CDW (CDW) Q3 2026 Earnings Call Transcript

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DATE

Wed, Nov. 4, 2026

CALL PARTICIPANTS

• Investor Relations - Steve O'Brien
• Chair and Chief Executive Officer - Chris Leahy
• Chief Financial Officer - Al Miralles

TAKEAWAYS

• Net Sales -- $6.8 billion, representing an 18% increase driven by record quarterly hardware and software sales.
• Non-GAAP EPS -- $3.26, growing 20% year over year due to operating leverage and opportunistic share repurchases.
• Gross Profit -- $1.4 billion, a 10% increase reflecting momentum in infrastructure modernization and enterprise AI adoption.
• Gross Margin -- 20.5%, down 140 basis points year over year due to a higher mix of hardware-intensive large infrastructure projects.
• Commercial Segment Revenue -- $4.0 billion, up 21% driven by corporate investments in capacity, productivity, and cloud readiness.
• International Revenue -- $880 million, a 26% increase reflecting modernization and efficiency priorities in the United Kingdom and Canada.
• Government Segment Revenue -- $913 million, up 10% as customers prioritized operating efficiency and critical data control.
• Education Segment Revenue -- $982 million, increasing 8% due to investments in secure learning environments and student outcomes.
• Hardware Revenue -- Up 21% year over year, led by data storage and server sales which more than doubled.
• Client Device Revenue -- 19% growth, reflecting higher average selling prices for more capable configurations despite a decline in unit volumes.
• Software Revenue -- 14% increase, driven by double-digit growth in network management, virtualization, and operating systems.
• Netted-down Revenue -- Represented 38.2% of gross profit, an increase of 220 basis points year over year reflecting strong demand for SaaS and IaaS solutions.
• Professional and Managed Services Revenue -- Returned to growth at 2% year over year as deployment timing and customer prioritization evolved.
• Non-GAAP SG&A Expenses -- $766 million, up 5.6% primarily due to higher performance-based compensation tied to gross profit growth.
• Adjusted Free Cash Flow -- $506 million for the quarter, representing 123% of non-GAAP net income.
• Lovelytics Acquisition -- Completed for $525 million on Sept. 25, 2026, to expand capabilities in modern cloud, data, and AI services.
• Full-year Non-GAAP EPS Guidance -- Raised to a low double-digit growth range, up from the prior high single-digit expectation.
• Full-year IT Market Growth Guidance -- Increased to a high single-digit rate for the U.S. addressable market on a customer spend basis.
• CDW Market Outperformance Guidance -- Raised to 300 to 400 basis points over the U.S. IT addressable market.
• Quarterly Cash Dividend -- $0.68 per share, an 8% increase and the 13th consecutive year of dividend growth.
• Senior Notes Issuance -- $1.5 billion, with proceeds intended to repay $1 billion in notes maturing in Dec. 2026 and fund the Lovelytics acquisition.
• Cash Conversion Cycle -- 20 days, which falls within the target range of high teens to low 20s.
• Total Headcount -- 14,600 coworkers, including approximately 600 individuals joined through the Lovelytics acquisition.

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RISKS

• Miralles stated, "gross margin was 20.5%, down 140 basis points year over year," citing a higher mix of hardware-intensive infrastructure projects that carry a lower margin profile.
• Miralles noted that client device unit volumes declined during the quarter, although this was offset by higher average selling prices for richer configurations.

SUMMARY

CDW Corporation (NASDAQ:CDW) reported record financial performance for the third quarter of 2026, driven by enterprise infrastructure investment and AI adoption. Management reported that demand remained resilient across commercial, public, and international segments, with hardware growth outpacing software due to data center modernization and AI factory deployments. The company raised its full-year 2026 outlook for both non-GAAP earnings and market outperformance relative to the U.S. IT addressable market. CFO Al Miralles indicated that despite lower gross margins resulting from product mix, the company achieved strong operating leverage through its Geared for Growth expense efficiency initiatives.

