CDW’s 20 Percent Share Plunge: Big Takeaways From Q1 Results

Here are the more significant things to know about CDW’s earnings and subsequent stock fall on Wednesday.

CDW shares plummeted 20 percent after the company reported gross margin pressure with a lower mix of cloud and SaaS revenues for the first quarter ended March 31 despite better-than-expected sales growth of nine percent.

CDW shares closed Wednesday down $27.80 to $109, wiping out $3.45 billion in share value. The $109 close is just above the new 52-week low of $106, which came during intraday trading on May 6.

CDW reported gross margin of 21 percent, down 60 basis points, compared with 21.6 percent in the year ago period in the wake of a higher hardware mix and a lower mix of “netted down” revenue, which includes cloud and Software as a Service (SaaS).

Operating income came in at $376 million, up four percent from $361.4 million in the year ago quarter, but an 18 percent decline from analyst expectations of $459 million.

CDW sales for the quarter were higher than expected, up nine percent to $5.67 billion compared with $5.19 billion in the year-ago quarter. The Zacks Investment Research Wall Street consensus estimate was $5.4 billion.

CDW non-GAAP earnings per share of $2.28 per share was in line with the Zacks Investment Research Wall Street consensus. In the year-ago period, CDW reported non-GAAP earnings per share of $2.15.

“Netted down” sales, where CDW records an agent commission or fee rather than full contract value, were flat year over year, representing 34.5 percent of gross profit, down from 36.5 percent of gross profit in the year ago period. That was driven by declines in software assurance and warranty licensing amid growth in hardware sales and software licenses.

Even with the gross margin pressure, CDW reported first quarter gross profit of $1.2 billion, up six percent compared with $1.1 billion in the year ago quarter.

CDW also reported a nine percent increase in non-GAAP sales, general and administrative (SG&A) expenses of $738 million in the quarter.

Here are the big takeways from the first-quarter earnings call.

Customers Have Shifted Spend Priorities To Hardware In Midst of Supply Chain Crisis

The gross margin drop came as customers “focused more of their spend” on acquiring “solutions hardware” in the wake of a “volatile” pricing environment sparked by the memory shortage and supply chain crisis, said CDW Chief Financial Officer Albert Miralles.

“The need for and relevance of our cloud and services business remains high, but during this time of dynamic hardware pricing and supply chain concerns customers have shifted their spend priorities,” said Miralles.

Miralles said the hardware pricing changes and supply “friction” issues are both in the “realm” of what the company expected.

“We expected that the first half would be heavily weighted toward solutions hardware,” he said. “We have seen that play out. We expected the price changes, albeit diverse across different subcategories would vary and they have, and we expected customer engagement and activity would be really strong. All of that has played out.”

The “bonus,” said Miralles, is that the level of “continued customer activity” with a focus on hardware has continued into the second quarter.

“In the first quarter we experienced some level of pull forward consistent with what we would have expected,” he said. “But we did see a fair amount of written business that did not get delivered owing to our backlog leading into Q2 being a bit higher. All of those elements lead us to continued expectation of strength in Q2 and potentially beyond. We are reserving some level of uncertainty for the back half, as all of that activity kind of makes its way through the funnel.”

CDW Increased Its Hardware Inventory Sequentially By Several Hundred Million Dollars During The Quarter

CDW increased its hardware inventory by 40 percent sequentially, or several hundred million dollars, during the quarter in the wake of the customer demand for hardware in the midst of the supply chain crisis.

“Our inventory indeed was up in the quarter and really a reflection of who we are and how we operate in environments like this where customers have an urgency to get product,” said Miralles. “We step up. We are often first in line and able to get that inventory and you saw that come through this quarter.”

That said, Miralles said, the company still has a “continued commitment” on delivering free cash flow. “You take a quarter like this where our inventory went up several hundred million and we still delivered our free cash flow within the range of expectations relative to non-GAAP net income,” he said. “As it pertains to ASP (average selling price) changes and the kind of impacts on that inventory, certainly that was the driver of what led to inventory increases but it didn’t have a meaningful impact on the dollar amount of that inventory.”

CDW’s AI-First ‘Geared For Growth’ Initiative Is Slated To Deliver Up To $200M In Cost Savings

CDW CEO Christine Leahy told analysts that the company’s ‘Geared For Growth’ AI-first initiative, which is targeting cost savings of up to $200 million, will “supercharge” the company as it embeds AI throughout the $23.2 billion organization.

“It certainly is focused on driving effectiveness into our sales and customer facing organizations, but equally embedding AI across our core end to end processes which will indeed drive efficiency,” said Leahy when asked during the company’s first quarter earnings call if the cost savings will result in layoffs in the organization. “In terms of where the specific (cost savings) dollars are coming from they will be derived both from increased productivity as well as cost savings, and having our co-workers leverage their time, skills and capabilities in a more valuable way.”

