Good morning, all, and thank you for joining us for the CDW Third Quarter 2025 Earnings Call. My name is Carlie and I'll be coordinating the call today. [Operator Instructions] I'd now like to hand over to our host, Steven O'Brien with Investor Relations. Floor is yours.

Thank you, Carlie. Good morning, everyone. Joining me today to review our Third Quarter 2025 results are Chris Leahy, our Chair and Chief Executive Officer; and Al Miralles, our Chief Financial Officer. Our earnings release was distributed this morning and is available on our website, investor.cdw.com, along with the 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 and 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 the reconciliation charts in the slides for today's webcast and in our earnings release and 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 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, 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 and 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 quarter, consolidated net sales were $5.7 billion, up 4% above last year. Gross profit was $1.3 billion, 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 end markets. They also reflect the power of our deep end 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 are foundational to enabling modern work. And once again, major capital investments were heavily scrutinized. Corporate and small business customers also prioritized preproduction AI trials to prove out use cases to validate concepts and ROIs. These priorities led to strength in cloud, software and services. Let's take a deeper look at how customer priorities and unique market dynamics…

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 gross profit of $1.3 billion 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 in Client Devices and NetComm 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 to 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 out of client devices sequentially despite the category's continued solid growth. Every channel grew year-over-year except education, as our customers balance priorities across our diverse portfolio. Demand for CDW professional and managed services continued to be strong at 14%. This can be seen in net sales transferred over time or CDW's principal. Overall, cloud infrastructure, SaaS and security offerings were strengths in the quarter. These are offerings included in the category of net sales transferred at a point in time or CDW's 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 and up meaningfully from 32.9% in the prior quarter. Customers across end markets outside of Education and Federal continue to invest in client devices, driven by Win 10 end-of-life…

[Operator Instructions] Our first question comes from Amit Daryanani from Evercore ISI.

I guess, Chris, maybe just to start with the public vertical, especially the federal part has been challenging this year. 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 do you think the dollars that are lost from shut down 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?

Yes, Amit, sure. Look, let me first say that the teams have done a really outstanding job navigating in the post-DOGE landscape and building momentum as we went into the shutdown that we expect to pay off on the other side. But all that said, look, we are -- we have taken a conservative view of Q4 understanding that we've got some pipeline and backlog going into Q4 and some run rate business associated with those agencies who are open. So Q4 is not a 0 quarter, we have plenty of business there. But with regard to the agencies that aren't open, obviously, we're constrained in building that pipeline. But we are there working with customers to make sure we're the ones that they turn to when we get out of the shutdown. So when we think about the guide, I'd say, look, it's conservative for Q4. We think it's smart to be prudent. We presume the shutdown lasts and persists through the quarter 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 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 Amit, look, I'd say this is just 1 more curveball in the many curveballs that have hit us in 2025 and the team is managing well.

Perfect. And if I could just follow-up, the small business growth at 14% was really impressive, and I think it actually accelerated by a couple of points versus June even. Can you just double-click on what is driving that strength? And 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?

Yes. So Amit, small businesses been, I would characterize it as incredibly resilient, coupled with outstanding execution by the team. And I'd also observed 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 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 the rest of the segments, unclear, I think we need to be a little cautious about that right now, just given how resilient small business 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 the small businesses are hanging tight.

Our next question comes from Keith Housum from Northcoast Research.

I appreciate the opportunity here. In terms of 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 funding will continue for PCs or perhaps shift in other ways or there could be a pretty tough headwind for you guys in '26?

Yes, look, I characterize it as follows: We continue to see solid demand. We often get asked what inning we're in, and we're in that kind of later stage of the mid innings. So if you had me pin it down, I'd say, sixth inning and probably rounding around to the seventh inning stretch. So we continue to see healthy demand, and we'd expect that to continue over the next few quarters. Now look, we are getting past the end-of-life cycle. And as we get past that, we tend to see it trickle out. But we do not -- we don't see it slowing down over the next couple of quarters. So when you think about the drivers, right, we've got replacement of Windows 10 end-of-life transition. We also are seeing heightened focus on GenAI productivity initiatives. And we said before that AI PCs were not as a large portion of what we are converting. We are seeing that pick up. So that would be another tailwind for PCs. So we feel good about the next couple of quarters.

