Q2 2025 CDW Corp Earnings Call
Good morning Owen. Thank you for joining us for the CDW second quarter 2025, adding School. My name is Kylie 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 star, followed by 1, on your telephone keypad, to remove yourself from the line of questioning will be staff followed by 2 at night time over to our host, Steve Brian Flores.
Our second quarter, 2025 results are crystal. He our chair and chief executive officer Al Morales, 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 and 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 in form AK, we furnished to the SEC today and in the company's other filings with the FCC CDW assumes, no obligation to update the information. Presented during this webcast, 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. You'll find reconciliation charts in the slides for today's webcast and in our earnings release and Form 8K. Please note all references to growth rates or dollar amounts changes in our remarks today are versus the comparable period in 2024 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. I also want to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast.
Cast without specific written permission from the company with that. Let me turn the call over to Chris.
Thank you, Steve. And good morning everyone. I'll begin with a high-level overview of our second quarter, financial and strategic performance, and share some thoughts on the balance of the year and I will take you through a more detailed. Look at our results, Capital strategy, and priorities, and outlook for 2025, we'll move quickly through our prepared remarks. To ensure we have plenty of time for questions.
Second quarter results underscore the power of our full-stack, full-lifecycle solutions in a dynamic and complex environment. The team delivered double-digit topline growth even as federal and education markets faced evolving headwinds.
As a result, that reflects not only strong execution, but also the Strategic advantage of our Diversified portfolio of products, Services Solutions, and customer and markets.
For the quarter, consolidated net sales were $6 billion, a 10% increase over last year. Gross profit was $1.2 billion, up 5%. Non-GAAP operating income was $520 million, up 2%. Net income per share was $2.60, an increase of 4%. We delivered adjusted free cash flow of $210 million.
The team was focused and determined staying true to our value proposition and customer Centric approach.
Customer focus was similar to the first quarter and remains squarely on much dues versus wants with 2 key priorities first client devices which reflected a baseline replacement cycle Amplified by the Windows 10 end of life transition and a heightened focus on productivity initiatives. Second mission, critical infrastructure projects which were particularly strong across Enterprise customers in our corporate Channel.
The team success addressing customer priorities, delivered, gross profit, growth of 5%, which exceeded our expectations. Let's take a closer look at how customer priorities and market dynamics shaped performance across our end markets and portfolio in the quarter.
As always, there were 3 main drivers of our results. Our balanced portfolio of customer and markets, the breadth of our product services and solutions and Relentless execution of our 3-part growth strategy.
Corporate small business Healthcare government and education. Each channel is a billion-dollar plus business annually. Additionally, our UK, and Canadian operations together delivered sales of 2.5 billion US Dollars last year.
Our scale allows us to segment our business into customer and markets with dedicated sales. Professionals industry, experts, and Technical Resources, who deeply understand the unique priorities of each market. When end markets, behave differently, from each other. The diversity of our customer base serves us. Well,
the benefits of our scale and diverse and markets with evident once again in the second quarter with strong performance and Commercial Healthcare, and the UK and Canada.
Offending expected Federal and education declines.
Commercial performance, which includes corporate and small business with strong and balanced.
Both teams didn't exceptional job pivoting to customers. Shifting needs in areas of focus with corporate net sales of 18% and small business up, 13%
Greater Enterprise Market penetration in corporate drove. Excellent hybrid infrastructure growth and both teams also delivered strong client, device growth as they leveraged, our comprehensive Suite of Client Solutions and services to help customers meet their priorities to both enhance, workplace experience and productivity.
Small business. Also continued its success helping customers use SAS to drive efficiency, and flexibility and delivered. Strong double-digit Cloud performance.
Public increased 2% as the teams helped customers navigate, a dynamic environment marked by changes in funding streams and protocols.
Once again, Healthcare was a standout performer with net sales of 24% as they continue to help our customers address clinical continuity.
Education posted an 11% decline in Topline K12 declined by double digits, driven by both changes to Federal funding rules and expected changes in funding streams, which included the expiration of stimulus funds.
Results. Also, reflect the expected impact of Chromebook, buying during the first quarter ahead of anticipated price increases which we previously identified,
Higher ed posted a modest decline as institutions assess the impact of new Regulatory and funding pressures, including Grant freezes and student visa uncertainty, despite these challenges projects, continue to move ahead, most notably Network upgrades, vital to student satisfaction.
Government increased 3%, mid single digit state and local growth more than offset and expected decline in Federal.
Many state and local jurisdictions. Move ahead on critical projects as they closed out their fiscal years and the 2025 budget Cycles.
