CDW 3rd Quarter 2026 Earnings Call - CDW CORP

Explicit Guidance:

• Full-Year 2026 (FY2026) Revenue Growth: Expect US IT addressable market to grow at a high single-digit rate; CDW anticipates 300–400 basis points of outperformance vs. the market.
• Full-Year 2026 Gross Profit: Growth expected at a mid-to-high single-digit rate (upgraded from prior mid-single-digit expectation).
• Full-Year 2026 Gross Margin: Expected to be down vs. FY2025 due to product/end-market mix (weighted toward high hardware content/lower margin "netted down" streams).
• Full-Year 2026 Net Interest Expense: Higher guidance of $255–$260 million, driven by $1.5 billion in new senior notes issued in Q3.
• Full-Year 2026 Non-GAAP EPS Growth: Low double-digit range (upgraded from prior high-single-digit expectation).
• Currency Impact: Expected to be relatively neutral to reported growth rates for FY2026.
• Q4 2026 Gross Profit: Mid-single-digit year-over-year (YoY) growth; implies sequential low-to-mid-single-digit decline.
• Q4 2026 Non-GAAP EPS Growth: Low double-digit YoY.
• Q4 2026 Non-GAAP SG&A: Low single-digit YoY and sequential increase.
• Q4 2026 Operating Margin: Expected to show year-over-year efficiency improvements.

Business-Segment Outlook:

• AI Adoption Trajectory: Transitioning from enterprise experimentation to production/workflow redesign; momentum broadening into mid-market, small business, and public sector over the next 12 months.
• Hardware: Growth driven by infrastructure modernization (servers, storage, AI factories); unit volumes strong for servers/storage; client devices (up 19%) expected to continue with higher average selling prices (ASPs) offsetting lower unit volumes as customers seek richer configurations.
• Software & Cloud: Continued strong demand for SaaS/IaaS; growth driven by network management, virtualization, and operating systems.
• Services: Return to growth (up 2%); expected to accelerate over multiple quarters as projects move from procurement to implementation and ongoing management.
• Geographies: US commercial (up 21%), international (up 26% in UK/Canada), government (10%), and education (8%) all showing strong growth; international trends mirror US priorities in modernization and resilience.
• Product Mix: "Netted down" (cloud/subscription) revenue streams up 17.1% and now represent a record 38.2% of gross profit; hardware content in mix remains elevated.

Market and Competitive Outlook:

• Demand Trends: "Written demand" continues to outpace invoicing; backlog building, particularly in enterprise infrastructure.
• Supply Chain: Availability and delivery conditions normalizing; supply variables still influencing the market but no significant constraints preventing conversion of demand to revenue.
• Competitive Position: CDW expects to outperform the market by 300–400 basis points; leveraging scale, deep customer relationships, and "full-stack, full-lifecycle" orchestration to capture demand where customers invest.
• Pricing Environment: Pricing impacting results, but growth in key categories (servers/storage) driven by unit volume; client device growth driven by mix shift to higher-capacity configurations rather than pure price increases.
• Market Durability: Underlying demand drivers (AI readiness, data explosion, cybersecurity, hybrid optimization) expected to persist beyond 2026, with strength anticipated in 2027.

Macro / Industry Outlook:

• Economic View: Customer spending budgets remain concentrated on strategic priorities: infrastructure modernization, security/resiliency, cloud adoption, and AI-ready data.
• Regulatory/Trade: No specific mentions of tariff, rate, or regulatory impacts in guidance; focus remains on technology adoption drivers.
• Industry Shift: Tectonic change in technology environment; shift from task-level productivity to operational redesign; "Relevance" as the winning strategy in an AI-forward world.

Strategic Initiatives:

• Lovelitics Acquisition Integration: Completed acquisition (Sept 25, 2026) for $525M; operating model uses a "greenhouse approach" to maintain separate channel identity to foster growth; integration measured in Q4 2026 outlook with expected contribution growing into 2027.
• Capex/Investment: Continuing to invest in coworker development, industry specialization, and AI capabilities (e.g., deepening data/AI practice areas); $1.5 billion new debt issued to fund acquisition and refinance matured notes.
• Share Repurchases: ~$1 billion remaining under authorization; opportunistic repurchases expected to continue.
• Dividend: Increased quarterly dividend by ~8% to $0.68/share ($2.72 annual); target payout ratio of ~25% of non-GAAP net income; 13th consecutive annual increase.
• "Geared for Growth" Program: Aiming for durable operating leverage through 2027–2028; expense efficiencies and savings to be reinvested; YoY improvement in operating leverage expected, though quarterly progression may not be linear.

Risks and Headwinds to Outlook:

• Margin Compression: Full-year gross margin expected to remain lower than prior year due to mix shift toward hardware-heavy infrastructure projects and "netted down" cloud/subscription revenue.
• Expense Volatility: SG&A improvements may fluctuate sequentially due to timing of cost savings vs. reinvestment cycles in the "Geared for Growth" initiative.
• Deployment Timing: Services growth dependent on the natural lifecycle of projects (procurement → implementation → management); catch-up expected over several quarters rather than immediate.
• Market Volatility: Technology landscape is complex and rapidly evolving; customer prioritization may shift, impacting the mix of hardware vs. software/services.
• Interest Costs: Higher interest expense anticipated due to new debt issuance.

Management Tone on the Future:

• Confidence: High confidence in strategy, underlying demand durability, and forward earnings power; expressed strong belief in the "AI flywheel" (Solve, Learn, Repeat, Scale).
• Caveats: Avoided projecting specific 2027 numbers but affirmed expectation to "take advantage of" current demand trends in 2027.
• Execution: Emphasis on "precision execution" and "discipline" regarding economics and returns; focus on converting partner capacity into sustained consumption.
• Strategic Outlook: Viewed as a "consequential phase" of AI acceleration; management sees CDW's role as essential "orchestration" in an increasingly fragmented ecosystem.

Miscellaneous:

• Dividend Increase: Announced 8% increase in quarterly dividend to $0.68 per share ($2.72 annually).
• Headcount: Total coworkers at 14,600 (including ~600 from Lovelytics); ~10,500 customer-facing.
• Debt Structure: Ended Q3 with 2.5x net leverage (within 2–3x target range); $5.6 billion net debt.
• Cash Conversion: Adjusted free cash flow for Q3 was $506 million (123% of non-GAAP net income); YTD adjusted FCF $785 million (73% of non-GAAP net income).
• Capital Allocation: YTD shareholder returns of ~$892 million (114% of adjusted FCF), exceeding the 2026 target of 50–75%.