The paragraph is an introduction to CDW's First Quarter 2025 Earnings Call. Carly, the call coordinator, introduces Steve O'Brien from Investor Relations, who will be hosting the call. Steve introduces Chris Leahy, the Chair and CEO, and Al Miralles, the CFO, who will review the quarterly results. The earnings release and supplemental slides are available on the company's investor website. Steve notes that some statements are forward-looking, subject to risks, and that the presentation includes non-GAAP financial measures, which have been reconciled to GAAP measures. A replay of the webcast will be available later on the website.

In the conference call, Christine Leahy, on behalf of CDW, provided an overview of the company's strong first-quarter performance, highlighting strategic progress with industry-leading margins, effective expense management, and capital use. Net sales increased by 8% to $5.2 billion, with gross profit up by 7%. Non-GAAP operating income rose by 10%, and net income per share increased by 12%. Customers prioritized operating efficiency and expense elasticity, with a focus on client device prioritization due to device refresh needs, Windows 10 expiration, and tariff-related price concerns. While tariff uncertainty slowed major infrastructure investments, it boosted demand for client devices and consumption-based solutions.

In the first quarter, the company's performance was driven by its diverse portfolio and strategic execution across various customer end-markets, including corporate, small business, healthcare, government, and education, each generating over a billion dollars annually. Federal government market growth was slow due to new policy priorities, while education experienced accelerated growth due to high Chromebook demand. The company achieved strong commercial performance with corporate and small business sales growing by 68%. The ability to provide full-stack, cost-optimizing solutions contributed to steady commercial gross margins. Public sector sales also increased by 11%, showcasing the benefits of the company's market diversity and strategic focus.

Healthcare saw significant growth with a 20% increase in net sales, fueled by client devices, cloud, and services. The education sector experienced an 11% rise, with K-12 driven by Chromebook demand and higher education boosted by security, data centers, and services. Government sales had a slight uptick due to state and local growth offsetting federal decision-making pauses. The UK and Canadian operations grew by 10%, led by the UK. The company's diverse solutions and services portfolio saw balanced growth across hardware, software, and services. Hardware sales rose by 7%, driven by client devices, though offset by declines in NetComm and storage. Software sales were up 10%, with a shift towards software-defined networking. Strong security performance and cloud services, particularly "as a service" solutions, also contributed to growth. CDW services saw a 14% increase in sales, driven by customer reliance on their strategies and expense management.

The paragraph highlights the company's investment in a customer-driven strategy aimed at enhancing its market relevance and leadership. To adapt to rapid changes, the company focuses on high-growth areas like cloud adoption, cybersecurity, IT optimization, and AI. Recent investments integrate services into its portfolio, exemplified by acquiring Mission Cloud Services to enhance delivering critical customer outcomes. The strategy is illustrated by a project where CDW helped a truck manufacturer with a solution for migrating identity governance data to a centralized cloud platform, improving security and data management.

The paragraph discusses CDW's successful implementation of an artificial intelligence-driven solution that creates a zero trust environment for 25,000 users, enhancing user access, compliance, and operational efficiencies. This solution also contributed to the company's future growth potential. CDW anticipates continued growth, maintaining its 2025 outlook for US IT market growth and a CDW growth premium. Despite altering market conditions, CDW's first-quarter performance was solid, indicating healthy commercial market spending. Customers remain cautious but steady in their spending, and CDW balances its optimistic outlook with potential challenges.

The paragraph outlines the challenges faced by federal and education customers due to government efficiency initiatives, economic uncertainty, and potential recessionary effects impacting IT planning and budgets. The organization has a history of guiding partners and customers through uncertain times, such as during the pandemic and financial crisis. Currently, it assists customers in navigating challenges like cloud workload growth, security threats, and data management for AI integration. The team is actively engaging in scenario planning, optimizing spending, and preparing for economic slowdowns by evaluating different architectures, procurement models, and product options.

The paragraph outlines the company's readiness and confidence in their strategy and business model to navigate uncertain market conditions. They emphasize their commitment to managing the business to remain a vital partner to customers and vendors. Albert Miralles then reviews the first-quarter performance, highlighting a gross profit of $1.1 billion, a 5.5% year-over-year increase. The growth exceeded expectations due to increased demand for client devices, cloud, security, and services, especially in the education channel. The gross margin was stable at 21.6%, despite a higher contribution from client device sales, which rose to 33% of net sales. Netted down revenues also saw a record contribution to gross profit.

In the first quarter, CDW's netted down revenue from solutions transferred at a point in time is expected to outpace other areas due to strong cloud infrastructure and SaaS growth. EBITDA revenues grew by 12% year-over-year, and all channels experienced sales growth. Corporate and small business sectors saw top-line growth, and education benefitted from device refreshes and tariff anticipation. While the government sector was challenging, expectations were met, and healthcare excelled due to strategic investments. Internationally, the UK showed strength from PC refreshes, but Canada was hampered by macroeconomic issues. Despite anticipated volatility due to economic and political uncertainties, overall performance exceeded expectations. Expenses increased slightly due to higher gross profit.