• Chief Executive Officer Leahy noted that AI adoption is currently concentrated in infrastructure for large customers before expanding to the mid-market and public sectors.
• Leahy stated, "AI adoption is creating an explosion of data, much of it fragmented across applications, clouds, and infrastructure."
• Management identified six AI imperatives for customers, including trusted intelligence, infrastructure readiness, application integration, and security governance.
• CFO Miralles indicated that written orders are currently outpacing invoicing, resulting in an increasing backlog specifically in enterprise infrastructure.
• The company is utilizing a greenhouse approach for the Lovelytics integration, allowing the firm to operate separately while using CDW as a distribution channel.
• Miralles stated, "Spending is increasingly tied to measurable efficiency gains, data governance, and cost optimization with focus on ROI."

INDUSTRY GLOSSARY

• SaaS: Software as a Service, a model where software is licensed on a subscription basis and centrally hosted.
• IaaS: Infrastructure as a Service, a form of cloud computing that provides virtualized computing resources over the internet.
• NetComm: Networking and Communications, referring to hardware and software used to connect computers and devices.
• Geared for Growth: CDW's strategic initiative aimed at driving durable operating leverage through efficiency and reinvestment.
• ASP: Average Selling Price, the average price at which a particular product or service is sold.
• Netted-down revenue: Revenue recognized on a net basis when the company acts as an agent rather than a principal in a transaction.
• FinOps: Financial Operations, a management practice that promotes shared responsibility for cloud computing infrastructure and costs.

Full Conference Call Transcript

Operator: Hello, everyone. Thank you for joining us, and welcome to the CDW third quarter 2026 earnings call. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Steve O'Brien with investor relations. Steve, please go ahead.

Steve O'Brien: Thank you, Joel. Good morning, everyone. Joining me today to review our third quarter 2026 results are Chris Leahy, our Chair and Chief Executive Officer, and Al Miralles, our Chief Financial Officer. Our earnings release was distributed this morning and is available on our website, investor.cdw.com, along with supplemental slides that you can use to follow along during the call. I'd like to remind you that certain comments made in this presentation are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. Those statements are subject to a number of risks and uncertainties that could cause actual results to differ materially.

Additional information concerning these risks and uncertainties is contained in the earnings release we furnished to the SEC today and in the company's other filings with the SEC. CDW assumes no obligation to update the information presented during this webcast. Our presentation also includes certain non-GAAP financial measures, for instance, non-GAAP operating income, non-GAAP operating income margin, non-GAAP net income, and non-GAAP earnings per diluted share, non-GAAP selling and administrative expenses, and non-GAAP effective tax rate, net sales on a constant currency basis, free cash flow, and adjusted free cash flow. Non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules.

You'll find reconciliation charts in the slides made available on our website and in our earnings release. 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.

Chris Leahy: Thank you, Steve, and good morning, everyone. I will begin with an overview of our third quarter performance, strategic progress, and outlook. Al will then provide detail on the financial results, capital allocation, and expectations for the balance of the year. The team executed with precision and delivered record performance in a dynamic technology environment shaped by prioritization of infrastructure modernization and AI adoption. For the quarter, net sales increased 18% to $6.8 billion. Gross profit was $1.4 billion, 10% above last year. Expense efficiency delivered operating leverage, and non-GAAP operating income increased by 17% to $620 million while we continue to invest in our coworkers, industry specialization, and AI capabilities.

Opportunistic share repurchases contributed to 20% growth in non-GAAP net income per diluted share of $3.26, and disciplined working capital management converted performance into adjusted free cash flow of more than $500 million. These results demonstrate the power of our model, capture demand wherever it is most impactful to our customers, and convert it into profitable growth. Meeting customer priorities drove record quarterly sales in both hardware and software, with both contributing to double-digit gross profit growth. Momentum in AI enterprise adoption drove strong infrastructure investment, propelling hardware growth ahead of software. This delivered significant profit dollars today and opportunities for solutions and services over time.

