Q3 2025 CDW Corp Earnings Call
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 the reconciliation charts in the slides for today's webcast and in our earnings release in Form 8-K. Please note all references to growth rates or dollar amount changes in our remarks today are versus the comparable period in 2024.
Sales growth rates are described on an average daily basis. Unless otherwise indicated, a replay of this webcast will be posted to our website later today. I want to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast without specific written permission from the company. With that, let me turn the call over to Chris.
Thank you, Steve, and good morning everyone. I'll begin with a high-level overview of our third quarter, financial, and strategic performance, and share some thoughts on the balance of the year. I will take you through a more detailed. Look at our results, Capital strategy and priorities. In full year outlook, we will move quickly through our prepared remarks. To ensure we have plenty of time for Q&A.
Third quarter results, underscore the power of our full stack, full life cycle Solutions, the team executed well in an extremely Dynamic and complex environment for the port or Consolidated net sales for 5.7 billion dollars up 4% above last year.
Gross profit was 1.3 billion dollars up 5%.
Non-gaap operating income was 531 million down. 1% non-gaap, net income per share was $2.71 up 3%, and we delivered adjusted free, cash flow of 209 million.
These results, reflect the power of strong execution, when coupled with our extensive portfolio of products, Services Solutions, and diverse customer and markets. They also reflect the power of our deep and market knowledge and strong durable customer relationships. You see the benefit of this in our government education results armed with insights into evolving, protocols funding mechanisms and budget priorities. Our team Drew on their combined deep industry expertise and trusted customer relationships to guide clients through an unprecedented period of change.
During the quarter customer priorities remained focused, on must dos, such as security enhancements, and client device upgrades that our foundational to enabling modern work. And once again, major Capital Investments were heavily scrutinized
Customers also prioritized pre-production AI trials to prove out. Use cases to validate Concepts and rois.
These priorities led to strength and Cloud software and services.
Let's take a deeper look at how customer priorities and unique market market dynamics shaped performance across our end markets and portfolio in the Border.
As always, there are 3 main drivers of our results. Our balanced portfolio of customer and markets, the breadth of our products, services and solutions and Relentless execution of our 3-part strategy.
First. Our balanced portfolio of diverse customer and markets. We have 5 Us sales channels, 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 dollars last year.
Our scale allows us to segment our businesses 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 benefit of our scale and End Market. Diversity was evident once again in the third quarter.
Small business delivered double-digit growth in Topline and gross profit is customers continue to lean more into technology in this Dynamic environment.
Growth with powered by success delivery Cloud, excuse me, and client device Solutions. While still NASA. We saw an uptick in AI workstations which are particularly well suited for small businesses functioning as many AI servers capable of running. AI models locally at the network Edge. AI workstations. Enable rapid prototyping and deployment of advanced models helping small businesses innovate faster.
Corporate delivered mid single-digit, Topline growth with low single digit growth process.
The team's ability to address customer focus on Mission critical priorities. Drove, excellent, performance and security and Cloud growth profit and Topline.
Client devices. Also remained a priority, increasing mid single digits and Topline and double digits in gross profit.
The team success addressing these priorities offset, lower demand for infrastructure Solutions.
The public team executed well within unsettled and markets, delivering, 1% Topline growth with low single digit, gross profit.
government, net sales, increased 8% state and local, deliver an impressive quarter with double digit, net, sales, and gross profit growth, which more than offset the anticipated decline in Federal
Both teams navigated the post Doge landscape with agility and precision with the federal team, showcasing, our strategic value to their agency, customers, laying a solid foundation for future growth.
Growth and higher ed was offset by an expected decline in k12 and total education. Net sales, decline 9% gross margin benefited from a shift in K12, mix away from Chromebooks coupled with strong cloud and software growth. And the teams delivered combined growth profit growth. Despite the decline in net sales
Education, Healthcare growth profit grew faster than eighty 7% Topline. Growth growth was driven by Cloud solutions that deliver clinical continuity and security which remained top priorities. The dynamic in the quarter was consistent with the strong performance in the prior 4 quarters. We are watching for signs of customer, hesitancy caused by changes in funding particularly among Healthcare clients. Relying on Medicare payments, which can constitute up to 30% of their cash flow.
Stand Out performance was delivered once again by our UK and Canadian operations together reported as other which increased net sales by 9% both teams executed. Extremely well under unsettled conditions. UK, net sales increased by double digits and Canada by mid single. Digits profitability, in both markets grew faster than net sales,
Clearly this quarter's results demonstrate the power of the first driver of our performance, our balanced portfolio of customer and markets.