Great. And then in terms of the government funding, can you remind us how much the federal government perhaps funds, education, health care and how that contributes to their spending?

Yes. Okay. So the Fed funding of education at the K-12 level is generally the subsidies during COVID were big funding mechanisms, but typically, the states are the main funders for the K-12 level. And we've been seeing over the past 2 years and helping our customers revert back to the typical funding sources, which is typically state and local. On the high ed side, we've got -- we're paying attention closely with our customers on grants that might be canceled and things like that. But they're also in a battle for students. So I'd just say that the technology they're investing in is all about winning the race for students, and we're seeing that pick up quite nicely. We had a nice higher ed quarter. And with regard to health care. Look, we're keeping a watchful eye on that because there are some policy potential changes that could impact the income streams for health care systems, and so we're keeping a watchful eye. Again, though, I'd just say that health care systems, as you've seen in the last 7, 8 quarters, have been leaning into technology in a way that I haven't seen in previous years to drive clinical -- clinical continuity, to drive security and equally to drive competition in their industry. So we're keeping a watchful eye, but I feel very comfortable and the team feels very comfortable that we will navigate through funding changes, it's part of what we do. We're able to pivot and find where the sources of funding are coming and help our customers through that.

Our next question comes from Erik Woodring from Morgan Stanley.

Chris, in each of the last 4 earnings you've referred to the spending environment as complex or challenging. And I'd love if you could just maybe 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 to grow through those past cycles. This year, we're obviously just seeing a bit more muted gross profit dollar growth of some negative compares. So really just trying to get your viewpoint on really how this complexity is different from history and how it's impacting your gross profit dollar growth? And then a quick follow-up.

Yes, it's a great question. And if I had to boil it down to 1 thing, I would say volatility. Uncertainty might be the word most people would use. But as I think about this past year in particular, the curveballs that have come at every organization rapidly, and without necessarily a lot of time to adjust, have had technology buyers, business owners, schools, all institutions adjusting to the volatility and, therefore, not having a certainty and predictability to invest, that has been a primary reason it's been so uncertain and helping customers unpack both investments and make decisions around new architectures with AI. So we've got questions around new technology, AI; funding shifts that can happen month-to-month; there has been a hesitancy to make commitments on some larger pieces of technology. It's been hard to run a business. Now that said, it feels very much now that the leaders of these institutions are kind of getting used to the unpredictability, the unevenness and just starting to really pick up and move forward with mission-critical needs and investing behind technology because they feel like they otherwise are going to get behind. So it's really that policy bouncing around, the funding changes that we hear about, the geopolitical world that we live in and the macro uncertainty, the uncertainty around inflation and everything that's impacting the economy. But I'll tell you, for me, it really ultimately comes down to this unpredictability that we've been living in for about 9 months.

Okay. Very fair. And Al, just as a quick follow-up. You have been very transparent over the last few quarters about the kind of variable comp headwind you're facing this year. I'm wondering if we take a step back, what type of gross profit dollar growth does CDW have to see to return back to your kind of 10%-plus EPS growth algo of old? Any color there would be super helpful.

Yes. Just a couple of things. First, I would just note for 2025, which we've talked about as a bit of a period of transition for us but also traction and we're seeing that traction above our expectations, so important in that regard. If you actually take the effect of the '24 compare on expenses, and we talked about kind of these incentive compensation accruals from prior year, we would look like our gross profit and our non-GAAP operating income are a bit closer to parity. So and I would say that is consistent with this period of transition after a pretty dynamic couple of years. To your question, Erik, what's it going to take to get the further traction and get upwards of high single digits, double digits on EPS? I think what we need to see is a sustaining of that gross profit growth and the spend, continuation of our progress on gross margin and then importantly, 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. It's obviously a balancing act with all those things, including investing, but that's what the horizon looks like for us.

