Loading…
Loading…
Hello, everyone, and thank you for joining the CDW Corporation fourth quarter 2025 earnings call. My name is Gabrielle, and I will be coordinating your call today. During the presentation, you can register a question by pressing star. If you change your mind, please press star followed by 2 on your telephone keypad.
Please kindly limit yourself to one question and one follow-up. If you have any further questions, please rejoin the queue. I will now hand over to your host, Steven J O'Brien with Investors. Please go ahead.
Thank you, Gabby, and good morning, everyone. Joining me today to review our fourth quarter and full year 2025 results are Christine A. Leahy, our Chair and Chief Executive Officer, and Albert Joseph Miralles, 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 this 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. 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-Ks we furnished to the SEC today and in the company's other filings with the SEC. CDW Corporation 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 reconciliation charts in the slides for today's webcast and in our earnings release and Form 8-Ks. Please note all references to growth rates or dollar amounts 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. A 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 Corporation and may not be recorded or rebroadcast without specific written permission from the company. With that, let me turn the call over to Christine A. Leahy.
Thank you, Steve. Good morning, everyone. I'll begin our call with an overview of our fourth quarter and full year performance and share some thoughts on our strategic progress and expectations for 2026. Then I'll hand it over to Al, who will take you through a more detailed review of the financials as well as our capital allocation strategy and outlook. We'll move quickly through our prepared remarks to ensure we have plenty of time for questions.
The team delivered a strong finish to a complex year, and fourth quarter results exceeded our expectations. Results that demonstrate the resilience of our business model, committed execution, and power of our strategy. The quarter, the team delivered net sales of $5.5 billion, up 5%. Gross profit of $1.25 billion, up 9%, non-GAAP operating income of $503 million, up 1%, and non-GAAP net income per share of $2.57, up 4% over 2024. Customers remained laser-focused on operating efficiency and cost leverage.
Must-do priorities also included client devices, servers, and security. To help customers address these priorities, the team delivered solutions and services that drew on our deep architectural and technical expertise and drove strong double-digit growth across software, cloud, and professional and managed services. Higher margin categories that contributed to our strongest gross margin of the year. Turning to the full year results, 2025 performance was driven by our clear strategy and disciplined investments.
Delivered in the face of remarkable complexity. 2025 was the year that tested every part of our company. We managed through uncertainty around tariffs, unexpected shifts in education and health care funding, significant changes in government spending priorities, and the longest federal government shutdown on record. Factors that shaped customer buying behaviors in unconventional ways. We stayed focused, adapted quickly, and advanced our strategy.
The team executed with precision and leaned into their deep end market expertise and durable client relationships to help customers address their unique challenges. For the year, the team delivered over $22 billion in net sales, up 7%. Gross profit of nearly $5 billion, up 6%. Nearly $2 billion of non-GAAP operating income, up 3%, and record non-GAAP net income per share of $10.02, up 5%.
Performance that generated $1.1 billion in adjusted free cash flow that we used to fund our capital allocation priorities, including the return of nearly $1 billion to shareholders via dividends and share repurchases, as well as a capability-enhancing tuck-in acquisition during the fourth quarter. Now let's take a deeper look at how meeting customer needs drove our fourth quarter results. As always, there were three drivers of performance. Our diverse portfolio of customer end markets, the breadth of our product solutions and services portfolio, and the relentless execution of our three-part strategy for growth.
First, our diverse customer end markets. As you know, we have five US customer channels.
Corporate
Small business,
Health care, government, and education. Each channel is a meaningful billion-dollar-plus per year business on its own. Within each channel, teams are further segmented to focus on customer end markets, including geographies and verticals. We also have our UK and Canadian operations, which together delivered sales of $2.7 billion in 2025. Once again, the power of our diverse customer end markets was evident.
As strong double-digit performance in both small business and state and local more than offset expected federal headwinds from the government shutdown.
Corporate top
Corporate top line was relatively flat year over year, down 1%. With strong cloud adoption offset by slowing hardware solutions and the expected moderation in Windows 11 refresh activity. Exceptional small business growth of 18% was fueled by cloud consumption and related services and continued activity in client device modernization. Investments that underpin focus on innovative AI opportunities.
Our international operations, UK and Canada, reported together as other, delivered high single-digit growth within the challenging markets. In our public business, health care increased by 5% on top of last year's exceptional performance. Government increased by 4% as strong double-digit growth in state and local more than offset the expected decline in federal, due to the extended shutdown. K-12 deep customer and partner relationships, combined with our life cycle services capabilities, drove a major Chromebook solutions rollout with New York City Department of Education.
This together with solid growth in higher ed delivered a strong 13% increase in education top line. The diversity of our customer end markets was clearly a driver of fourth quarter performance.
The second driver of performance is our
Broad and deep portfolio of solutions and services. This quarter, our full stack, full life cycle offering enabled us to meet the diverse customer priorities across our end markets. Portfolio performance was led by cloud and professional managed services. Cloud remains a major engine of performance contributing roughly half of the quarter's gross profit growth.