It also demonstrates the power of the second driver of our performance. The breadth of our full stack, full life cycle offerings,
the team's ability to address customers top priorities, drove, balance performance across the portfolio.
Hardware Topline increased 3%, Following last quarter's strong Solutions, Hardware performance. The lumpiness and Enterprise projects. We have seen in recent years. Continued and growth was more muted with strength and NETCOM and servers partially offset by the decline in storage.
Consolidated a client device growth continued at a healthy 7% Pace with gross. Most end markets, partially offset by declines in k12 and Federal
Driven by cloud and security.
Beyond security top, customer software, priorities included Network resiliency, Next Generation, customer service and support and application Suites tied to operating system and device refresh.
Services with a standout performer up 9%, Top Line, and contributing 9% of total CW Topline, this quarter up from 5% in 2020.
Strong performance was powered by double-digit Topline and profit increases in CW professionals and managed services. This quarter service is delivered nearly 1/3 of our total gross profit growth and bolstered gross margin.
And that brings us to the final performance driver. This quarter, the impact of our strategic Investments Investments, designed to create better outcomes for our business. And for our customers Investments that are focused on enhancing our customer-facing capabilities and our internal capabilities, which together Drive profitable growth by improving, how we operate and how we serve.
During the quarter, we made progress on our companywide Evolution to embed AI into the core of how we operate serve and grow a strategy designed to drive productivity and efficiency and Empower. Our co-workers from conversational Ai and cw.com, that enhances product Discovery and improved sales conversion to intelligent agents, that streamline pre-sales qualification and self-directed agents created by our co-workers. We are embedding AI across the Enterprise.
Efforts while earlier in the adoption cycle are already translating into better co-worker and customer experiences. As we scale AI across our business, we are unlocking new levels of agility, efficiency and service quality.
Our AI offerings enable our customers to unlock value, as well as with prior waves of innovation. Customers are focused on translating ai's potential into measurable business impact. This is particularly true for customers looking to harness AI to Leap Frog, traditional barriers and gain a Competitive Edge and just like our prior, Innovation Cycles, while eager to accelerate adoption and capture value. Many customers don't have time or resources for trial and error and need a trusted partner to guide them.
That's where CW comes in with our deep expertise and comprehensive portfolio. We are delivering Enterprise grade AI solutions that are practical secure and scalable. Whether it's intelligent search workflow automation or embedded. AI power Diagnostics, our Solutions, unlock real business value without the complexity or cost of building from scratch. While avoiding pit hole pitfalls and ensuring long-term success.
I stand on an example of this is a recent engagement with a national Service Company. An engagement where CW designed a comprehensive AI data hardware and software solution,
by integrating CDW advisory Services, development, Cloud architecture and hard and Hardware prototyping our solution delivers cloud-native architecture embedded systems and centralized observability tools, all tailored to the customer's unique operational needs
The solution includes AI powered Diagnostics in Real Time. Performance dashboards which together create a smarter more scalable infrastructure. The outcomes data driven decisions that are enabling smarter operations with greater efficiency, like predictive maintenance and Supply Chain management. And data that unlocks new revenue streams aligned to their business goals.
This project, exemplifies our value proposition for customers deliver. Enterprise grade technology and AI capabilities in a way that's accessible customizable and outcomes driven.
This is the heart of our value proposition driving tangible business outcomes that meet customers where they are.
Our value proposition shines in AI where we help customers move beyond the hype to unlock tangible value.
That leads me to our expectations for growth for the remainder of the year.
Given our year-to-date performance and current market conditions. We are maintaining our prudent full year outlook, which calls for us it market growth to be in the low single digits, and a customer spend basis with CW, growth premium of 2, to 300 basis points.
Clearly, we are operating under a lot of unknowns, including the duration of the government shutdown, which could not only impact Federal results, but could have an impact on other and markets, including Healthcare and education.
At the same time, the wild cards we spoke about last quarter including recessionary conditions. Higher inflation, increased geopolitical, unrest, and outside changes to announced tariffs. Persist
I know many of you may be wondering what we expect for 2026 as is our custom. We are in the middle of our planning process and will provide our thoughts on our year end conference call.
And controlling what we can control in a time of unprecedented technological change and uncertain market conditions, our value proposition has never been stronger. Customers are turning to CDW as a trusted partner to help them navigate complexity, unlock opportunity, and drive meaningful outcomes. We're confident in our strategies, grounded in our capabilities, and committed to delivering results. With that, let me turn it over to Al, who will share more details on financial performance. Al.
Thank you, Chris, and good morning, everyone. I will start my prepared remarks with details on our third-quarter performance, move to capital allocation priorities, and then finish with our remaining outlook for 2025.
