CDW Corporation ($CDW)

Good morning, everyone. Thank you for being here. I have the pleasure of hosting the fireside chat here with CDW and pleasure of hosting Chris Leahy and Al Miralles. So Chris Leahy, CEO; Al Miralles, CFO. Thank you both for coming to the conference, and thank you to the audience as well.

Chris will -- we've been discussing AI all through this conference. So I think predictably, a lot of my initial questions are going to be focused on that, and I'm sure you're answering those questions all day here today. Investors want to really focus on CDW as a leader in this industry, how do you participate in AI, how in sort of this new world order that includes a lot of AI workloads how does see the Blue participate in it with your customers?

Yes. Well, thank you, Samik, and thank you for having us. We're happy to be here and happy to answer the questions. If I could just zoom out for 30 seconds and then zoom back in Obviously, we're all operating in an environment where technology complexity is exploding, frankly. And this is where CDW plays well. This is who we are in terms of helping our customers navigate the complexity. I think we can be clear that customers are no more -- no longer in the experimentation stage of AI, but they're asking us how to implement AI safely, economically and at scale. And that takes not just accessing a model or through a product, it takes the entire infrastructure stack from server, networking, data, storage, governance, cloud, security, all those things, along with change management working together. And CDW is uniquely positioned with our full stack capabilities and the ecosystem of diverse customers that we have to deliver against that. The Q1 results that you've seen illustrate the strength in the infrastructure and software area. -- where we're seeing customers continue to progress their AI spend and continued modernization. And I would just say as this complexity continues to increase our scale, our technical resources our partner reach and our trusted advisory role becomes even more important. Now at this moment in time, we are pairing that with sharper operating discipline and a clear accountability for reinvesting back into the growth areas of the business. So we've talked about our AI-powered modernization across the enterprise. We call it geared for growth. And it's how we're going to simplify CDW's operations. We're going to decomplexify the work. We're going to modernize our workflows and embed AI across the whole of the enterprise. The goal is obviously to have clear financial commitments regarding this work. So don't think of this as a cost program. This is a program to ensure that we are delivering better experiences and outcomes to our customers, to our partners, to our coworkers and ultimately to the business. The goal is to translate productivity into operating leverage and then have a disciplined methodology to translate that operating leverage into reinvestment and shareholder value. Now with regard to AI and the areas that we are seeing at the moment, I'll give you a couple of examples. We've already said that people are moving to production. A couple of areas where CDW play would be AI factories, as an example. We're providing for enterprises and large companies and NeoClouds as well, full stack solutions, including design work, all the way to the procurement and in many cases, we're landing on a managed service, GPU as a service, which is good for the customer and great for us. Other areas we're helping customers with are optimizing workloads across the hybrid environment. So those are just a couple of examples of where we're currently working with customers.

Maybe on that front, the private AI factory that you've talked about recently as well. Can you just help us understand what the pipeline dynamics are behind deals like those how long is a typical sales cycle from initial engagement to production? And do you feel you're at a point where that's a repeatable process across your customer base?

Yes. That's a great question. And I just say that customers are at all different and whether they need a kind of quick assessment or if it's a longer-term project. We have projects that can be a month long, can be 6 months long, can be 3 months long. So those are -- they can be very, very much varied. But you're right. The exciting thing for us and for customers, particularly in the verticals is the engagements end up being repeatable. So the architectures that we're codesigning with our partners are ones that are patterns that we can use again. So we are absolutely at the point where the solutions that we're bringing to market or solutions that we can replicate and deliver at a higher and higher margin.

Okay. Interesting. Maybe let's take a step back. The last few years have been anything but predictable. And you've had tariffs, government shutdowns, everything to sort of navigate and now you're looking to navigate AI as well. When you look back at how CDW did during that dynamic period, what are the lessons you would take forward to what you now have to execute in this sort of world where everyone wants to deploy AI and want your help to help deploy AI?

Yes. I think you described it very well, Samik. So I think these past few years have reminded all of us that we have to stay focused on those things that we can control. and that resilience and adaptability are more important than precision and forecasting, et cetera, but being resilient and adaptable. And for us, our takeaway is that our services-led model is very important. It's a strategic engine for the company going forward. And it helps us perform across all cycles. So I'd say that's number one. Number two, strong balance sheet has been a real benefit for flexibility in a world of uncertainty. So we lean into our strong balance sheet. And then lastly, I'd say customer-led approach. You know CDW has been very much customer at the center of everything we do since our beginnings 42 years ago. This has been really important during this period and a reminder going forward that we are investing in -- where demand is real and not theoretical because there's a lot of theory out there. So when you think about AI, that fits naturally into these things that I've just identified. And AI is a real platform shift CDW has been through many technology shifts throughout our time period. And so staying resilient, staying customer-led and continuing to scale the services that are high relevance, high-growth AI first puts us in a great position as we move forward.

