Q1 2025 CDW Corp Earnings Call
Carly: Good morning, Owen, thank you for joining us for the CDW first call to 2025 at Annem's call. My name is Carly and I'll be coordinating the call today. If you'd like to register a question during the call, you can do so by pressing the star flow by 1 and go to the phone keypad.
Speaker Change: to meet with staff at Land Questioning will be staffed by two. I'd now like to hand over to our host Steve O'Brien of Investor Relations. The floor is yours.
Steve O'brien: Thank you, Carly Good Morning everyone. Joining me today to review our first quarter 2025 results are Chris Leahy, our Chair and CEO and Al Morales, our Chief Financial Officer.
Steve O'brien: 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.
Steve O'brien: 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.
Steve O'brien: Those statements are subject to a number of risks and uncertainties that could cause actual results to differ materially.
Steve O'brien: Additional information concerning these risks and uncertainties is contained in the earnings release and form 8k refurnished to the FCC today and in the company's other filings with the FCC.
Steve O'brien: CDW assumes no obligation to update the information presented during this webcast.
Steve O'brien: Our presentation also includes certain non-GAAP financial measures including non-GAAP operating income, non-GAAP operating income margin, non-GAAP net income, and non-GAAP earnings per share. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules.
Steve O'brien: You'll find reconciliation charts in the slides for today's webcast and in our earnings release and form a K. Please note, all references to growth rates or dollar amounts to changes in our remarks today are versus the comparable periods in 2024 with net sales growth rates described on an average daily basis, unless otherwise indicated.
Chris Leahy: Replay of this webcast will be posted to our website later today. I want to remind you all that this conference call is a property of CDW and may not be recorded or re-broadcast without specific written permission from the company. Would that let me turn the call over to Chris. [inaudible]
Chris Leahy: Thank you, Steve. Good morning, everyone. I'll begin today's call with a brief overview of our first quarter performance and provide thoughts on our view for the balance of the year. I will provide additional details on our results, our capital allocation priorities and further perspective on our outlook.
Chris Leahy: We'll move quickly to our prepared remarks to ensure we have plenty of time for questions.
Al Miralles: The team had an excellent start to the year with strong execution during a period of rapidly changing market dynamics. Once again the benefit of our strategic progress was evident with our industry leading margins. Strong expense management and effective use of capital drove leverage down the PNL.
Al Miralles: For the quarter, net sales were $5.2 billion, 8% higher than last year on an average daily
Al Miralles: Gross Profit was $1.1 billion, 7% higher than last year on an average daily basis.
Al Miralles: Broadly speaking, customers remain focused on mission-critical projects and must-do, and their priorities were consistent with 2024. Laser focus on operating efficiency and expense elasticity with one addition.
Al Miralles: Client Device Prioritization, which reflected three factors, need for refresh, the upcoming Windows 10 expiration, and a desire to get ahead of tariff-related price increases.
Al Miralles: Underlying demand was solid. Commercial market growth was consistent with the cerebral trajectory we saw late in the fourth quarter.
Al Miralles: tariff on certainty slowed down major infrastructure investments but also drove demand for client devices and greater focus on expense elasticity, consumption based solutions and services.
Al Miralles: Federal government market growth was subdued throughout the quarter as agencies digested the impact of new policy priorities, while education growth accelerated towards the end of the quarter driven by Chromebook demand ahead of potential price increases.
First-quare result, underscore the power of our full stack, full-leg cycle solutions.
Al Miralles: The team's ability to provide solutions that address customers' priorities for cost optimization drove excellent performance across services, software, and cloud. Let's take a closer look at how customer priority market dynamics impacted and market and portfolio performance in the quarter.
Al Miralles: As always, there are three main drivers of our results, our balanced portfolio of customer and market, the breadth of our product solutions, and services portfolio, and relentless execution of our three-part growth strategy.
Al Miralles: First, our balance portfolio of diverse customer and markets. We have five US channels. Corporate, small business, healthcare, government and education. [inaudible]
Al Miralles: Each channel is a billion dollar plus business annually. Additionally, our UK and Canadian operations choose to gather delivered sales of $2.5 billion US dollars last year.
Al Miralles: Our scale allows us to segment our business into customer end markets with dedicated sellers and technical resources who deeply understand and address the unique priorities of each market.
Al Miralles: The benefit of a diverse end-market was evident in the first quarter with all customer end-markets posting average daily sales growth.
Al Miralles: Our ability to address both customer priorities for client devices and customer priorities for cost optimization with as a service in ratable solutions, drove solid profitability and our commercial growth margin with steady year-over-year.
Al Miralles: Public top line increased by 11 percent. Healthcare was a standout performer with net sales of 20 percent driven by client devices, cloud and services.