Both cloud revenue and gross profit rose at strong double-digit rates fueled in part by accelerating demand for cloud-enabled AI solutions. Professional and managed services top line increased double digits driven by hybrid infrastructure engagement targeting expense savings and budget optimization. Implementation of AI-powered customer care and customer experience solutions, and AgenTeq AI engagement. Hardware increased by 2% as double-digit increases in notebooks and servers were offset by declines in storage.
At the end of the quarter, our teams helped customers navigate memory-related price increases and announced future increases. Client devices showed continued growth of high single digits. Growth reflected a variety of cross currents with the large education project and modest memory-related pull-in offset by the expected slowdown in Windows 11 refresh by enterprises, and the forty-three-day government shutdown. Software performance was excellent.
Top line rose by 12% and gross profit even faster. Driven by cloud as well as in part by customers renewing software licenses tied to hybrid solutions that extend the life of their existing infrastructure. Security remains a key priority across all of our customers, with top line and gross profit both up single digits. Security services remained strong led by demand for vulnerability assessments, identity, and access management implementations, and customer training.
Along with engagements focused on cloud deployment, endpoint and application security, and safe adoption of AI. Security solutions showcase how we embed services in every outcome we deliver. Services that amplify and accelerate value for customers and partners alike. During the quarter, just as they did all year, the team did an exceptional job leveraging our deep and broad portfolio of full stack, full life cycle solutions to address customers' most pressing priorities.
And that leads to our third driver of results, relentless execution of our growth strategy. Our investments in high relevance, high growth areas position CDW Corporation to deliver in a world where technology ecosystems are more dynamic and interconnected than ever. As choices multiply and risk rises, our value to customers and party partners only grows. And AI plays directly to our strengths.
We have the architectural depth,
Partner reach, and delivery scale to lead in the AI era, and our services forward model sets us apart. Our AI offering spans strategy, data modernization, GenAI integration, and automation. And we're rapidly expanding our offerings with repeatable, scalable,
Toolkits.
As always, our portfolio is built around the customer. Our vertical use cases map directly to desired end market outcomes. From risk and fraud and clinical efficiency to student success. Citizen services, and merchandising.
In parallel, our horizontal solutions address universal priority, such as employee and customer experience, operations, security, and automation. Solutions like deployment playbooks and managed offerings. No matter the model, services are built in from day one. While still early, AI momentum is building across every market we serve.
Let me share two recent AI solutions. One from a large enterprise and one for a small business, to bring this model to life. First, a large enterprise. A large enterprise wanted to scale advanced AI capabilities within a hybrid data center environment to meet rising performance demands, manage data sensitivity, and control the cost of public cloud AI workloads.
After a competitive RFP process, we earned the deal with a solution that leveraged our deep partnership and our full stack full life cycle approach. One of the largest enterprise deployments of next-generation accelerated compute. The solution improves total cost of ownership with a potential ninety-day payback, dramatically increases developer agility, and reduces long-term regulatory and data governance risk. This is the model emerging across our enterprise customers.
Complex recurring margin accretive engagements, where our integrated capabilities matter. While we help large enterprises implement full-scale AI stack build-outs, we also deliver solutions for smaller customers that embed AI directly into their workflows. As a workforce multiplier. A great example of this in action is the approach we used to help a fast-growing, multi-location automobile service business whose lean IT team was struggling to support an expanding footprint.
Our solution, a modern IT service management platform that utilizes a generative AI virtual agent as the first line of support. The generative agent instantly resolves common questions, triages tickets, and surfaces relevant knowledge in real-time. Governance guardrails ensure safe handling of sensitive data, delivering efficiency gains without
Added risk.
Their IT team is holding headcount while shifting to higher value work. The kind of productivity-led ROI customers want from AI. And the entire engagement was delivered at an accessible price for a cost-conscious customer. Two great client stories that highlight our standout AI solutions.
But with AI embedded across the entire stack, a key part of our AI story is that AI is not a discrete contributor. It is a pervasive one. Pervasive one, with results embedded in our hardware, software, and services performance. And that brings us to our expectations for 2026. Today's technology ecosystems are more dynamic, interconnected, and mission-critical than ever.
At the same time, we continue to see unique dynamics from the public sector including lingering impacts of last year's government shutdown. As well as economic and geopolitical conditions that continue to drive cautious customer behavior. Against this backdrop, we currently look for the US IT market to grow in the low single digits in 2026, on a customer spend basis. 200 to 300 basis points of CDW Corporation outperformance. Wild parts include meaningful changes in known ongoing exogenous factors, which include public spending dynamics, tariff, and geopolitical risks, as well as memory pricing and supply.
