CDW Q3 2026 earnings call transcript, November 4, 2026

Please note all references to growth rates or dollar amounts changes in our remarks today are versus the comparable period in 2025, with net sales growth rates described on an average daily basis, unless otherwise indicated. Replay of this webcast will be posted to our website later today. This conference call is property of CDW and may not be recorded or rebroadcast without specific written permission from the company. With that, let me turn the call over to Chris.

This quarter's performance reflects the power of strong execution and value of our deep industry and technology expertise. Let's take a look at the three drivers of performance this quarter. The breadth and depth of our customer end markets, our full stack, full lifecycle portfolio, and our growth strategy, which underpins our value proposition in an AI-forward world. First, our customer end markets. Our three U.S. segments. are commercial, government, and education, and our U.K. and Canadian operations are reported as other. Within each, we align resources by customer type, size, and complexity. Our unmatched scale powers this level of segmentation. Customer breadth sharpens our view of where demand is moving, and our deep specialization turns that insight into precise execution for each customer end market. With hundreds of thousands of customers, we have had a unique view of technology priorities and how they are evolving. And what we see is convergence. Customers are modernizing and optimizing their foundations, advancing their AI priorities, and demanding measurable returns on technology investment. We also see a familiar pattern in technology adoption. AI is starting with infrastructure for large, sophisticated customers, expanding across the stack and then out to the mid-market, small business, and public sector. Across those markets, customer priorities are consistent. What differs is the outcomes customers are solving for. You see that in this quarter's broad-based growth. Commercial top line increased 21%, international 26%, government 10%, and education 8%. For commercial, capacity and productivity drove investment. Corporate customers built more resilient, scalable environments to support

increasingly complex workloads, driving investment across infrastructure modernization, cloud, AI readiness, and more capable client devices. Small businesses emphasized productivity, cost control, and security. For financial services, it was speed with control, investing to act on data faster, strengthen resiliency, and improve decision-making while maintaining security, governance, and cost discipline. For healthcare, doing more with constrained resources, remain the top priority. Investment centered on improving clinical workflows and operating efficiency while managing continued reimbursement and funding pressures. For government, technology investment was tied directly to mission. Federal and state and local customers prioritized operating efficiency and control of critical data and infrastructure. Education institutions invested to secure learning environments, improve student outcomes, and ensure responsible for financial services. Thank you. I adoption with K-12 extending device lives and higher education, emphasizing optimization, security, and greater value from data and international reflected many of these same priorities. Modernization, resilience, and efficiency drove more than 20% growth in both the UK and Canada. Success addressing distinct end market priorities underscores the value of our second performance driver, our full stack, full lifecycle port portfolio, which delivers multiple paths to growth. Investments in modernization and AI prioritization pulled through demand across the technology stack, driving excellent performance across hardware and software. Availability of product and delivery conditions showed signs of normalizing with fewer surprises than earlier in the year. Hardware increased 21% driven by modernization, including AI related investment from foundational infrastructure,

computer. to significant AI factory deployments. Data storage and servers more than doubled while netcom increased 9%. Investments that create follow on opportunities across the lifecycle. Client device performance was also strong, up 19%. Customers invested in greater processing power, memory and security to support evolving workloads and extend device lives. Although unit volumes declined, higher average selling prices more than offset the decline, reflecting both price increases and demand for more capable configurations. Modern technology environments are inherently hybrid, spanning hardware, software, cloud and services. And these environments become more interconnected. Customer investment increasingly extends across multiple parts of the technology stack. You see this in our software and cloud performance. Software increased 14% driven by double digit growth across network management, virtualization, and operating systems. Cloud delivered stellar growth, reflecting broad demand across SaaS and IaaS solutions and workloads. Services lead, enable, and extend the technology lifecycle. Professional and managed services returned to growth up 2%. Performance continued to reflect the timing of large deployments, with services opportunities following as deployments moved through the technology lifecycle. Our ability to capture opportunities across the full technology lifecycle is underpinned by our third performance driver, our growth strategy. Our growth strategy is anchored in our north star. Relevance. Relevance defines how we win. Scale sustains it with reach and insight. Specialized expertise turns that insight into action, and repeatable solutions extend our impact.