Al Miralles: Education increased top line by 11% with balanced performance across both K-12 and higher education.
Al Miralles: K-12 was driven by Chromebook, reflecting both customer refresh needs and buying ahead of anticipated tariff price increases while higher ed growth was driven by security, data center, and services.
Al Miralles: Government net sales increased slightly as the impact of pauses in federal agency decision-making due to new administration priorities was offset by state and local growth.
Al Miralles: Other, which represents our UK and Canadian operations, posted a 10% increase led by the UK.
Al Miralles: Hardware increased top line by 7%. Excellent growth in client devices, which increased more than 20%, was partially offset by declines in both net common storage.
Al Miralles: Software Topline increased by 10%. Topline growth was primarily driven by the ongoing shift in spend from traditional networking to software-defined networking architectures.
Software Gross Profit increased faster than net sales.
Al Miralles: Security Performance was strong, consistent with the fourth quarter, with both top line and gross profit growing by low double digits.
Al Miralles: Priorities met by as a service in radical solutions to optimize spend drove excellent performance in cloud with spend, top line and gross profit all up meaningful double digits.
Al Miralles: Customers continue to lean into CDW services to build and execute their strategies, manage the expenses, and accomplish mission-critical objectives, which drove the services' top-line
Al Miralles: CDW Managed and Professional Services Top Line and Gross Profits, both increased by double digits.
Al Miralles: The third driver of performance is our ongoing investment in our customer-driven strategy, a strategy designed to maximize our relevance and differentiation in the marketplace and continuously fortify our leading position as vendor partner choice and trusted advisor to our customers.
Al Miralles: To meet the accelerated pace of change over the last five years, we have concentrated our strategic investments on key, high growth, high relevance areas like cloud adoption and optimization, cyber security, IT workflow automation, and AI expertise.
Al Miralles: Given the vital role services play in today's interconnected solutions recent investments have been focused on embedding services throughout our entire portfolio including Mission Cloud services which closed last November .
Al Miralles: And just as our previous investments have done, mission a leader in AI and a premier AWS partner for those our ability to deliver mission critical outcomes for customers.
Al Miralles: An ability that is more important than ever in today's dynamic environment where customers continue to move forward with mission critical projects.
Al Miralles: Movement we are seeing across our portfolio and especially in security where the need to deliver seamless access for employees while ensuring data protection is crucial. A need that are falsely of security solutions underpinned by products, services and deep expertise addresses.
Al Miralles: A great example of this in action is the solution to UW developed for an American designer and manufacturer of heavy duty commercial truck.
Al Miralles: An industry leader for more than 100 years, the company had multiple HR systems with employees logging in daily across offices in the United States and around the world, managing trust and identity required manual intervention and made it difficult to get a global view of the data.
Al Miralles: Working closely with the company CISO, our team engineered, designed and implemented a solution that migrated data from on-premises identity governance to cloud-hosted centralized control.
Al Miralles: Utilizing artificial intelligence to streamline processes, the solution delivered a zero-trust environment for nearly 25,000 users.
Al Miralles: Not only did the solution deliver significant measurable outcomes through enhanced user access, compliance and operational efficiencies, the scalable automated platform also set the company up for future growth.
Speaker Change: For CDW, the solution represents a multi-million dollar multi-year software transaction and professional services fees that exceeded $1 million for our team's engineering and implementation work.
Al Miralles: This is a great example of the power of our strategic investments helping customers achieve mission critical outcomes.
Al Miralles: And that leads me to a topic that's on everyone's mind, our outlook for the remainder of the year. We are maintaining our 2025 outlook, which calls for US IT Margaret Rose to be in the low single digits on a customer spend basis, with a CDW growth premium of two to 300 basis points.
Al Miralles: While market parameters have changed since we first shared our outlook with you in February , our current view is underpinned by what we are seeing and hearing in the market, our first quarter performance and a continued level of prudence.
Al Miralles: While the start of the second quarter, with the start of the second quarter, the overall rhythm of the business has been solid and spend in the commercial market remains healthy.
Al Miralles: Despite the pull forward of client devices at the end of the first quarter, both written and shipped orders have been consistent with overall first quarter performance. Customers indicate that while they are watchful of the environment, they do not intend to alter their course for now.
Al Miralles: Maintaining our full year-out with balances are better than expected first quarter results in current customer sentiment with two counter-vailing factors
Al Miralles: First, it recognizes that our federal and education customers will need more time to adjust to recent government efficiency initiatives that will impact their IT planning, prioritization, and in some cases their budgets. Second, it incorporates a level of general economic uncertainty and caution that could
Al Miralles: Our outlook does not factor in potential wild cards, such as recessionary conditions.
Al Miralles: Of course, the environment remains fluid and as always will continue to monitor the market and update our view as necessary throughout the year.
