CDW Corporation

Hello everyone and thank you for joining the CDW First Quote 2025 earnings call. My name is Gabrielle and I will be coordinating your call today. During the presentation, you can register a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two on your telephone keypad. Please kindly limit yourself to one question and one follow-up. If you have any further questions, please rejoin the queue. I will now hand over to your host, Steve O'Brien, with Investors Relations. Please go ahead.

Thank you, Gabby, and good morning, everyone. Joining me today to review our fourth quarter and full year 2025 results are Chris Leahy, our chair and chief executive officer, and 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 this call. I'd like to remind you that certain comments made in this presentation are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. Those statements are subject to a number of risks and uncertainties that could cause actual results to differ materially. Additional information concerning these risks and uncertainties is contained in the earnings release in Form 8-K We furnished to the SEC today and in the company's other filings with the SEC. CDW assumes no obligation to update the information presented during this webcast. Our presentation also includes certain non-GAAP financial measures, 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 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. Good morning, everyone. I'll begin our call with an overview of our fourth quarter and full year performance and share some thoughts on our strategic progress and expectations for 2026. Then I'll hand it over to Al who will take you through a more detailed review of the financials as well as our capital allocation strategy and outlook. We'll move quickly through our prepared remarks to ensure we have plenty of time for questions. The team delivered a strong finish to a complex year and fourth quarter results exceeded our expectations. Results that demonstrate the resilience of our business model, committed execution, and power of our strategy. For the quarter, the team delivered net sales of $5.5 billion, up 5%, gross profit of $1.25 billion, up 9%, non-GAAP operating income of $503 million, up 1%, and non-GAAP net income per share of $2.57, up 4% over 2024. customers remained laser-focused on operating efficiency and cost leverage. Must-do priorities also included client devices, servers, and security. To help customers address these priorities, the team delivered solutions and services that drew on our deep architectural and technical expertise and drove strong double-digit growth across software, cloud, and professional and managed services. higher margin categories that contributed to our strongest gross margin of the year. Turning to the full year results, 2025 performance was driven by our clear strategy and disciplined investments delivered in the face of remarkable complexity. 2025 was a year that tested every part of our company. We managed through uncertainty around tariffs, unexpected shifts in education and healthcare funding, significant changes in government spending priorities, and the longest federal government shutdown on record, factors that shaped customer buying behaviors in unconventional ways. We stayed focused, adapted quickly, and continued advancing our strategy. The team executed with precision and leaned into their deep end market expertise and durable client relationships to help customers address their unique challenges. For the year, the team delivered over $22 billion in net sales, up 7%. Gross profit of nearly $5 billion, up 6%. Nearly $2 billion of non-GAAP operating income, up 3%. And record non-GAAP net income per share of $10.02, up 5%. Performance that generated $1.1 billion in adjusted free cash flow that we used to fund our capital allocation priorities, including the return of nearly $1 billion to shareholders via dividends and share repurchases. as well as a capability-enhancing tuck-in acquisition during the fourth quarter. Now let's take a deeper look at how meeting customer needs drove our fourth quarter results. As always, there were three drivers of performance, our diverse portfolio of customer end markets, the breadth of our product solutions and services portfolio, and the relentless execution of our three-part strategy for growth. First, our diverse customer end markets. As you know, we have five U.S. customer channels. corporate, small business, healthcare, government, and education. Each channel is a meaningful billion dollar plus per year business on its own. Within each channel, teams are further segmented to focus on customer and markets, including geographies and verticals. We also have our UK and Canadian operations, which together delivered sales of 2.7 billion US dollars in 2025. Once again, the power of our diverse customer and markets with evidence and strong double digit performance in both small business and state and local more than offset expected federal headwinds from the government shutdown. Corporate top line was relatively flat year over year down 1% with strong cloud adoption offset by flowing hardware solutions and the expected moderation in Windows 11 refresh activity. Exceptional small business growth of 18% was fueled by cloud consumption and related services and continued activity in client device modernization, investments that underpin focus on innovative AI opportunities. Our international operations, UK and Canada, reported together as other, delivered high single-digit growth within the challenging markets. In our public business, healthcare increased by 5%. on top of last year's exceptional performance. Government increased by 4% as strong double-digit growth in state and local more than offset the expected decline in federal due to the extended shutdown. K-12's deep customer and partner relationships, combined with our lifecycle services capabilities, drove a major Chromebook Solutions rollout with New York City Department of Education. This, together with solid growth in higher ed, delivered a strong 13% increase in education top line. The diversity of our customer end markets was clearly a driver of fourth quarter performance. The second driver of performance is our broad and deep portfolio of solutions and services. This quarter, our full-stack, full-life cycle offering enabled us to meet the diverse customer priorities across our end markets. Portfolio performance was led by cloud and professional managed services. cloud remains a major engine of performance, contributing roughly half of the quarter's gross profit growth. Both cloud revenue and gross profit rose at strong double-digit rates, fueled in part by accelerating