CDW Corporation 2026 Q2 Earnings Call

Good morning, everyone. Joining me today to review our second quarter 2026 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 the 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 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. For instance, non-GAAP operating income, non-GAAP operating income margin, non-GAAP net income, and non-GAAP earnings per diluted share, non-GAAP selling and administrative expenses, non-GAAP effective tax rate, net sales on a constant currency basis, free cash flow, and adjusted free cash flow. 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 made available on our website and in our earnings release. Please note all references to growth rates or dollar amount changes in our remarks today are versus the comparable period in 2025, 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.

This conference call is 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. Before we begin our review of the quarter, I want to briefly address the announcement we issued this morning regarding Al's planned retirement. We share that Al plans to retire in 2027 after an extensive career following the completion of an orderly transition. He'll remain in his current role until his successor is appointed, and we will then continue to serve in an advisory capacity to ensure continuity. The search for a successor is currently underway. On a personal note, I want to thank Al for his many contributions to CDW's success. He has been a trusted partner to me, an exceptional leader for our coworkers, and a driving force behind the growth and evolution of our company. I'm grateful that we will continue to benefit from his expertise as we execute a seamless transition.

With that, let me turn to the second quarter performance, strategic progress, and outlook. Al will then provide additional details on our financial results, capital allocation priorities, and expectations for the balance of the year. The team delivered strong results this quarter through disciplined execution and a clear focus on the priorities driving customer demand. Together, they delivered net sales of $6.6 billion, up 10%, gross profit of $1.3 billion, up 6%, non-GAAP operating income of $556 million, up 7%, and non-GAAP earnings per diluted share of $2.91, up 12%. Net sales, gross profit, and non-GAAP earnings per share set new all-time quarterly records. These results demonstrate the strength and resilience of CDW's business model in a dynamic technology environment shaped by growing AI complexity, pricing volatility, and ongoing memory challenges. Demand remained healthy with AI increasingly influencing customer activity despite cautious and deliberate customer spending.

Customer investment in AI readiness and modernization drove strong infrastructure demand. By bringing together the right technology, expertise, and execution, the team delivered double-digit top-line growth with substantial gross profit dollars. Strong gross profit, combined with operating leverage and disciplined capital allocation, drove 12% non-GAAP earnings per share growth. Today, AI infrastructure implementation is most advanced among our largest customers, which is typical of a major technology transformation cycle. Infrastructure investment comes first, followed by services, software, and lifecycle opportunities. As adoption expands, deployment activities broaden across customers of all sizes. What shapes demand may change from quarter to quarter, but technology remains essential and increasingly complex. Technology changes, customer priorities change, CDW's role does not. That enduring relevance is the foundation of our value proposition. Let's take a deeper look at how we met customer priorities this quarter. There were three primary drivers of performance.

Our balanced portfolio of customer end markets, the breadth of our full stack capabilities, and our growth strategy, which sustains our relevance. First, our diversified customer portfolio. The diversity of our customer end markets is one of the defining strengths of our business model. Today, we operate across three U.S. segments: commercial, government, and education. Commercial serves customers through dedicated corporate, healthcare, and financial services teams. Within each end market, we align resources by customer size, enterprise, mid-market, and small business. Government is aligned around state and local and federal customers, while education serves both K-12 and higher education institutions. Our other segment represents our combined U.K. and Canadian operations. Each market has dedicated sales teams and deep industry and technical expertise. Let's take a look at how they performed this quarter. Commercial delivered another strong quarter, with net sales increasing 9%.

Corporate increased 11%, driven by the demand for infrastructure modernization, cloud, and AI readiness initiatives. Healthcare remained a standout performer, growing 9%, driven by demand for mission-critical outcomes, including AI-enabled claims management and clinical documentation. Financial services increased 2% with continued healthy customer demand. Government net sales increased approximately 14%, driven by improving federal demand and continued momentum across state and local customers. Clients prioritized infrastructure, software lifecycle management, and productivity initiatives. Education net sales increased by approximately 1%. K-12 demand remained healthy with a strong mix of software services and lifecycle offerings, despite fulfillment timing shifts. Higher education continued to operate in a constrained funding environment. International, once again, delivered exceptional growth. Net sales increased approximately 23%, led by a record quarter in Canada and continued strong momentum in the U.K.