Services continues to be a focus area for state and local up by significant double digits.
Federal performance reflected the impact of new Administration priorities with mixed per performance across the various agencies.
Some civilian agencies caused purchases and others moved forward, with the evolving funding mechanisms and shifting Rules of Engagement. The team worked with customers to help them. Prioritize the invest addressed Mission critical needs further. Deepening, relationships in cap capturing opportunities, where budget exists.
Stand Out performance was delivered by our UK and Canadian operations which we report as other
The UK team capitalized on client device demand and captured full stack opportunities with public sector customers while our candidate team drove meaningful growth, despite tariff related, macroeconomic uncertainty.
This exceptional execution by both teams delivered. A combined Topline increase of 12%, on a reported basis each of high single digits or better in local currencies.
Clearly second, quarter results, demonstrate the power of our balanced. Portfolio of customer and markets.
Results. This quarter also demonstrate the power of our second driver of performance. The breadth of our full stack, full life cycle offering
The team's ability to address C customers top priorities drove, strong performance across software, hardware, and services.
Hardware increased 9% driven by a significant increase in infrastructure, Solutions, notably Netcong storage and servers as well as client devices.
NETCOM and servers both increased Topline by meaningful double digits while storage increased by high single digits.
Client devices, increased 12%, asps held strong and unit growth was solid.
Software increased by 16% with excellent growth across all end markets; except K-12. Growth was driven by the toy application, Suites Network Management, and Backup Disaster Recovery.
Cloud spin increased by double digits with growth driven by security productivity data storage and recovery and collaboration.
Services had another excellent quarter up 8% in total with CDW professional and managed Topline up. 13%.
And that brings us to the final performance driver. For this quarter.
The impact of our customer-driven strategic Investments which for the past 6 years have been focused on expanding the breadth of our services capabilities capabilities that are integral to delivering full Stacks, end, to-end outcomes and our key point of differentiation in the market.
Today, our comprehensive Services portfolio spans the full life cycle from advisory to implementation to orchestration and managed services that include cyber security, Readiness, infrastructure, planning and execution strategic. It Road mapping data managing devops and 247365 million services for infrastructure, security cloud and digital experience.
Capabilities critical to our ability to help our customers thrive in the ever-evolving landscape.
A great example of this in action is our AI Center of Excellence, a comprehensive approach that helps transform AI from concept to execution.
Powered by a multi-disciplinary team of data, Engineers Architects and analysts our experts deliver structured workshops to identify use cases, established governance and security Frameworks and Define Roi.
From there, our proof of concept Services, provide a scalable path to validate and deploy, AI Solutions.
Rapid prototyping follows, where we accelerate adoption and impact using our deep vertical, expertise and infrastructure, ready Solutions across Cloud Edge and hybrid infrastructures.
Finally, our AI managed Services operationalize AI at scale, tackling the unique challenges of AI workloads, with Consulting, guidance and purpose-built tooling.
As you can see, CDW, AI Solutions, provides comprehensive support across the entire AI life cycle.
Solutions that deliver fast secure and Roi driven Innovation, Innovation that leads to measurable outcomes for our customers and further deepen the relationships.
Let me highlight 2 examples, that demonstrate how our services Investments are driving meaningful customer outcomes. First, a rapidly scale, and apparel company needed to improve the efficiency of their. It support operations.
Like integrating our Cloud Foundation managed services for AWS with our generative, AI expertise, we delivered a solution that leverages historical ticket data to streamline workflows as new tickets arrived. The AI agent references, past cases and recommends resolutions in real time.
The 6-figure engagement, included knowledge, transfer documentation, infrastructure setup, agents development, testing and integration.
And, most importantly, transform the customer support operations, freeing engineers to focus on strategic initiatives.
The second example is a comprehensive security solution. We are delivering to a leading North American Transport company.
Their legacy Security operation Center was 1 size, fits all and did not meet the evolving operational needs.
What began as a strategic advisory engagement evolved into a full-scale identity and access management initiative. Ultimately leading to a multi-year, managed Services engagement with 10, 10 million dollars, total contract value
And engagement that includes 24/7, managed Security operation across their entire technology stack.
Including multi-vendor, firewalls security information, and event management. Systems endpoint detection, and response, vulnerability scanning, third-party risk, management and identity and access management across 8 platforms.
It also includes continuous enhancement through penetration testing purple team assessments and embedded automation.