Capturing demand where it matters most to customers means mix will vary quarter to quarter. We expect that. What does not change is the underlying trajectory. Our strategy is driving stronger economics over time. Over the past five years, gross profit has increased at more than twice the rate of net sales. 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 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 investments. 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 remained 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 AI adoption, with K-12 extending device lives and higher education emphasizing optimization, security, and greater value from data. International reflected many of these same priorities.

Modernization, resilience, and efficiency drove more than 20% growth in both the U.K. and Canada. Success addressing distinct end market priorities underscores the value of our second performance driver, our full-stack, full-lifecycle 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 to significant AI factory deployments. Data storage and servers more than doubled, while NetComm 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 move 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. 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. 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 fragmented across applications, clouds, and infrastructure. Trusted, secure, and usable information is essential. Our recent addition 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 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's 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. 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 U.S. IT addressable market to grow at a high single-digit rate in 2026 on a customer spend basis, and we see 300-400 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 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.

Al Miralles: Thank you, Chris, and good morning, everyone. I'll begin with details on our third-quarter performance, move to capital allocation priorities, and then finish with our outlook for the remainder of 2026. As Chris mentioned, this quarter demand was strongest in AI-driven hybrid infrastructure and data center modernization, particularly in servers, storage, and cloud. We're also seeing those investments pull through opportunities across networking, data governance, security, and services. The AI market is increasing both the scale and complexity of customer technology environments. Customers are evaluating how infrastructure, cloud, data, application security, and endpoints work together in a secure, governed, and cost-effective architecture, reinforcing the value of CDW's full-stack, full-lifecycle model.

Third quarter gross profit of $1.4 billion increased 10.3% year over year. This is well above our expectation for a mid-single-digit year-over-year increase. Spending is increasingly tied to measurable efficiency gains, data governance, and cost optimization with focus on ROI. Third quarter gross profit, gross margin was 20.5%, down 140 basis points year over year, but up 40 basis points from the second quarter. As we've discussed in prior quarters, gross margin will vary with changes in product and end market mix. In the current environment, our mix continues to be weighted towards large infrastructure projects, which carry higher hardware content.

We experienced meaningful growth in cloud, SaaS, and IaaS solutions, which are transferred at a point in time where CDW is agent, also 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 continuing 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-GAAP SG&A totaled $766 million, up 5.6% year over year. The increase was 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-GAAP 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 Growth's 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 headcount 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 borrowings 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 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%-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 utilized 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%-75%. Year-to-date share repurchases of $653 million already match our total for all of 2025. We have repurchased a total of 5.3 million shares this year at 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 $0.68 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 2.5x net leverage, within our targeted range of 2x-3x. 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. 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, cloud adoption and optimization, AI-ready data and applications, 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%-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 million-$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 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 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 quarter 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. This concludes the financial summary. I will now ask the operator to open up for questions, and we would ask each of you to limit your questions to one with a brief follow-up. Thank you.

Operator: We will now begin the question-and-answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question is from David Vogt with UBS. Your line is now open. Please go ahead.

David Vogt: Great. Thanks, guys, for taking my questions. Appreciate all the detail. Maybe Chris and Al, can you talk to the demand drivers in the quarter? I know you mentioned a lot of infrastructure programs and projects in the quarter, but can you maybe speak to a little bit more granular, what you're seeing from a pricing backdrop, a supply chain backdrop, and sort of a demand backdrop? For example, how much of the strength that you're seeing in server storage, networking infrastructure is price-driven versus demand-driven? And are you shipping, or are you able to satisfy the demand that you see out there?

Are there any sort of supply constraints that are maybe potentially impacting your ability to convert that demand into revenue? Thank you.

