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F500-2021-161-CDW

The information technology services company is based in Vernon Hills, Ill., and employs 10,000 people across 28 locations. With the pandemic forcing companies to transition to remote work in 2020, thus driving demand for the company's WFH tech solutions, CDW reported a 13.3% year-over-year climb in profits for 2020.

This year's Fortune 500 marks the 66th running of the list.

F500-2020-178-CDW

CDW provides technology products and services—from hardware to security systems to cloud computing—for businesses, schools, and the government. Founded in 1984, the company emerged from a $3 <i data-stringify-type="italic">Chicago Tribune</i> classified advertisement to sell a used computer in 1982. CDW was publicly traded from 1993 until 2007 (when it went private in a $7.3 billion deal by Madison Dearborn Partners and Providence Equity Partners) and it made its <i data-stringify-type="italic">Fortune</i> 500 debut in 2001 at No. 435. Today the Illinois company is public once again, thanks to a 2013 IPO on the Nasdaq, and counts more than 10,000 employees and 250,000 customers.

Fortune's proprietary methodology allows us to zero in on the 50 global firms that are best poised to deliver—and continue delivering—above average gains.

The Future 50

This year's Fortune 500 marks the 65th running of the list.

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This year's Fortune 500 marks the 61st running of the list. Wal-Mart claims the top spot again. See who made the list.

Wal-Mart stayed on top as its sales crept closer to half-a-trillion dollars. Apple moved into the top five. And UnitedHealth Group continued its steady climb. 

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Based in Vernon Hills, Ill., CDW provides information technology solutions to customers in business, government, health care, and education in the U.S., the U.K., and Canada. The company sells both discrete hardware and software products and services as well as integrated IT solutions, including on-premises and cloud computing services. The company also offers managed IT solutions and software design and development services. Founded as CDW Computer Centers in 1984, it changed its name to CDW in 2003.

Q2 2026

Q1 2026

Q4 2025

Q3 2025

Q2 2025

Q1 2025

Q4 2024

CDW (CDW): Company Profile, Stock Price, News, Rankings

legacy

Hello, everyone. Thank you for joining us, and welcome to the CDW second quarter 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.

Thank you, Joel. Good morning, everyone. Joining me today to review our second 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, 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 amount 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.

Thank you, Steve, and good morning, everyone. Before we begin our review of the quarter, I want to briefly address the announcement we issued this morning regarding Al's planned retirement. We share that Al plans to retire in 2027 after an extensive career following the completion of an orderly transition. He'll remain in his current role until his successor is appointed, and we will then continue to serve in an advisory capacity to ensure continuity. The search for a successor is currently underway. On a personal note, I want to thank Al for his many contributions to CDW's success. He has been a trusted partner to me, an exceptional leader for our coworkers, and a driving force behind the growth and evolution of our company. I'm grateful that we will continue to benefit from his expertise as we execute a seamless transition.

With that, let me turn to the second quarter performance, strategic progress, and outlook. Al will then provide additional details on our financial results, capital allocation priorities, and expectations for the balance of the year. The team delivered strong results this quarter through disciplined execution and a clear focus on the priorities driving customer demand. Together, they delivered net sales of $6.6 billion, up 10%, gross profit of $1.3 billion, up 6%, non-GAAP operating income of $556 million, up 7%, and non-GAAP earnings per diluted share of $2.91, up 12%. Net sales, gross profit, and non-GAAP earnings per share set new all-time quarterly records. These results demonstrate the strength and resilience of CDW's business model in a dynamic technology environment shaped by growing AI complexity, pricing volatility, and ongoing memory challenges. Demand remained healthy with AI increasingly influencing customer activity despite cautious and deliberate customer spending.

Customer investment in AI readiness and modernization drove strong infrastructure demand. By bringing together the right technology, expertise, and execution, the team delivered double-digit top-line growth with substantial gross profit dollars. Strong gross profit, combined with operating leverage and disciplined capital allocation, drove 12% non-GAAP earnings per share growth. Today, AI infrastructure implementation is most advanced among our largest customers, which is typical of a major technology transformation cycle. Infrastructure investment comes first, followed by services, software, and lifecycle opportunities. As adoption expands, deployment activities broaden across customers of all sizes. What shapes demand may change from quarter to quarter, but technology remains essential and increasingly complex. Technology changes, customer priorities change, CDW's role does not. That enduring relevance is the foundation of our value proposition. Let's take a deeper look at how we met customer priorities this quarter. There were three primary drivers of performance.