2, great examples that underscore are differentiated approach as a trusted partner invested in our customers, long term success,
They also demonstrate how our strategic Investments deepen customer relationships, and how they drive sustained growth industry-leading margins and strong cash flow.
And that leads me to our expectations for growth for the remainder of the year.
we are maintaining our 2025 Outlook which calls for us it market growth, to be in the low single digits on a customer, spend basis, with a CDW growth, premium of 200 to 300 basis points,
Have you supported, by what we are seeing and hearing in the market, underpinned by a continued level of prudence?
To continue for the balance of the year.
Armed with insights into evolving, protocols funding mechanisms and budget. Allocations are teams are drawing on their deep industry, expertise, and trusted customer relationships to both formulate, strategies to navigate this period of change and to emerge even stronger out.
Comes only possible by our scale and unique ability to verify.
The wild cards we spoke about last border including recessionary conditions, higher inflation, increased geopolitical, unrest, and outside changes to announce tariffs, still exist.
We will keep a watchful eye on market conditions, and as in our practice as is our practice update, our view as we move through the year.
As we look ahead our priorities remain clear. We will focus on what we can control and execute with precision.
We will maximize the strength of our business model and leverage our competitive advantages, including our full staff full life cycle solutions to help customers navigate complexity and achieve their goals.
Our commitment to delivering customer value is unwavering. Our strategy is working and our teams are energized and executing with discipline and purpose. Now, let me turn it over to Al
Thank you, Chris and good morning everyone. I will start my prepared remarks with details on our second quarter performance move to Capital allocation priorities and then finish with our 2025 Outlook.
Second quarter growth profit. At 1.2 billion dollars was up 5% year-over-year. This was above our expectations of low single-digit growth as our teams captured, increased demand for software and infrastructure Solutions. Hardware alongside continued growth and client devices and services in this complex and dynamic environment. We did not see any meaningful levels of pull forward. This quarter related to tariffs or other factors.
gross margin of 20.8% was below Q2 2024 driven by the impact of a higher contribution from large customer corporate customers, which tends to carry lower rates as well as a lower mix of netted down revenues,
Gross margin is sensitive to changes in both customer and product mix.
This quarter, these changes were notable and gross margin was down 100 basis points year-over-year.
And Healthcare customers focused on Hardware upgrades including client devices which together with meaningful spend on network and data center Solutions through prioritization away from sales transferred. At a point of time where CDW is agent also known as netted down revenues.
This led to a lower relative mix of netted down sales compared to last year and a lower percentage of contribution to gross profits at 32.9%.
Netted down revenues continue to represent an important and durable Trend within our business. Alongside our professional and managed Services listed as transferred over time where CDW is principles which continued their strong, growth trajectory increasing 13% year-over-year and reflecting Investments we've made in the business over the last 6 years.
Consistent with recent Trends commercial customers. Prioritize Mission critical Hardware Investments that could not be postponed and public customers dealt with shifts in government, priorities and funding.
Given the unique Dynamics, impacting several of our end markets, our sales and gross profit performance. Demonstrate the power of our de diverse and markets and how we are meeting our customers where they need us Post.
I want to thank our teams for navigating this environment and delivering above our expectations.
Turning to expenses for the second quarter, non-gaap sgna, totaled 722 million of 72 7.2% year-over-year.
This increase with primary driven by commissions related to higher gross profit achievement and the impact of higher other performance-based expenses.
For the second quarter of the efficiency ratio of non-gaap sgna to gross profit was 58.1% down 230 basis points compared to the first quarter representing the expected, leverage on, seasonally greater profit dollars, but up 130 basis, points year-over-year.
We continue to structurally align our business for a stronger future: expense leverage.
Co-worker count at the end of the quarter was approximately 15,000, 15, 15,000 with customer-facing. Co-worker count at 10,700 both slightly down year-over-year.
Leverage from a broader operations.
Non-GAAP operating income was approximately $520 million, up 1.8% versus the prior year.
Non-gaap operating income margin of 8.7% was up 20 basis points from the first quarter, but down 70 basis points from the prior year, second quarter level of 9.4%.
Net interest expense was 4.5 billion, 4.5 million higher year-over-year, impacted primarily by lower interest earned on cash balances and higher average interest rates on our long-term debt.
Non-gaap net income with 344 million in the quarter up 1.4% on a year-over-year basis.
With second quarter weighted, average diluted shares of 132.4 million non-gaap net income per diluted share with 2.660 up 3.9% versus the prior year. Second quarter.
Moving to the balance sheet at period ends. Net debt was roughly 5.2 billion dollars, roughly flat with the prior year.
