CDW (NASDAQ:CDW) reported a “strong start” to fiscal 2026, citing robust demand tied to AI investment and infrastructure modernization as customers worked through memory supply and pricing constraints, according to executives on the company’s first-quarter earnings call.
Chair and CEO Chris Leahy said consolidated net sales rose 9% year-over-year in the quarter. Gross profit increased 6% to a record first-quarter level, while non-GAAP operating income rose 2%. Non-GAAP net income per diluted share grew 6% to $2.28, and adjusted free cash flow totaled $251 million.
Segment performance: commercial and international strength offset federal and higher ed softness
CDW highlighted the benefits of its diversified end-market exposure across its U.S. Commercial, Government, and Education segments, plus international operations reported as “Other” (combined U.K. and Canada).
- Commercial: Net sales rose about 10%, which Leahy described as an “excellent start” with broad-based growth across customer sizes. CFO Al Miralles said demand was driven by infrastructure hardware and infrastructure software, with corporate and healthcare customers focused on network upgrades and software investments, and financial services customers purchasing storage and servers to enable AI inferencing.
- Government: Sales increased about 5%, led by a double-digit increase in state and local that more than offset a low single-digit decline in federal. Leahy said federal results were impacted by budget timing and procurement delays tied to the prior year’s shutdown. Miralles added federal activity resumed after a fourth-quarter shutdown, but net sales and gross profit were down year-over-year as expected.
- Education: Sales grew low single digits, up about 3%, with K-12 strength offset by extended decision-making in higher education. Leahy said K-12 demand was driven primarily by client device purchases ahead of anticipated price increases.
- International (Other): Sales rose 18% in U.S. dollars. Leahy said the U.K. posted high single-digit growth in local currency driven by private sector demand, while Canada grew double digits in local currency with balanced end-market growth.
Product mix: infrastructure hardware and software drove growth, services were flat
Leahy said customer urgency around AI hardware infrastructure investment and supply constraints pushed spending toward networking, storage, servers, power, and cooling, creating a heavier infrastructure hardware mix. CDW reported hardware revenue up 10%, led by infrastructure categories including networking, servers, and enterprise storage—each up more than 20%.
Client device demand was described as strong, but reported growth was 3%. Leahy attributed that to difficult comparisons stemming from tariff-related pull-ins a year earlier, especially in K-12, as well as shipment delays that pushed orders into backlog.
Software revenue rose 11% as customers invested in productivity, collaboration, and security platforms. Leahy said license growth was “strong and focused on AI readiness and standardized core workloads.” Cloud customer spend growth remained “healthy,” but he said it slowed versus prior quarters as customers prioritized hardware.
Services revenue was flat, as “solid performance in professional and managed services was offset by declines in warranties,” which management tied to the infrastructure-heavy revenue mix and timing between equipment purchases and installation. Leahy noted professional and managed services gross profit contributed nearly 15% of total gross profit growth.
Margins and expenses: gross margin pressured by mix, SG&A included AI-related investments
Miralles said first-quarter gross profit was $1.2 billion, up 6% and at “the higher end” of expectations for a mid-single-digit increase. Gross margin was 21%, down 60 basis points year-over-year, which he said was primarily due to a lower mix of “netted down” revenues as customers focused more on acquiring hardware in a volatile pricing environment.
Netted down sales were roughly flat year-over-year and represented 34.5% of gross profit, down from 36.5% in the first quarter of 2025. Miralles said the shift was “largely the result of software assurance and warranty performance” declining amid stronger hardware and software license growth.
On expenses, non-GAAP SG&A totaled $738 million, up 8.8% year-over-year. Miralles said the first quarter is typically the highest expense ratio of the year due to seasonality, incentives tied to gross profit performance, and investments in “productivity enablement in the form of AI tools and training” expected to improve expense efficiency later in the year and beyond.