Our balanced portfolio of customer end markets, the breadth of our full stack capabilities, and our growth strategy, which sustains our relevance. First, our diversified customer portfolio. The diversity of our customer end markets is one of the defining strengths of our business model. Today, we operate across three U.S. segments: commercial, government, and education. Commercial serves customers through dedicated corporate, healthcare, and financial services teams. Within each end market, we align resources by customer size, enterprise, mid-market, and small business. Government is aligned around state and local and federal customers, while education serves both K-12 and higher education institutions. Our other segment represents our combined U.K. and Canadian operations. Each market has dedicated sales teams and deep industry and technical expertise. Let's take a look at how they performed this quarter. Commercial delivered another strong quarter, with net sales increasing 9%.

Corporate increased 11%, driven by the demand for infrastructure modernization, cloud, and AI readiness initiatives. Healthcare remained a standout performer, growing 9%, driven by demand for mission-critical outcomes, including AI-enabled claims management and clinical documentation. Financial services increased 2% with continued healthy customer demand. Government net sales increased approximately 14%, driven by improving federal demand and continued momentum across state and local customers. Clients prioritized infrastructure, software lifecycle management, and productivity initiatives. Education net sales increased by approximately 1%. K-12 demand remained healthy with a strong mix of software services and lifecycle offerings, despite fulfillment timing shifts. Higher education continued to operate in a constrained funding environment. International, once again, delivered exceptional growth. Net sales increased approximately 23%, led by a record quarter in Canada and continued strong momentum in the U.K.

Demand remained healthy across hardware, software, and cloud categories, with both the U.K. and Canada delivering mid-teens or better local market growth. The second driver of our results this quarter is the breadth of our full-stack, full-lifecycle offering, which enables us to capture demand across evolving customer priorities and technology trends. During the quarter, success addressing healthy demand for modernization, AI readiness, and resilience drove a 10% increase in hardware revenue. Server, storage, and NetCom all delivered very healthy double-digit growth. Notebook and desktop increased a combined 10%, reflecting strong execution and customer willingness to invest in mission-critical technology despite pricing pressures. Higher average selling prices more than offset lower unit volume. Software, cloud, and security all delivered healthy top-line and gross profit growth. Software increased by low double digits, driven by security, application suites, and storage and network area management software.

Robust cloud growth reflected continued prioritization of application modernization, AI evaluation, and hybrid environment optimization. Memory price inflation also contributed to cloud adoption as some customers sought help finding alternatives to hardware expenditures. For security, both top-line and gross profit increased double digits, driven by demand for both protecting advanced technology architectures and strengthening governance and compliance capabilities. Services increased 1%. Just like every part of the business, services demand follows customer priorities. This quarter, customer focus on hardware and cloud investments, combined with deployment timing, influenced the mix of services demand. We expect a pickup in lifecycle and professional services as customers move from procurement to implementation to management. The third performance driver, our growth strategy, is crucial to sustaining our relevance. Our strategy is built around an enduring reality. Technology will continue to evolve, but the need for a trusted partner remains constant.

As AI adds complexity across the technology landscape, that need has never been greater. Customers increasingly recognize that AI is not a point solution. It's an architectural challenge. AI workloads span on-premises, public cloud, edge, and hybrid environments. As AI scales, organizations must integrate complex technology environments while managing security, governance, and risk. Accomplishing this requires a partner that can orchestrate the resources required and deliver the execution needed to turn AI investments into tangible outcomes. CDW is that partner. We bring together the right technology, expertise, and execution as we help customers deploy AI with confidence, scale faster, and realize value sooner. The strategic implication is straightforward. AI increases our relevance because it increases complexity. As customers move from AI experimentation to pilots to implementation to scaling, we are capturing opportunities today across infrastructure, security, data integration, and ongoing lifecycle support.

Let me share a couple of recent examples that illustrate the role CDW is playing across customers' AI journeys. A western state's technology office has made substantial progress in its AI journey, launching an AI sandbox, advancing statewide AI literacy, and incentivizing agency adoption. As AI activity accelerates, the state faces a challenge common across many organizations, a growing patchwork of AI initiatives without a consistent way to manage, govern, and scale them. Through our AI360 framework, we designed a solution that is helping the state move from isolated AI projects to a cohesive operating model that integrates strategy, governance, infrastructure, security, data, and application development. By bringing together the right technologies, partners, expertise, we are creating a scalable framework for evaluating, deploying, and governing AI across agencies, enabling the state to accelerate adoption while maintaining security oversight and ensuring measurable outcomes.

This multi-year, multimillion-dollar engagement demonstrates the scalability of our model. We will drive recurring services revenue. We are now productizing the solution to deliver highly relevant and proven AI-driven outcomes at scale to state and local governments across the country. Another engagement, one with a large financial services company, demonstrates the broader services opportunity that is emerging as frontier AI innovation accelerates. Like many enterprise organizations, our customer is dealing with a growing gap between the volume and complexity of new AI-driven threats and the ability of security teams to remediate them quickly and consistently. They need a more coordinated, scalable approach to managing vulnerabilities across their entire technology estate. Through our Claude Mythos AI security vulnerability program, the team brought in CDW expertise across security, observability, cloud DevOps, systems engineering, hybrid infrastructure, and global delivery to design a more automated approach to identifying and remediating vulnerabilities at scale.