The liquidity remains strong with Cash Plus revolver availability. Availability of approximately 1.7 billion dollars.
The 3-month average cash conversion cycle was 16 days below. The low end of our targeted. Range of High Teens to low 20s.
This cash conversion, reflects our effective management of working capital including discipline management of our inventory levels. Even as Solutions, Hardware Sales, accelerated and client device, growth continues.
As we've mentioned in the past timing and market dynamics will influence working capital on any given quarter or year. We continue to believe our Target cash conversion, range Remains the best guideposts for modeling working capital longer terms
Adjusted free cash flow was $210 million in the quarter, bringing us to roughly $460 million year-to-date.
This reflects 73% of non-gaap, net income slightly below our stated rule of thumb of 80 to 90% of non-gaap net income. But in line with our expectations, given the role of timing plays throughout the year.
We utilize cash consistent with our 2025 Capital allocation objective during the quarter, including returning approximately 150 million dollars, in share repurchases and 82 million in the form of dividends.
As a reminder, we target returning 50 to 75% of adjusted free cash flow to shareholders in 2025. So we are clearly ahead of pace through the second quarter at 112%.
That brings me to our Capital, allocation priorities. Our first capital priority is to increase the dividend in line with non-gaap net income growth, we have increased the dividend for 11 second consecutive years through 2024
We continue to prudently manage. Our dividends with respect to growth 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 2.4 times. Now, leverage with our targeted range of 2 to 3 times, we will continue to proactively manage liquidity, while managing flexibility as evidenced by our 2024 debt, refinancing and Redemption actions, and the subsequent draw down of our 2025, senior notes, this quarter,
Finally, our third and fourth Capital, allocation priorities of m&a and shared purchase remain important drivers of shareholder value.
We continually evaluate m&a opportunities. That could accelerate our 3-part strategy for growth.
Likewise we remain committed to our targets returning, 50 to 75% of adjusted free cash flow to shareholders via the dividend and share repurchases in 2025.
Now, turning to our Outlook.
We came into 2025 with an appropriately prudent view of the year and despite the strong first half, we believe this environment calls for continued. Prudence last quarter, we share that will be laser focused on controlling what we can control and supporting our customers only. As we know how to do in this Dynamic environment, this has not changed.
Our Outlook assumes continued frictional, impacts in the government and education segments, and a level of General economic uncertainty and caution, but it does not factor in recessionary conditions. Higher inflation, increased geopolitical, unrest and outside changes to announced tariffs.
As always as the landscape changes, we will provide you with updates each quarter.
With these factors in mind. We are holding our full year 2025 view of low single digit growth for the it Market.
We continue to Target Market. Outperformance of 2, to 300 basis points on a customer spend basis.
Based on the anticipated, mix of products and solutions.
We now expect low to mid single digit first pro profit growth for the full year 2025 contemplating. Our strong first half along, with our prudent view on the remainder of the year.
We continue to expect second, half gross profit contribution to be slightly above the first half, but lower than the historical split of 48 and 52% respectively.
And we continue to expect 2025 gross margins to be roughly consistent with 2024 levels and to remain. Well, above 48 from 3 plus years ago.
Finally, we expect our full year non-gaap net income, per diluted, share to grow low single digits year-over-year as we focus on profitable growth except exceptional customer outcomes and effective execution of our Capital allocation priorities.
Please remember, we hold ourselves accountable, for delivering, our financial outlook, on a constant currency basis. On that note, we expect currency to be a slight Tailwind to report a growth rates for the year.
Moving to modeling. Thoughts to the third quarter. We anticipate gross profit to grow at a low single digit rate year-over-year and to be flat to slightly above the second quarter level.
Moving down the p&l. We expect third quarter, operating expenses to increase slightly quarter of a quarter aligned with growth profit and combined with some Investments back into the business.
This will result in non-gaap sgna as a percentage of gross profit levels to be higher than in a third quarter of 2024, but consistent with 22, 202 levels.
Keep in mind that operating expense levels in 24, particular, in the second half of 2024 benefited from lower performance-based attainment and thus, the reversal of incentive compensation across, which will compare unfavorably to 2025.
Finally, we expect third quarter non-gaap and income per diluted share to be flat to modestly up year-over-year and quarter-over-quarter impacted by the aforementioned factors.
That concludes the financial summary. As always, we'll provide updated views on the macro environment and our business on future calls,
And with that, I will ask the operator to open up for questions.
We would ask each of you to limit your questions to 1 with a brief follow-up. Thank you.