Non-GAAP operating income was about $452 million, up 1.8%, and non-GAAP operating margin was 8%, down 50 basis points. Net interest expense fell about $2 million year-over-year due to lower debt levels, and the non-GAAP effective tax rate was 25.2%.
AI strategy and “Geared for Growth” modernization initiative
Leahy said customers are moving “from exploration into real production environments,” and argued that AI adoption increases both services intensity and hardware relevance. He described CDW’s approach as “AI first and outcome obsessed,” with AI being embedded across operations, sales motions, and solution delivery.
During the quarter, CDW expanded AI-enabled selling capabilities, including what Leahy called the “CDW Assist Super Agent,” designed to help sales teams prioritize opportunities and engage customers through AI-supported workflows.
Executives also discussed “Geared for Growth,” an AI-powered modernization initiative aimed at simplifying and rewiring operating processes, including quote-to-cash and supporting workflows. Miralles said benefits from the program are expected to begin flowing through in the second half of 2026.
Looking further out, Miralles said the company anticipates gross annual run-rate improvements of about $100 million in 2027, with a potential line of sight toward $200 million into 2028. He said “upwards of half” of the savings could be reinvested, with an expectation of ROI, and emphasized the effort supports CDW’s goal of returning to targeted SG&A efficiency and “durable operating leverage.”
On AI economics, Leahy told analysts that AI deals can be margin accretive due to “higher value services attach and continuing recurring revenues,” and said CDW is “very optimistic” about margin accretion as AI becomes embedded across the technology stack.
Leahy also said CDW finalized a relationship with a provider called Boost Run to offer customers access to high-performance AI infrastructure through a flexible GPU-as-a-service model that can work alongside on-premises and cloud environments.
Cash flow, capital allocation, and 2026 outlook
CDW ended the quarter with net debt of $5.1 billion and liquidity of $2.5 billion, including cash and revolver availability. The three-month average cash conversion cycle was 16 days, slightly below the company’s target range of the high teens to low twenties, which Miralles attributed to working capital management despite strong infrastructure hardware sales and efforts to assure supply.
Adjusted free cash flow was $251 million, representing 85% of non-GAAP net income. CDW returned $282 million to shareholders through $201 million of share repurchases and $81 million in dividends, which Miralles said was 112% of adjusted free cash flow and ahead of the company’s full-year target payout of 50% to 75%.
For 2026, management maintained its view that the U.S. IT addressable market will grow in the low single digits on a customer spend basis, and that CDW will outperform the market by 200 to 300 basis points. Leahy said the company’s outlook reflects strong near-term visibility into the second quarter from order activity and backlog, balanced against “uncertainty in the second half of the year.” He added that the outlook does not factor in potential “wild cards” such as recessionary conditions or meaningful changes in exogenous factors like geopolitical risks and pricing or supply dislocations.
Miralles said the company now expects full-year gross profit to grow in the low- to mid-single digits, with the second half contributing slightly more than the first half, though with “slightly more weight to the first half” than CDW typically experiences due to customer urgency around pricing and supply concerns. Based on a higher expected hardware mix, CDW now expects gross margins to be approximately in line with 2025 levels, and reiterated its expectation for non-GAAP EPS growth at the high end of mid-single digits for the year.
For the second quarter, Miralles said CDW anticipates gross profit to grow at a high single-digit rate sequentially, leading to mid-single-digit year-over-year growth, and expects non-GAAP EPS to rise at a high single-digit rate year-over-year.
About CDW (NASDAQ:CDW)
CDW (NASDAQ: CDW) is a leading provider of information technology products and integrated solutions for business, government, education and healthcare customers. The company sources and resells hardware and software from major technology vendors and packages those products with professional services, managed services and lifecycle support. Its offerings span IT infrastructure, cloud and data center solutions, cybersecurity, networking, unified communications, endpoint devices, and software licensing and procurement services designed to simplify IT operations for customers.
CDW combines a broad product portfolio with consultative sales, implementation and technical support capabilities.