Al Miralles: There is no doubt that we are operating in uncertain times, but we have experienced uncertainty in the past.
Al Miralles: During prior periods of uncertainty, most recently a pandemic in post-pandemic supply chain crisis,
Al Miralles: And before that, the financial crisis of 2008 and 2009, our partners and customers turned to us. They recognized the vital role we play in their success and knew that leveraging our strengths would lead to better outcomes for them.
Once again, customers and partners are turning to us.
Al Miralles: To help them navigate the challenges of today's dynamic landscape so they can effectively address cloud workload growth, increased security threats, and aging client device space and significant data challenging, including how to manage data to leverage AI for insights and productivity aspirations.
Al Miralles: As they always do, our team has rolled up its sleeves. They are working with their customers to scenario plan,
Al Miralles: They are also working with customers to test multiple brands for future projects providing product optionality, depending on different terrorist scenarios.
Al Miralles: and to prepare for a potential economic slowdown the team continues to help customers evaluate the economics of various architectures and procurement models.
Al Miralles: As our customers navigate this dynamic period, we are ready and confident in the power of our strategy and strength of our business model to weather uncertainty and serve our customers [inaudible]
Al Miralles: Regardless of market conditions, we will do what we have done successfully in the past and focus on what we can control. We will manage the business to ensure we remain a vital, valued partner to both customers and vendors.
Al Miralles: and ensure we are well prepared to capitalize on our strengths and accelerate out of the curve. With that, let me turn it over to Al.
Al Miralles: Thank you, Chris, and good morning, everyone. I will start my prepared remarks with details on our first quarter performance, moved to capital allocation priorities, and then finished with our 2025 outlook.
Al Miralles: First quarter gross profit of $1.1 billion was up 5.5% year-over-year on a reported basis and 7.2% year-over-year on an average daily sales basis.
Al Miralles: This was above our original expectations of low single-digit growth as our teams captured increased demand for client devices, cloud security and services in a dynamic environment.
Al Miralles: We also saw a full-foroter demand for client devices that was most acute in the education channel but also had a minor influence on other channels. In total, we estimate that we benefit by approximately $100 million in net sales or two percentage points of growth in the quarter.
Al Miralles: In line with our expectation, gross margin of 21.6%, was relatively consistent with 2024 levels, down 20 basis points year over year.
Al Miralles: Groose Margins held firm, even with strong client device performance which comprised 33% of net sales, up from 29% of net sales in the first quarter of 2024.
Al Miralles: The Higher Contribution from Client Device Sales was partially offset by a higher contribution from Nettedown Revenants.
Al Miralles: Nettedown revenues contributed a record, 36.5% of our gross profit, compared to 35.1% in the prior year of 1st quarter in 35.8% in the 4th quarter of 2024.
Al Miralles: Are netted down category solutions listed as transferred at a point in time for CDW's agent in our earnings release and filings, represents an important and durable trend within our business.
Al Miralles: alongside her professional and managed services listed as Transferred Over Time for CDW's Principle.
Al Miralles: We continue to expect netedown revenue streams to outgrow the rest of the portfolio driven by consistently strong cloud infrastructure and SaaS growth. Netedown revenue has increased 12% year-over-year in the first quarter on an average daily sales
Al Miralles: Moving on to a quick review of our end markets for the quarter, on an average daily sales basis, all of our channels grew on a year over your basis.
Al Miralles: Corporate and small business produced top line growth for the second consecutive quarter. In the public space, education on a strong above-seasonal quarter has closed both refreshed aging devices and tried to get ahead of potential tear-related price increases. In the public space, education on a strong above-seasonal quarter, education on a strong above-seasonal quarter has closed both
Al Miralles: While the government channel remained challenging, the team achieved our expectations and help customers navigate a complex environment.
Al Miralles: Healthcare was a standout performer again, this quarter, as the team delivered
Mission Critical Outcomes, Enabled Byers Strategic Investments
Al Miralles: International grew driven by strength in the UK, from PC Refresh activity, and full stack wins with public sector customers. Well Canada faced macroeconomic impacts that muted spending.
Al Miralles: We still expect volatility in international and markets. Customers in these regions face ongoing economic and political uncertainty.
Al Miralles: Overall, I want to credit our teams for delivering above our expectations in a rapidly changing market. Our performance shows we can see to meet our customers where they need us most.
Al Miralles: Turning to expenses for the first quarter, non-GAAP SGNA totaled $678 million, up 2.8% year-over-year. This increases due to higher gross profit achievement.
Al Miralles: The efficiency ratio of non-GAPS-GNA to gross profit was 60.4% down a 170 basis points from the 62.1% in Q1 2024, reflecting typical leverage and our discipline approach to expenses.