This multimillion-dollar engagement demonstrates the power of CDW's integrated capabilities. By bringing together expertise from across the organization, we are solving complex customer challenges and delivering mission-critical outcomes. Two great examples of how we are helping customers deliver AI-driven outcomes today. The opportunity broadens from here. As inference moves closer to users and devices, AI deployments will require a wider range of technologies and services, creating additional opportunities for CDW to deliver customer outcomes, capture share, and drive profitable growth. The same objective driving customer AI adoption, better business and mission outcomes, is shaping how we are leveraging AI within CDW. Our approach is straightforward. Deploy AI to create measurable value, to improve customer experience and outcomes, increase coworker productivity, and generate operating leverage. CDW Assist Super Agent, our AI-powered sales tool, delivers on all three. It supports account planning, opportunity identification, customer engagement, and workflow automation.

CDW Super Agent is just one example of how we are putting AI to work. We are embedding AI throughout the business, from sales and finance to operations. AI is simplifying processes. It's improving consistency and increasing efficiency. We are moving with discipline and speed, supported by strong governance and security. AI is strengthening how we operate today while creating a meaningful opportunity to drive productivity and profitable growth over the long term. That leads me to our full year outlook. Current market conditions remain constructive. Infrastructure demand is strong, cloud consumption trends are favorable, customer engagement is healthy, and AI-related activity continues to expand across industries and customer segments. Written demand, shipping activity, and backlog trends remain robust, with writings exceeding invoicing and backlogs significantly elevated. Operating excellence and expense discipline remain priorities, and we expect continued improvement in our operating leverage as we move throughout the year.

Given this backdrop, we are increasing our full-year outlook. We now expect the U.S. IT addressable market to grow in the mid-single digits in 2026 on a customer spend basis, with 200 to 300 basis points of CDW outperformance. In an environment where technology decisions are becoming more consequential, CDW has never been more relevant. Our scale, broad capabilities, deep industry and technical expertise, and full staff, full lifecycle model ensure that our success is not tied to any single technology category. We help customers maximize the value of their technology investments and capture opportunity wherever demand emerges. Customers rely on us to simplify complexity and translate technology investments into tangible outcomes. Partners rely on us to accelerate adoption, extend the reach of their innovation, and bring their technology to market at scale.

Our position between customers and partners in the heart of the technology ecosystem reinforces our confidence in the durability of our business model, the strength of our competitive position, and the opportunity ahead. Technology evolves. Customer priorities change. Our value proposition endures. With that, let me turn it over to Al for a more detailed review of our financial performance. Al?

Thank you, Chris. Good morning, everyone. It has been a privilege to serve as Chief Financial Officer of CDW for the last five years. I'm proud of what our team has accomplished and how we've continued to help our customers achieve meaningful outcomes, all while transforming our own business and delivering growth and profitability for our shareholders. I am committed to supporting a smooth transition and will ensure the company is well-positioned for continued success. Turning to our results. I will begin with details on our second quarter performance, move to capital allocation priorities, and then finish with our outlook for the remainder of 2026. Second quarter gross profit of $1.3 billion was up 6.3% year-over-year. This was modestly above our expectation for a mid-single-digit year-over-year increase.

The performance reflected solid demand, with customers continuing to prioritize technology investments that support AI, productivity, workplace modernization, infrastructure needs, and security. Second quarter gross margin was 20.1%, down 70 basis points year-over-year. As Chris mentioned, we view these spending patterns as consistent with the early stages of a technology adoption cycle, where infrastructure investment by large enterprise clients often leads, followed over time by services, software, security, and lifecycle opportunities.

Importantly, within the quarter, these profitable engagements generated meaningful gross profit dollars and strengthened our position in the AI market. The strategic point is that AI is increasing complexity across the technology stack. Customers are evaluating infrastructure, cloud, security, data, and endpoint investments as part of broader modernization programs, and that complexity reinforces the value of CDW's full stack, full lifecycle model. Consistent with recent trends, customers navigated a dynamic technology and macro environment. Demand remains stronger where technology investments are tied to operational necessity, productivity, infrastructure, and workplace modernization and security. With this being said, netted down revenue streams were up 16.1%, picking back up again this quarter as we expected. They represented 35.9% of gross profit, up 300 basis points year-over-year and 140 basis points quarter-over-quarter.