Okay. Great. AI deals, you mentioned margin accretive, higher-value services attached and some recurring revenue streams as well. Just maybe help us dimensionalize the level of attach that we should expect associated with the AI deal versus what a similar sort of traditional deal would look like? How are we thinking about sort of the higher services playing out on AI deal itself and how does that become sort of a tailwind for the company over a multiyear period?

Yes. When I think about the services associated with AI engagements with customers, you think design and readiness assessments, you think security and governance, you think deployment, you think orchestration, we also very much focus on managed services. So if you step back and think in totality, AI as a technology is putting our customers in a position where they value more services from CDW, okay? Particularly the mid-market, but needing more advice, design work, et cetera, and then actually implementing on the blueprint. And so we see AI as an opportunity to add a higher magnitude of services around what we're selling at a higher margin with more recurring revenue opportunities through our managed services.

You announced the Boost run partnership to offer GP as a service to customers. How do you think about -- or how should we think about the economics of that model for CDW versus traditional on-prem infrastructure sale?

Yes. So this is a really interesting and it's a very strategic partnership where we that we sold, we actually are implementing for boost their NeoCloud. But equally, that gives us access and in many ways, inventory for us to bring to our customers in a supply-constrained time when it comes to AI compute and access. So it is a demand driver. It is an access it's an access to the supply constraints. And it allows our customers to drive to an outcome and solution more quickly because you've got cloud capacity, you've got on-prem but because of the supply constraints, the ability to have a neocloud where they can go and put workloads and speed to production is becoming more and more important. But if you don't have supply, you can't do it.

Is this a shift in how CW monetizes, not only AI infrastructure, I mean, that looks to be the case that you can think about that. But even traditional in the future, like how do you think about moving from a transaction to more recurring revenue by changing the go-to-market with even the traditional side of your business?

Yes, well, we're seeing that with the traditional side as well. When you think about as a service, for example, most of -- much of the hardware that we sell, we also have very sophisticated as a service offerings. A great example would be for the 2028 Olympics we're doing Device as a Service. That's a massive production for the Olympics. Every device that anybody touches at those games they will have been prepared and delivered and managed and secured by CDW. So across the entire stack, there is more and more opportunity to provide as a service recurring revenue. The other thing is with AI, and I think you were getting to this point, when we think about the economics and how we get paid, there is services upfront, there is resale, there is managed services on the back, but there's also consumption. All of our OEMs, all of our partners are interested in adoption and consumption. That is the next wave of growth, and we are well positioned to help them and help our customers drive consumption. What the customers come to CDW for is to make sure that when they're making choices, they're optimizing. They're optimizing where they put a workload based on cost, based on performance, based on scalability and flexibility based on compliance, based on security. These are all vectors that customers have to take into consideration and make trade-offs around, right? And with AI now, it's making those even harder to do. So lots of opportunity going forward in the consumption and adoption area and in helping our customers optimize from the get-go, what they're spending and where they're spending.

Chris, maybe the Sticosort of slight division here in terms of rate of demand, but also you're seeing supply constraints, how does see CDW add value to customers when you particularly run into a supply-constrained world like we are starting to see now?

Yes. Well, I think it's pretty straightforward in that we are the largest scale. We have the largest leverage with our partners, and our partners really do turn to us to -- when we need that and where customers need that. So in this situation that we are finding ourselves in now, we have been able to garner information about price increases and have access to inventory in time for many of our customers to purchase or get their purchase orders in well in advance of price increases. So I think the benefits we bring are information and its relative information, what's happening at each of the OEMs with the relative cost changes, timing when is it going to increase? Clarity on supply, where it sits, can we actually get it in. And the team did a really phenomenal job to the extent where we were able to deliver on a lot of product that's not even yet going to be implemented. So they just wanted to get a hold of it.

Okay. Pricing, I mean 1 of the questions we run into often is supply is constrained, pricing is going up. What are you seeing sort of from your customers and in terms of response to those price increases? Any views on that front?

Yes, I'm happy to take it, Samik. Chris mentioned in her opening comments that this is where we're at our very best. That is in dynamic environments, volatile environments with respect to pricing and supply. We sit in the middle. We sit in the middle of a vast OEM universe and a big customer base. And so that's just what we've done. And while at the beginning of the year, we saw quite a bit of price variability and lots of talk about supply constraints. We help customers navigate through that. We certainly have seen OEM by OEM movements in pricing and had to help our customers navigate through that. I would say, as we exited Q1 and into Q2, it's more of an orderly environment. We continue to work closely with kind of both universes populations that is partners as well as customers to figure out how do we supply, how do we get the supply? How do we fulfill demand and we make sure that customers are getting the most for their book.