And today, relevance matters. More than ever. Today's technology decisions are business decisions and mission decisions. As the stakes rise and AI investment grows, decisions are more consequential than ever. And getting those decisions right starts with the right foundation, data. Turning enterprise data and context into trusted intelligence is essential to scaling AI. AI adoption is creating an explosion of data, much of it for fragmented across applications, clouds, and infrastructure. Trusted, secure, and usable information is essential. Our recent edition of Lovelytics deepens the expertise we bring to this foundational work across data strategy and engineering, analytics, generative AI and machine learning, and data migration and modernization. AI is in a consequential phase of its acceleration. The market is shifting from experimentation and task-level productivity to production, workflow, redesign, and performance. As it moves from fulfilling more tasks to changing how work gets done, AI unlocks greater productivity, capacity, speed, innovation, better decision-making, and results. Realizing that potential starts with the outcome. CDW's AI-first perspective puts outcomes first, then builds the strategy around what must connect across both the technology and the organization to deliver it. Customers will move at different speeds and from different starting points, but the six AI imperatives are the same. Enterprise data needs to become trusted intelligence. Infrastructure must be ready. AI needs to move into applications and workflows, and security, governance, and economics must keep pace. Bringing those elements to

together is at the heart of what CDW does. We orchestrate environments, connecting across the technology stack to deliver outcomes. Our position at the center of the technology ecosystem makes this orchestration possible. No single vendor can address every requirement. We connect partner innovation and customer needs, bringing together the right technology, expertise, and services. Few providers can bring it all together. CDW can. Significant AI capacity has been built. Return on that investment depends on adoption and sustained consumption. We know how to drive both. Our cloud performance demonstrates our success connecting innovation to customer needs and turning partner capacity into sustained consumption. AI is broader and more complex, making our role even more valuable. AI momentum is building across the enterprise market, and we are selectively serving customers in this space, including those at the cutting edge, while staying disciplined on economics and returns. Now, the next phase of adoption is underway, broadening into the mid-market, small business, and public sector. Across these markets, teams are accelerating adoption and turning it into sustained consumption. Here's a customer example that shows what that looks like in practice. A major international airport goal was clear. Move its critical terminal transportation system toward near-zero outages. The team developed a solution that seamlessly brings together AI, computer vision, LiDAR, telemetry, machine learning, and advanced infrastructure. This integrated solution continuously monitors the entire system and identifies potential issues before they disrupt operations, enabling corrective action sooner. The outcomes matter. Greater system reliability, reduced downtime,

more efficient use of maintenance resources, and better experience for the millions of passengers who rely on one of the world's busiest airports. And for CDW, related production monitoring and cloud analytics opportunities total about $2 million. This is orchestration in action, connecting technology, services, and expertise to deliver a critical business outcome. It's also a great example of how we are turning what was once bespoke into repeatable solutions and what is repeatable into scalable outcomes. We've built an AI IoT solution that is extensible across multiple operational environments from transportation systems to water and power infrastructure. This is how our AI flywheel works. Solve, learn, repeat, and scale across industries, customer sizes, and stages of adoption. Because for our customers the larger AI opportunity is not simply doing tasks faster, the opportunity is in changing how customers operate to deliver meaningful outcomes. Helping customers achieve this quickly and efficiently requires even more than a broad portfolio and the ability to connect technologies. It requires the scale to turn insight into precision to deliver faster, more cost-effective time to value. Our scale is a compounding advantage that extends well beyond AI. As technology change accelerates across the ecosystem, our deep customer understanding positions us to capture demand wherever customers invest.