Third quarter of gross profit of 1.3 billion dollars was up 4.6%. Year-over-year. This was above our expectation of low single-digit year-over-year growth as our teams captured increased demand for software and services. Alongside continued growth and client devices and NETCOM in this complex and dynamic environment.
Similar to the second quarter, we did not see any meaningful levels of pull forward related to tariffs or other factors.
Gross margin of 21.9% was up 10 basis points. Over the prior Year's third quarter back in line with our overall expectations of roughly flat. The 2024 levels
Gross margin was also up meaningfully 110 basis points. Quarter over quarter driven by the impact of a higher mix of netted. Down revenues continued, strong growth in services and a slight mix at a client devices sequentially. Despite the categories continued solid growth.
Every channel grew year-over-year except education as our customers balance priorities across our diverse portfolio.
Demand for CDW, professional on managed Services, continue to be strong at 14%.
This can be seen in net sales transferred over time where CDW is principal
overall Cloud infrastructure SAS and security offerings were strengths in the quarter. These are offerings included in the category of net sales transferred. At a point in time where CDW is Agent or netted down sales.
Netted down revenues continue to represent an important and durable, Trend within our business representing 36% of gross profit up from 35.7% in Q3 2024, at meaningfully, from 32.9% in the prior quarter.
Customers across and markets outside of education and federal continue to invest in client devices, driven by wind 10 end of life and the enablement of modern work, work practices.
On this solutions, front software and NETCOM growth continued, although storage with softer in the quarter has demand for Hardware upgrades in the data center, space remains uneven.
I would also like to highlight how our small business and International Teams are executing exceptionally, well in a challenging macroeconomic environment.
Alongside this, our public teams continue to manage shift in government priorities and funding, which I'll touch on a bit more in the Outlook section.
Our teams navigated this Dynamic environment for both CDW and our customers delivering results that exceeded our expectations and demonstrated the power of our diverse and markets. Thank you to our team for your efforts.
Turning to expenses for the third quarter, non-gaap sgna totaled 725 million up 8.7% year-over-year and consistent with our expectations, that asymmetrical timing of expenses. Compared to 2024 would inflate the year-over-year expense growth comparisons in Q3 and Q4 of 2025.
This increase in expense is primarily driven by commissions related to higher gross profit achievement and the impact of higher performance base expenses relative to the prior year.
Notwithstanding the efficiency ratio of non-gaap sgna to growth profit for the quarter. Plus 57.7% representing progress back towards our sweet spot in the 55 to 56% range.
We continually work to structurally aligned our business for stronger future. Expense Leverage.
Co-worker count at the end of the quarter, was approximately 14,900 down both year-over-year and quarter of a quarter with customer-facing. Co-worker count of 10,700 down slightly year-over-year.
Is the balanced growth expansion of capabilities and exceptional, customer experience with greater efficiency and cost leverage from our broader operations.
For our year.
Our non-gaap operating income margin of 9.2%, with up to 50 basis points from the second quarter, but down 50 basis points from the prior year, third quarter of 9.7%.
Net interest expense was relatively flat year-over-year. Our non-gaap effective tax rate was marginally below the low end of our range at 25.1%.
Non-gaap. Net income was 357 million in a quarter of 0.6% on a year-over-year basis.
with third quarter weighted, average diluted shares of 131.8 million non-gaap net income per diluted share with $2.71 up 3% versus the prior year, third quarter, and above our expectations of flat to modestly up year-over-year
to the balance sheet at period. End net debt, was net. Debt was 5.2 billion, dollars roughly flat with the prior quarter.
Liquidity remains strong with Cash Plus revolving availability for approximately 1.8 billion dollars.
The 3 months, average cash conversion cycle was 11 days. Below the low end of our target. Range of High Teens. Hello 20s.
This cash conversion outcome, reflects our effective management of working capital including discipline management of our inventory levels. Even as Hardware Sales, remain, firm and client, device growth continues.
As we've mentioned in the past timing and marketing Dynamics will influence working capital in the cash conversion cycle in any given quarter or year. We continue to believe our Target cash. Conversion, range Remains the best guideposts for modeling working capital longer term.
Adjusted free cash flow is 209 million in the quarter bringing us to 668 million year to date.
This reflects 68% of non-gaap, net income, moderately below, our stated rule of thumb of 80 to 90% of non-gaap net income. But relatively in line with our expectations, given the role timing plays throughout the throughout the year,
We expect season a seasonally strong. Fourth quarter, free cash flow to move the full year. 2025 free cash flow back closer to the rule of thumb.
We utilize cash consistent with our 2025 Capital allocation objectives during the quarter including returning, approximately $150, million in share repurchases and 82 million dollars in the form of dividends.