Thank you very much. We thought it's open lines for Q&A. If you would like to ask a question, please do come pressing star for by 1 on your telephone keypad now. And if you'd like to remove your Surfer line, the questioning will be started by 2 as a reminder, to raise a question B Star. Followed by 1. Our first question comes from Eric wood ring from Morgan Stanley. Eric, your line is now open.
Great. Good morning guys. Thank you so much for uh, for taking my questions. Um, Chris, I just wanted to maybe go with you first and you guys have strung together. Um 3 consecutive quarters of nice outperformance, versus your stated expectations. Um, you are still telling us though that you expect to outperform it Market spend by 200 to 300 basis points. And so, is the outperformance we've seen from CDW over the last. Let's call it 9 months, really just entirely Market driven, because otherwise I'd expect you to gain more than 23, 200 to 300 basis points of share that. That was kind of a commonality um, over the last decade,
It so, so maybe can you just help us understand? Uh, if you are outperforming, uh, your expectations by such a degree. Why? Why that wouldn't lead to more outperformance versus the market and then I have a follow please. Thank you.
In fact, taking care.
Okay, I appreciate that. Thank you Chris, and then maybe as a follow-up if, if we think about your biggest products,
Segments on the hardware side, client devices, NETCOM, servers and storage. Um you know, I think this was the first quarter in a while where we kind of heard unanimously positive commentary across. All of those end markets, especially relative to last quarter where I think NETCOM and storage were declining. Um, based on your conversations, with customers and and what you see in your pipeline can can you maybe help us all better? Understand, kind of where we are in the cycle for each of these respective and markets, um, and how that influences your views, as we look out against 6 to, you know, 18 plus months. Um, in advance. Thanks so much guys, good luck.
Uh, thanks Eric. Yeah, let me zoom out a little bit. I'll just
because obviously the Cycles are impacted by the macro environment. So I would say, if we think about the hardware Cycles client in particular, you know, we've been seeing uh, uh, strength in client over the past several quarters. Uh, CW's team has been doing a tremendous job, delivering uh, and capturing opportunity, given the breadth of client devices and services that we provide, um, we probably say we're mid cycle and that refresh. Um, so if you think Ford, think about it that way with regard to the um, infrastructure Hardware, you know?
You know, this is seems to be on an up uptick and that's not unusual Visa V the timing of endpoint devices networking and then infrastructure. So um again though, I have to note that it's going to bounce around as it always does based on specific budgets and based on the priorities within and markets, for example, higher ed, which has been, um, you know, has been, uh, feeling some of the, uh, impact from the federal funding changes is still investing heavily in network, uh, and Compass device campus networking because it is a key differentiator for, uh, students, uh, students who are going there. So it's going to bounce around based on the End Market that we're that and what their needs are, I'm going to have Al dive into each of the categories, a little more specifically.
Yeah. Thanks Chris. Uh, Eric just a few things that I note a, as you know, and of course noted uh, for 6 quarters, we've seen client device growth and that's been, uh, quite positive. And I'd say, most of the strength on Hardware to date has been in more the tra transactional, fronts specifically clients. Uh, we've been saying for a while at with respect to Solutions it's a matter of when not if and while this is a single quarter, I would say somewhat encouraging that we did see a turn uh on that front for Solutions now uh it's 1 quarter number 1 and and 2 I would say the comps uh were negative so that certain helps the
Equation. But I would say there's, uh, some indication there that customers are showing resiliency and needing to get to move forward with some of their refresh, uh, initiative. So, uh, again early days in that, but for this quarter Solutions, actually outperformed transactions. And so that's, uh, somewhat encouraging us and we're watching it closely.
Thank you very much. Uh, next question comes from David vote from UPS, David. Your line is now open.
Great. Thanks guys for taking my questions so maybe Chris it out. Can you maybe just expand upon sort of the strengths that you saw on the quarterly corporate was incredibly strong? And but I think you also noted that there wasn't a dramatic or or or you didn't see an impact from pull forward. Can you kind of just maybe expand upon kind of what was sort of the motivating factor? I don't know what that the corporate Market to be a little bit more, uh, to be healthier than maybe in the past couple of quarters. I know the comp wasn't that much easier, and then I'll just give you my follow-up. And so, I'll, you know, obviously you talked about a smaller percentage of netted down in the quarter. Um, if I kind of just take the numbers really quickly, it looks like there's a little bit of product growth margin is that just reflective of the larger corporate size in the quarter, which I think you referenced in your prepared remarks. I just wanted to make sure if there was anything else kind of going on under the surface. Thanks
Technology is such an important tool for driving all the goals missions, strategic imperatives of, of our customers. That it is a place that customers prioritize Investments at the same time, I just would say they are, um, cautious and being very prudent as we move forward. Um, that's number 1. Number 2, I'd say that the teams execution has been very spot-on in terms of having worked over the last several quarters with our customers. I think I mentioned before that we were doing a lot of design work and and sorting through its customers projects to come. Uh that relationship that work has is coming to fruition and we see it in in uh nice growth. This quarter particularly around uh large Enterprise deals and across the full stack, full life cycle solution.