As always, we will provide updated perspective on business conditions and refine our view of the market as we move throughout the year. Regardless of market conditions, our priority is clear. Deliver sustainable profitable growth by deepening customer value, sharpening efficiency, and deploying capital with discipline, investing where we see the greatest strategic impact and long-term returns.
We are operating in a complex yet exciting time.
With our full court press on strategy and team with proven execution, we are well-positioned to capture share by delivering on our unique value proposition to customers and partners. Now let me turn it over to Al, who will provide more detail on the financials and outlook. Al? Thank you, Chris, and good morning, everyone.
I will start my prepared remarks with details on our fourth quarter performance. Quickly recap 2025 as a whole, move to capital allocation priorities, and then finish with our outlook for 2026. Fourth quarter gross profit of $1.3 billion was up 8.6% year over year. This was above our expectations for a low to mid-single-digit year-over-year increase as our teams captured growth in client devices alongside increased demand for software and services. While we saw some moderate levels of pull forward in the range of $50 million in net sales, driven by memory-related price increases and supply chain concerns, the overall impact on fourth quarter growth was minor.
Fourth quarter gross margin of 22.8% was up 50 basis points over the prior year's fourth quarter. Gross margin was also up 90 basis points compared to the third quarter driven by the impact of a higher mix of netted down revenues, improved product margins, and a slight mix at Appliant Devices sequentially. Despite the category's continued solid growth. The diversity of our end markets also served us well in this quarter.
Government increased on the strength of state and local, while federal modestly outperformed our expectations and did factor in a blow-up prolonged government shutdown. Small business and international continue to execute at a high level, while education also posted solid growth with both K-12 and higher ed finishing the year strong. Healthcare also increased year over year despite the comparison to a prior year fourth quarter where sales increased 30%. Corporate was relatively flat year over year, this was in line with our expectations reflected both continued caution towards major capital investments in solutions hardware and customers being further along with their Windows 11 related refresh programs compared to other channels.
The diversity of our portfolio also served us well in the quarter. Demand for licensed software was strong, and we saw robust growth in virtualization, application suites, network management, and storage area management software. As customers look to extend the useful life of their network and data center assets. The need for and relevance of CDW Corporation's professional managed services continue to grow as reflected by net sales transferred over time where CDW Corporation is principal increasing 11% year over year.
Cloud, SaaS, and security offerings were particularly strong in the quarter. These are offerings included in the category of net sales, transferred at a point in time CDW Corporation is agent or netted down sales. Which increased 8%. Netted down revenues continue to represent an important
And durable trend within our business,
Representing 36.1% of gross profit up from 35.8% in '24 and up slightly from 36% in the third quarter.
Turning to expenses for the fourth quarter.
Non-GAAP SG&A totaled $752 million, up 14.6% year over year and were consistent with our expectation that asymmetrical timing compared to 2024 would inflate the year-over-year growth comparison. This increase in expenses was primarily driven by commissions, related to higher gross profit achievement, and the impact of higher performance-based expenses compared to the prior year. We continue to structurally align our business for stronger future expense leverage, and we expect to make progress towards this in 2026 and deem 2025 to be a normal baseline for comparative purposes. Coworker count at the end of the quarter was approximately 14,800 and customer-facing coworker count was 10,500. Both down slightly year over year and quarter over quarter.
Our goal is to balance growth expansion of capabilities, and exceptional customer experience with greater efficiency and cost leverage from our broader operations. Non-GAAP operating income was approximately $502 million, up 0.6% versus the prior year. Non-GAAP operating income margin of 9.1% was down 50 basis points from the prior year fourth quarter level when expenses benefited from lower performance-based compensation, and coworker-related costs. Net interest expense was up roughly $2 million year over year, and $3.5 million from the third quarter as we entered into a new expanded five-year senior unsecured credit facility.
Our non-GAAP effective tax rate was moderately below the low end of our target range, at 24.2%. Non-GAAP net income was $336 million in the quarter, up 0.9% on a year-over-year basis. With fourth quarter weighted average diluted shares of 130.6 million. Non-GAAP net income per diluted share was $2.57, up 3.8% versus the prior year period and above our prior expectation of down slightly year over year.
Shifting gears to briefly review full year results. 2025 was a year of transition and a return to growth. Market demand was relatively in line with what we initially anticipated while customer sentiment was cautious throughout the year impacted by the twists and turns of economic policies, geopolitical issues, and the early stages of many customers' AI journeys. Through all of that, our teams delivered for our customers and we're proud of their execution in this environment. We grew net sales 6.8%, and gross profit 5.9% during the year, holding gross margins reasonably flat at 21.7% again showing that even when client devices are higher in the mix, and solutions hardware demand is uneven, our margins remain resilient.
Our non-GAAP net income per diluted share increased 5.2% breaking through the $10 per share mark an all-time record for CDW Corporation. Moving to the balance sheet. At period end, net debt was $5 billion down roughly $165 million from the prior quarter, driven by increased cash and cash equivalents. Liquidity increased under our new facility with cash plus revolver availability of approximately $2.5 billion.