As a reminder, we began the year targeting to return 50 to 75% of adjusted free cash flow to shareholders in 20125. Right now, we're clearly ahead of the pace through the third quarter having returned 747 million to shareholders or 112% of adjusted free, cash flow.
That brings me to our Capital, allocation priorities. Our first capital priority is to increase the dividend in line with our non-gaap, net income.
We're announcing an approximately 1% increase in our dividend to $2.62 annually. Our 12th consecutive year of an increase.
We will continue to prudently manage our dividends with respect to the growth environment and target a roughly 25% payout ratio of non-GAAP net income going forward.
Our second priority is ensure we have the right capital structure in place the end of the quarter at 2.5 times, net leverage within our targeted range of 2 to 3 times.
We will continue to proactively manage liquidity while maintaining flexibility.
Finally our third and fourth Capital, allocation priorities of m&a and share repurchase and remain important. Drivers of shareholder value.
the continuity evaluate m&a opportunities, that could accelerate our 3 Port strategy for growth
Given our actions to date in 2025. We now expect to meaningfully surpass. Our return of capital of 50 to 75% of adjusted free cash flow to shareholders via the dividend and share repurchases in 2025.
While we remain active in the m&a market, our consistent year to date cash flow has allowed us to be opportunistic toward sharing purchases that we, as we deem, our stock to be attractive at these valuations.
Now turning to our Outlook throughout 2025, we navigated a complex environment with appropriate level of Prisons, a view that we've maintained despite our strong results. We've been laser focused on controlling what we can control and supporting our customers only as, as as we only know how to do in this Dynamic Market.
A remaining 2025 Outlook assumes continued frictional. Impacts in the government education, segments potential funding, shortfalls for Health Care, customers and a level of General economic uncertainty and caution.
It does not, however, factor in recessionary conditions, higher inflation, increased geopolitical unrest, and changes to announced tariffs.
As always as the landscape changes. Next year, we will provide you with updates each quarter.
With these factors in mind. We are holding our full year 2020, 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.
Our expectation for low to mid single digit gross. Profit growth for the full year is unchanged.
We continue to expect second half first profit contribution to be slightly above the first half, but lower than the historical split of 48 and 52%.
And we continue to expect 2025 gross margins to be roughly, consistent to 2024 levels and to remain. Well, above rates from 3 plus years ago.
Finally, we continue to 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, exceptional, customer outcomes, and effective execution of our Capital allocation priorities.
Please remember to hold ourselves accountable for delivering our financial outlook on a constant currency basis.
On that note, our expectation for currency is to be a slight tailwind to report growth rates for the year.
Moving the modeling thoughts for the fourth quarter, we anticipate gross profit to grow at a low to mid single digit rate year-over-year. And to be down low to mid single, digits sequentially relatively aligned to historical seasonality.
Moving down the p&l. We expect fourth quarter, operating expenses to be modestly down quarter of a quarter aligned with gross profit, but reflecting some Investments back into the business.
This will result in non-gaap sgna as a percentage of gross profit to be higher than both the fourth quarter of 2024 and the third quarter of 2025
As a reminder, operating expense levels in 2024, particularly in the second half of the Year benefited from lower performance, space attainment and thus reversal of incentive compensation occurs.
This muted the Run rate expense load in the second half of last year.
Finally, we expect fourth quarter non-gaap, net income per diluted share to be down slightly year-over-year and down sequentially impacted by the aforementioned factors.
This concludes the financial summary as always, we'll provide updated views on the macro environments and our business on our future results calls
With that, I will ask the operator to open it up for questions. We'd ask each of you to limit your questions to 1 with a brief follow-up. Thank you.
Thank you very much, good. Bye to open the lines for the Q&A.
As a reminder, if you would like to ask a question, please see more now by pressing star, followed by 1, on your telephone keypad, if you like to move yourself, out of questioning will be star followed by 2 as a reminder, to raise a question, you'll be startled by 1. Our first question comes from Amit dariani, from a isi. I'm at your line that's not open.
Um, good morning, thanks for taking my question. Um, I guess Chris maybe just to start with uh, you know, the public vertical, especially the federal part has been challenging this year. Um, can you just talk about how much of the current shutdown is potentially impacting your guide? So what are you embedding in December quarter from public Federal contribution? And then, you know, do you think the dollars that are lost in shutdown right now, you end up catching this, you end up having a bit of a catch up eventually when the government opens or is that an optimistic scenario?