Okay. So maybe let's do a bit of a deep dive into the for growth initiative. You're targeting $100 million in savings run rate savings by 2027, $200 million by 2028 with roughly half of that reinvested in the business is, I think, what you outlined. Any more texture around what are the areas you're targeting? Where do those savings come from?

Yes. Let me start, and Chris may have something in there, Samik. So in terms of the major drivers. So first, you should think about this, Chris said the this isn't just cost cutting. This is structural for us. This is how do we actually sustainably improve our cost base, but also end-to-end experience for customers, partners, coworkers. The areas that we're focused on include looking at workflow and process. So how do we actually make process, end-to-end, more seamless, frictionless, faster-moving, easier decisions. So think like quote-to-cash processes from end to end, looking at our supply chain. So obviously, we're a big direct procure and indirect procure. So how do we use data and AI to forecast demand, forecast supply, make sure that we're getting kind of cost of goods sold for the best possible price, we're customer 0 in terms of looking at our own tech spend and using AI to determine the -- how do we optimize our tech spend to make sure we're getting the right ROI. And then just classic traditional looking at our operating model, how do we move faster? How do we find the places to centralize, how do we find the places to do things differently in terms of our operating model and do them in a most efficient manner. So -- that's -- they're the core areas, and we continue to learn as we go, but we are fast at work on those fronts.

I would just add, to be clear that our ultimate goal is to drive productivity that translates into operating leverage that allows us to reinvest in the growth areas of the business and obviously return value to shareholders.

Maybe just following up on that. I mean, what's the confidence that the reinvestment component that you have drives a better ROI rather than just helping you maintain the ROI where it is, like how do you provide confidence into that?

Samik, what I would say is that we are committed to, as Chris said, getting back to operating leverage and getting our SG&A ratio back to that sweet spot 55%, 56%. And -- so as you can imagine, there's always pulls on demand for reinvestment, and we have a rigorous process to look at ROI and make sure that every dollar we're putting back in, in the way of investment is going to get a compounding return. So that's how we're looking at it. And I would say, we're into the process. We're in the thick of it, and we feel really good about what the.

Think about the investment buckets as in the sales organization, sales capabilities, not just people but tools, technical industry capabilities in the areas that are revenue producing and margin expanding.

Okay. Maybe just to sort of then look at what you can do beyond what you've announced already, if some of the plan that you've announced already with the revenue growth that you see on that front doesn't meet up to your ROI expectations? Is there opportunity to scale out more broadly the gear for Growth program? Do you already sort of have some level of visibility in terms of what a plan B or more extension of that plan would look like?

We do -- look, while we are in full force on these efforts, we definitely -- we view this as multiyear. So we're going to learn as we go. The targets we gave, we feel really good about achievability, but we expect that we're going to be able to amplify further, right? We have nothing to say today in terms of changing those targets. But I think the upside is real there and feel good about the path we're on.

Got it. Al, you did mention SG&A to gross profit, the ratio being above 55 to 56 you want to get it down to that level. What should investors look for? Is the second half a good comparison to then look for in terms of proof points that you start to get closer or with geared for growth being more focused on 2027 is 2027 when we start to look at that?

Sure. So look, we've been going on this, I'd call Q2 inflection point in terms of those savings. -- beginning to flow, but sequentially will improve as the year plays out. And so we've said that the back half of the year is where you really would see savings coming online and you start to see sequential improvement of that SG&A ratio as we go into '27, we'd expect that will continue to improve. Importantly, Samik, I would just say the -- seeing the improvement on the expense base and the SG&A ratio but also seeing from our investments, our top line and our gross profit continue to grow, right? So we've made a lot of investments. We've got a strong go-to-market engine that's running. We are focused on services at scale. So it should not only be focused on seeing the expense base movement, but also getting the top line acceleration, which will further drive operating leverage and SG&A ratio improvement.

Okay. Okay. So on that front, on the call, you did express confidence that the netted down revenues do revert to a more normal level in the second half of the year. What is driving the confidence on that outcome?