The three-month average cash conversion cycle was sixteen days, slightly below our target range of high teens to low twenties. This cash conversion metric reflects our effective management of working capital including disciplined management of our inventory levels even as hardware sales were firm and client device growth continued. As we've mentioned in the past, timing and market dynamics will influence working capital and the cash conversion cycle in any given quarter or year. We continue to believe our target cash conversion range remains the best guidepost for modeling working capital longer term.
Adjusted free cash flow was an excellent $418 million in the quarter, bringing us to $1.09 billion for the full year. This reflects 82% of non-GAAP net income for the year within our stated rule of thumb of converting 80% to 90% of non-GAAP net income to cash. We effectively utilized cash consistent with our 2025 capital allocation objectives during the quarter, including returning $153 million in share repurchases and $82 million in the form of dividends. As a reminder, we began 2025 targeting to return 50% to 75% of adjusted free cash flow to shareholders.
We finished well ahead of that target. Having returned nearly $1 billion to shareholders or 90% of our adjusted free cash flow. And that brings me to our capital allocation priorities moving forward. Our first capital priority is to increase the dividend in line with non-GAAP net income growth.
We announced on our last earnings call a 1% increase in our dividend to $2.52 annually. Our twelfth consecutive year of an increase. We will continue to prudently manage our dividend with respect to the growth environment and target a roughly 25% payout ratio of non-GAAP net income going forward. Our second priority is to ensure we have the right capital structure in place.
We ended the fourth quarter at 2.4 times net leverage. Within our targeted range of two to three times. We will continue to proactively manage liquidity while maintaining flexibility. Finally, our third and fourth capital allocation priorities of M&A and share repurchases remain important drivers of shareholder value.
We continually evaluate M&A opportunities
That can accelerate our three-part strategy for growth
As shown by our recent acquisition
Of the select assets of Lexicon Tech Solutions. This acquisition highlights our strategy of bolstering our end-to-end life cycle capabilities for education customers with the potential to broaden the applicability to our other channels down the road. For 2026, we are maintaining our target to return 50% to 75% of adjusted free cash flow to shareholders via the dividend and share repurchases. We remain active in the M&A market, our cash flow performance both in 2025 and what is expected for 2026, will allow us to be opportunistic towards share repurchases as we deem our stock to be attractive at this valuation.
Customers have compelling needs to address priorities across the full IT stack. But this is balanced against the risk of supply chain, and pricing challenges. Ongoing geopolitical unrest, and general economic uncertainty and caution. A new year does not wipe the slate clean, but it does give us a chance at a fresh perspective.
On that note, ahead of our Q1 2026 earnings call, we'll be updating the reporting of our customer channels. As a brief preview, we've made changes to reflect our current go-to-market structure. With this, you will see more information on government and education, including gross profit, and operating income for each. We will continue to disclose net sales for our health care, and corporate channels and will additionally disclose net sales for our financial services vertical.
These channels will be included in the segment we will be calling commercial. Small business will be integrated within the commercial segment, and we will still maintain the preeminent small business support model in our industry and our small business teams will also be aligned to the areas of industry expertise. While we've seen heightened uncertainty in recent years, and 2025 was as dynamic a year as any, we believe we have navigated these complex environments with an appropriate level of prudence, and precision. We believe that our updated go-to-market structure and the investments we've made to fortify this structure we are set up for success in 2026 and beyond.
Turning to our outlook. We will continue to deliver for our customers and partners. And as always, as the landscape changes, throughout the year, we will provide you with updates each quarter. With these factors in mind, our full year 2026 expectation is for our addressable IT market to grow low single digits and we target market outperformance of 200 to 300 basis points on a customer spend basis.
With this, we expect gross profit to grow in the range of low single digits for the full year 2026. And we expect second-half gross profit contribution to be slightly above the first half. Based on the anticipated mix of products and solutions for 2026, gross margin should be slightly higher than 2025 levels, and remain well above rates from three-plus years ago. Finally, we expect our full-year non-GAAP net income per diluted share to grow mid-single digits year over year as we focus on operating leverage, and effective execution of our capital allocation priorities. Please remember, we hold ourselves accountable for delivering our financial outlook on a constant currency basis.
On that note, our expectation is for currency to be neutral to reported growth rates for the year. Moving to modeling thoughts for the first quarter. We anticipate gross profit to decline at a mid-single-digit rate sequentially leading to mid-single-digit year-over-year growth. We expect some demand to be pulled forward into Q1 to get ahead of price increases in certain memory-intensive product categories.
Separately, our first-quarter view reflects an expected slow start to the year for the federal channel as the pipeline rebuilds following last quarter's government shutdown. Moving down the P&L, we expect first-quarter operating expenses to be down from 2025 on a dollar basis whereas they are normally flat to up sequentially. However, as we normally see, the first-quarter operating margin will likely be at the lowest quarterly level for the year. Finally, expect the first-quarter non-GAAP net income per diluted share to be up mid-single digits year over year.
