CDW Corporation (CDW) Earnings Call Transcript & Summary

Good morning, everyone. Asiya Merchant. I work here at Citi Research. I look after the tech hardware, tech supply chain stocks. Very pleased to have CDW here inaugurating our Global TMT Conference. I believe it's the 33rd Annual Conference. Don't quote me on that, but it feels like that, like Jayz said. So really happy to have Chris Leahy here as well as Al Miralles from CDW. This is a fireside chat. So we're going to have a few questions. If they want to kick off with some prepared remarks, that's great. Otherwise, we're going to delve straight into questions. I'm going to leave some time for Q&A from the investment community here. So please do raise your hand, and we'll make sure the mic comes your way. So good morning.

Good morning.

Good morning.

All right. I'm going to kick it off here unless you had some prepared comments or statements. Everything is on the web.

Yes. Just some typical disclaimers, all comments as of Q2. Please visit our website if you like additional information.

Yes. It's all there.

All right. I'm going to kick it off. CDW, another great quarter in calendar 2Q, 10% year-on-year growth. Just -- when you think about your business at the end of 2Q and as you are sitting here in calendar 3Q relative to where we were at the start of the year, lots of moving parts, tariffs and all that, that pursued. Just help us understand how you would characterize your business as you sit here today versus where you were, let's say, 6 months ago?

Yes. I would say our performance has been quite resilient. And that's a reflection of the diversity of our portfolio and really disciplined execution. The team has been able to help our customers navigate both end market-specific and technology complexity and do it very well. So again, we've just had really nice resilient performance. When I think about the progress we're also making in our services area, that's been very positive, and we're seeing strong growth consistently and that also grows our relevance with customers. So net-net, I'd just say it's highly resilient. We're seeing very precise strong execution and delivering across all the end markets. I guess I would say in the end markets have delivered essentially what we had expected. Enterprise is the one area that I think in the first half was probably a little bit above our expectations, very strong. So that's how I'd characterize it now.

Okay. And then that leads me to my next question, Chris and Al, you guys actually implied caution in your second half despite the first half even 1Q and 2Q proving to be much stronger. Just what's kind of embedded in that? You talked a little bit about enterprise. Is there also federal, public, state and if you can just talk about those end markets as well?

Yes. Well, as enterprise performed better, and we haven't really -- we haven't baked into the back half as much growth. Now that's not going to say -- that's not to say we might not see it. That would be upside, but we just haven't baked it in it to be cautious. And from a federal and education perspective, those end markets are obviously challenged by the administration policy changes, funding changes, protocol changes, and we're helping them navigate through that. So with regard to federal, for example, we've seen pockets of growth, but we still expect muted third and fourth quarter performance. And we've baked that into our outlook. With regard to education, same thing. We certainly see catalysts for growth for both end markets, but we see their performance is a little more muted as we're going through the end of the year. And that's kind of baked into the cautiousness of our outlook. I would say the word of the day is prudent. That's what the word we keep using. And look, I think it's quite sensible to be prudent with an outlook given the changing nature of policies and administration decisions that are so unpredictable and volatile right now. It feels like the right place to be.

Okay.

And maybe just to add on the prudence front. We've seen strong growth across end markets, including healthcare, international, part of our outlook would presume that it would be more modest than what we've seen so far.

Okay. And then just on the other side of that, like what would you be looking for to say, okay, now that has kind of done its course, run its course and now we're kind of more in a normal environment that CDW is typically operating in?

Well, I mean, we're balancing looking at our pipeline, very good visibility to our pipeline with kind of macro vigilance. So we look at all kinds of indicators from IT growth to the cadence of client rollout to GDP growth to budget clarity in the federal space. I mean we're looking at all the components that impact the sentiment in the various end markets and on a macro basis. And what we'd like to see is we'd like to see more consistent growth in the enterprise and small business space and more clarity around the budgetary and policy areas for education and federal government. And that would give us an indication that we're starting to see more traction and a pickup.

So more expansion, normal business. Okay.

Yes.

Then the other question I often get from investors is about your competitive ability, right? How can you -- you often talk about U.S. IT market growth is growing at this. We're generally at a premium to that market. And you've proven that in the past as well, and I think even in the recent quarters and take a look at you. How -- help investors understand about your continued ability to drive market share gains? What's driving that? What's the sustainability there?

Yes. Well, I would just -- I'd start with reminding investors where CDW started and how we got to where we are. We started a very, very long time ago as a reseller and then a value-added reseller. And we've really evolved into, I'll call it, a modern VAR, but it's really a technology integrator where we're stitching together technology solutions for our customers. And frankly, now with AI and automation, adding intelligence into the mix. So I would say from a relevance perspective in the highly complex world that we live in, CDW has become even more relevant. You add to that our scale. We don't have competitors at scale, which gives us a number of advantages in the market, whether it's verticalization or cost leverage eventually, that's a real powerful position to be in. Our partner ecosystem is stronger than any, I would say, because partners see CDW as the #1 channel player, and we are always the first call, whether it's in good times or tough times, the partners understand CDW can move the needle for them. The other things I'd say are just where we've been investing in our expertise. So when I said technology integrator, think of advisory services, think of managed services, think of higher-margin areas of business, whether it's data, whether it's AI, whether it's security, but always with the full life cycle from advising, to designing, to building, to procuring, to implementing and ultimately to managing. So when I look at where we stand today, I feel very confident that our position is incredibly strong. We evolve with the market and we stay very close to the customers. And we operate with a level of agility, notwithstanding being a big business that is really healthy and I think differentiates us. The last thing I would just say is if you look at our model, I mean, we've got a diversity of end markets, which is always helpful when you've got macro events or technology-specific events, brand events or end markets like we have now with federal and education where there's some complications and the diversity and breadth of our portfolio. So whatever is happening in the tech space, our customers are using us because we can cover everything they need and make it work.