Professional and managed services were impacted this quarter by deployment timing and customer prioritization of hardware and cloud investments. We continue to build our pipeline as customers move modernization, security, and AI projects from procurement into implementation, which supports our expectation that the current wave of infrastructure investment will lead to future services growth. Turning to expenses for the second quarter. Non-GAAP SG&A totaled $764 million, or 57.9% of gross profit, down 20 basis points year-over-year and down 410 basis points quarter-over-quarter. This was consistent with our expectation that the expense ratio would continue to decrease as we approach the second half of the year. Looking forward, we expect our Geared for Growth efforts to pay dividends in the second half of the year and further improve expense efficiency thereafter as initiatives scale across the organization.

Coworker count ended at approximately 14,700, and customer-facing coworker count was 10,300, both down modestly year-over-year and quarter-over-quarter. Our ongoing goal is 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 $556 million, up 7% versus the prior year, delivering some incremental leverage as we expected. That compared to 6.3% gross profit growth. Non-GAAP operating income margin was 8.5%. Net interest expense increased approximately $3 million year-over-year, driven by higher average borrowings during the quarter. Our non-GAAP effective tax rate was within our target range at 26%. Non-GAAP net income was $370 million in the quarter, up 7.8% on a year-over-year basis. Second quarter non-GAAP net income per diluted share was $2.91, up 11.9% year-over-year.

This double-digit EPS growth was above our expectation for high single-digit growth year-over-year. Moving to the balance sheet. At period end, net debt was $5.5 billion. Liquidity stands at $2 billion with cash plus revolver availability. The three-month average cash conversion cycle was 21 days, within our target of high teens to low 20s. This cash conversion metric reflects a combination of timing, market dynamics, higher hardware sales, and proactive inventory positioning to support customer urgency to secure product amid a dynamic environment. We continue to believe our target cash conversion range remains the best guidepost for modeling working capital longer term. Adjusted free cash flow year to date was $278 million, or 42% of non-GAAP net income for the first half, below our stated rule of thumb of converting 80%-90% of non-GAAP net income to cash.

We continue to expect cash flow conversion to normalize over the balance of the year and have line of sight towards achieving our expectations. We've been focused on managing working capital in a way that supports our customers and drives shareholder value, even as ongoing hardware-driven growth and the inflationary price environment has warranted investing in working capital. We've also effectively utilized cash consistent with our 2026 capital allocation objective during the quarter, including returning $344 million in share repurchases and $80 million in the form of dividends. Through the first half of 2026, we've returned approximately $545 million to shareholders in the form of repurchases, compared to $653 million over the entirety of 2025 and $500 million in each of the years 2023 and 2024. This 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. We've increased the dividend for 12 consecutive years through 2025. 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 going forward. Our second priority is ensure we have the right capital structure in place. We ended the second quarter at 2.5x net leverage, within our target range of 2x to 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. We continually evaluate M&A opportunities that advance our capabilities and extend our reach and relevance to customers. While we remain active in the M&A market, we have been opportunistic towards share repurchases.

With the additional $1 billion authorization announced in the second quarter, we have more than $1.1 billion remaining capacity under our share repurchase program. Turning to our outlook. Our first half performance was driven by strong underlying demand as customers build out infrastructure for their AI use cases, secured their networks and innovated at the edge. Importantly, while customers acted with urgency around hardware procurement, our written production and backlog trends support our view that the strength we are seeing reflects healthy and durable underlying demand for modernization, security, resiliency, and AI readiness. At the same time, we remain prudent in how we view the remainder of the year given the complex variables in play. Factoring in these variables, we are raising our full year outlook and expect gross profit to grow mid-single digits for the full year 2026.

This leads to a first half versus second half split that is more aligned to historical, second half-weighted seasonality than we originally expected. Based on the anticipated mix of products and end markets, we expect second half gross margins to be below second half 2025 levels. This means full year 2026 gross margin would be modestly below the full year 2025, although well above the levels from three-plus years ago. We now expect full year non-GAAP net income per diluted share growth to be at the high end of high single digit range year-over-year, reflecting our expected gross profit performance, increasing operating leverage from our Geared for Growth initiatives, and disciplined execution of our operational and capital allocation priorities. 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 a slight benefit to reported growth rates for the year. Moving to modeling thoughts for the third quarter, we anticipate gross profit to increase at a mid-single-digit year-over-year growth rate. Moving down the P&L, we expect third quarter non-GAAP SG&A to be lower than the second quarter, driven by our Geared for Growth program benefits. This will result in non-GAAP operating expense as a percentage of gross profit that is down both year-over-year and quarter-over-quarter. Finally, we expect third quarter non-GAAP net income per diluted share to also be at the high end of high-single-digit growth year-over-year. With that, I want to thank our teams for delivering another strong quarter of execution.