That concludes the financial summary. As always, we'll provide updated views on the macro environment and our business on our future results calls. With that, I will ask the operator to open it up for questions. And we would ask each of you to limit your questions to one.
With a brief follow-up. Thank you.
Thank you very much, Al. To ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question is from David Vogt from UBS. Your line is now open. Please go ahead.
Great. Thanks, guys.
For taking my question and appreciate all the details Chris and Al. So maybe, Chris, for you, Al talked about a little bit of a pull forward in Q4. Hitting a little bit of a pull forward in Q1 from a memory perspective. How do we think about what that means for the balance of the year? I know the guidance talks about it even split from gross profit.
But just from a demand perspective, what are your partners telling you in terms of how to think about these memory-sensitive product categories like PCs and servers and you know, just maybe help us qualitatively think about how the year should progress given where memory prices are today?
Yeah, David. Let me, try to share as much visibility as we have into, the memory impact from partners and what we're seeing, vis a vis demand. First of all, I'd say as we think about the upcoming quarter, it's hard to tell yet what we expect to see from a pull-forward perspective. I think, look, we've quantified it and believe to the best of our ability that we're going to see about the same amount of pull forward in Q1 or slightly more than we actually saw in December.
When you think about the various products, I would just tell you that PCs for us, for example, have been strong. We price these decelerating growth this coming year, but we still see strength as we explained in our prepared remarks. It might be a little choppier during the course of the year as a result of memory, but we still see strength there. What we've done is in the back half of the year, we've really just tamped that down a bit to take into account that we don't have visibility all the way to the back end of the year.
But that's how we're thinking about it.
Great. And maybe one Al as a quick follow-up. You talked about
SG&A being sort of a baseline in calendar 'twenty-five and working towards you know, operating leverage in '26. And I'm just penciling in really quick math that looks like based on your commentary, the SG&A as a percentage of gross profit doesn't really decline that much in '26. Mean, can you kinda talk to that? Is that is that the right way to think about it, and why shouldn't it decline a little bit more given, you know, obviously, all of the investments that you've made in '25 and '26 be a bit of a
Know, better year in terms of conversion?
Yeah. Thanks. Good morning, David, and thanks for the question. A couple of things.
First, what you're seeing in our outlook as you would beginning of the year is prudent. But what you should take from it is the shape of the outlook that we're providing. Right? Low single digits and gross profit, and then mid-single digits down to EPS.
We expect that we are going to have operating leverage in it top priority. Obviously, We're past the compares from the prior year. We've got a lot of focus on how do we continue to optimize our cost base here. But you will see kinda that operating leverage kick in and progress through the year.
The impact on an SG&A ratio you will see it. Right? But that's gonna follow more as the operating leverage progresses and accelerates. And particularly, as we start to see growth pick up in a more meaningful way.
So, our outlook shows the shape of how we'd like it to work, if we can amplify the growth, if we can continue to make progress on optimizing our expenses, David, it's gonna be, more significant in terms of progress down the P&L as well as that SG&A ratio coming down.
Great. Thanks, guys. Thank you, David.
Our next question is from Adam Tindle from Raymond James. Your line is now open. Please go ahead.
Okay. Thanks. Good morning.
I just wanted to start on the outlook. As I think about 2026, the drivers presumably PC mix will come down. You've got, obviously, these memory, price increases happening, so, you know, potential for inflation hitting. But when I think about the drivers here, it's low single-digit market growth, 200 to 300 basis point outperformance of that.
And low single-digit gross profit dollar growth. So it seems like the implication here is not much improvement in gross margin despite PC mix coming down and inflation. Coming through the model. Last time we saw, this you know, increase in component cost, it was a benefit to gross margin.
I just wonder if you zone into that point, what might be similar or different than a few years ago where we were getting benefits, from, inflation in this model?
Thanks.
Good morning, Adam. It's Al. So, I'll take that I do think that we are expecting that we will see gross
Margin
Expansion. You know, we'll call it kinda modest pickup. But there is an opportunity for that to accelerate. If I give you a little bit more detail, kinda what that could look like in the way of the shape of the year, given the landscape we're dealing with in the memory environment.
We will likely see stronger hardware growth in the first half and we will likely then see that fade a bit in lieu of more netted down revenues. Software cloud, etcetera. As well, we would hope that we will see progression through the year on services. So just shape of the gross margin, first half, probably a bit lighter, second half pickup, on the factors that I just mentioned.
So that's what it looks like. Do think that, if that plays out, we would see that drop down into our operating margin. Obviously, you got a lot of moving parts right now, Adam. On these different fronts, but that's the way we'd see it.
Looking as we sit here now.
Got it. Thanks.