For a couple of things. First of all, what we saw in Q1 on the hardware fund was pretty extreme, right? We had customers moving with urgency, particularly in solutions hardware given the price movement and the supply movement. And our outlook calls for that continuing through Q2. As we sit here now and what we talked about on the Q1 earnings call, order activity continued to be strong. So there's a possibility you could see hard work continuing that path and the growth continuing. But our outlook, as we sit here now, calls for that balancing out. And therefore, on the back half of the year, netted down revenue is kind of playing a more equal part in the allocation. That confidence on netted down revenues, driven by a couple of things. Number 1 is the durability of SaaS and cloud. We've got really good line of sight to that element of our business. A lot of that business is recurring and reoccurring and we just think that from a customer perspective in terms of decision-making and allocation of spend you're going to see balancing out as the year plays out.

The -- so you mentioned the hardware, the likelihood that it stays strong even in the back half. Are you seeing customers trying to pull ahead to get ahead of the price increases or wide supply constraints? And it doesn't seem like that's in your base case for the second half that you have a lot of pull forward if you're assuming netted down revenue mix improves?

So in the first quarter, pull forward was around $100 million, but really important that I note that the build of our backlog in Q1 into Q2 was even higher than that. So in Q2, we would expect a bit more pull forward, but it's conceivable you could continue to see the backlog continue to build as well. So while our outlook is still cautious in terms of hardware spend really continuing to sustain in the back half, when we report Q2, we'll give more information in terms of -- could that possibly extend knowing the pull forward, but also that backlog build?

Okay. Okay. Got it. You face some challenges related to services growth in the quarter. Can you just walk us through the drivers there and what happened in the quarter related to services?

Yes. With regard to the services performance in the quarter, that was really customer timing decisions. Hardware was shipped and received and not implemented. So services will follow. There's nothing structural from a demand perspective. And we just expect that long-term opportunity services will continue to be a robust provider of growth.

Okay. Okay. Great. Let me just check if anyone in the audience has a question. Mic here, please?

Given the -- I don't know if you sat in the lunch today, but given the amount of effort that's taking place in many companies to incorporate things like Quad and other types of capabilities. Are you having any view on how software sales are going to start playing out from your experience and your conversations with clients?

The conversations with clients are reflecting an upward tick in demand for software. We are seeing that, and we're seeing more and more companies who are wanting to explore multiple LLMs and the models. They're looking to us to help them understand how to -- again, back to the optimize and not end up with too much spend across multiple models. So we are seeing an uptick.

You play both sides of this aisle, the services and the hardware -- and you talked about being in the mid-market, which is a wonderful place probably for this type of service. Are you seeing also then a pull through an increased pull-through on the hardware side by engaging on the services side business, like in essence, has it lifted? Or are you just seeing a you're getting the same amount of business in the hardware side?

Yes. No, I would say -- that's the beauty of the model, which is full stack, full life cycle. And we are always seeing whether it's we start with hardware with a customer because they have a particular need and attaching services or start with services, it's naturally going to pull through the hardware. And we continue to see that flywheel really work quite well add AI into that and the ability to drive that flywheel with more intelligence, more speed, more accuracy I would just expect that to get better and better.

Did you have anything that's on the specific nature in terms of a specific uptick or a lift that you've been seeing as a result of playing both sides of this or prior to having deep penetration into the services business.

I'm not -- there's nothing that I'm particularly pointing to. The reason I say that is because when you think about solution. A solution involves everything. It is rare today that there's a point product, unless it's a replacement and they're buying it on our digital site. But it's typically going to include services, software, hardware and some element of cloud in everything. It's a matter of where we start and the journey from, for example, advisory services and where that takes us in cloud migration, for example, and then managed services or it might be a refresh of a device that takes us well beyond the refresh of the device because we are identifying other opportunities and bringing in our experts around AI and productivity and suddenly, it turns into an expanded engagement.

So 1 last question because you talked about the SG&A, and it looks like it hit a level where you finally said, "Hey, we have to do something about and get involved with geared for growth. But were there other things taking place in the business that we're triggering you in advance of that, sort of like warning signs or like something was a little out of kilter in some respects that you needed to address the overall issue of probably the cost of complexity in the business?

Yes. Here's what I would say. Obviously, if you look back over the last number of years, nobody would debate the unprecedented times we've seen from a tech perspective, including AI. We called 2025 really a transitional year. We had made significant investments in our go-to-market engine and acknowledge that as we entered into 2026. really important we get back to operating leverage and then we see improvement on that SG&A ratio back to what we'd call our sweet spot kind of 55% to 56% of gross profit. We have done a lot of just expense reduction over the last 3, 4, 5 years as we've had kind of demand moderations ups and downs. What's different about geared for growth than it is structural, it's really kind of reengineering, rethinking how we operate, how do we get down to the core. And the timing is great from an AI perspective because we can really reimagine process from end to end. So that was the impetus for it. And we think as we think about going forward, the potential for amplifying our profitability, it's an important component.