And David, maybe I'll just uh provide a little bit more granularity with respect to add a down, revenues and gross margin. Uh, so to Chris's point, we are quite pleased with the level of customers spend that. We saw broadly across the business, and I would say the breadth and depth of of the end markets uh, for this quarter with that larger customer spend. Uh, it just so happens that a greater share of the wallet, went to Solutions, uh, and went to clients and maybe less. So from a net of down Revenue perspective, now, a couple things going
On there with net netted down revenues, uh, 1, as I just noted, a bit of kind of dilutive effect. Their number 2, I say, really strong results on SAS and IAS, but comps were quite uh, difficult uh, in that space. And therefore, they were kind of coming up against those comps. And then just remember in the net, it down Revenue space. There are other categories, uh, that will drive the results and namely in this case warranties and commissions and things like that. Uh, we're a bit lighter so they diluted the net. It down Revenue contribution affect as well. So, um, look, I would just caution just like we would not overeat the strength of solutions for 1 quarter. Uh, I would not over extrapolate, the effect that we've seen on netted, down Revenue in this quarter.
Great. Thanks Chris. Thanks Al
Thank you very much. Our next question comes from Amit dariani from evercore isi. I'm at your line is now open.
Um good morning, thanks for taking my question. Um I I guess maybe to start with Chris your guide I think sort of assumes that the back half growth rates on a year-over-year basis will decelerate a good bit from the first half Trend that you saw. Um, you know, giving some of the commentary you've had especially an uptick in solutions. Could you just talk about, why do you think you're seeing this deceleration and growth in the back half of the year?
Yeah, on it. It's really we've we've looked at education in federal and we're really um we're taking into account. What we think is going to be a softer back end and and frankly unseasonal you know, and I think about what's going on with the policy and funding changes and protocols. Uh our our customers are just taking a step back. They're taking a step back to understand and move through these changes and you know and use the budget they can but also understand where they're going to come out on the other side of this and the good news is you know, CW's right in the middle, helping them do that. So we're just being very um we're being cleared in terms of what the next several quarters are going to bring. We're confident that uh, once there's more clarity and the money is Flowing that we'll be able to help our customers, use it and deliver efficient and effective technology, but it really is driven by that on the other on the with regard to the other. Um uh, with the other segments, we are
Are are still taking a cautious tone, excuse me. As Al mentioned, we're we're being prudent because our customers are being prudent, and we don't want to get ahead of our skis. We want to really just take it as it comes. And, you know, we'll, we'll see what happens in Q3, but that's the reason you you see a little bit more softness in the back half of the year.
Got it. Perfect. And then I'll uh maybe just a quick question for you. Free cash flow conversion in June. We're somewhat subdued. I think at 61%, can you just touch on kind of what's happening there? And then really longer term on a free cash flow basis.
What do you think we need to?
Be for CDW to get back to that double digit. Free cash flow Cadence, we used to have thank you.
In the first half and that does draw upon working capital including inventory. We are super disciplined about how we use our inventory and making sure we're getting the right returns, but you're going to have some timing effect. So, through the first half, we're in the 73 percent range, uh, relative to, uh, non-gaap net income. Uh, and I would expect Amit that for the full year uh that that will play out right within our range of 89.9%. So pure timing, I would call the second quarter solid, but we'd expect that the second half would be even stronger.
Thank you very much, moving on to the next question. Uh, next question comes from Harry Reid from Rush Shard and Co Redbarn Harry. Your line is now open.
Hi, good morning, thanks for taking the question. Um apologies if I missed her, but I think that you said sgna is a percentage of gross profit will be in line with Q2 in Q3. Um, that's you know, to ish percentage Point compression in adjusted margin year-over-year. Just wondering where these costs are coming into the model given you mentioned but uh, that co-workers were slightly down year-over-year and then, I guess we follow up is that the main driver? That's essentially
Decelerated decelerating adjusted EPS growth from, you know, 7 and a half percent in in the first half to, I guess flattened in H2 implied by the guidance, thank you.