Okay. People -- just one level deeper on that one, on that particular question. As it relates to cloud, I mean, there is this view that as you transition more towards the cloud, you need less of like somebody holding your hand to kind of navigate you through this. The cloud is there, why not just -- our Infrastructure as a Service is already available. Do we need services? Do we need somebody like CDW holding our hand through this journey?

Yes, I would say the answers are resounding yes. And I think it is often underestimated what the complexity of making technology work feels like. If we just -- if we think about cloud and the transition to cloud because I remember it very well, okay, we still don't have more than 50% of workloads on the cloud, right? This is back in 2011, '12, when it was really starting to take hold. You oftentimes -- and in cloud, you had this and AI, I think we've had this as well. You have customers who are saying, oh, we've got to do that. We've got to hop on the bandwagon, but then they get a bill and they realize it's not the panacea. What CDW does is help our customers optimize their technology, optimize their return on investment. And that means you're taking into account all the components around cost, performance, scalability, agility, et cetera. And right now, in cloud, that requires assessment across multi-cloud environments. It's just not one and done. So I would just -- I would tell you that the complexity is there and that customers need us now more than ever. That's validated by our relationships with our partners where our technology partners are incenting us to provide these services. They're incenting us to bring their technology to market with -- leading with services because of the complexity and the need to have trusted advisers at the client space to actually make the technology work. There's not an easy button.

Okay. All right. I'm going to ask Al a few questions on margins now and OpEx. So first on margins, Al, you did talk about in the last quarter, there was an increase in volume related to enterprise business that typically does come with a little bit of margin implications there. Just looking forward, how are you thinking about margins and continuing to drive performance while the enterprise maybe a little bit more softer than your first half or second quarter like you talked about?

First, look, over the continuum, we feel really good about margins and margins continuing to move up. If you look back 3 or 4 years, our margins are up meaningfully during that period. 2025, we would expect margins to be reasonably consistent with 2024, and there is some unique components contributing there. So we started the year with strength in client devices and netted down revenue. We weren't expecting a meaningful pickup in solutions growth. We actually had that, and it came in the form largely on the enterprise side. So that diluted some of the effect of the netted down revenues. Now we're expecting that there continued growth in enterprise, but not the level that we just experienced. So that's how we get to that full year on the margin front. As we look forward, I mean, the holy grail for us is full stack, full life cycle. So we're seeing contribution client solutions, cloud services, all of those elements together, we think, are margin accretive, and that's what we're really shooting for.

Okay. And then the flip side of that is, as you're seeing that migration towards more solutions, more cloud, more AI possibly in there as well. You also have to consistently expand on the OpEx side by investing in more talent, which is a slightly different model than moving PCs. You don't need as many people, I guess, or talent as much to move PCs. So can you provide any color and rationale behind the OpEx levels that you guys have talked about for the second half year? I think there's a little bit of accruals and compensation that you've talked about as well. So just help the investment community understand the right model, what you're seeing in the back half and then as we look forward, the model for that OpEx?

Yes. Let me start with the broader and then we'll come to that. On the broad scheme of things, we invest for capability and capacity, and that's exactly what we're doing. And while we are driving efficiency in our operations, and you've seen that, we do think it's super important for us to continue to invest really across the cycle. What we're trying to achieve in that is ultimately really strong, durable gross profit growth. And look, we've seen that this year, which is encouraging, but that's why it's important to invest over the continuum, if you will. And we think that ultimately will not only add value from a shareholder perspective, but will get us back to our earnings algorithm that we're really focused on. So that's kind of the strategic broad picture, if you will. Just tactically for this year. What we've seen is really strong operating leverage in the first quarter. And I mentioned at the time that we would expect some asymmetry in leverage for the remainder of the year, and that was really a function of the prior year being more challenging, having compensation accruals being taken down, save a bad compare or tougher compare in the out quarters. And so we're seeing that play out in these quarters. You get to the full year effect and we may have some modest deleverage. But with continued durable gross profit growth, we're going to get back to our focus on operating leverage and really driving results down the P&L.

Okay. And that leads to sort of help investors understand actually along those, like what drives that durable GP growth? Is it devices and then you kind of move to network? Is it server storage, then you start to do solutions? Do they all have to move in tandem together, which would be great. But how are you thinking about how you exit 2025? And then how should investors be thinking about '26?

Yes. Look, we are built for like we said, full stack, full life cycle. So ultimately, that's what feels most healthy is when you're seeing a balanced contribution across those categories. That being said, we're where we need to be from a customer perspective, right? So I talked about beginning of the year, strong client growth and netted down. You would have expected with the strong client growth that our margins would fade, but they held up quite nicely. What we're seeing now and again, it's one quarter with Q2, a really healthy contribution, solutions, services, cloud, client, right, across the full stack. So what we would like to see is continued balanced contribution across those categories, which plays to our strengths and being where we need to be with our customers and really our capabilities.

I'd just add one thing to that, Al, which is what you can expect to see and what you've seen us invest behind to expand our gross margins and our bottom line margins is overweighted growth in the higher-margin areas. So it's a balance, as you said, but continuing to double down in areas like our services capabilities, like our managed services capabilities, like particular practice areas, data and security as those tend to drive a higher margin.