Maybe a follow-up for Chris. I know a lot of the investor conversation recently has been around AI and whether or not that's a benefit or headwind to CDW Corporation. Reminds me a little bit of years ago when there were questions around cloud for CDW Corporation. And as you mentioned in the prepared remarks, think cloud is now driving a significant portion of the gross profit dollar growth in this model and clearly was not a headwind.
So, Chris, I wonder if you might kinda compare and contrast cloud versus AI in terms of the investor narrative and what you're seeing in the customer behavior. And I remember at the time, you had kind of a landmark where you landed, AWS on the line card many years ago, and that was kind of the stomping point to say, you know, hey. You know, cloud is gonna be a benefit. You see opportunity like that with AI?
Is there, you know, strategic partnership with OpenAI, Anthropic, somebody like that that could potentially materialize what would be sort of the turning point? Thanks.
Yeah. Adam, thanks for the question. Let me start with the end and work backward. With, the various partners you've named.
We've already got relationships with them as you would expect, and small smaller companies as well. But all the big players in the AI space, CDW Corporation has got partnership relationships with right now. I would say, look. While we're still in the early innings, and you heard me say this, AI momentum is picking up in all of our end markets.
And, you know, a slight difference from cloud versus the AI revolution now is cloud was you know, just a consumption model, and AI is embedded across the entire stack. That's changing the entire platform, so to speak. So when I think about where we sit right we're very optimistic about 2026 and beyond. We are seeing customers absolutely move into production stage.
And if I just take a moment on the value proposition that CDW Corporation brings to bear, look, organizations don't struggle with access to models. They struggle with making them work to solve problems, real problems. And that's across their full technology estate.
And so
You think about CDW Corporation, that place to restrict. And its structural advantages that we built over decades. Our clients depend on our expertise for integration and secured deployment of AI-enabled tech solutions. And so customers are looking to us now to really help them adapt and consume.
And remember, there's been a lot of investment in capacity, for AI. Now that capacity has to be consumed, and we're right there to help them do it. Know, a neutral party, with deep technical expertise across the entire tech stack, a trusted adviser with intimate knowledge of our customers in Flex Tech Estates, and increasingly an expert in identifying how these technologies can be applied. So we, Britney, ability to orchestrate and optimize across the technology landscape.
And we believe that these capabilities the expertise in our customer intimacy and the customer relationships make us more relevant now than ever. You asked about an inflection point. I think we are at the point of inflection with our customers in AI, and we're seeing that in every component part of our business.
Thank you, Adam. Our next question is from Amit Daryanani from Evercore ISI. Your line is now open. Please go ahead.
Yep. Thanks. Good morning. Guess maybe the first one Chris, with IT budgets growing in the low single-digit range,
Love to kind of understand where do you see customers allocating incremental dollars by category? Just anything in terms of 26 spend hardware versus solution would be helpful. And I don't think I heard you talk a lot about NetComm and how that's stacking up. So would love to see where where that's in the customer priority list.
Yeah. Good good morning, Amit. I'll and I'll take this. And just maybe rattle through kind of our thoughts and what's underpinning our outlook.
So as we sit here now, client client device growth, we continue to feel good about. Obviously, it's a different landscape we've we've been in, and maybe a little less kinda focused on Windows 11. I think kinda where the focus there would be Still plenty of units from COVID refresh. As well as we are seeing a pickup, on AIPCs. So in this memory-intensive environment, I think we'd expect that client devices could be a little more uneven than usual.
But the activity we're seeing in the customer interactions we're seeing suggest there's still plenty of demand on the client front.
Cloud
SaaS, security, kinda those evergreen categories that have been really strong for us. Expect will continue to be really important. And we would say kinda for the full year, those categories will, have higher weight. And so we'd expect that netted down revenues will continue to be very durable.
In the solution space, it's a mixed bag, and it's been a mixed bag. We do, Amit, feel more positive on the network siding side of things. 2025 was a solid year on networking, and we think that there are, reasons and drivers for that to continue. On the server and storage front, a bit more choppy just as it's been. And so kind of our expectations on that front are pretty modest in the way of growth.
Got it. Super helpful. And then you know, Al, you spoke a little bit about the OpEx dynamics in the '26. So maybe you could expand on this a little bit because the last few quarters you've seen OpEx growth be ahead of revenue growth by a few 100 basis points. Do you think it's more a reflection of internal investments that you folks are making versus incentives or cost inflation?
I'd love to just understand, like, what what happened in the last six months. And then as you think about leverage showing up in the model in twenty-six, can you expand on do you see that stacking up more across headcount control or incentive comp or inflation? Just I would love to kinda just understand what what drives the leverage in '26 as you go forward. Thank you.
Yep. Happy to tackle that. So in 2025, you'll remember kinda q q one, we showed the greatest amount of operating leverage, and we indicated given the shape of the year, from the prior year around incentives, we expected asymmetry. The biggest driver of what we saw for the year was just that.