Al Miralles: co-worker count at the end of the quarter was approximately 15,100 and customer-facing co-worker count was 10,850, both relatively unchanged quarter of recorder and year-over-year.
Al Miralles: Our goal is to balance growth, expansion of capabilities, an exceptional customer experience of greater efficiency, and cost leverage from our broader operations.
Al Miralles: non-GAAP operating income was approximately $44 million, up 10% versus prior year driven by expense leverage on our gross profit growth.
Al Miralles: Non-Gath operating income margin of 8.5% was up from 8.3% in the prior year for us quarter.
Al Miralles: With first quarter weighted average diluted shares of $133.5 million, non-GAAP net income per diluted share with $2.15, up 11.9% versus the prior year first quarter.
Al Miralles: Moving to the balance sheet, at period end, net debt was roughly $5.2 billion, up roughly $40 million from the fourth quarter of 2024. But, what did you remain strong with Clash Plus Revolver availability of approximately $1.7 billion?
Al Miralles: The three month average cash conversion cycle with 15 days, down one day from the prior year, first quarter, down three days from year end 2024, and below the low end of our target range of high teens to low 20s.
Al Miralles: Discached conversion reflects our effective management of working capital, including discipline management of our inventory levels even as client device sales accelerated. [inaudible]
Al Miralles: Adjusted free cash flow with $49 million in the quarter, consistent with our expectations and reflecting 87% of non-GAAP net income within our stated rule of thumb of 80% to 90% of non-GAAP net income.
Al Miralles: For the quarter-reutilized cash consistent with our 2025 Capital Allocation Objectives, including returning approximately 200 million dollars and share repurchases and 83 million dollars in the form of dividends.
Al Miralles: As a reminder, we're targeting 50-75% of adjusted free cash flow to shareholders in 2025. We are clearly ahead of pace through Q1.
That brings me to our capital allocation priorities.
Al Miralles: Our first capital priority is to increase the dividend and line with non-GAAP net income growth. We have increased the dividend for 11 consecutive years through 2024.
Al Miralles: We continue to prudently manage our dividend with respect to the growth environment and target a roughly 25% payout ratio of non-gapment income going forward.
Al Miralles: Our second priority is to ensure we have the right capital structure in place. We ended the first quarter at 2.5 times net leveraged within our targeted range of 2-3 times.
Al Miralles: We will continue to proactively manage liquidity while maintaining flexibility as evidenced by our 2024 debt refinancing and redemption actions.
Al Miralles: Finally, our 3rd and 4th Capitol allocation priorities of M&A and Sherry Purchases remain important drivers of shareholder value.
Al Miralles: We continually evaluate MNA opportunities that could accelerate our three-part strategy for growth as shown by our recent acquisition of Mission Cloud Services.
Al Miralles: Likewise, remain committed to a target to return 50-75% of adjusted free cashflowers, shareholders, via the dividend and share repurchases.
Al Miralles: Now turning to our outlook. While the strength we saw in the first quarter emanated from solid, underlying demand, we also saw some customers trying to get ahead of potential tear-related price increases.
contributing roughly two points of our year-over-year net sales growth.
Al Miralles: We have contemplated this pull forward into our seasonal view, understanding it does not change the full year 2025 overall.
Al Miralles: We came into 2025 with an appropriately prudent outlook, and despite the strong start to the year, we believe this environment calls for continued prudence.
Al Miralles: We are laser focused on controlling what we control and supporting our customers as only we know how to do in this dynamic environment.
Al Miralles: Our outlook assumes frictional impacts in the government and education channels and a level of general economic uncertainty caution, but it does not factor in recessionary conditions.
Al Miralles: As always, as the landscape changes, we will provide you updates each quarter [inaudible]
Al Miralles: With these factors in mind, we are holding to our full-year 2020-25 you a low single-digit growth for the IT market. The continued target market outperformance of 2-300 basis points across about some of our spend-bases.
Al Miralles: Based on the anticipated mix of products and solutions, we continue to expect low single-digit gross profit growth for the full year 2025 and gross margins to remain relatively stable and within the range of 2024 levels.
Al Miralles: We expect first half course profit to be slightly lower than the second half, but higher than the historical split of 48% versus 52%.
Al Miralles: Finally, we expect our full-year non-GAAP earnings per diluted share to grow low single digits year over year as we focus on profitable growth, exceptional customer outcomes, and an effective execution of our capital allocation priorities.
Al Miralles: Please remember we hold ourselves accountable for delivering our financial outlook on a full-year constant currency basis. On that note, we expect currency to be roughly neutral to report growth rates for the year.
Thank you.
Al Miralles: Moving to modeling thoughts for the second quarter, the anticipate made to high single-digit gross profit growth sequentially leading to low single-digit year-of-year growth.
Disfactors in the pull forward in client device demand.