Our performance reflects the strength of our customer relationships, the resiliency of our business model, and ability of our coworkers to help customers solve complex technology problems in a changing environment. This concludes the financial summary. As always, we will provide updated views on the macro environment and our business on our future earnings calls. I will now ask the operator to open up for questions. We would ask each of you to limit your questions to one with a brief follow-up. Thank you.

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 Adam Tindle with Raymond James. Your line is now open. Please go ahead.

Okay, thanks. Good morning and congrats, Al, on the announcement. Chris, I wanted to start on AI. Those examples that you gave were helpful. I just wonder, the customers that are adopting AI, understanding that it is sort of in that larger cohort, maybe you can give investors sort of a view on what the impact is to CDW when those customers are deploying AI. Maybe more specifically, what happens to their spend with CDW? And if you could touch on any updates on the AI line card business model, a little bit more fleshing out of the AI potential tailwinds to CDW, that would be helpful. Thanks.

Yeah, sure. Good morning, Adam. First I want to start with while we see the technology pick up most strongly first in the enterprise space, as I mentioned, we absolutely are seeing it broaden across all of our industries and customer segments. We're at the point where we are taking use cases that are proven and working in various industries and scaling them in repeatable offerings for customers. In terms of the what's it doing to our business, look, we're not sharing dollars per se, but we perceive that AI is part and parcel of most of what we're selling. From the hardware itself to the software implementation, and certainly in the services that we're bringing to bear. It's really a full stack approach to the technology movement.

In terms of customers and where they are in their journey, having moved from pilot to obviously implementation, I would say here's what we're observing, which are customers are working hard now on the return on investment and being more deliberate and thoughtful about the analysis around that. Which, of course, plays to our strength with the variety of services and analysis and the solutions that we bring to bear. What we are seeing is real focus on those use cases that move the needle in the various industries. When you think of healthcare and claims assessment and training tools, if you think of retail with demand forecasting and term projection, if you think of financial services, obviously fraud detection, but also trading speed.

We really are starting to see use cases come to bear in ways that are going to scale more quickly than they have in the past, in our view. I'd simply say it's a full stack opportunity for us. We think we're incredibly well-positioned because CDW has never been about one technology or one part of the stack. It's been about bringing those things together so that they work together, and AI is a great opportunity for us to do this. We're delighted to see the traction across all of our customers, taking off, frankly, in a really positive way. We see lots of tailwinds to continue the acceleration in services and the hardware components.

Great. Maybe just a quick follow-up for Al. Got to acknowledge that operating income grew faster than gross profit dollars in the quarter, it looks like we're starting to get at a turning point to get CDW back to the business model that I think investors came to know and love over the years. I guess the question would be, what do you think drove that trend in the quarter, that kind of inflection in better operating leverage? Any learnings that you're having from Geared for Growth or any updates on that $100 million-$200 million of savings that I think you outlined on the last call?

Yeah, sure. Thanks, Adam, and appreciate your comments. As we said on the last call, we thought that we would see operating leverage inflect in the second quarter. That was more a result of really good old-fashioned discipline around expenses and just broader efficiency efforts, less contribution at large from Geared for Growth. That being said, Adam, our efforts on Geared for Growth through the first half have been significant, and our plan had always been that we'd see those benefits start to pay off in the back half of the year. I would say we are at or beyond our expectations in terms of how those efforts are progressing. Likewise, with respect to the benefits.

As we approach the back half of the year, those benefits will start to play out, we would expect both our operating leverage, and likewise, our expense ratio to improve on a sequential basis in the back half and certainly into 2027.

Your next question is from Erik Woodring with Morgan Stanley. Your line is now open. Please go ahead.

Super. Thank you for taking my questions, guys, and good morning. Al, can we maybe just dig down quickly into the non-netted down gross margin trends? I know you alluded to earlier some spending from large enterprises, some big deals in infrastructure. I want to maybe be a little bit more pointed and ask, were there any instances in the quarter where you weren't able to price on a cost-plus basis because of customer feedback to pricing or anything like that? Therefore, did you see any kind of like-for-like margin pressure year-over-year, whether we're looking at services or storage or PCs or servers, whatever it may be? Then a quick follow-up, please. Thank you.

Sure. Thanks for the question, Erik. First, I would just say the answer is no, in terms of like-for-like pressure. We operate in a competitive environment, but we were deeply focused on ensuring we had this pricing discipline and that we were effectively passing through price increases. That was not a factor in the core of our business. The driver was mix. It was mix into infrastructure products. It was mix at larger dollar-tier orders, and then, as you noted, with more enterprise customers. As Chris referenced in her prepared remarks, very common that we see that in early stages of tech adoption, really beginning with some of these larger clients, and then making its way down to the middle market. That's part of our encouragement, as we are seeing that play out as we speak.