That aren't open. Obviously, we're constrained in building that pipeline, uh, but we are there working with customers to make sure we're the ones that they uh, turn to when we get out of the shutdown. Um, so when we think about the guide, I'd say look, it's conservative for Q4. We think it's smart to be prudent. Um, we presume the shutdown lasts and persists through the quarter, um, and that's what we built into our model. All that said, as in past shutdowns, you're exactly right typically. History shows that it's not lost sales, it's just timing. And then when the shutdown ends, the the sales have shifted in timing and can take some time. So it's a little bit extended time frame to come back in but absolutely, we don't view that as an optimistic Outlook, we view that as what we would traditionally see and what we've managed in the past. And, you know, Amit look, I'd say this is just 1 more curveball in the many curve balls that have hit us in 2025 and the teams managing well.
Perfect, thank you for that. And if I could just follow up, uh, the small business growth at 14% was really impressive and I think that's the accelerated by a couple of points, uh, versus June event. And can you just double click on what is driving that strength? And you know, do you think the trends that we see in SMB are a good leading indicator to what should happen to the overall business? Going forward, just from a historical perspective. Do you think it's a good leading indicator or not? Thank you.
Yep. So um, it a small businesses in I I would characterize it as incredibly resilient coupled with uh, outstanding execution by the team. Um, and I'd also observe that over the past year to 18 months, we've seen small businesses leaning even more heavily into technology to try to gain a competitive advantage in like level the playing field. So there's been a, a shift a slight shift. I'd say in the uptick in demand in the small business Arena and those businesses have just shown to be very resilient in terms of an indicator for uh, the rest of the segments unclear. You know, we I think we need to be a little cautious about that right now, just giving how resilient small businesses has been. And so we're going to keep a watchful eye across all the end markets, but certainly, the team has done a great job and uh and those small businesses are hanging tight.
Thank you.
Thank you very much.
Uh, next question comes from Keith hosen from North Coast research, Keith your line is now open.
Good morning guys, appreciate the opportunity here. Um, in terms of like the PC and the endpoint Market, obviously it's been a really good year for these devices and it looks like things are going to continue for another quarter or 2, but as you look out to 2026 expectations that, that funding will continue for PCs or perhaps shipped in our ways or is it going to be a pretty tough headwind for you guys in 26?
Good morning, Keith. Yeah. Look uh I carried to rise it as follows. Excuse me. We we continue to see solid demand. Um, we often get asked what anywhere in and and we're in the kind of later stage of the mid Innings. So if you had me pin it down, I'd say 6 inning and probably rounding around to the seventh inning stretch, uh, so we continue to see healthy demand and would expect that to continue over the next few quarters. Now, look, we are we are getting past the end of life cycle and and, and as we get past that we we tend to see it trickle out. But we do not, we don't see it. Uh, we don't see it slowing down over the next couple of quarters. So when you think about the drivers, right? We've got uh, replacement of Windows, 10, end of life transition. We also are seeing heightened focused on gen AI productivity, uh uh initiative. And we said before that, AI PCS were not as a large portion of what we are. Uh, converting we are seeing that pick up, so that would be another, um, Tailwind for
PC. So we feel good about the next couple of quarters.
Great. Thank you. Um and then in terms of the government funding can you remind us how much the federal government perhaps funds? Education Healthcare and how that contributes to you know their spending
yeah, okay, so how fehb the
Investing in is, is all about winning the race for students, and we're seeing that take up quite nicely. We had a nice higher ed quarter. Um, and with regard to healthcare look, we're keeping a watchful eye on on that because there are some policy potential changes that could impact the income streams for Healthcare systems. And so we're keeping a watchful eye again, though. I just say that Health Care Systems as you've seen in the last 7, 8 quarters have been leaning into technology, uh, in a way that I haven't seen in previous years, uh, to drive clinical, um, clinical continuity to drive security, and equally to drive, uh, competition in their in their uh, uh, in their industry. So we're keeping a watchful eye, but I feel very comfortable in the team, feels very comfortable that that we will navigate through funding changes. It's part of what we do. Uh, we're able to Pivot and and find where the sources are finding are coming and help our customers for that.
Thank you.
Thank you very much.
Our next question comes from Eric Woodring from Morgan Stanley. Eric, your line is now open.
Good morning. Thank you for taking my questions. Um, Chris, you know, each of the last 4, erne, you've referred to the spending environment as complex or challenging. And I'd love if you could just, maybe expand expand a bit on what is so complex about this environment? And I say that just because CDW has seen basically every type of cycle in its long history, you have been able
Ble to go grow through those past Cycles. Um, this year, we're obviously just seeing a bit more muted gross profit dollar growth off some negative compared. So really just trying to get your viewpoint on on really how this complexity is different from history um and how it's uh and how it's impacting your growth profit dollar growth and then a quick follow-up. Thank you.