Leahy said the multi-year cost management and efficiency ‘Geared For Growth’ initiative has paved the way for the AI-first focus of the plan going forward.

“At the end of the day, we’ve done a lot of foundational work over four years to get to the point now where we are able to be focused on AI first and our customer’s outcomes and in doing so super charge the power of the business through AI,” she said. “We are quite excited about this program in view of the entire context of moving with speed to value for our customers, for our partners and for the development of our co-workers.”

CDW has already seen “some great uptick” in the sales organization for the AI tools it has rolled out to the team, said Leahy.

“When you roll positive tools into the organization that are driving more precision selling, speed to value, things like that, that all helps in terms of the change management,” she said. “We are feeling quite positive about the uptake and how it is going.”

AI Investments Will Lead To ‘Enhanced Expense Efficiency’ In Second Half Of Year

Miralles predicted the investment in “productivity enablement in the form of AI tools and training” will lead to “enhanced expense efficiency” in the second half of the year and beyond.

“The AI-powered modernization investments we have been making under geared for growth are focused on transforming how we operate and particularly as it supports our long term, durable and scalable growth,” he said. “The program is a disciplined, multi-year effort to simplify and rewire our operating model, reducing complexity, modernizing quote to cash, and supporting processes and embedding AI to enable faster, better decisions across the enterprise.”

Miralles said ‘Geared For Growth’ investments are beginning to “translate into real productivity improvements” across CDW’s business.

“We have already identified substantial opportunities that will enhance our cost structure and will begin to accrue benefits in the second half of this year,” he said. “As we look forward into 2027 and 2028 we would anticipate run rate improvements in the range of $100 million to $200 million. These savings will be balanced with some reinvestment back into the business to fuel our broader growth strategy.”

CDW ended the quarter with 14,700 employees, down slightly year over year. “Our ongoing goal is to balance growth, expansion of capabilities, and exceptional customer experience with greater efficiency and cost-leverage from our broader operations,” said Miralles.

Is CDW Seeing OEM Push For Cost Savings That Could Squeeze Channel Partners?

When asked if CDW is seeing OEM partners potentially looking for further cost savings, potentially squeezing channel partners, Leahy said CDW is used to “seeing partners change their programs periodically” particularly when there are “inflection points” in technology.

“What I would say with the scale and size of CDW our relationship with our partners tend to turn out very well for CDW,” she said. “We are not experiencing what I would call any kind of constraints or downward pressure in conjunction with the partner programs and the economics. In fact they are leaning on us more heavily given the importance of our role in the channel even more with AI, the orchestration requirements, the integration requirements, those are the bottlenecks in terms of reaching customers. So we’re finding that our role both with customers, but equally with partners, is becoming more compelling and important.”

---

CDW Is Continuing To Evaluate M&A Opportunities to Accelerate Growth

Miralles said CDW remains active in the M&A market with its expected cash flow performance allowing the company to be “opportunistic” toward share repurchases as it “deems its stock to be attractive” at the valuation.

Miralles cited “customer urgency to get ahead of memory-related price increases and potential supply chain concerns” in the wake of the supply chain crisis.

Under Leahy, CDW has already made a number of acquisitions to boost its enterprise services business, including AWS cloud service providers Mission Cloud Services in 2024 and Enquizit in 2023.

The biggest acquisition under Leahy came in 2021 when the company acquired Sirius Computer Solutions for $2.5 billion. That deal, Leahy proclaimed at the time, “meaningfully” expanded and scaled the company’s services and solutions capabilities.

CDW competitors told CRN that they believe former HPE COO Hang Tan, who was hired just last week as chief strategy and transformation officer, was brought on board to drive higher margin services and evaluate potential acquisitions.

The hiring of Tan “points to CDW wanting to become a higher-margin organization,” said the CEO of a technology vendor who works with CDW and did not want to be identified. “It looks to me like Hang Tan is being brought in to help them flip the script on being a box-mover. CDW doesn’t need to get bigger. It is already huge. What they need to do is figure out how to be more strategic, more AI-relevant and more services-led for the customers they do have.”

Leahy, for her part, said Tan, who will report directly to her, came on board after the company shifted its strategy chief to another position.

“Hang has been a great add,” she said. “I think when you look at our business, you look at the speed of change in the world right now, you look at the position we have in the market as the largest of our kind, the fullest capability, as the trusted advisor, having yet another player on the executive team with deep technical relationships and chops, operating experience, and frankly a competitive spirit is going to be one more addition to help us move with speed in the market to maintain our leading position.”