In the reported quarter, the company saw improvements in its efficiency ratio for SG&A costs and gross profit, which was down to 60.4%. The workforce remained stable with a total count of approximately 15,100. Non-GAAP operating income rose to $444 million, a 10% increase, with an improved operating income margin of 8.5%. Net income also increased by 9.9% to $287 million, leading to an 11.9% rise in income per diluted share to $2.15. Despite a net debt increase to $5.2 billion, liquidity was robust at $1.7 billion. The cash conversion cycle improved to 15 days, aided by effective working capital management amidst higher client device sales.

The company maintains that its target for cash conversion is an effective guide for long-term working capital modeling. In the recent quarter, adjusted free cash flow was $249 million, aligning with expectations and representing 87% of non-GAAP net income. They utilized cash in line with their 2025 capital allocation goals, including $200 million in share repurchases and $83 million in dividends. They aim to distribute 50% to 75% of adjusted free cash flow to shareholders by 2025 and are ahead of this target through Q1. The first priority is to align dividend increases with non-GAAP net income growth, maintaining an 11-year streak of increases and targeting a 25% payout ratio in the future. The second priority is to maintain an optimal capital structure, ending Q1 at 2.5 times net leverage, within the targeted range of two to three times. The company also focuses on M&A and share repurchases as key elements of shareholder value, continuously evaluating opportunities like the acquisition of Mission Cloud Services. Overall, they remain committed to returning 50% to 75% of adjusted free cash flow to shareholders through dividends and share repurchases.

In 2025, the company anticipates low-single-digit growth for the IT market, driven by strong underlying demand and some customers preemptively purchasing ahead of potential tariff-related price increases. Despite the positive start to the year, the company maintains a cautious outlook due to economic uncertainties and potential challenges in the government and education sectors, excluding recessionary conditions. They aim to outperform the market by 200 to 300 basis points and expect gross profit and margins to remain stable compared to 2024, with stronger performance in the second half of the year. The company projects low-single-digit growth in earnings per share, focusing on profitable growth and strategic capital allocation, with currency impacts expected to be neutral.

In the article's paragraph, the company anticipates mid to high-single-digit sequential gross profit growth for the second quarter, leading to low-single-digit year-over-year growth. This projection considers advancing client device demand due to pre-tariff purchases and reduced spending in government and education sectors. The gross margin is expected to align with 2024 levels. Operating expenses are likely to increase in line with gross profit, but non-GAAP SG&A as a percentage of gross profit should decrease compared to the first quarter. Non-GAAP earnings per diluted share are anticipated to grow at a mid-teens rate sequentially, nearly matching the previous year's second quarter figures. The CFO concludes the financial summary and opens the floor for questions, with David Voigt from UBS posing a question about the product categories Netcomm and storage and their market dynamics, which Chris and Al are expected to address. Christine Leahy acknowledges the inquiry.

The paragraph discusses the current state of the networking market, highlighting that customers are still acclimating and digesting recent changes. There is a shift towards software-defined architectures, with a cautious approach towards larger infrastructure deals. This is seen as a timing issue rather than a problem, with ongoing design discussions indicating future growth. Christine Leahy addresses a question about maintaining profitability amid a competitive environment and potential tariffs. Despite the challenges, she expresses confidence in the ability to pass cost increases to customers. Although customers might adjust their purchasing volumes, they are expected to continue spending their budgets.

The paragraph discusses the financial performance and strategies of CDW. Initially, it touches on how the cost of goods sold and pricing fluctuations might affect gross margins but reassures that they can maintain profitability. Albert Miralles mentions that despite market variability, they are able to pass through costs to customers, maintaining margins as a cost-plus provider. An unidentified analyst and operator then move to a question from Asiya Merchant of Citigroup, who inquires about strong performance in the healthcare sector. Christine Leahy attributes this success to CDW's strategic investments in their sales team, healthcare technologists, industry experts, and facilities like transformation centers where customers can test technologies.

The paragraph discusses CDW's successful market strategy focused on healthcare, leading to significant growth in client devices and top-line performance. The company noted that healthcare organizations were slow in adopting cloud technologies, but there's been a recent acceleration in cloud workload optimization among CDW customers, driven mainly by the importance of security. During a Q&A session, Christine Leahy from CDW mentioned that despite the challenging macroeconomic environment, strong demand continues into the second quarter, particularly in the SMB and corporate sectors. Customers are cautious, but there's active engagement in planning and design, which is seen as a positive indicator for ongoing business activity. Client devices in the commercial space remain robust.