Yeah, sure. Uh, good afternoon Harry, uh, on the sgna front, you have it right. The, uh, that efficiency ratio of non-gaap S2 and a relative to the GP for 23, would be reasonably consistent with Q2, uh, which was 58.1% for the quarter. Um, so on an efficiency ratio basis, and I would say that kind of like, that's what we're looking at largely for the back half. Now, just a reminder, from the last call when you think about, uh, operating leverage Harry, uh, and comparing to the prior year, in the first quarter, we had very significant operating leverage, uh, down the p&l and including on the expense front. And I mentioned there that we expect, we would have some asymmetry for the remainder of the year, the most notable component of that Harry, is that in comparing to 2024 right where our results were softer and D.
Accelerated through the year. Uh, we had pretty significant drawdowns of our incentive compensation approvals. And so really what you're seeing here in Q2 and kind of for remainder of year is just negative Compares versus the prior year where those acrs will coming down. The only other Factor Harry that. Maybe I would point out is uh look we've done. I think a really nice job being disciplined about our spending. Uh but the reality is over uh a number of quarters are gross profit growth has been a bit lighter than we would have hoped. So we're at a spot that while we continue to drive for operating leverage and expense efficiency. Um, our current expense base is kind of geared towards a bit higher gross profit growth. Now if we achieve the level of growth that we would hope for, we're going to grow right back into parody with respect to our expense base. And uh,
That's how we'd see that playing out as we go forward.
Yeah, that makes sense. Thank you.
Thank you very much. Uh, next question comes from Sammy, Chetty. From JP Morgan to make your line is now open.
Yeah. Hi um, thank you for taking my questions. Uh, maybe for the first 1. Um, Chris, um, curious, I mean, a lot of investors have been asking us about how customers are responding to the provisions under the big, beautiful bill. And if there is any sort of discussion around access spending, from customers, to take advantage of some of those Provisions. Like, we saw in 2018, uh, any discussions with customers on that front any insights you can share about how customers are, um, even looking at sort of those Provisions or reacting to it. And then, I have a follow-up.
uh, yeah sure something like I think there are
Side. It's, you know, what are they potentially going to be defunded in? And where are they going to receive funding? So when I think state and local, for example, you know, we we've used some of the funding as shifting from fed to State, um, and state organizations are going to have to pick that up but then you've got specific federal agencies that are very much the beneficiary and we're focused on those. So it's really on the commercial side. What are the things that benefit the company and in the federal and state? It's really the the puts and takes of where the funding is going. And those are the conversations we're having right now with our customers.
Got it, got it. And for my follow up, maybe this is more for. I'll I'll more curious about the guide, what's implied for 4q earnings. Because with the first half and your guide for the third quarter, uh it looks pretty conservative for 4 q earnings and looks like unless you're down year-over-year on earnings for 4, q stuff to get to a low single year growth for the full year. Uh anything to call out there in terms of what impacts for QC is 90 or what's driving the consumerism on the implied 4q earnings. Um okay, thank you.
Yeah, sure Sonic I I wouldn't point out anything very particular. I would say both Q3 and Q4. We have a level of uh conservative conservatism baked in the most notable uh, components as Chris suggested were, are more in the federal and
The education space. Um, the only thing maybe I would add otherwise is as you know, corporate can be stronger in Q4 uh, kind of with the year end push. And, uh, you know, there we are being more modest than what we've seen in the first half, so that may have some effect on Q4 seasonality, but I wouldn't call anything else out as remarkable.
Great. Thank you. Thanks for taking my questions.
Thank you very much. Our next question comes from Asia, Merchants from sissy group, Asia. Your line is not open.
Great. Thank you for taking my questions. Good morning. Uh, on the decrease in gross profit. Margins, I know that's been happening for a few quarters now. Um I think you called out data storage servers, NETCOM products. Can you just help us explain like is it a function of pricing that you're not being able to is you know is is a competitive environment where you're not able to pass through pricing? Um and you know where does that kind of bottom out in terms of gross margins on those products? Thank you.
