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

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

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

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

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

Yeah. Our position as an end-to-end provider, we are finding that to be more significant than ever. where customers are facing the power of this new technology and the complexity. And we're talking about high-risk, high-impact decisions that they're making. So having a trusted partner who can take them not just from architecture and design and security concerns to procurement, deployment, integration in a way that works, governance to keep data safe, cost management through FinOps and ultimately, you know, taking some of the work off their plate through managed services, we're finding that that value proposition is resonating incredibly well across the mid-market and in those verticals that I mentioned. Equally, actually, a small business where small businesses are wanting to put AI to work and they want to do it seamlessly. They want to do it affordably. They want to do it securely. They want to do it so they can scale. And so that becomes a hotbed for us with our digital capabilities and also an acquisition muscle for us. So those are the areas we're seeing. And I would just say that, look, everything, every conversation has AI in it and security. It's the two things that come into play and then cost optimization.

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

Sure. First in Q2 and year to date, the gross margin effect was really a mixed component it was a stronger mix into enterprise and a bit lighter uh growth on the services side of things um look we view that again as an encouraging trend that enterprise is coming strong and that we ultimately see that rolling down the curve in markets and small for sure um as we look forward our expectation with the outlook is that enterprise will probably continue to be strong uh at the same time we are seeing strength in cloud and sass so that helps to bolster gross margins as well really importantly as we look forward because we don't obsess about a single quarter on gross margin and in this case we don't see it as a driver of kind of less economics or a degradation of elasticity of demands uh we look at it over the continuum and we look over that continuum and we think about the lifetime value we can provide to our customers, you're going to see services attached kick in. You're going to see cloud and SaaS continue to kind of, you know, bring strong growth and all of that should ultimately lead to kind of up into the right on our first market.

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

Yeah, I would say that some of our implementation services on the larger enterprise engagements that we have were delayed when our customers were focused on buying the hardware. And we would expect those to play out. And we see it in the backlog playing out as we get close to the end of the year. As we move forward, look, I think where you're going to see services pick up, particularly as AI is adopted into the mid-market at a faster pace, is going to be professional services that we offer, which is architectural services, design services, data services, et cetera, all the way through implementation and integration, but then managed services. So the very front end of the value chain and the back end of the value chain, I think, is where you're going to see us start to grow those services and they become more and more relevant to our customers. And the beauty of professional services at the very tip of the sphere and managed services is they both give us insight, visibility and insight into other opportunities where we can serve our customers. We see other opportunities for engagements, other opportunities to help them deliver better outcomes.

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

If I didn't ask you a question.

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

Yeah, it's a great question. As we think about driving AI relevance, it requires ensuring that we've got the partner ecosystem that is equally relevant. So our partner ecosystem has expanded, as you can imagine. So with the AI labs, for example, we have partnerships with them. With the data fabric providers, we have partnerships with them. With the chip providers, those partnerships have grown even more strategic because they want to drive consumption. So as we always do, we evolve with the market and those partnerships evolve as well. Now, what I would tell you is if you take any of our partners, every single one of them is very excited about the reach, our customer reach, and in particular the reach into the mid-market. They know that's our legacy. They know we know how to do that. And they are all really supportive of us, both in terms of alignment and investment and execution, to help drive business into the mid-market.

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

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

Looks like you want to clone Al.

We want to clone Al. Yes, there we go.

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

Yeah, I guess I would just want to remind investors, we've been through a number of evolutions in the technology space. And, you know, it's a simple but not easy formula. It's adapting to the new space and staying ahead of it with our customers. And we're doing the same thing here. You know, the first wave of this AI technology has been capacitive building. but the next wave is putting AI to work. And that is where we play. And so when you think about the benefits of scale that we bring to bear for our customer base, the logistics, the portfolio, the pricing leverage, and you think about the intimacy that we also can bear, the depth of technology and industry expertise, there are a number of advantages that can't be matched. And the wave is coming, and it's coming soon. Awesome.

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

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

This one.