That leads me to our outlook. Current market conditions remain constructive. Customer engagement and written demand remain healthy. Writings continue to outpace invoicing and backlog is building, particularly in enterprise infrastructure. Given this backdrop, we are increasing our full year outlook. We now expect the USIT addressable market to grow at a high single digit rate in 2026 on a customer spend basis. And we see 300 to 400 basis points of CDW outperformance compared to the market. The opportunity ahead is significant. Technology is undergoing tectonic change. In an AI forward world, we translate customer investment into outcomes and partner in. Innovation into adoption and sustained consumption. Demand will shift. Technology will evolve. What endures is our relevance, powered by advantages that compound unmatched scale, deep customer relationships, specialized expertise, and a unique position at the center of the technology ecosystem. That gives us confidence in our strategy, the opportunity ahead, and the forward earnings power behind today's dividend increase. With that, let me turn it over to Al.

known as our netted down business. Demand also remains strong among large enterprise and financial services customers making significant investments in hardware infrastructure, particularly servers and storage. These large projects generated meaningful gross profit dollars and helped to drive upside to that end in the third quarter. Over time, they also create opportunities for additional solutions and services. Netted down revenue streams increased 17.1% year-over-year and accelerated from the second quarter growth. They represented a record 38.2% of gross profit, up 220 basis points year-over-year and 230 basis points quarter-over-quarter. Professional and managed services returned to growth in the quarter while continued to be impacted by deployment timing and customer prioritization of hardware and cloud investments. As infrastructure, security, and AI projects move from procurement into implementation, integration, and ongoing management, we continue to expect services opportunities to follow. Turning to expenses for the third quarter, non-GAP SG&A totaled $766 million, up 5.6% year-over-year. The increase is primarily incentive-related, reflecting higher performance. based compensation tied to stronger gross profit growth. As expected, we began to capture benefits associated with our geared for growth efforts. As a percentage of gross profit, non-GAP SG&A was 55.3%, an improvement of 240 basis points year-over-year and 260 basis points from the second quarter, consistent with our prior expectation for improvement on both a year-over-year and sequential basis.

Keep in mind that geared for gross long-term objective is durable operating leverage, which incorporates both expense efficiencies and savings used for reinvestment. Seasonality impacts the expense leverage ratio, so improvement will not always be linear on a sequential basis. Coworker count totaled 14,600, while customer facing coworker count was approximately 10,500. Our head count in the quarter reflects the addition of approximately 600 new coworkers from the Lovelytics acquisition. We remain laser focused on our goals to balance growth, expansion of capabilities, and exceptional customer experience with greater efficiency and cost leverage from our broader operations. Non-GAAP operating income was approximately $620 million, up 16.8%. year-over-year, demonstrating strong operating leverage. Notwithstanding the lower gross margin profile of the business compared to the prior year, non-GAAP operating income margin was solid at 9.2%, highlighting the flexibility of our operating model. Net interest expense was in line with our expectations at $66 million. This year, interest expense has been influenced by higher average borrowers, under our revolving loan facility, and lower interest income on cash balances. Our non-GAAP effective tax rate was within our range at 26%. Non-GAAP net income was $410 million, up 14.8% year-over-year. Third quarter non-GAAP net income per diluted share was $3.26, up 20.4% year-over-year, well up

above our expectation for growth at the high end of high single digits, impacted by the strong operating performance, combined with our opportunistic share repurchases through 2026. Moving to the balance sheet, at period end, net debt $5.6 billion and liquidity was $3.4 billion with cash plus revolver availability. During the quarter, we issued $1.5 billion of new senior notes. We will use the net proceeds to repay our $1 billion December 2026 senior notes at maturity, with the remainder used to fund the LoveLytics acquisition. The three-month average cash conversion cycle was 20 days within our targeted range of high teens to low 20s. We continue to believe our target cash conversion range remains the best guidepost for modeling working capital longer term. Adjusted free cash flow is $506 million in the quarter, or 123% of non-GAAP net income, driven by profit growth and disciplined working capital management. That brings year-to-date adjusted free cash flow to $785 million, or 73% of non-GAAP net income, slightly below our stated long-term rule of thumb of converting 80 to 90% of non-GAAP net income to cash. but demonstrating significant progress towards this annual goal. We have line of sight towards achieving our cash flow objectives. This year, we've been focused on managing these objectives in a way that supports our customers and drives shareholder value, even as ongoing hardware-driven growth has warranted investing in working capital.