That being said, in the current period and potentially in the near term, you could see more of these larger orders, and they just naturally come at slightly lower margins. Erik, I would also just add, at the same time, our mix into services was less so. I guess maybe further, I would just note on the more positive side, our netted down revenues really, really strong, grew 16%, 36% of our gross profit. Again, we felt really good about the core of our business, maintaining healthy margins, upholding our cost-plus regime in this dynamic environment.

Okay. No, that feedback is incredibly helpful. Thank you, Al. Then maybe just a quick follow-up. If I just take some of your modeling thoughts on 3Q, some gross margin and pressure year-over-year, but gross profit flat sequentially into 3Q, it would imply that revenue is down maybe mid-single digits sequentially in 3Q. That's historically worse than seasonality. Just relative to your qualitative comments on backlog or pipeline or breadth of spend, that feels quite prudent. Could you maybe add some kind of granular commentary, just making sure we're thinking about that 3Q rise and maybe why we would see a below seasonal quarter relative to some of the strength of spend you're alluding to? That's it for me. Thank you.

Sure. Thanks, Erik. Look, I would say you have it right. At mid-single digits, it would be kind of flattish sequentially. That's really a function of us. While certainly more optimistic given the health trends we're seeing, we continue to layer in a level of prudence. Spend is there, our pipeline is there. Through July, our written production really, really strong and continues to exceed our invoicing, leading to a higher backlog. The underlying metrics are really, really strong. We just want to be a bit cautious, as we typically are. While we raised Q3, Q4 with respect to gross profit, we're at mid-single digits, there's a bit of a level of prudence there. Likewise, like Q2, what I'd say all of the elements are there for us to outperform, and that's what we're focused on.

Super. Thanks for the color, Al. Best of luck.

Your next question is from Asiya Merchant with Citi. Your line is now open. Please go ahead.

Great. Thanks for taking my question. If I can dig down a little bit on AI deals that you talked about. I understand initially the adoption is largely with larger organizations, but help us understand, as you're thinking about this services adoption to follow the infrastructure deals that you're talking about, maybe how we should think about the services attach rate as we progress through this year and as we think about next year. In general, would we expect this to be margin accretive or these AI specific deals accretive or margin neutral over time? Thank you.

Sure, Asiya. Let me start with obviously what's going on right now, which is we're seeing a lot of demand, as I mentioned, in the areas of infrastructure, cloud, security, and data foundation, across the full portfolio. When you think about the adoption curve, which is going to be multi-year and not a single product, that requires readiness, it requires deployment, it requires integration, it requires optimization and ongoing operations. Services is in every single component of those requirements. When you say attach rate, I would say there's attach rate opportunity, but more importantly, our services are embedded at every stage of the need around AI. Adoption is definitely broadening right now, as I mentioned, beyond large enterprise into, as you heard me say, healthcare, education commercial, and into smaller businesses as well.

That's the productization that we're working on in the mid-market and smaller businesses, is so we can create AI solutions that are scalable and proven in the real world. I'd also say that when you think about inference near users and the data, edge is next, and there will be incremental demand for edge infrastructure, networking, security endpoints. In all of those instances, again, services are critical to the design, deployment, and management. Across the whole spectrum, you can expect to see from us continuing growth, particularly across the managed services and the recurring nature of that business. We see it as being an increasingly meaningful contributor to our profit growth over the next several years, and we're building a durable engine to achieve that.

Great, thanks. If I can, a quick follow-up. Earlier in the year, of course, there was a lot of concerns around availability of hardware, memory inflation, et cetera. How would you characterize what's changed here? Seems like the backlog still remains pretty elevated for you guys, but how would you characterize availability now of product to help meet this backlog? Thank you.

Thanks, Asiya. I would call the environment a bit more normalized. There is definitely continued urgency from customers, and I think that speaks to their needs, particularly on the AI side of things. They've now been at this for three quarters. I would say things have become more normalized, and that's both from a standpoint of expectations vis-a-vis pricing, as well as supply chain needs. The backlog does reflect that there are still delays in product delivery, but I would say the level of consistency and hitting delivery dates has been better. There is not a level of double orders, cancellations, and all of those phenomena. When we add that all up, we would say the market's become more orderly in our space and more normalized, and customers have adapted to the environment.

To that end, those variables did not influence our results for the quarter in any meaningful way with respect to pull forward or the like. It's become more orderly.

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

Great. Thanks for taking my questions, guys. Maybe Chris and Al, just a question about demand and elasticity. I understand that you saw relatively strong growth in server storage, NetCom, and some other categories. Can you speak qualitatively to feedback or maybe conversations you're having with customers around their tolerance, if you will, for pretty meaningful price increases across large technology platforms? The reason why I'm asking, it doesn't sound like you saw any pull forward in the quarter or any sort of degradation in demand, but just would love to get your thoughts in terms of what the feedback has been, given that a lot of the OEM partners that you work with have expressed, it sounds like continued price increases as we move through not just the first half of this year, but the second half of this year. Then I have a follow-up. Thanks.