Yeah, good morning, Asia. So a couple things that I point out, maybe just I'll start with quarter over quarter. So I think it is notable uh, to to indicate that order over a quarter, when you uh, exclude our isolate, the effect of netted down revenues, that non- netted down margin was actually up 10 basis points uh, quarter over quarter. So that's been a metric. We've been tracking USA and that was flat to slightly up. So I'd say uh somewhat reassuring in that regard. After several quarters, where that non- netted down margin had trailed off. Um, on the year-over-year, the comparison is a little bit different. Number 1, definitely impacted by the dilution of netted down revenues and I spoke to that, but that does that that does have a factor. Let's remind ourselves that netted down revenues. Come in a, 100% gross margin. So
So any dilution or drop off of that category will have a pretty profound impact on our gross margin and then the other Factor year-over-year uh, was with our strong Solutions. We saw a significant mix in from Enterprise customers and some pretty big deals and very commonly in those cases they will come out a bit lower margins and so that had some effect on our gross margin year on a year-over-year basis.
Basis. Again, I would just say caution against over extrapolating while we're pleased with the spend we saw in Solutions and certainly that Enterprise customers showing up as more resilient. Um, we're not overreacting to the margin effects at this point,
And if I look at that same metric, you know, if I look at it for, for the guys, for the remainder of the year, should I be expecting those levels to be consistent or tick down for fiscal 25 relative to fiscal 24, just given the performance year on year for the first half.
For the full year is still reasonably similar to 2024 levels.
Okay, thank you.
Thank you very much.
Our next question comes from Bank of America Ripley. Your line is now open.
Hi, thanks for taking my questions. The first 1 for Chris. Uh you had strong growth in client devices and Chris you talked about refresh our customers taking this opportunity to upgrade their devices. So on the client side, are they upgrading to things like AI PCS and are you seeing any AI driven demand and the data center side in terms of servers? So just an overall uh your thoughts on how AI is impacting your revenues.
Can I have a follow up? Yeah, sure. Um, on the PC side, I would say that, uh, the refresh discussion and the wind 10 experience continues to be the key driver, uh, conversations in some um, and purchasing of AI PCS is picking up, but I think we, you know, I'd say we're middle Innings of the client device. Uh, refresh. And we're kind of early Innings of the aipc Optix. Um, on the infrastructure side. Yes, those conversations are, um, in every discussion we have about infrastructure generally and we're seeing some good Headway there.
Regarding AI. I think you just asked a general question on AI. I tell you that. Um,
Customers across the board right now. Feel like, uh, they are moving from experimentation to a higher degree of importance and urgency around Ai and the impact it can have from client devices all the way into the infrastructure. So we are seeing those conversations pick up quite a bit. Um we feel very well positioned to help our customers in those conversations across the full stack. As we've said before, you know AI is embedded in every layer of the stack and our full. Our full stack approach allows us to have those conversations and help customers design, uh, for appropriate AI uses in the future. Um, the other thing is every part of the life cycle that customers are interested in, whether it is a generative AI, whether it's a genetic AI, whether it is prescriptive or a predictive AI, uh, we have consulting services that support our customers there. So the
The team has been incredibly involved in, um, in customer conversations, Soup To Nuts about what does AI mean, let's unpack it. Uh, so we're feeling positive. We are seeing an impact on revenue on the um, on the hardware side, just picking up, but really, it's at the front end with the Consulting and it's starting to pick up in our managed Services area.
I, I just think we're at an inflection point with customers around Ai and, uh, it's becoming much more part of the conversation, which excites us.
Great. Good morning, guys, and appreciate it. Hey, you know, there's commentary regarding large deals that probably so that as soon as large deals, were performed better than like the Run rate or the SMB business, is this a trend that we see kind of developing through the rest of the year that more of a spending is going to be coming from the large companies.
And good morning Keith. This is Al uh, I uh, I would not anticipate that that's going to be outsized, right? While it was more significant in the quarter, we're not factoring that in to our Outlook. You know what I would say? Maybe leave you with is we're pleased that we're seeing a breath in depth of end markets show up. Now we have the effect from education uh and government but you're seeing the power of our diverse and markets here and in this case uh Enterprise but I would expect that for the remainder of the year, it's going to be more balanced in terms of End Market contribution.
Great. Actually, that's all I have appreciate it. Thank you.
Thank you.
Thank you very much. We currently have no further questions so I just let the hand back to see if I burn for any further remarks.
Over to Chris.
All right, let me close by once again thanking our, our 15,000 co-workers around the globe, for their ongoing dedication to serving. Our customers, you are our true competitive advantage. And the sole and reason why we consistently deliver meaningful value, and exceed, our customers needs and expectations. You are the reason we have and will continue to lead the industry. Thank you to our customers for the privilege and opportunity to serve you and repeatedly earn your trust. And thank you to everyone listening for your continued interest in CW, Alan, I look forward to talking to you next quarter.
as we conclude today's call, we'd like to thank everyone for joining even now this connect your lines,