Yeah, you know, it's a great question. And if I had to boil it down to 1 thing, I would say, volatility, uh, uncertainty might be the word most people would use, but as I think about this past year in particular, um, the, um, curve Falls that have come at every organization, uh, rapidly and um, you know, without necessarily a lot of time to adjust, I've had uh, technology buyers business owners, uh, schools all institutions, uh, adjusting to the volatility and therefore not having any uh, certainty and predictability to invest. That is been a primary reason it's been. So, um, so uncertain and helping customers unpack. Um, both Investments and make decisions around new architectures with AI. So we've got questions around new technology, AI funding shifts, that can happen, you know, month to month. Um there has been a hesitancy to make commitments.
On some larger pieces of Technology. Uh, it's just you know it's been hard to run a business. Now that said I it feels very much now that the leaders of these institutions are kind of getting used to the uh, unpredictability the unevenness. And just, you know, starting to really pick up and move forward with Mission critical needs. Um, and investing behind technology because they feel like they otherwise are going to get behind. So it's, it's really that, uh, policy bouncing around the funding changes that we hear about the geopolitical, um, world that we live in and the macro uncertainty, you know, the uncertainty around, um, in inflation and, um, you know, everything, that's impacting the economy. But I'll tell you, for me, it come really. Ultimately comes down to this unpredictability that we've been living in for about 9 months.
Okay, no, very fair. Thank you for, uh, for all that detail, Chris. And then Al just as a, as a quick follow-up, uh, you know, you have been very transparent, uh, over the last few quarters about the, the kind of variable comp head when you're facing this year. I'm wondering, you know, if we take a step back, what type of gross profit dollar growth does cbw? Have to see to to return back to your kind of 10% plus EPS? Um, growth I'll go of old, um, any color there would be super helpful. Thanks so much guys.
To take to, to get the further traction and get upwards of high tangle digits double digits on EPS. I think what we need to see is, uh, sustaining of that gross profit growth and the spends, uh, continuation of our progress on gross margin and then importantly, uh, a a great focus on profitable growth and getting back to operating leverage, We Believe, kind of, with those variables in place and getting operating leverage, we will start to see that efficiency ratio, come back down towards the sweet spot, and then I would say, then you're going to see the compounding effects down the p&l. So that's what we're focused on is obviously a balancing act with all those things including investing. Uh, but that's what the Horizon looks like for us.
Awesome. Thank you. Good luck, guys.
Thank you very much. As a reminder, if you would like to raise a question, please sign on. Now, by pressing star for by 1, on your telephone keypad. Our, next question comes from Sammy chesy from JP Morgan. I meet your line that's now open.
Oh, hi. Thanks for taking my questions. Uh, Chris maybe. Um, if you can start on the services side, pretty strong growth there. Um, maybe if you can take it, a bit deeper in terms of the nature of opportunities, you're seeing particularly, the ones associated with, um, the AI deployments you're seeing from your customers, and any thoughts in relation to m&a and further, consolidating, consolidating the services opportunity.
Unity, uh, for the company and I have a quick follow-up. Thank you.
Yes, Sam, I can't take that. This is this is Al uh really strong results on services, Top Line for the quarter uh underneath that 9%. Uh it was 14% growth and managed and Professional Services. So a couple themes or practice area details, I'd share their uh number 1 uh data. And I and AI, definitely a focus. Uh, continued focus on security as you would expect and then cloud has been a really persistent uh, contributor from a service perspective, Services perspective. Um, we've got a new leader in our services space. We are uh, very, very focused on refining exactly where we play and where the best growth opportunities are. And we're seeing some of the early benefits from, uh, from that. So, as we look forward, uh, Sonic, I would expect that like, netted down revenues Services, has the potential to be kind of
A um, outlier in terms of growth contribution and we feel encouraged by the progress we're seeing at this juncture. Uh I'll just remind you too just in terms of just spotting our progress here, if you go back a few years Sonic Services was about 5% of our net sales this quarter it was 9% and so if we can continue on this growth path uh we think it's going to be a meeting.
Meaningful, contributor to our top and bottom line.
Okay, okay. And then uh, just curious you made a comment about um, the data center upgrades from your corporate customers, in particular, sort of being uneven. Any thoughts on what's the primary driver? There we understand the macros challenging. But, um, obviously, in terms of investment is it really? The AI sort of decision making that's uh driving this unevenness or is it more evaluation of public Cloud? What are you seeing on that front end in terms of what's sort of causing this lumpiness in those decision making processes. Thank you.