In the quarter, we utilize cash consistent with our 2026. Capital allocation objectives, returning $108 million through share repurchases and $79 million through dividends. Year-to-date, we've returned approximately $892 million to shareholders, or 114% of adjusted free cash flow, well ahead of our 2026 target of returning 50% to 75%. Year-to-date share repurchases of $653 million. That would easily match our total for all of 2025. We have repurchased a total of 5.3 million shares this year and an average price of approximately $123 per share. That brings me to our capital allocation priorities moving forward. Our first capital priority is increase the dividend in line with non-GAAP net income growth. Today, we announced approximately 8% increase in our quarterly dividend to 68%. per share or $2.72 annually, our 13th consecutive year of an increase. We continue to prudently manage our dividend with respect to the growth environment and target a roughly 25% payout ratio of non-GAAP net income. Our second priority is ensure we have the right capital structure in place. We ended the third quarter at 2.5 times net leverage within our target range of two to three times. We continue to proactively manage liquidity while maintaining flexibility. Finally, our third and fourth capital allocation priorities of M&A and share repurchases remain important drivers of shareholder value. On September 25th, we completed the acquisition of Lovelytics, a leading data and AI services firm, for $525 million. Lovelytics expands our capabilities and our services

and solution offerings in modern cloud, data and AI. And while we remain active in the M&A market, we will also continue to be opportunistic towards share repurchases with approximately $1 billion remaining under authorization. Now turning to our outlook. Budgets remain concentrated on the areas of greatest strategic importance, including infrastructure modernization, security and resiliency, We'll see you next time. Cloud adoption and optimization, AI-ready data and application, and targeted device investments. Healthy written production and an elevated backlog support our view that underlying demand will remain durable in Q4. At the same time, we remain balanced given the complex and rapidly evolving technology landscape. Factoring in these variables, we now expect gross profit to grow at a mid to high single digit rate for the full year 2026, up from our prior expectation of mid single digits. This leads to a first half versus second half split in the range of 48% to 52%, which is aligned to historical second half weighted seasonality. Based on the anticipated mix of products and end markets, we continue to expect full year 2026 gross margin to be down compared to the full year 2025. The outlook for net interest expense is now higher in the range of 255 to 260 million, driven by the $1.5 billion notes issuance during the third quarter. Finally, we now expect full year non-GAAP net income per diluted share growth to be in the low double digit range year over year, up from our prior expectations.

expectation for high single digit growth. Please remember we hold ourselves accountable for delivering our financial outlook on a constant currency basis. On that note, our expectation is for currency to be relatively neutral to reported growth rates for the full year. Moving to modeling thoughts for the fourth quarter, we anticipate gross profit to increase at a mid single digit rate year over year, which equates to a seasonal low to mid single digit decline and we'll see you next time. Sequentially. Moving down the P&L, we expect fourth quarter non-GAAP SG&A to increase at a low single digit rate year over year and sequentially. Non-GAAP operating expense as a percentage of gross profit will demonstrate continued efficiency improvement on a year over year basis, driven by our geared for growth efforts. Finally, we expect fourth quarter non-GAAP net income per diluted share to increase at a low double digit rate year over year. With that, I want to thank our coworkers for an exceptional order of execution. Our performance reflects the strength of our customer relationships, the power of our business model, and our ability to help customers navigate increasing complexity.

Your first question is from David.

David Vogt with UBS. Your line is now open. Please go ahead.

open. Please go ahead.