Al Miralles: I had a tariffs and sub-seasonal spending in the government and education channels.
Al Miralles: The continue to expect First March to be similar to overall 2020-24 levels.
Al Miralles: Moving down the P&L weeks, expect second quarter operating expenses to increase quarter of recorders seasonally, aligned to gross profit, but for non-GAPS-GNA as a percentage of gross profit levels, to be lower than in the first quarter.
Al Miralles: Finally, we expect second quarter non-GAAP earnings for deluded share to grow at a mid-teens rate sequentially to a level that is nearly flat with the second quarter of 2024.
Al Miralles: That concludes the financial summary. As always, we'll provide updated views on the macro environment and our business on our future earnings calls.
Al Miralles: And with that, we'll ask the operator to open it up for questions. We would ask each of you to eliminate your questions to one with a brief follow-up. Thank you.
Speaker Change: Thank you very much. We're not at all open the lines for Q&A. If you'd like to ask question, please press star for the by one on your telephone keypad now. To meet yourself at line of questioning, we'll be star for the by two.
Al Miralles: As a reminder, to raise a question, the star flowed by one. Our first question comes from David Vogt of UBS. David's to your line is now open.
David Vogt: Great, thanks guys, good morning. Maybe both for Chris and Al. I don't want to go into the tariffs because you talk a lot about tariffs, but I want to talk about some of the product categories. You know, I thought you had relatively easy compares against netcom and storage last year.
David Vogt: Are they seeing a pause in spending by customers ahead of tariffs on certainty? Just kind of one of the dynamics going on in those particular end markets that seems a little bit weaker than I would have thought given some of the checks that we had done thank you. Thank you very much.
a continuing shift to software-defined architectures.
David Vogt: and a bit of a pause in the larger infrastructure deals that we mentioned in terms of the cautiousness right now.
David Vogt: We don't see it as a harbinger or problematic. It's just a timing issue in the first quarter.
David Vogt: To us is a leading indicator of what's to come so not concerned about the categories in fact feeling that the services work that we're doing is is foreshadowing what will be coming in the future borders.
Great. Thank you very much.
Speaker Change: Thank you very much. Our next question comes from Erik Woodring, the Morgan Stanley , Erik Caroline, it's not open.
Hi, good morning. This is Maya Amp for Erik.
Speaker Change: One question from me, you know, what are you seeing kind of across the pricing landscape and given some of the competition comments we've made in recent calls? Is there any risk that, you know, you would not be able to pass through any
Speaker Change: Yeah, let me, I would start with the resiliency of our gross margin that you saw this quarter, not with standing, kick up and climb devices. So,
Regardless of the...
Speaker Change: I'll call it competitive environment that we are in. We are still continuing to be able to drive profitability. And, you know, as we see Tara implemented down the line, we might continue to, we might see a kick up in competitiveness, but we
Speaker Change: feels fairly confident that we'll be able to pass along.
Speaker Change: And as you know, as the cost of good sold goes up and the price goes up, the gross margin itself might...
Speaker Change: Reduce a little bit mathematically, but otherwise we feel very confident as we have in prior circumstances like this that we'll be able to maintain our profitability .
Speaker Change: And maybe I would just add to that, we would observe that in the quarter despite quite a bit of variability, a pretty orderly market, certainly a variability across the different OEMs with product categories as well as end markets. [inaudible]
but really not the level of variability.
Speaker Change: in this type of environment. And just a reminder, we're a cost plus provider, so what we did see in that kind of orderly environment is pretty much where customers
Speaker Change: were taking actions that we were passing through the impact and maintained our margin to of course this point, we were able to hold firm in that regard.
Great. Thank you. Great. Thank you.
Thank you very much.
Speaker Change: Our next question comes from Asiya Merchant of City Roof. Asiya, your line is now open.
Osia Merchant: Great. Thank you very much for taking the question and good results here. Just, you know, healthcare has been up strong. I think you refer to that being strong again. Just if you can parse out what's going on in this healthcare is it's specific to CDW and how you guys are thinking about, you know, it ahead in terms of your channel performance.
Looking ahead to the rest of 25th, thank you.
Osia Merchant: Yeah, sure. I think, look, I think health care, there are the results reflect several things that are specific to CW. In particular, our strategic progress over the last several years.
Osia Merchant: We have invested behind both our sales organization, our technologists within healthcare and our industry experts in healthcare. We've invested in things like the transformation centers where our customers can come together and chest out technologies with CDW experts and their peers.
Osia Merchant: We have focused our go-to-market on size and type of customer in the healthcare space and you're seeing really good results based on the tremendous execution of that strategy.
Osia Merchant: Orderly Results for Q1. We did see a nice uptick in client devices.