Chris Leahy: David, thanks for the question. I start by saying that we're seeing demand remain resilient, and when you think about what's been driving it, obviously, pricing is impacting results. But look, there are needs that the customers are leaning into that we've been seeing very high on the list. So think AI readiness, think data growth, network modernization, cybersecurity, resiliency, and hybrid architectures, all really in the preparation stage for utilizing AI. And what we are seeing is working with customers to make trade-offs in their budgets, in some cases move to fewer units and higher capacity. But at the end of the day, we see the durability of that demand continuing.

In terms of the pricing itself, I'll let Al address that.

Al Miralles: Yeah, thanks for the question, David. I would say that the market is still driven by supply variables as well as pricing. If we look across our different product set, the growth was substantially driven by units, and I will give you one exception in a second. So if we look at the areas of greatest strength, server storage, definitely strong unit growth, strong volume of customer spend coming through. While those buyers are influenced by price, that was not the driver of our growth. It was more so on the unit side. Now, the one standout in that regard, no surprise, would be client devices. That is, client devices grew at a nice clip at 19%.

Units were down, and ASPs were up. But I will just note as well on client, the one kind of nit for us is the ASPs were up partially because customers are choosing to move to more richer configurations. So it is not just price movement.

David Vogt: Great. Maybe just, Al, as a quick follow-up, so if I just take your comments around pricing on client devices units and your netted-down mix, maybe can you flush out where you saw a little bit of margin pressure? Is it just the configurations within server storage have lower margin, or the infrastructure, other infrastructure assets? I am just trying to get a sense because it looked like your product gross margin ex netted-down maybe ticked down slightly sequentially in the quarter.

Al Miralles: Yeah. Happy to take that, David. So first, like Chris said, the demand was broad-based across all of our end markets. That being said, our results reflected significant upside relative to our expectations. A good piece of that over-performance came from our enterprise customers and our financial services customers focused on infrastructure. That was not a phenomena of like-for-like margin compression, more a function of mixing strong into particular products and mixing strong into particular end markets, like those two noted, will have an impact on your margin. We do believe that is part and parcel to where we are in the adoption cycle with AI.

So at the end of the day, we are most guided by, how do we drive gross profit growth? How do we get operating leverage? While we care about kind of where we spot the gross margin, it is not the only variable for the quarter.

David Vogt: Great. Thank you very much. Appreciate it. Thanks, guys.

Operator: Your next question is from Amit Daryanani with Evercore. Your line is now open. Please go ahead.

Amit Daryanani: Thanks a lot, and congrats on the nice set of numbers here, guys. Chris, I just want to talk about the high single-digit IT spend expectation for the year you talked about. Can you just talk about how this is a mix between hardware and software sort of tracking? When we talk to your vendors, they sort of share that sentiment that, hey, demand is much ahead of supply right now, and you sort of echo that as well. Does that suggest that these high single-digit IT spend growth rates could persist beyond calendar 2026?

Just trying to get a sense on the durability of the goodness we are seeing over here, especially if demand seems to be in excess of supply.

Chris Leahy: Amit, thanks for the question. Look, as I mentioned in the last question, the demand that we are seeing is based on a number of factors, all of which are, our customers are not choosing not to purchase. They are just getting really disciplined in what they are buying and how they are buying. At the end of the day, the data explosion, the need to be ready for AI, cybersecurity risks that are exponentially expanding, and the need for optimization across hybrid infrastructure, we are just finding that to be durable is what I would say.

As I think forward, I do not want to project too much forward, but the bottom line is they are evaluating what they need based on the component parts of being successful in AI. We do not see that dampening anytime soon. I do not want to project into 2027, but what we see now is strength. We think the underlying demand drivers will continue, and we would expect to take advantage of those in 2027.