demand for cloud-enabled AI solutions. Professional and managed services top line increased double digits, driven by hybrid infrastructure engagements targeting expense savings and budget optimization, implementation of AI-powered customer care and customer experience solutions and agentic AI engagements. Hardware increased by 2% as double-digit increases in notebooks and servers was offset by declines in storage. Towards the end of the quarter, our teams helped customers navigate memory-related price increases and announced future increases. Client devices showed continued growth of high single digits. Growth reflected a variety of cross-currents, with the large education project and modest memory-related pull-in offset by the expected slowdown in Windows 11 refresh by enterprises and the 43-day government shutdown. Software performance was excellent. Top line rose by 12% and gross profit even faster, driven by cloud as well as in part by customers renewing software licenses tied to hybrid solutions that extend the life of their existing infrastructure. Security remains a key priority across all of our customers, with top line and gross profit both up single digits. Security services remained strong, led by demand for vulnerability assessments, identity and access management implementations, and customer training, along with engagements focused on cloud deployment, endpoint and application security, and safe adoption of AI. Security Solutions showcases how we embed services in every outcome we deliver, services that amplify and accelerate value for customers and partners alike. During the quarter, just as they did all year, the team did an exceptional job leveraging our deep expertise and broad portfolio of full-stack, full-life cycle solutions to address customers' most pressing priorities. And that leads to our third driver of results, relentless execution of our growth strategy. Our investments in high relevance, high growth areas position CDWs to deliver outcomes in a world where technology ecosystems are more dynamic and interconnected than ever. As choices multiply and risk rises, our value to customers and partners only grows, and AI plays directly to our strengths. We have the architectural depth partner reach, and delivery scale to lead in the AI era. And our services forward model sets us apart. Our AI offerings span strategy, data modernization, gen AI integration, and automation. And we're rapidly expanding our offerings with repeatable, scalable toolkits. As always, our portfolio is built around the customer. Our vertical use case is mapped directly to desired end market outcomes. from risk and fraud and clinical efficiency to student success, citizen services, and merchandising. In parallel, our horizontal solutions address universal priorities such as employee and customer experience, operations, security, and automation. solutions like deployment playbooks and managed offerings. No matter the model, services are built in from day one. While still early, AI momentum is building across every market we serve. Let me share two recent AI solutions, one from a large enterprise and one for a small business, that bring this model to life. First, a large enterprise. A large enterprise wants to scale advanced AI capabilities within its hybrid data center environment to meet rising performance demands. manage data sensitivity, and control the cost of public cloud AI workloads. After a competitive RFP process, we earned the deal with a solution that leveraged our deep partnerships and our full stack, full lifecycle approach. One of the largest enterprise deployments of next generation accelerated compute, the solution improves total cost of ownership with a potential 90-day payback, dramatically increases developer agility, and reduces long-term regulatory and data governance risks. This is the model emerging across our enterprise customers, complex recurring margin accretive engagements where our integrated capabilities matter. While we help large enterprises implement full-scale AI stack build-outs, we also deliver solutions for smaller customers that embed AI directly into their workflows as a workforce multiplier. A great example of this in action is the approach we use to help a fast-growing, multi-location automobile service business whose lean IT team was struggling to support an expanding footprint. Our solution? A modern IT service management platform that utilizes a generative AI virtual agent as the first line of support. The generative agent instantly resolves common questions, triages tickets and services and surfaces relevant knowledge in real time. Governance guardrails ensure safe handling of sensitive data, delivering efficiency gains without added risk. Their IT team is holding headcount while shifting to higher value work. The kind of productivity led ROI customers want from AI, and the entire engagement was delivered at an accessible price for a cost-conscious customer. two great client stories that highlight our standout AI solutions. But with AI embedded across the entire stack, a key part of our AI story is that AI is not a discrete contributor, it is a pervasive one, which results embedded in our hardware, software, and services performance. And that brings us to our expectations for 2026. Today's technology ecosystems are more dynamic, interconnected, and mission critical than ever. At the same time, we continue to see unique dynamics in the public sector, including lingering impacts of last year's government shutdown, as well as economic and geopolitical conditions that continue to drive cautious customer behavior. Against this backdrop, we currently look for the US IT addressable market to grow in the low single digits in 2026 on a customer spend basis. with 200 to 300 basis points of CW outperformance. Wild cards include meaningful changes in known ongoing exogenous factors, which include public spending dynamics, tariffs, and geopolitical risks, as well as memory pricing and supply. As always, we will provide updated perspective on business conditions and refine our view of the market as we move throughout the year. Regardless of market conditions, our priority is clear. Deliver sustainable, profitable growth by deepening customer value, sharpening efficiency, and deploying capital with discipline, investing where we see the greatest strategic impact and long-term returns. We are operating in a complex yet exciting time. With our full-court press on strategy and team with proven execution, we are well-positioned to capture share by delivering on our unique value proposition to customers and partners. Now, let me turn it over to Al, who will provide more detail on the financials and outlook. Al?