Osia Merchant: So that reflects top line growth significantly. And the other thing is, we've mentioned this before, but healthcare organizations were a little behind in the adoption of cloud and cloud optimization. And so we've seen an acceleration over the last couple of years for CDW customers in our ability to help them actually accelerate workloads to the cloud, make decisions around that. And then finally I just say security has been a big driver for our healthcare results.
Speaker Change: Thank you very much. As a reminder, you would like to raise a question. Please press off by one by your telephone keypad now. And Jeremy, you're so kind of questioning. Please
Speaker Change: Our next question, constant, Amit Daryani. I've ever caught ISI. I'm at your line as my husband.
Amit Daryani: Yep, thanks a lot. Good morning, everyone. I guess maybe you stop at Chris, I realize it's a tough evolving macro environment, but you know as you look at the SMD and corporate vertical specifically, are you seeing any change in the orders of buying behavior in Q2 versus what you saw in March. And you know, did this pull in potentially sustain into the month of April given. [inaudible]
Liberation Day technically was in the first week of April .
Yeah, good morning, Amit.
Amit Daryani: But as I mentioned in my earlier comment, we are also deeply involved with customers in planning phases and design phases and we take that as a positive sign for as we move throughout the year and then client devices.
Amit Daryani: in the commercial space has been very strong for the reasons we've discussed before. I mean, refreshes were probably, you know, we're probably now into the refresh in the early innings, kind of a mid cycle, I guess I'd say.
So we get refresh refresh
Amit Daryani: He's picking up and that's been a positive as well. So I just say look we're cautiously optimistic. Our customers are incrementally more cautious. They are disciplined.
Amit Daryani: But yet they're determined, and given the breadth and depth of our portfolio and our capabilities to help customers toggle to the most optimized solution, we are feeling I would just say cautiously optimistic.
Amit Daryani: Got it. And if I can just follow up with Al, Al, when I think about your calendar 25 guide and EP is wearing low single digits, can you talk about how are you embedding buybacks in that model? Because if I just assume you do your free cash look immersion and your buybacks [inaudible]
Speaker Change: Kind of 50% free cash or range, you should build a TVO or EPS guide on a flat revenue. So just talk about what are you embedding in your guide from a buyback perspective. Thank you.
Speaker Change: Yeah, good morning, Amit. We are continuing to bake in an expectation on it that we would be within
Speaker Change: That's 50 to 75% range in terms of return to shareholders now. That being said, we in Q1 took advantage of valuation opportunities.
Speaker Change: and we did buy back $200 million in shares, and so therefore we certainly are ahead of pace and I would say kind of the front loading does indeed Amit benefit us kind of when you think from an averaging perspective but we're not presuming per say that that pace will continue. So I'd say we're still within the range of our 50 to 75% albeit with Q1.
It's likely towards the top of that range.
Perfect. Thank you.
Speaker Change: Thank you very much. Our next question comes from Samik Chatterjee of J.P. Morgan. Samik you're lying, it's not open.
Sameek Chatterjee: Thank you and thanks for taking the questions. Chris, I wanted to go back to your response to the question from Amit, where he said,
Sameek Chatterjee: doing sort of choosing one versus the other and I have a follow-up.
Sameek Chatterjee: Sure, it was a little hard to hear the question, but I think I caught it. It was on commercial spend and kind of dissecting how much of the...
April Activity is related to transactional and spending budgets versus...
Sameek Chatterjee: Driving, you know, Projects Board. Look, let me start by saying we're sharing an outlook in our perspective based on what we've seen so far. Like everybody else, we can't predict the future. We're sharing an outlook in our perspective based on what we've seen so far.
I would say I would...
Sameek Chatterjee: I would call what we're seeing as solid and balanced and when I say balanced that is across both transactional and activities that suggest that large mission critical projects will move forward at some point.
You know, the timings throughout the year are hard to say.
Sameek Chatterjee: But we're feeling a positivity and a determination amongst our customers. Our outlook does however reflect.
Sameek Chatterjee: A more muted environment as we go out, go throughout the year because of the pull-through that we've experienced. So we've baked that into our outlook, the incremental cautiousness. But I, and I call it solid, balanced. And it feels pretty good.
Speaker Change: Historical Trends, and with the pull forward in client devices, how should we think about cross-margin percentage rates, greater to some of these, or of cadence we've seen in the last couple of years, is there more of a sequential increase as we go through the year on account of the client devices pull forward? Thank you.
Speaker Change: Yeah, sure, Sonic. No, I would not expect that there's going to be much in the way...
Speaker Change: A variation on gross margin both, say Q2, as well as a full year, we would expect gross margins to be reasonably.
similar to 2024 levels.
Speaker Change: Now, what we have seen obviously in the first quarter was a pretty significant mix shift into client devices.