Amit Daryanani: Perfect. Thank you for that. If I can just follow up, I think your gross margin, gross profit dollars are up 10% year-over-year. Your operating income dollars are up like 17%. Clearly, some fairly impressive OpEx leverage in the model in the quarter. Can you just talk about what exactly is driving that? Is that Geared for Growth perhaps ahead of track? You could update us on that, or were there other factors that helped that OpEx leverage in the quarter? Thank you.

Al Miralles: Yeah, good morning. Amit, I will take this. Substantially what you are seeing there in terms of the operating leverages are Geared for Growth efforts kicking in and those savings coming to fruition in the quarter. We had previously given indications of what that run rate expense base could look like as we go into 2027, as we go into 2028. I would say we are at or above expectations in terms of the progress therein. The one caveat I would give you, Amit, is great print for us in that regard in terms of that SG&A ratio at 55%, but there will be variability in terms of when the savings land relative to our reinvestment.

Therefore, I will take you back to our commitment is year-over-year improvement in our operating leverage. That does not mean that every quarter will be perfectly linear with respect to that SG&A ratio, but super pleased with our progress to date.

Amit Daryanani: Perfect. Thank you.

Operator: Your next question is from Keith Housum with Northcoast Research. Your line is now open. Please go ahead.

Keith Housum: Great. Good morning, guys, and appreciate the opportunity here. In terms of the Lovelytics acquisition that just closed here, I guess, perhaps you got some deep dives a little bit deeper into it in terms of the acquisition you are making in terms of how you guys are going to manage them and integrate within the existing CDW portfolio and the type of revenue synergies that we can expect going forward from the acquisition.

Chris Leahy: Yeah, sure. I'll start. Lovelytics, we're very excited about the acquisition. It's not just a great company, it's a great team of people. As we've said, it really expands our modern cloud data analytics and AI capabilities that are very much at the front end of AI adoption. In terms of the integration, we are doing our greenhouse approach, and we've shared that with investors before. With a company like Lovelytics, the size that they are, the capabilities they have, we like to operate them almost separately for a period of time and use CDW as a channel. The reason is, we don't want to overwhelm them.

We want to keep the growth going, and we want to be really disciplined about the opportunities from our broad base of customers that we bring to Lovelytics. So far, so good. It's worked in the past, and we're really looking forward to growing that business and utilizing their skill sets across our broad customer base.

Al Miralles: And maybe, Keith, I'll just add to your question on the how did that get baked into our outlook. Like Chris said, super excited about this business. Our focus, particularly in Q4, is getting off to a great start with respect to our integration and scaling the business. Our incorporation of Lovelytics in the Q4 outlook is measured, as you would expect from us. As we look into 2027, we will certainly provide more in terms of what we think the contribution effect is. But you should think of this business as smaller relative to the obvious overall scale of CDW, but growing very fast. So, we're really excited about the prospects of what the future holds here.

Keith Housum: Great. If I can just follow up on that. In terms of the financial profile, is it accretive to margins, or is it a case of more of a rounding error, probably won't be able to see it?

Al Miralles: Gross margins, for sure, accretive, right? It is a professional services business, so the margins are quite rich. Our focus is going to be how do we help them to continue to scale so we get all of the advantages of those richer margins.

Keith Housum: Good. Thank you.

Operator: Your next question is from Ruplu Bhattacharya with Bank of America. Your line is now open. Please go ahead.

Ruplu Bhattacharya: Hi. Thanks for taking my questions. The first one is on gross margins. You've talked about AI several times. What percent of revenue or what percent of gross profit were AI infrastructure sales? Are margins lower on the AI sales? Beyond that, did vendor incentives or competitive pricing have any influence on gross margin? I have a follow-up.

Chris Leahy: Ruplu, let me start on that one, and let me zoom way out to start. When we think about AI, it's not a single product category. It's a multi-year opportunity and a full-stack solution. It's a great question, but if you look at the growth in infrastructure, whether you take a single piece of the hardware or a single GPU, yes, that can be dilutive to our underlying business margins of 21%. But we look at it in the context of our customers' broader imperative to get value out of AI and what's required to deliver on their outcomes.