Yeah, sure. I'll start the answer. You're right, we have not experienced what I would say is meaningful pull forward in the quarter. In terms of customer engagements and discussions, look, nobody likes it when prices go up. I would say that our customers are engaging us more frequently in more detailed discussions around analyzing their choices. They're being really rigorous around this because they still have mandates within their organization to deliver on, whether it's a mission outcome or a business outcome. Customers are still purchasing technology. They're still spending to their budget. We're actually seeing in cases where budget from other functions within an organization are being reallocated to technology because of the essential nature across their businesses. It gives us an opportunity with our customers to shine, frankly. When you look at, I'll give you an example, PCs.

PCs were very strong in terms of growth this quarter because customers were willing to make the mission-critical investments, notwithstanding the pricing. I think we're going to continue to see that approach from customers, and working more and more with CDW to identify areas where they can cost optimize across their entire technology estate.

David, maybe I would just add, if we look across our end markets, there's probably a little bit of a diversity in practice. Obviously, at the enterprise end of things that have very dedicated technology teams, they're very much on top of what's going on in the pricing market, supply chain, and market. The implications for them are significant because their purchases can be bigger dollar amounts. As you move down the curve In a mid-market, small education, it's not for a lack of sophistication, but the level of awareness and then acting on things is at a little bit different pace than at the enterprise level. I do think that that has evolved over the last several quarters, and you're seeing that play out.

I would say, that's why we feel encouraged by the opportunities in front of us as this rolls down the curve and customers look to, at scale, take advantage of opportunities in the market to move forward, particularly around their AI needs.

Great. Maybe just as a follow-up, Chris, you touched on it briefly in your other answer to my question, when you think about prioritization, I think you mentioned, Chris, that customers are looking from pulling spending from other sort of initiatives internally. Did I hear you correctly, and are you seeing within your own portfolio a shift away from more discretionary programs and products to, I think as Al just pointed out, more mission-critical? Does that mean that sort of the services vertical for at least the foreseeable future probably suffers some reprioritization relative to hardware in your portfolio? Is that the right way to think about it?

I wouldn't think about it that way. Let me start with the reallocation of budgets. This has been a quiet trend for the last couple of quarters, where technology budgets have been increasing a little bit in different areas because the initiatives that they support are specific to functions, and Chief Financial Officers are now saying, "Well, that now becomes technology spend." This hasn't been discussed a lot, it certainly is happening. In terms of services versus hardware, what we're seeing is just the natural uptake of the new technology, and we see the infrastructure spend happening right now. Again, there's no component of what we're doing for customers where services are not going to be critical to what they're buying from us. I wouldn't think of it as an air gap going forward.

I would think of it as the trigger, the start of increasing demand for the services that we bring to bear across the full spectrum of needs.

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

Yep. Thanks for taking my question. I have two as well. I guess maybe the first one to start with, AI infrastructure obviously becoming a big investment area for your customers. I was wondering if you could talk about, AI, are you starting to see an uptick in engagement with the frontier model companies as they perhaps look to gain exposure to your customer base? Maybe you can just contrast how that engagement different from the hyperscale vendors when they started doing this. Maybe on the second part on this, are you seeing customers, especially the enterprise customers, evaluate and repatriate workloads back on-prem to optimize the token cost? Is that a better opportunity for CDW versus running things in a public cloud on a frontier model?

Amit, thanks for the questions. I'll start. In terms of engagement with the AI labs, et cetera, we've made great progress there. We've been through this cycle before where new partners come on board, and they have to sort through the value of the channel. I would say that the AI labs have found very quickly that the channel is a friend, and it's a great route to market for them. We have seen terrific progress in partner programs, in relationships, and building investment from them, et cetera, to bring their capabilities to the market. Particularly mid-market is a significant focus from a scale opportunity perspective. Our vertical segments is also a very significantly attractive customer end market for the AI labs. In terms of the second question, which was-

Repatriate. Oh, yeah. We are seeing repatriation, but this is what I would say, Amit. It's not better or worse for us. We're going to help our customers optimize wherever their workloads should be. We certainly are seeing larger customers now starting to test in the cloud, et cetera, because of easy access, but getting more rigorous around optimizing costs, and therefore bringing some workloads back to on-prem. We are seeing some small businesses, for example, heavily leaning into the cloud because they can't afford or get access to the hardware. The bottom line is, as is always the case with technology, it's about optimizing. Optimizing for cost, optimizing for security, optimizing for quality, optimizing for output. So it's not an if/or, it's a how do we do this together to achieve our outcomes in the most cost-efficient, secure, quality way.

That is where we sit, so we see this as a positive opportunity across the board.