Sameek Chatterjee: and frankly, away from solutions when you take those elements for the quarter, it explains almost all of the variation versus prior year and prior quarter as well. I will also note, Samik Vets, our original outlook, contemplated.
Some level of like for like, compression and gross margins.
Sameek Chatterjee: and while we didn't see a ton of that in Q1, we are continuing to make space that you could see some of that, all in when you add up all of those factors, Samik, I think you get back to something like 2024 levels.
Great, thank you. Thanks for taking the questions.
Speaker Change: Thank you very much. The further a mind if you would like to raise a question, please press staff for the by one on your telephone keypad and to move yourself that line of questioning, please staff for the by two. Our next question comes from Harry Reid, if you're Fred done, Harry, your line is not open.
Hi, good morning.
Harry Reid: I just wanted to ask on that your hiring plans for the rest of the year, do you expect to have a sequentially flat?
Harry Reid: Koworka-based as you've seen in Q1. And then what are you currently seeing in terms of wage inflation in the market? And do you expect, if you see continued growth in growth profits, see operating leverage like we've seen in the first quarter of the year? Thank you.
Al Miralles: Yeah, I'll start in the now, I can jump in in good morning.
Harry Reid: In terms of our plans for the year, we are managing expenses very prudently [inaudible]
Harry Reid: World's particular industry world, particular technology and digital world, so we'll continue to invest behind that. In terms of wage inflation, we aren't really seeing anything of any note.
Speaker Change: across wage inflation at this point in time. And I didn't catch the third quarter of the question, Albert Duke.
Okay. What was their third part of the question?
Speaker Change: Oh yeah, just if you expect he continued operating that, can you hear me?
Harry Reid: Oh, yeah, let me pick up on there Harry, so obviously.
Yes, can you hear us?
Harry Reid: I think there's a lot of lack there, yeah, please go ahead.
Speaker Change: Okay, well obviously what you saw and Q1 was pretty…
Speaker Change: Significant Operating Leverage, and that was partially a function obviously from our strong growth, but a little bit impacted as well by the poll forward.
Speaker Change: So I think what you can expect on the operating leverage front is in this environment of low single digit growth kind of remainder of the year, we wouldn't have quite the operating leverage we had in Q1 because there's a bit of a kind of asymmetry there between what we saw on growth in Q1.
That's the solid underlying growth we've seen.
Speaker Change: Could play out, and certainly that would lead to stronger operating leverage for the full year, so...
Speaker Change: and then maybe Ari, I would just add to that on Chris' comments on the head count. She talked about continuing to invest in the business. That's super, super important.
But really, our playbook here has been…
Speaker Change: Demand, we want to be cautious in terms of our spending and our hiring overall to the event to the extent that if we did see a pullback, we would not want to be in a place where we have to more urgently pullback on expenses. So what you're seeing is kind of a careful, thoughtful plodding.
Speaker Change: of our expenses and our hiring to ensure that we're balanced in this dynamic environment.
Speaker Change: Okay, that makes sense, thanks. And maybe just a very short follow-up. It's that incorporating why the guidance on ETS growth is the same as growth of this stage.
Speaker Change: You've got it, Harry, that's spot-on. It's just essentially with our really strong growth from Q1, the other bit of kind of a deceleration and a bit of an asymmetry in your operating leverage.
Great. Thank you.
Speaker Change: Thank you very much. Our next question comes from Keith Housum of North Coast Research. Keith, your line is not open.
Keith Housen: Good morning, guys. I'm just understanding that you guys are a cost plus model. Preskin, you talked about the impact you've seen on pricing right now. I mean, vendors on a white scale, you know, raise their prices and if they have, you know, what extent are you guys seeing? And if they haven't, you know, what are your expectations for or what your conversations are having with them in terms of when they may occur and in what they're thinking for the rest of the year.
Speaker Change: Yeah, good morning, Keith. A couple things. First look at it. It did vary quite a bit by OEM, by product category, et cetera. I won't remind you too, Keith. Look more than 50% of our business in the form of gross profit comes from software and services. So you would not see it in those categories. So you have kind of the remaining. Okay, let's get started.
Speaker Change: Less than 50% focused on hardware. Certainly, there were OEM's partners that had pricing increases as we saw tariffs.
Speaker Change: Again, all this point back to pretty orderly. We were way in front of those. We had a really good sense of how that was going to play out and we weren't. [inaudible]
Speaker Change: Constant Interaction with their customers in terms of the timing and the quantum of those, you know, but it is, is as you would expect based on the OEMs that we do business with and where they're located and kind of how how tariffs may impact them. [inaudible]
Great.
Speaker Change: In focusing on the services that you guys offered to your customers, are you guys reaching the prices on lows or are you guys kind of holding firm?
And sorry, Keith, did you say services?