[Operator Instructions] Our next question comes from Samik Chatterjee from JPMorgan.

Chris, maybe if we can start on the services side, pretty strong growth there. Maybe if you can dig a bit deeper in terms of the nature of opportunities you're seeing, particularly the ones associated with the AI deployments you're seeing from your customers? And any thoughts in relation to M&A and further consolidating the services opportunity for the company? And I have a quick follow-up.

Yes, Samik, I'll take that. This is Al. Really strong results on services top line for the quarter. Underneath that 9%, it was 14% growth in managed and professional services. So a couple of themes or practice area details I'd share there. Number one, data and AI definitely a focus; continued focus on security, as you would expect; and then cloud has been a really persistent contributor from a services perspective. We've got a new leader in our services space. We are 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 that. So as we look forward, Samik, I would expect that the life netted down revenues, services has the potential to be kind of an outlier in terms of growth contribution, and we feel encouraged by the progress we're seeing at this juncture. I'll just remind you, too, just in terms of just spotting our progress here. If you go back a few years, Samik, services was about 5% of our net sales; this quarter, it was 9%. And so if we can continue on this growth path, we think it's going to be a meaningful contributor to our top and bottom line.

Okay. Okay. And then just curious, you made a comment about 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 macro is challenging. But obviously, in terms of investment, is it really the AI sort of decision-making that's driving this unevenness? Or is it more evaluation of public cloud? What are you seeing on that front in terms of what's sort of causing this lumpiness in those decision-making processes?

Sure, Samik. 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 you saw it over the last couple of quarters, Q2, we saw a bit of a surge, particularly in the enterprise space with bigger projects that aided solutions growth there. And in 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 can a bit more?

Our next question comes from Harry Read from Rothschild & Co.

Just looking at SG&A and the year-on-year growth rate, both on a 1- and 2-year view, it looks like it's accelerating quite a lot. But forgive me if I heard it wrong, I think you said that year-over-year margin should expand in Q4, that's EBITDA over gross profit. So just could we have some clarity on what's driving quite a sharp deceleration on SG&A growth, if you do expect gross profit growth year-over-year to slow a little bit? And then maybe if you could break down if that's largely driven by front office wages or back office wages?

Harry, it's Al. I'll go back to my comments: The biggest variable is comparing against our compensation and think kind of bonus plans and the like from the prior year post-Q1, from last year, while our gross profit was declining and below our expectations, we were pretty considerably taking down those comp expense items where this year, we don't have that. So it is more than anything, Harry, to compare of that. Again, I'll go back to my comment that if you adjust for those factors and 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 evenness between gross profit and operating income. Now I do believe that kind of part of the calculus here is that we've had obviously very strong growth in the pandemic period and we had deep reduction flattening for 2 years, 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 parity or gearing of our expenses relative to gross profit. So as we look forward and with the expectation that growth can persist and should persist, then you're going to -- you're going to return to operating leverage, and again, to an efficiency ratio that we would be much more comfortable with in that 55%, 56% range.

Yes, that makes a lot of sense. And then just a short one. It looks like SBC as a percent of GP is kind of hitting the top end of the range of what it's been historically. Just any thoughts in of what that margin could be into Q4 and then the rest of -- then into 2026?

Yes. Harry, sorry -- and I think you might be speaking to the compared to the prior year in that regard and it looks like we are up considerably.

Yes. I'm just looking at the [indiscernible] in the quarter. Yes, and then just looking generally what it's been on a quarterly basis as a percentage.

Yes. I don't think if you look back over time, it's going to look outsized on a percentage basis to any other metric. But what you are seeing from the prior year is we had a larger equity program 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. So '25 on an absolute basis and ratio basis should look reasonably normalized versus previous years where you didn't have that distortion.