We don't think about it as just selling a single component, but selling solutions across the entirety of the infrastructure, data, application layer, workflows, security, and economics. We are so well-positioned with our full stack, full life cycle to help our customers connect and orchestrate the spectrum of technology, services, and expertise required to help them, and to ensure that they work within the confines of their current environment. So that's how we think about bringing value to our customers and ultimately richer economics to the business.

Ruplu Bhattacharya: Okay. Thanks for the details there, Chris. For my follow-up, can I ask, you raised your target for customer spend to 300-400 basis points premium to U.S. IT growth. What is driving that more? Is that data center equipment, or is that on the client devices side? Could any of that be related to a pull forward of purchasing because of fears of component availability or higher pricing going forward? Or do you think that client budgets are actually going up? Thank you.

Chris Leahy: Yeah. It's a great question. I say this, it's both, but more heavily weighted to infrastructure. We know historically when we have very, very strong hardware performance that we outperform the market by several hundred basis points versus our typical 200-300, and we expect to do the same here. In terms of pull forward, immaterial, frankly, because when we look at all the leading indicators, we look at writings, we look at invoicing, we look at backlog, we are not seeing what I would say is a flush or pull forward. We feel confident in the numbers that we've put out there.

Ruplu Bhattacharya: Okay. Thanks for all the details.

Operator: Your next question is from Guy Hardwick with Barclays. Your line is now open. Please go ahead.

Guy Hardwick: Hi, good morning. Most of my questions have been answered, but perhaps you could just give a little bit more color as to, we see tremendous performance in double-digit GP growth, but only mid-single-digit growth in SG&A. Just wondering to what extent was the RIF material to that, and at what point do you guys think you've stopped reinvesting in the business? It seems that you guys are net hiring in terms of other roles, into some more advanced roles, maybe AI skills, et cetera. So these people will generally be more expensive than perhaps people who've left the organization.

So maybe you can give us a few quarters forward-looking outlook in terms of how investments in the business versus the Geared for Growth program.

Al Miralles: Yeah. Hi, Guy. Happy to take that. So, in the quarter, just a reminder, Geared for Growth focused on broad productivity, incorporation, integration of AI in our work processes, looking deeply at our quote-to-cash efforts to figure out how do we create a better experience and streamline the work we do, and drivers of efficiency therein. All of those efforts are in flight, have played out. With respect to Q3, there certainly is a coworker component that drove some of those savings. I won't parse out all of the details, but I think you can get a sense from that as you unpack the coworker count. So our coworker count was 14,600.

About 600 of that is from Lovelytics, so you can get a sense for just the impact vis-à-vis productivity. Importantly, and you noted it, we are investing back in the business. And a couple things I'd note, Chris may jump in here as well, we are investing in our services capabilities, including deepening our data and AI practice areas, and you saw that with the Lovelytics acquisition. We continue to hone and improve upon our go-to-market engine. Then again, I'll just say we're focused on our end-to-end customer experience, quote-to-cash, and how do we really make a better experience for our customers? So, there are some of the big areas that we've been focused on investing.

Some of those are coming to fruition, but expect them to accelerate as we look into 2027.

Chris Leahy: Yeah. The only thing I would add is that these efforts are not purely cost-lowering attempts. We're basically changing the way that we operate the business to create durable capacity to both invest on a continued basis back into the business and to provide returns to our shareholders. So, the focus is both on growth overall and efficiency.

Guy Hardwick: Thank you.

Operator: Your next question is from Joseph Cardoso with JPMorgan. Your line is now open. Please go ahead.

Joseph Cardoso: Hey. Good morning, and thanks for the questions here. For my first one, wanted to touch on the commentary around order intake outpacing invoicing and how that's translating into backlog, and maybe more importantly, your visibility. Just curious, given all the dynamics you're seeing, if that is driving a greater visibility, and how we then historically, and how that's translated, and should we be thinking about that's translating to something more multi-quarter in nature, and where maybe that backlog build is happening as it relates to the portfolio? I do have a follow-up.