Keith Housen: Yes. Your question was, are we holding prices on the services or raising those? Yeah, we're maintaining market competitive pricing right now.
Thank you.
Speaker Change: Thank you very much. My next question comes from George Wang from Barclays, George, the line is not open.
George Wang: Thank you for taking my question. I just have a question on the AICC and the kind of increasing AIC complexity in general, just curious if you have any research thoughts in terms of given the dynamic and the natural backdrop. You know, has anything changed kind of for you would like to call out versus three months ago? So in terms of whether you are seeing a faster or steady or slow down in terms of AIC adoption in general.
George Wang: Yeah, I would say look, the refresh that we're seeing, or the upkick in client devices is coming still primarily from a refresh need and the aspiration of wind ten. We are selling AIPCs, we're having more conversations about that but I would say that the majority of what we're selling now continues to be through just like refresh and movie 2011.
Speaker Change: Okay, great. And just a quick follow-up, if I can, you know, in the last couple of days we saw this a new flash in terms of collaboration with the penguin solutions.
Speaker Change: which caught my eye. I just hear it's, you know, it is something you can replicate towards other providers and kind of for the vendors in terms of this unique setup. I just hear it's easy to double-click on this partnership and kind of what the value add from CDW. Thank you very much.
Speaker Change: in conversations with these partners, Frontsen Center, to ensure that we are a value proposition is appropriate.
Great. Thanks a lot.
Speaker Change: Thank you. Thank you very much. Our next question, because Ruplu Bhattacharya, the Bank of Rafa, Ruplu, your line is now open.
Hi, thanks for taking my questions.
Speaker Change: First one for Al. I think you said that in one queue, the knitted down items were 36.5% of gross profit. Just my math suggests that that means that the core business, ex-knitted down items, was sequentially lower and you're on your lower in terms of gross margin, maybe at like 14.9%
Speaker Change: This year, you should see client devices come up, but then you've also had a very strong quarter of neted down item. So do you think that core business margins can can continue to remain strong for the rest of the quarters in the year and then I will follow up for.
on seasonality. Thank you.
Sure, thanks Ruplu.
You are correct, are non-neted down.
Gross margins for the quarter. [inaudible]
Speaker Change: We're about 40 basis points lower than the prior year. I think I mentioned earlier, Ruplu Bhatt. The Delta on our, you're over your Delta on our overall gross margins as well as I'm not netted down.
was almost entirely a mix-
Speaker Change: Phenomena, that is the mixing into client devices, including the poll forward effects.
Speaker Change: as well as mixing out-of-solutions drove that decline. There was very little in the way of like for like compression in those margins.
Speaker Change: Again, I'll just reiterate, Ruplu Bhatt being said, we continue to kind of have some caution and are making space that you could see more like for like compression, but at this point, we're holding pretty firm.
Speaker Change: Okay. Okay. Thanks for the clarification there, Al. And then maybe one for Chris.
Speaker Change: You've seen some pull forward in the education space. Typically the June quarter is a strong quarter for education.
Speaker Change: How is there a change in seasonality that we should think about for education this year as we model out the distress of the quarters? And the same question Chris for federal, how are you seeing the impact of Doge and Doge and do you think federal might remain a little bit weaker for the next quarter, but how are you thinking about growth and federal in the second half? Doge and Doge and Doge and do you think federal might remain a little bit weaker for the next quarter?
Thank you for taking my questions, really appreciate it
Speaker Change: You know, determines how to respond, prioritize, manage budgets, etc. So we factor that into our outlook for the full year as well, but expecting a little bit more muted. Sometimes you see an uptick once you have a new administration in office.
Speaker Change: and we aren't expecting that as much now, and we haven't seen that as much now. Now I would say that on the positive side and federal a number of the agencies that are strong customers of COW on the...
Speaker Change: on the non-defense side, or agencies that are not yet seen cuts and are still going strong, so that's a positive fine for us.
Speaker Change: And Ruplu, I would just maybe add when you add that up for Q2.
Speaker Change: When you add that up for Q2, including the Frictional Elements in Federal, the Poll Forward for Education and some Frictional Elements there, we would expect Q2 to be sub-seasonal.
Okay, understood. Thank you so much.
Speaker Change: Thank you very much. We currently have no further questions, so I'd just like to hand back to Chris Leahy for any further remarks.
Chris Leahy: Okay, thank you and let me close by re-emphasizing my confidence in this team.
Speaker Change: Our strategy and the durability of our resilient business models. Thank you to our CDW co-workers across the globe for your unwavering commitment to our customers. Thank you to our customers for the privilege and opportunity to help you achieve your goals. And thank you to those listening for your time and continued interest in CDW.
Speaker Change: As we conclude today's call, Ruplu Bhattacharya, like everyone is joining, giving our disconnect your lines.