The paragraph discusses a company's cautious optimism regarding its business outlook, noting that customer behavior is disciplined yet determined. The company is focusing on providing optimized solutions through its portfolio. Amit Daryanani asks about the company's 2025 earnings per share (EPS) guidance and the role of stock buybacks in achieving it. Albert Miralles responds, stating that they plan to return 50% to 75% of free cash flow to shareholders through buybacks. The company took advantage of market opportunities in Q1 by buying back $200 million in shares, but they do not expect to maintain that pace throughout the year.

The paragraph discusses a conversation about customer spending habits and order activity as the company enters the second quarter. Chris notes that while spending remains robust, some customers seem cautious. Christine Leahy explains that their observations are based on current trends, indicating balanced spending between transactional activities and large projects. However, due to earlier spending patterns, a more cautious environment is anticipated for the rest of the year. The conversation also touches on revenue expectations for the first and second halves of the year, questioning whether more revenue is expected in the first half compared to historical trends.

In the paragraph, Albert Miralles addresses a question from Samik Chatterjee about the impact of the pull forward in client devices on gross margin percentages. Miralles explains that he does not anticipate significant variations in gross margins for Q2 or the full year compared to 2024 levels. He notes that in the first quarter, there was a substantial shift toward client devices and away from solutions, which accounted for almost all the variation compared to the previous year and quarter. Although their original outlook expected some gross margin compression, it wasn't significant in Q1, but there's still a possibility for variation. Overall, the expectation is that gross margins will return to levels similar to those in 2024. Samik acknowledges the response, and the operator moves on to the next question from Harry Read regarding hiring plans and wage inflation. Christine Leahy begins to answer before passing it to another speaker.

The paragraph discusses the company's balanced approach to managing expenses and investing in strategic hires throughout the year, focusing on technology, sales, and digital roles. Despite negligible wage inflation, the company is hopeful for continued operating leverage, although it anticipates less leverage for the remainder of the year compared to Q1. This is due to anticipated low-single-digit growth rather than the significant growth seen in Q1. The company remains cautiously optimistic about strong underlying growth and emphasizes the importance of investing in their workforce.

The paragraph outlines a cautious approach to spending and hiring by a company, aiming to maintain balance in a dynamic environment. The company's guidance on earnings per share (EPS) growth aligns with gross profit growth due to strong growth in Q1 and some deceleration. During a Q&A session, Keith Housum from Northcoast Research inquires about the impacts of pricing changes within the company's cost-plus model. Albert Miralles responds, explaining that price increases vary by original equipment manufacturer (OEM) and product category, and notes that over half of the company's gross profit comes from software and services, which are not impacted by hardware price changes.

In this paragraph, several individuals discuss the impact of tariffs on Original Equipment Manufacturers (OEMs) and pricing strategies in services. Keith Housum inquires whether the company is raising prices or maintaining them, to which Christine Leahy responds that they are keeping market-competitive prices. George Wang from Barclays then asks about the adoption of AI technology and any changes in strategy due to macroeconomic or tariff influences. Christine Leahy notes that most sales stem from a need to refresh client devices due to the expiration of Windows 10, with conversations about AI Personal Computers (AIPCs) growing, but the primary driver being the transition to Windows 11. Wang also mentions a new collaboration with Penguin Solutions.

In this paragraph, Christine Leahy from CDW and George Wang discuss CDW's partner ecosystems, with Leahy emphasizing the company's focus on maintaining an appropriate value proposition in all partner relationships. Ruplu Bhattacharya from Bank of America asks Albert Miralles about the lower gross margins in CDW's core business for the first quarter, attributing the decline to a mix change involving client devices rather than an actual compression in margins. Miralles confirms that the year-over-year decline in overall and non-netted down gross margins was primarily due to the mix shifting towards client devices and moving away from solutions, with minimal impact from direct margin compression.

In the discussion, Christine Leahy addresses questions from Ruplu Bhattacharya about changes in the education and federal sectors. Leahy notes that there has been a pull forward in the education sector, with customers buying earlier than usual to avoid potential tariffs, thus affecting typical Q2 seasonality. On the federal side, she anticipates a more muted environment due to government budget management challenges under the current administration. However, she highlights that some non-defense federal agencies, which are key customers for CDW, remain strong and have not experienced budget cuts, providing a positive outlook for the company.

In the paragraph, Albert Miralles highlights that the second quarter (Q2) results are expected to be below the usual seasonal expectations due to various factors like federal friction and educational pull-forwards. Ruplu Bhattacharya acknowledges this information, and the call proceeds with the operator noting the absence of further questions. Christine Leahy closes by expressing confidence in the team, strategy, and business model, and thanks CDW coworkers, customers, and listeners. The call ends with an invitation to join the next quarterly discussion.

This summary was generated with AI and may contain some inaccuracies.