CDW Earnings Call: Growth, AI Bets and Margin Squeeze

CDW Corporation ((CDW)) has held its Q1 earnings call. Read on for the main highlights of the call.

CDW Corporation’s latest earnings call struck a cautiously upbeat tone as management celebrated record first‑quarter gross profit, solid EPS growth and robust free cash flow while acknowledging margin pressure and execution risks. Executives framed 2026 as off to a strong operational start, but stressed disciplined spending, AI‑driven productivity gains and careful navigation of supply and backlog challenges.

Broad-Based Revenue Growth Across Key End Markets

CDW posted 9% year‑over‑year net sales growth in Q1 2026, with momentum spread across major customer segments rather than reliant on a single pocket of strength. Commercial revenue climbed roughly 10%, government rose about 5%, and international operations in the U.K. and Canada combined for an impressive 18% increase in U.S. dollar terms.

Record Gross Profit with Some Margin Erosion

Gross profit advanced 6% to $1.2 billion, marking a record first quarter even as gross margin slipped 60 basis points to 21%. Management framed the result as resilient given the heavier hardware mix and pricing backdrop, emphasizing that the company is prioritizing absolute profit dollars and long‑term relationships over near‑term percentage margins.

EPS Growth Outpaces Operating Income

Non‑GAAP operating income improved about 1.8% to $452 million, while non‑GAAP net income rose 3.1% to $295 million. Helped by share repurchases, non‑GAAP diluted EPS grew faster than profits, increasing 6.3% to $2.28 and underscoring the combined effect of operational execution and capital allocation on per‑share earnings.

Robust Free Cash Flow and Shareholder Returns

Adjusted free cash flow reached $251 million in the quarter, converting roughly 85% of non‑GAAP net income into cash. CDW returned $282 million to shareholders through $201 million of buybacks and $81 million in dividends, equating to 112% of adjusted free cash flow and running ahead of its full‑year capital return targets.

Hardware and Software Drive, Services Support Growth

Growth was led by a 10% increase in hardware revenue, with infrastructure categories such as networking, servers and enterprise storage each rising more than 20%. Software revenue grew 11%, while professional and managed services gross profit contributed nearly 15% of the overall gross profit increase, highlighting the evolving mix of CDW’s technology solutions.

AI Adoption Accelerates and Expands Deal Sizes

Management highlighted a visible shift among customers from AI experimentation toward production‑grade deployments, including a nearly eight‑figure AI deal that bundled significant professional services. CDW expanded its CDW Assist Super Agent offering and rolled out an AI‑powered “Geared for Growth” modernization program, positioning itself as a key integrator in the AI infrastructure and services landscape.

Geared for Growth Targets Large Productivity Upside

The company has identified $100 million to $200 million in potential gross annual run‑rate productivity improvements over 2027–2028 from AI‑enabled process modernization and simplification. A portion of these savings is earmarked to be reinvested into growth initiatives, signaling that CDW views efficiency gains as both a margin lever and a funding source for future expansion.

Balance Sheet Strength Supports Investment Flexibility

Net debt ended the quarter at $5.1 billion, up about $50 million sequentially but leaving net leverage at 2.5 times, comfortably within the company’s 2 to 3 times target range. Liquidity stood at roughly $2.5 billion, giving CDW room to keep investing in AI capabilities, working capital and shareholder returns while maintaining a conservative financial profile.

Gross Margin Feels Mix and Timing Squeeze

The 60 basis‑point decline in gross margin to 21% reflected a shift toward lower‑margin hardware and fewer netted down revenues, along with timing factors around large projects. Management expects full‑year gross margins to be roughly in line with 2025 levels, but acknowledged that Q1 illustrates how mix and delivery timing can temporarily compress profitability.

Operating Margin Hit by Higher SG&A and Investments

Non‑GAAP operating margin slipped about 50 basis points year over year to 8%, as non‑GAAP SG&A expenses increased 8.8% to $738 million. Executives noted that Q1 typically carries the highest expense ratio due to seasonality and incentives, and added that elevated spending on AI tools and modernization weighed on margins but is intended to drive long‑term efficiency.

Services and Netted Down Revenues Take a Breather

Services revenue was essentially flat in the quarter, and netted down sales accounted for 34.5% of gross profit versus 36.5% a year ago. Customers focused budgets on hardware and software licenses rather than higher‑margin services, warranties and software assurance in Q1, tempering mix‑driven margin expansion even as overall demand remained solid.

Supply Constraints Inflate Inventory and Backlog

Memory supply and pricing constraints altered customer budgets and delayed shipments, pushing a meaningful volume of orders into backlog instead of recognized revenue. To protect its ability to fulfill demand, CDW increased inventory by more than 40% sequentially, accepting balance sheet pressure in exchange for securing product availability.

Elevated Backlog Adds Execution and Timing Risk

Significant written business did not convert to revenue in Q1, leaving backlog heading into Q2 higher than usual and skewing delivery into future periods. Management acknowledged that while this backlog underpins near‑term revenue visibility, it introduces execution risk around fulfillment timing and margin realization in coming quarters.

Isolated Pockets of Weakness in Federal and Higher Ed

Federal sales dipped low single digits as agencies dealt with budget timing issues and procurement delays, softening what was otherwise a broad‑based growth picture. In education, strength in K‑12 was partially offset by slower decision‑making in higher education, illustrating how macro and funding dynamics differ across public‑sector verticals.

Core Margin Profile Pressured by Hardware Mix

Core, non‑netted down margins were seasonally lower in Q1 and further pressured by a mix shift toward infrastructure hardware that carries less immediate services attachment. Management noted that excluding netted down items, margins were broadly stable year on year, signaling that underlying pricing discipline remains intact despite short‑term mix headwinds.

Lean Workforce Reflects Ongoing Efficiency Focus

Total coworker count ended the quarter around 14,700, with approximately 10,400 customer‑facing employees, both modestly lower than a year ago and from Q4. The slight reduction reflects CDW’s continuing focus on productivity, coverage restructuring and aligning its workforce with changing demand patterns and technology priorities.

Guidance: Modest Growth with AI-Led Upside

CDW reaffirmed a cautious 2026 outlook, expecting the U.S. IT market to grow in the low single digits and aiming to outperform by 200 to 300 basis points, with full‑year gross profit rising in the low‑to‑mid single digits and gross margin roughly flat to 2025. Non‑GAAP EPS is projected to grow at the high end of mid‑single digits, Q2 gross profit and EPS are expected to increase in the high single digits sequentially, and AI‑driven Geared for Growth savings should begin contributing in the second half and ramp toward a $100 million to $200 million run‑rate benefit in 2027–2028.

CDW’s earnings call painted a picture of a company growing faster than its core market, using AI to sharpen its competitive edge and returning substantial cash to shareholders, even as it works through mix‑related margin pressure and supply‑driven timing issues. For investors, the key watchpoints will be backlog conversion, margin trajectory and how effectively CDW turns its sizable AI and modernization bets into sustainable profit growth over the next few years.