[Operator Instructions] Our next question comes from David Vogt from UBS.

Chris, maybe one for you. Can you help us understand and parse out sort of the impact on health care? 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 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 margins.

Yes. In terms of health care, look, when we look over the last several quarters, health care has really been, frankly, on fire. And you'll recall, we talked about a number of investments we've made across the health care segment, both in terms of industry experts, innovation centers, et cetera. And that's really been, in our view paying off in solidifying our relationship as a trusted adviser as the health care institutions are leaning into technology. As we think about the go forward, look, we're just going to be very, very clear and very watchful about the trickle-down effect that I had mentioned before, some funding shifts from income stream shifts. We just got to keep an eye on that. But we've been through periods like that before. And you tend to see things like M&A, you tend to see consolidation, and you tend to see movements within the industry itself, all of which requires technology support, so that's an area where we think we could see a second order impact from funding changes. But I'll come back to the notion that what we're doing with our customers in health care right now is not just foundational and optimizing it really is the future of care. And that we believe is sustainable over the long term. So we might see some lumpiness in health care based on funding. But again, we work hard and know our way around the funding mechanism.

Great. And then, Al, for you, 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 some more margin-rich solutions going forward outside of the netted down piece? Just trying to get a sense for how that trends? I know you're still in the planning phases for 2026, but you've had relatively good results in traditional gross margin outside of netted down. So I just wanted to get a sense of how you're thinking about that going forward.

Yes. Thanks for the question, David. 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 of quarters and so that's certainly encouraging that those non-netted down margins have held up. As we look forward, David, I think that a mix out of client would marginally benefit there as well. If things play out as we would hope on the services front that will also aid those margins. So I'd say modestly, you could see some tick up, but I'll reserve the right to give you more detail as we get into 2026.

Our next question is from Adam Tindle from Raymond James.

Chris, I wanted to start, I know you're in the middle of the planning cycle for 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. The Services 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 how that works? Would it make sense for maybe even larger scale M&A in Services, would be helpful?

Sure. Let me just start with the end. When we think about value creation, we think about high growth, high relevance 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 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 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 is it's like multiple flywheels working together. Customers don't buy point products anymore, they buy outcomes, they buy solutions, and services have now just become part and parcel of those solutions. So as we go into next year and as we've been doing this year, we keep a close eye on M&A opportunities, but you can certainly continue to see us invest behind services. And I think as Al said earlier, you'll see growth -- overweighted growth in those areas that are particularly relevant and important right now.

Got it. And maybe just a quick follow-up for Al. You talked about Q4 guidance on gross profit dollars being relatively in line with seasonal trends historically, but also talked about some pretty conservative assumptions in the public sector business understandably. I wonder if you could just unpack a little bit more of the buildup, what might be offsetting that weakness in public sector to drive more seasonal trends in gross profit dollar growth and your level of visibility into that?

Yes. Thanks, Adam. A couple of things. First, on the government federal front, just keep in mind that Q4 is low season, so while we did adjust down our expectations for the quarter, we had the fact that it has less weight on the quarter overall, number one. As Chris suggested, we walked into Q4 with some pipeline, and we have some regular run rate business with agencies that are still open. That being said, we definitely did kind of take out the pen to take down some expectations on government. It's just when you add all those variables, it doesn't end up being an outsized component adjustment, if you will. So that's number one. Number two, on the question of the, are there any offsets there? There are a couple of 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 of other channels that would be more favorable contributors would include small business that has very good momentum and then I would point out the U.K. that, again, has both a very healthy pipeline, but has been executing really well. So they serve as some offsets to government, but net-net, it's a modest take down for the quarter.

At this time, I would like to hand back to Chris Leahy for any further remarks.

Thank you, Carlie. Before we wrap up, I want to extend my sincere thanks to our nearly 15,000 coworkers 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. I also want to thank our more than 1,000 leading and emerging partners for their trust and collaboration in 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 now disconnect your lines.