Perfect, thank you. Al, if I could just have you clarify this a bit. Free cash flow is fairly muted in Q2, I think at $27 million, and free cash as a percent of net income, I think, is at 45%, 46% for the first half. Can you just walk me through what needs to happen in the back half of the year for you to actually get to this 80%-90% free cash flow conversion, and where would this uptick come from? Thank you.

Yeah, sure, Amit. Really timing effect through the first half.

Particularly in Q2. We had mentioned in Q4, we would expect in this environment from a pricing and supply chain perspective, that we would likely be making working capital investments, and we've done just that, right? That is the standing by our customers and ensuring that they get the product they need at the price that they can afford. That is what we've been doing to deliver for our customers. That being said, Amit, if I had to just boil it down, you do have kind of some moving parts with AR and AP, but if I had to boil it down, we have about a $400 million increase in our inventory since the end of the year.

As we sit here now and we start to see an environment that's become more normalized, we would expect that we will re-rationalize and ratchet back a bit in that regard. It's a bit of an intra-period movement that you're seeing now. We're super focused on delivering free cash flow, and we know the flywheel effect that that has. The biggest variable will be on the inventory front between here and the end of the year.

Your next question is from Joseph Cardoso with J.P. Morgan. Your line is now open. Please go ahead.

Hi. Good morning, and thanks for the question. Maybe for my first, it's great to see the hardware momentum over the past two quarters, along with the signals that it's continuing into the back half. Maybe just given kind of the momentum on the infrastructure side, it sounds like there's a confluence of drivers here we're hearing. Projects accelerations as customers take actions, given the pricing trajectory, demand being stimulated by Mythos, and then AI inferencing. I was just hoping if you can help contextualize what you guys are seeing from your customers on the ground around each of those, and of course, if I'm missing anything. Maybe just share how you're thinking about those in terms of materiality and timing. I have a follow-up. Thank you.

Okay. Joe, could you just characterize the various categories that you just hit? You went quickly and covered a lot of things, and I want to make sure that I answer your question. Just give me the highlights.

Yeah, sure. Basically trying to understand what's the demand drivers here and timing of them as it relates to project acceleration due to pricing dynamics, demand stimulated by Mythos, and investments more specifically on AI inferencing.

Okay. Gotcha. Okay. Pricing. Yes. We've said all along pricing is driving some level of demand, but I would not hover on that too much because as you see, the underlying demand is strong and durable, given our written and invoicing and backlog and how that's all working together. It's certainly a factor, but it's not the biggest factor. Regarding Mythos, yes, that's an important driver right now because, and just more broadly, I would say what we're seeing from a security perspective and the models hacking going on, that has piqued everybody's interest around security and certainly is driving our security services, consulting, and assisting with our customers to try and secure, at scale, their environments. The third one was?

Oh, AI inferencing. Well, yeah, AI inferencing. This is an interesting one because with token economics, I come back to it's all about optimizing for our customers. As you know, we will serve customers regardless of where workloads reside, et cetera. We're actually seeing, with customers of all sizes, a significant pickup in engagement around token economics and how to optimize for models, how to optimize for locations. I would call that a significant driver of services for us. Ultimately, obviously, that is how the hyperscalers and the model makers achieve their return on investment dollars that they're investing now. CDW will continue to support adoption and consumption, and our partners obviously are investing in us doing that. That's the biggest growth vector or growth catalyst right now, I would say.

Nope. Got it. Thank you. Appreciate the color there. Maybe as my follow-up and turning on to services which you just mentioned. You touched on it a bit now, but I guess if I can ask in another way, how should we think about the timing of the catch-up that you're pointing to? Do you have visibility into these services? Is it just a dynamic around delayed, for example, due to the installations of all the infrastructure being procured, and services are basically going to be stacked on at once the infrastructure is installed? Or is there another dynamic at play that makes transparency around timing less granular? Thank you.

Yeah, no. Two things. It is really purely timing and implementation timing. As we look forward over the next quarters, we're feeling very confident in the engagement with customers. We have good visibility to where those needs are. Given the timeline of engagement to execution, it'll take a little time for us to see that pick up significantly. By the time we get through the end of the year and round in the corner, we'll see the fruits of the labor that we're looking at right now.

At this time, I will now turn the call back to Chief Executive Officer Chris Leahy for closing remarks.

Thank you, Joel. Let me close by recognizing the incredible dedication and hard work of our coworkers around the globe. Their ongoing commitment to serving our customers is what makes us successful. Thank you to our customers for the privilege and opportunity to help you achieve your goals, and thank you to those of you listening for the time and continued interest in CDW. I look forward to talking to you next quarter.

This concludes today's call. Thank you for attending. You may now disconnect.

CDW (CDW) Q2 2026 Earnings Call Transcript

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