Al Miralles: Yeah. Good morning, Joe. First, on the visibility, I would say, consistent with last quarter, visibility continues to improve. We feel like order times and delivery are largely within reason. There's always exceptions, but for the most part, it's operating in a pretty orderly fashion. So there's that supply chain element. In terms of just the balance of written orders, invoicing, backlog, here's what I'd say. Because the supply chain environment continues to be reasonably orderly, we had good conversion of the backlog during the quarter, but we replenished that backlog with stronger written orders. That is, and Chris mentioned this, written orders are exceeding invoicing, which means that our backlog continues to grow. Things are operating as we expect.

Those health metrics we view as very positive and a really good indication of both customer engagement and spend potential as we look forward.

Joseph Cardoso: Oh, got it. Thank you all. Then maybe as my follow-up, it's good to see the services return to growth here, but I think again, pointing to this deployment dynamic, maybe can you just help us think through the timing about a potential services catch-up, or should we really be thinking about this more longer in the tooth in nature, just given kind of you guys pointing to more of the life cycle and maybe the addressable opportunity over that? Maybe just as a second part to this, just curious, is the higher hardware prices making services look maybe a little bit softer from a comparison purpose?

If we ignore that kind of dynamic, is there any underlying change in terms of the level of attach you're seeing from a hardware perspective, just given maybe a distortion on the pricing side? Thank you.

Chris Leahy: Yeah. Joe, let me take that. Let me just start with the end, which is where customers are focused and therefore where we are focused. You're right. Customers have been allocating their budgets to infrastructure, hardware, cloud, and just the foundational needs to become AI-ready. So that's where the budgets have been going, and that's obviously where we help our customers. We follow them where they need to go, and that does impact the timing to some extent of services. But look, services did return to growth, and we're happy to see that. It was earlier than we expected on the professional and services side, so delighted to see that. Good job by the team.

What I would say is we are continuing to see constructive engagement and pipeline around implementation, around optimization, security, governance, data, and just ongoing operations, so the full life cycle. I mean, it is just the nature of life cycle that procurement and deployment and implementation occur at different stages. When you think about the broader consulting, integration, and managed services needs, those tend to come in the middle and at the end of the project. I would think about this over the course of several quarters. I think you said long in the tooth. It won't be an immediate catch-up. It will just be the natural unfolding of the life cycle.

I mean, if I just give you a tangible way to think about it, I'll use Lovelytics and data. On the front end of an engagement there, we're going to do advisory services, and that might include AI and data strategy and an assessment around maturity and a roadmap build and use case prioritization, et cetera. That's great. That's strategic. But then we move into the implementation, and that will be more when we are actually deploying. An example would be to migrate legacy data warehouses. That's in the implementation and deployment stage. Then ultimately, operating to keep the environment secure, you'll see managed services, for example, with FinOps, to be a single point to monitor and control cost.

So that is the way that the life cycle of services flows out, and we expect it to be that as we move forward. As I said, we're happy to see we're back to growth, albeit modest, but still ahead of what we expected.

Joseph Cardoso: Thank you. Appreciate all the color.

Operator: I will now turn the call back to Chris Leahy, CEO, for closing remarks.

Chris Leahy: Thank you very much. Let me close by recognizing the dedication and hard work of our nearly 15,000 coworkers around the globe. Their commitment to serving our customers is what makes our success possible. Thank you to our customers for the privilege of helping you achieve your goals, and to our partners for their continued collaboration as we bring the best of the technology ecosystem together for our customers. Thank you to those listening for the time and continued interest in CDW. We look forward to speaking with you next quarter.

Operator: This concludes today's call. Thank you so much for attending. You may now disconnect.

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