Sure, Sonic, I I would I would point it more to some of the variables that Chris pointed out. That is the overall uncertainty in the environment, the macro and geopolitical trends that we're seeing that are causing a bit of a start and stop in terms of bigger projects. So uh, you saw it over the last couple quarters Q2 we saw a bit of a surge particularly in the Enterprise space uh with bigger projects that aided Solutions uh, growth there. And then this quarter, we saw a pullback in that regard and I think that while we will continue to say we think it's inevitable that the refresh and the recovery needs to happen in Solutions. It's clear that it's going to be more uneven than we anticipated. Now to your question on is
AI a factor. I think it's probably a variable, but I would lead more with just the overall macro geopolitical environment the level of uncertainty causing companies to just question. The is this the time to get on with the spend or could we kick the candidate more?
Thank you.
Cute. Very much.
Our next question comes from Harry Reid from your line, it's not open.
Hi, good morning. Thanks for taking the question. Um, just looking at sgna and the year-on-year growth rate. Um, both on a 1 and 2 year view, it looks like it's accelerating quite a lot, but forgive me, if I heard wrong I think you said that year over year. Margin should expand in in Q4 that's even over gross profit. So um just can we have some clarity on what's driving quite a sharp deceleration on on sgna growth? If you do expect growth profit growth year over year to slow a little bit,
um, and then maybe if you could break down, if that's largely driven by front office wages or or back office wages, thank you.
Good morning, Harry. It's El. Um, I'll go back to my comments. The biggest variable is comparing against our compensation and think kind of bonus plans and the like uh, from the prior year. Uh, post q1 from last year while our gross profit was declining and below our expectations. We were pretty considerably taking down, uh, Those comp expense items, uh, where it is this year. We don't have that. So it is more than anything Harry that compare of that. Again, I'll go back to my comments that, uh, if you would
Just for those factors. Can you look at both this quarter and the full year, we would expect that gross profit and expense growth would be much more at parity. So I call that kind of for the full year, uh, evenness between gross profit and operating income. Now, I do believe that kind of part of the calculus here is that we've had, uh, you know, obviously very strong growth in the pandemic period and we had deep reduction flattening for 2 years. Uh, we did make considerable reductions in our expense base, but in some respects 2025 is again that year of transition, where you get back to parody Or gearing up our expenses relative to the gross profit. So as we look forward and with the expectation that growth can persist and should persist, then you're going to believe.
You're going to return to operating leverage and again, to an efficiency ratio that we uh would be much more comfortable with in that 55556 range.
Yeah, that makes a lot of sense. Thank you. Um, and then just a short 1. It looks like SBC as a percent of GPA is kind of fitting the to the top end of the range of what it's been historically. Um, just any thoughts in of what that margin could be into Q4 and then the rest of uh, then into 2026
Yeah, uh, Harry. So I'm sorry and I think you might be uh, speaking to the compared to the prior year in that regard.
And it looks like we've been in the quarter. Yeah.
Yeah, and then just looking generally, that's what it's been on a quarterly basis of percentage.
Yeah, I don't, I don't think if you look back over time, it's gonna look outside, uh, on a, on a percentage basis to, to any other metric. Uh, but what you are seeing from the prior year, is we had a larger Equity program. Uh, that came down considerably based on the actual results over a 3 year period. And so 2024 was aided by the reduction of that Equity expense where we don't have that happening in 25 and ratio basis, uh, should look reasonably normalized versus previous years where you didn't have that distortion.
Right. Thank you.
Thank you very much. As a reminder, if you would like to raise a question, please sign on. Now, by pressing star, followed by 1, on your telephone keypad. Our next question comes from David vote from BBS. This is
Great. Thanks guys for taking my questions. Uh, Chris, maybe 1 for you, can you help us understand and parse out sort of the impact on Healthcare, you know, I guess what? We're trying to think through is, how much of it is sort of the lingering effects of sort of the efficiency efforts over the past year versus the government shutdown. And how do we think about sort of the, you know, the effects of those 2 different Dynamics at play, going into 2026 just to get a level set for how we should think about that market growth next year. And then I have 1 for Al on margin.
Yeah. Uh, morning. David in terms of healthcare, look. When we, we look over the last several quarters. Uh, Healthcare has really been frankly on fire and you'll recall we talked about a number of Investments. We've made across the health care uh segment both in terms of uh industry experts, Innovation, centers, Etc. And that's really been in our view paying off in solidifying, our relationship as a trusted. Adviser, as a healthcare institutions are leaning into technology. Um, as we think about the go forward, look, we are just going to be very very clear and very watchful about the trickle down effect as I had mentioned, before some funding shifts from, you know, income stream shifts. Uh, we just got to keep an eye on that, but we've been through periods like that before. And you know, you tend to see things like m&a, you tend to see consolidation, you tend to see um, movements within the industry itself. All of which requires technology technology support.