Demand remained healthy across hardware, software, and cloud categories, with both the U.K. and Canada delivering mid-teens or better local market growth. The second driver of our results this quarter is the breadth of our full-stack, full-lifecycle offering, which enables us to capture demand across evolving customer priorities and technology trends. During the quarter, success addressing healthy demand for modernization, AI readiness, and resilience drove a 10% increase in hardware revenue. Server, storage, and NetCom all delivered very healthy double-digit growth. Notebook and desktop increased a combined 10%, reflecting strong execution and customer willingness to invest in mission-critical technology despite pricing pressures. Higher average selling prices more than offset lower unit volume. Software, cloud, and security all delivered healthy top-line and gross profit growth. Software increased by low double digits, driven by security, application suites, and storage and network area management software.

Robust cloud growth reflected continued prioritization of application modernization, AI evaluation, and hybrid environment optimization. Memory price inflation also contributed to cloud adoption as some customers sought help finding alternatives to hardware expenditures. For security, both top-line and gross profit increased double digits, driven by demand for both protecting advanced technology architectures and strengthening governance and compliance capabilities. Services increased 1%. Just like every part of the business, services demand follows customer priorities. This quarter, customer focus on hardware and cloud investments, combined with deployment timing, influenced the mix of services demand. We expect a pickup in lifecycle and professional services as customers move from procurement to implementation to management. The third performance driver, our growth strategy, is crucial to sustaining our relevance. Our strategy is built around an enduring reality. Technology will continue to evolve, but the need for a trusted partner remains constant.

As AI adds complexity across the technology landscape, that need has never been greater. Customers increasingly recognize that AI is not a point solution. It's an architectural challenge. AI workloads span on-premises, public cloud, edge, and hybrid environments. As AI scales, organizations must integrate complex technology environments while managing security, governance, and risk. Accomplishing this requires a partner that can orchestrate the resources required and deliver the execution needed to turn AI investments into tangible outcomes. CDW is that partner. We bring together the right technology, expertise, and execution as we help customers deploy AI with confidence, scale faster, and realize value sooner. The strategic implication is straightforward. AI increases our relevance because it increases complexity. As customers move from AI experimentation to pilots to implementation to scaling, we are capturing opportunities today across infrastructure, security, data integration, and ongoing lifecycle support.

Let me share a couple of recent examples that illustrate the role CDW is playing across customers' AI journeys. A western state's technology office has made substantial progress in its AI journey, launching an AI sandbox, advancing statewide AI literacy, and incentivizing agency adoption. As AI activity accelerates, the state faces a challenge common across many organizations, a growing patchwork of AI initiatives without a consistent way to manage, govern, and scale them. Through our AI360 framework, we designed a solution that is helping the state move from isolated AI projects to a cohesive operating model that integrates strategy, governance, infrastructure, security, data, and application development. By bringing together the right technologies, partners, expertise, we are creating a scalable framework for evaluating, deploying, and governing AI across agencies, enabling the state to accelerate adoption while maintaining security oversight and ensuring measurable outcomes.

This multi-year, multimillion-dollar engagement demonstrates the scalability of our model. We will drive recurring services revenue. We are now productizing the solution to deliver highly relevant and proven AI-driven outcomes at scale to state and local governments across the country. Another engagement, one with a large financial services company, demonstrates the broader services opportunity that is emerging as frontier AI innovation accelerates. Like many enterprise organizations, our customer is dealing with a growing gap between the volume and complexity of new AI-driven threats and the ability of security teams to remediate them quickly and consistently. They need a more coordinated, scalable approach to managing vulnerabilities across their entire technology estate. Through our Claude Mythos AI security vulnerability program, the team brought in CDW expertise across security, observability, cloud DevOps, systems engineering, hybrid infrastructure, and global delivery to design a more automated approach to identifying and remediating vulnerabilities at scale.