It was the volatility, variability, through the quarters on the expense front relative to gross profit. Okay. So there's that. Number that number two, is, obviously, gross profit for us exceeded expectations.
We are still a highly variable model, and therefore, OpEx is going to respond to that higher gross profit, and we definitely did we definitely did see that. And then thirdly, I would say, look. We have been investing and continue to invest, and we think it's critical to feed into our strategy. So that would be kind of the third theme.
But the first two components really kinda trump the investment. Now as we move into 2026, we are now, like we said, a better baseline, more comparable baseline. On the variable components of comp. So we're gonna have that.
We will continue to invest, but we are laser-focused on opportunities to optimize our fixed cost base we think there are opportunities with really good line of sight. And so that's what we're going after. You're gonna see it first show up, terms of quarterly operating leverage with a progressive kind of level of speed. Through the year, and then it ultimately is gonna knock down that and A ratio back in towards the range that we'd like it to be.
Helpful. Thank you.
Thank you, Amit. Our next question is from Erik Woodring. From Morgan Stanley. Your line is now open. Please go ahead.
Great. Thank you for taking my questions. Chris, I realize this is kind of a backward-looking question, but it does inform the forward look. And
For many years, especially in years where hardware spending was strong, CDW Corporation would outgrow
U. S. IT market growth by maybe 400 to 500 basis points or even more. In each of the last three years, we haven't really seen that, only about 200 to 300 basis points of outperformance, even in a market like 2025 where hardware spending was robust.
So I would just love to understand, is there something structural about the market, perhaps competition or something we're not considering, that just makes it harder to outperform in the ways that you used to? Or or or what what can maybe explain that just relative to historical outperformance? And then a quick follow-up. Thank you.
Sure, Eric. Thanks for the question. If I think about the outperformance and we look at the addressable market in the last couple of years, you know, our outperformance has been in the high end of the two to three hundred basis point range in our view. In addition, the mix of our business is, continued to mix into netted down revenue.
So while we have while you while you have less compression on the top line, the more hardware you have, we now have a much greater mix of netted down. So that's going to impact the differential as well. I would say there's nothing in my mind that that from a competitive perspective that that concerns us. We're know, we're still the number one trusted adviser to our customers when we look at the various category by category, we well outperform the market.
And, look, we're really we're really confident and pleased with the strategy that we've put in place and how that is helping us to drive over index gross margin. And Al just went through, will give us the opportunity to leverage that down the P&L amplify earnings, and that's a result of the capabilities that we've built into the system. But we feel very confident about our ability to continue to take share moving forward across every category.
Okay. That's really helpful. Thank you, And then just as a follow-up, the last two quarters, we've seen a pretty notable divergence in corporate versus small business performance. Obviously, SMB, very strong double-digit growth corporate, more so inching along Just what do you think can help explain this?
Is this just kind of differences in where we are in spending cycles for these cohorts? And what does this mean for kind of these two cohorts as we think about 2026?
Thank you so much.
Yeah. I'd say a couple of things. We are in a little bit of difference in the spending cycles. And what we've seen with larger companies over the last couple of years, actually, particularly as AI has been introduced, is, taking the time to understand how that technology integrates into their estate and how to do that.
And to do experimentation and testing. So they have been more focused on cost optimization, extending the useful life of assets, the must-dos, like client devices, etcetera, And now we are actually seeing a number of larger companies who are starting to move into production and starting to spend more in that area. You know, it's still a cautious time for all of our customers, so we are taking a prudent approach to spend in this coming year. And as Alice said, we expected to be uneven, but we are at the front end, I think, of an uptick.
In what we're gonna start seeing from the corporate side. Small business is much more nimble in terms of their ability to adapt adopt AI. They're very cloud forward. And so they're at a they are at the front end of taking more packaged solutions applying them for a fast ROI, and doing it quickly and now.
So I just think you're seeing differences in not just maturity. That's not the best way to describe it, but it's where all of our customers are in the adoption cycle. And the key thing is that we're helping them with both design but then, obviously, it's the adoption and, importantly, consumption because all of the capacity that's been built for AI consumption capabilities has got to now be used by our customers, and we are right in the middle of helping them do that.
Great. Thank you so much for the color, Chris and Buck.
Our next question is from Ruplu Bhattacharya from the Bank of America. Your line is now open. Please go ahead. Hi. Thank you for taking my questions.
Al, based on the netted down items as a percent of gross profit, looks like margins in the core business ex netted down is actually trending well. I mean, it was up 70 bps, looks like sequentially and year on year. Can you remind us as suppliers are raising prices, how does that impact CDW Corporation? And can margins in the core business continue to grow? And I have a follow-up for Chris.
Yeah. Good morning, Ruplow. Non-net non-netted down gross margins, you're right. Strong, three things kinda I'd owe that to.
Our services growth has been strong. I would say sequentially, we had a bit of a mix out of client with age or aids our margins. And then thirdly, Ruplu, just margins and product margins in general have been resilient. And, we've seen that now for a number of quarters.