As you see your customers kind of in early stages of trying to figure out how to leverage AI. Do you see -- are you seeing more DIY activity where they would adopt a certain lab and integrate it to their back-end data? Or -- are you seeing more of a willingness to adopt like the Agentic capabilities of an existing software vendor. So you mentioned software activity is upticking. It sounds like a lot of that adopting . But is it both? Is it 1 more than the other in terms of deciding, do we want to just leverage and off-the-shelf third-party application vendors, agentic solution versus building your own? I'd be curious?

Yes. That's easy great question. And there's a wide spectrum depending on the size of the company, the enterprise, the industry the use cases available, et cetera. So you certainly have a large number of smaller companies trying things. But as we've moved from this experimentation stage into much more production, what we're seeing is more clarity around use cases and then decisions being made to optimize for the outcome of that use case. So it's hard for me to say is it 1 or the other because it's everything. It's just like we're in a hybrid world. Most organizations are going to have cloud workloads, AI workloads in the cloud, on-prem, co-lo, et cetera. It's the same thing in terms of the usage of which models, the LLM, small language models, how they're integrating it with their own data. It is a wide spectrum. It just really depends on the use case.

Okay. Maybe if we take step to a different topic, which is your changes in the reporting segments recently? And what was the motivation behind that? Particularly, I think you are now disclosing financial services as a stand-alone vertical where you've highlighted that as a stronger performer in terms of AI inferencing driven server and storage demand as well. So just help us think through rationale of the resegmenting that you've done? And does the Financial Services segment become sort of more of a proof point of what you're seeing relative to customer demand on the AI side?

Yes, I'll start, and Chris may add here. First, Samik, our criteria, you're right, thinking about segments is the -- is it a segment that appropriately reflects our verticalization strategy, check on financial services? Is it a segment that has critical mass, critical scale and a good depiction of our overall business. checks. So they are the things that we look at. We think about our financial services segment and buying centers there. It's a diverse set of customers, but we do have an allocation there on the enterprise space. So they are very sophisticated buyers, they are very focused on AI and inferencing intensity, and they are very focused on kind of having the broad array of capabilities to support them with AI. So I think security, latency, compliance, et cetera. So timely in terms of the disclosure in terms of fitting for what we think is important for segmentation, but also the critical theme on the AI front.

Okay. So maybe to wrap up. One, is let's look 2, 3 years out the gear for growth initiative, if that works out as planned, what's the right earnings algorithm for CDW? Do you get back to the double date earnings growth that it's like every investor wants to see that at this point. So how should we think about that probably being the end goal here? And do you see that as a realistic target?

I'll start, and then Chris will definitely jump in on this. So look, -- if we look at the investments we've made, they've been meaningful to really bolster our business and build out our capabilities. So really starting with last year and before getting our go-to-market engine humming, including verticalization from a business perspective, creating a services business that scales meaningfully and takes advantage of AI, really, really important investments we've made there. And then just the benefits of the diversity of our end markets, right? Which we think is really important in terms of the integrity of our business. If you add all of those components, they are compounders to our growth, then add geared for growth. That is then add assuring that we can get to operating leverage that we will get our SG&A ratio back to the sweet spot all of those elements on top of our capital allocation, including our willingness and opportunity to lean into our stock when it's weak, like what I would say right now is our stock is dislocated. We're taking advantage. We will use that to both make smart capital allocation decisions, but also drive EPS accretion. And -- all of those elements, Samik, get us back to confidence that we can return to double digits on EPS growth.

Yes. I guess the only thing I'd say in rounding out is, obviously, we've got the levers in place. We've got the structural tailwinds and we're committed to getting there.

Maybe just the last question then to wrap up. You did mention the buyback and that being sort of tracking as planned, but when does it become -- I mean, you clearly have visibility into earnings growth being better, the stocks dislocated as you mentioned, you have free cash flow, when does it become compelling enough to take a more aggressive stance on the buyback?

It is definitely compelling enough. Look, we were leaning into the stock last year, we leaned into buying back the stock in the first quarter. We think our stock is dislocated as we sit here now. So we view it as very compelling. Obviously, we had recent news that we increased our share authorization by $1 billion. If you take where we were at Q1 plus the $1 billion, we have $1.4 billion of capacity there, and we expect that we're going to use it in '26 and into '27. There are lots of options with your capital allocation. Right now, I'm not sure there's anything better than buying back our stock.

Great I'll wrap it up there. Thank you. Thanks for coming to the conference. Thank you for the audience as well.

Thank you.