So, that's an area where we think we. We could see a a second, second order impact from funding changes. Um, but I'll come back to the the notion that what we're doing with our customers and Healthcare right now is not just foundational and optimizing. It really is the future of care. And that we will, We believe the sustainable over the long term. So we might see some lumpiness in healthcare based on funding. But again, we, we work, um, we work hard,
Know, our way around the funding mechanisms.
Great. And then now for you, you know, it looks like on a profitability basis if we make an adjustment for netted down, you guys had a relatively strong performance outside of netted down gross profit. Should we think about that margin? Sort of accretion going forward as we mix to maybe fewer client devices in the overall portfolio and to more margin Rich Solutions, going forward outside of the meta gown piece. Just trying to get a sense for, you know, how that trans I know you're still in the planning phases for 2026, but you've had relatively good results in traditional gross margin outside of nether down. So just wanted to get a sense of how you're thinking about that. Going forward, thank you.
Yeah, thanks for the question David. Uh look very near-term and particularly for Q4 I wouldn't expect
Much of a change there. We have seen stability over the last couple quarters, uh, and so that's certainly encouraging that uh, those non-medical, as we look forward David. Um, I think that a mix out of client would marginally benefit there as well. Uh, if things play out as we would hope on the services front that will also Aid those margins. Um, so I'd say modestly, you could see some check up but uh a reserved the right to give you more detail as we get into 2026.
Understood. Thanks. Al thanks. Chris.
Thank you very much. Our next question is from Adam Tindle from Raymond James. Adam, your line is not open.
Okay, Dave, good morning Chris. I wanted to start. I know you're in the middle of the planning cycle for, uh, 2026, just reflect on how this cycle is, maybe similar or different than prior years and curious on the Strategic part of that discussion. In particular. Um the services uh, narrative here is obviously very strong on this call. I wonder how you and the board think about potentially value Creation in the services business and uh how that works. You know, that would it make sense for maybe even larger scale m&a in Services? Um would be helpful. Thanks.
Sure. Good morning Adam. Yeah. The way to start with the end, when we think about value creation, we think about high growth, High relevance, um, offerings to our customers and what they need now and into the future. So as you know, we've been investing heavily behind our capabilities that are uh industry specific and that could be expertise, technology specific. We've been investing heavily in both our professional advisory services and our managed services, and we view those as uh uh integral to the value creation for customers. Going forward as we've said now for a couple of years. Our full stack full life cycle, full outcomes approach, uh, is, you know, it's like multiple flywheels working together.
Um, relevant and important right now.
And maybe just a quick follow-up for Al. Um, you talked about Q4 guidance on gross profit dollars being relatively in line with seasonal uh, Trends historically, but also talked about some pretty conservative assumptions in the public sector business understandably. I wonder, you know, if you could just unpack a little bit more of the, uh, buildup, what might be offsetting that weakness in public sector, uh, to drive more seasonal Trends in gross profit dollar growth and your level of visibility into that. Thank you.
Yeah, thanks. Adam.
First, uh, on the Government Federal front uh just keep in mind that Q4 is low season. So while we did uh adjust down our expectations, for the quarter, uh we have the fact that it has less weight on the quarter. Overall number 1 as Chris suggested. Uh, we walked into Q4 with some pipeline, uh, and uh, we have some regular run rate business with agencies that are still, uh, open. That being said, we definitely did kind of, uh, take out the pain to take down some expectations on government. It just when you add all those variables, it doesn't end up being an outsized component adjustment. If you will, uh, set number 1. Number 2, on the question of the, are there any offsets?
There. Uh there are a couple minor offsets that is the we walk into a quarter so we have a pretty good idea of Pipeline and what it's going to take to convert that Pipeline and so a couple other channels that would be more favorable, contributors would include small business that has very good momentum and then I would, I would point out the UK that again, uh, has both a very healthy pipeline, um, but has been executing really well. So they, uh, they serve as some offsets to government but net, net. It's a modest takedown for the quarter.
That's helpful. Thank you.
Thank you very much.
At this time, I'd like to hand back to Chris Ley for any further. Remarks.
Thank you. Carly. Uh, before we wrap up, I want to extend my sincere. Thanks to our nearly 15,000 co-workers around the world. Their expertise, dedication and passion are the driving force behind our continued success.
I'd like to thank our customers who trust us every day and I also want to thank our more than 10,000 leading and emerging partners for their trust and collaboration and delivering innovative outcome-driven solutions. And to everyone joining us on today's call, thank you for your time and support Al and I look forward to speaking with you, again, in the new year.
As we conclude today's call, we'd like to thank everyone for joining. You may have disconnect your line.