So that certainly feels good. As we scroll forward and we think about some of the phenomena we have going on right now with memory, we feel good about margins. You know, I think what we're likely gonna see is increases in ASP, but just a reminder that we are a cost-plus provider, and, therefore, we are passing through our gross margin. And, right, during this period that we're seeing activity already, I think that concept is holding up, and we expect that will hold up.
So on the non-netted down margin front for 2026, I would say we expect firmness. And if we see some deceleration of clients, there could be some upside as well.
Okay. Thanks for the details there. I appreciate that. Can I ask Chris a question?
You've CDW Corporation has delivered very strong services growth now for the past many quarters. What type of work are you seeing are you engaging more with customers on the AI-related projects? Are you seeing small medium business, the middle market customers, are they looking at AI? And is this an area of focus and investment for for CDW Corporation?
Thank you.
Thanks, Rupul, for the question. Yes. It absolutely is. And when you think about that customer set that you just mentioned, those are customers that don't have the resources, the breadth of skills, and capabilities, the access to the partners.
And the full kind of end-to-end capabilities and so CDW Corporation has been both investing in over the years, but now highly engaged with customers in the small business space, the mid-market space, and the higher end of the mid-market space as well. To help on the design stage, the architectural stage, the analytics stage, the workshopping stage, and then taking that to the next several stages, which is obvious a migration and deployment. It's actually activating and operating. It's ensuring that the data that fuels all the benefits of AI are governed.
They're clean. Everything that needs to be done there. And then more and more, we're through what we are seeing and you see this in our results, is customers turning to us for managing their environment. So operating their environment securely and reliably.
Is an important part of our value proposition and those customers in particular are looking more and more to outsource that. So that's a benefit to us as well.
Okay. Thanks for all the details. Appreciate it.
Thank you, Ruplu. Our next question is from Keith Housum from Northcoast Research. Your line is now open. Please go ahead.
Great. Thank you. Good morning, guys.
Thanks for the opportunity here. In terms of just trying to unpack the memory industry-wide issue going on right now, I'm just trying to understand a
Bit further here in terms of comparing that to perhaps chip shortages that we saw several years ago. Is there a thought process here that the increases in prices have started already? How much of your portfolio is impacted or potentially impacted by what could be the rising prices or, you know, eventual shortages as well? Just and any visibility to where could we actually see shortages and what would be the impact on
You know, demand here?
Yes. Keith, thanks for the question. It is quite fluid. What we are seeing kinda across OEM partners and kind of product generations is varying quite greatly.
But you're seeing kinda week to week, month to month, price increases, flowing through. And what we're seeing is, customers help us helping customers navigate around that. In some cases, with these partners, Keith, there may be certain kind of configurations of machines, where they're not seeing as much of the way I'll just say it's the price increase, and there's less risk of supply. So it's very fluid at the time.
Now to your question on supply, what we see right now, very robust customer demand, significant customer activity kinda, on this front. And plenty of written demand that we are experiencing. So far, we are not seeing any significant roadblocks on the supply chain side of things. But we are counting on that.
You could see that as the year plays out. Our greatest visibility is obviously what's right in front of us for Q1 and to a bit lesser degree, Q2. But when we think about the demand we're seeing and the activity with customers, and the supply component, we feel good about the growth prospects in the first half. Obviously, we look to the second half. The visibility is less, Keith.
And we think that that's where the supply chain challenges could start to come into play. So we have an outlook that is modest in that regard and presumes that we can see deep dampening of growth during that second half of the year?
Okay. Helpful. I appreciate it. So far, like, year to date, I guess, what do you see in terms of, like, the precise price increases? Are we seeing
You know, single digits? Are we going to the double digits? Any type of context you can provide there.
Yeah. I don't know if I have a single answer for you, Keith. Like I said, it does vary greatly by partner, by product, Right? So know, in some cases, it's small single digits.
Some cases, it's a bit more and it is fluid. In terms of kinda where it will go. We could see in some cases, escalation. But just remember Keith, when we went go back to the periods where we've had this before, this is where we excel.
This is where we work with our customers and help them navigate both the partner universe and ecosystem, but also the configurations that might work for them, but also optimizes their cost. And so, look, we're right in our sweet spot. Albeit, it's a challenging time. This is where kinda we bring the most value.
Thank you.
Thank you, Keith. I will now hand back to CDW Corporation management for closing remarks.
Thank you, Gabby. Let me close by recognizing the incredible dedication and hard work of our coworkers around the globe, their ongoing commitment to serving our customers, is what makes us successful. Thank you to our customers for the privilege and opportunity to help you achieve your goals, and thank you to those listening for your time and continued interest in CDW Corporation. Al and I look forward to talking to you again next quarter.
Thank you. This concludes today's CDW Corporation fourth quarter 2025 earnings call. Thank you for joining. You may now disconnect your lines.