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CDW delivered strong Q2 revenue growth driven by AI and cloud investments, but margin pressures and public sector weakness temper near-term optimism.

# CDW Corporation Delivers Strong Q2 FY2025 Revenue Beat Amid Margin Pressures; Strategic Investments in AI and Cloud Drive Long-Term Outlook

---

## Executive Summary

- **CDW Corporation posted a robust Q2 FY2025 revenue beat**, with net sales of **$5,976.6 million** (+10.2% YoY), outpacing consensus expectations and driven by broad-based volumetric growth across Commercial, Small Business, Healthcare, and International segments.  
- **Earnings quality was mixed**: Non-GAAP EPS of **$2.60** modestly exceeded estimates, but GAAP EPS declined to **$2.05**. The beat was underpinned by core business volume rather than one-off adjustments, but **margin compression** was evident, with gross and operating margins each down 100 bps YoY.
- **Management struck a balanced tone**, emphasizing strong top-line momentum and strategic sector diversification, while candidly addressing ongoing margin pressures and a shifting revenue mix. Forward guidance remains prudent, targeting outperformance of the U.S. IT market by 200–300 bps, and is supported by continued investment in AI, cloud, and managed services.
- **Risks remain** around public sector headwinds (notably in education, down 10.9% YoY), ongoing margin pressure from mix shifts, and macroeconomic uncertainties. However, **opportunities in AI, cloud, and vertical market expansion** are emerging as key long-term growth drivers.
- **Catalyst watch:** Investors should monitor the pace of margin stabilization, progress in AI and cloud initiatives, and any signs of public sector demand recovery in the coming quarters.

---

## Performance Snapshot

| Metric         | Reported   | Consensus | Surprise | YoY Change |
|----------------|------------|-----------|----------|------------|
| Revenue        | $5,976.6M  | $5,800M   | +3.0%    | +10.2%     |
| GAAP EPS       | $2.05      | $2.10     | -2.4%    | -          |
| Non-GAAP EPS   | $2.60      | $2.55     | +2.0%    | -          |
| Gross Margin   | 20.8%      | 21.8%     | -100 bps | -100 bps   |
| Operating Margin| 7.0%      | 8.0%      | -100 bps | -100 bps   |
| Healthcare Rev | +24.1% YoY |           |          | +24.1%     |
| Corporate Rev  | +17.6% YoY |           |          | +17.6%     |
| Education Rev  | -10.9% YoY |           |          | -10.9%     |

---

## Earnings Quality

- **Revenue growth was broad-based**, with standout performance in Healthcare (+24.1% YoY) and Corporate (+17.6% YoY) segments, offsetting weakness in Education (-10.9% YoY).
- **Margin compression** was notable: gross margin fell to 20.8% and operating margin to 7.0%, both down 100 bps YoY. This was primarily due to a **mix shift toward larger, lower-margin corporate deals** and increased SG&A expenses, particularly from higher incentive compensation.
- **Cost structure remains under pressure**, but working capital management improved, as evidenced by a reduction in the cash conversion cycle from 18 to 16 days, supporting cash flow despite margin headwinds.

---

## Management Commentary & Guidance

- **Management maintained a balanced and transparent tone**, highlighting strong revenue growth and the benefits of sector diversification, while acknowledging ongoing margin challenges.
- **Forward guidance is prudent**, with expectations to outperform the U.S. IT market by 200–300 bps. Investments in AI, cloud, and managed services are being prioritized, including the launch of the AI Center of Excellence.
- **Capital returns remain a priority**, with a quarterly dividend of $0.625/share and continued share repurchases, reducing the diluted share count to 132.4M from 135.6M YoY.

---

## Key Risks

- **Margin pressures** from mix shifts toward lower-margin deals and rising SG&A expenses.
- **Public sector headwinds**, especially in education and federal segments, could persist.
- **Macroeconomic risks** such as inflation and interest rates, as well as competitive pricing pressures, may impact future performance.

---

## Expected Market Reaction

- The market is likely to **react moderately positively** to the strong revenue and non-GAAP EPS beat, but **caution will persist** due to ongoing margin compression and sector mix challenges.
- Analysts may focus on the company’s ability to stabilize margins and deliver on AI and cloud growth initiatives in the coming quarters.

---

## Final Takeaway

- **CDW Corporation delivered a strong top-line quarter**, but the quality of earnings is tempered by margin compression and a challenging public sector environment.
- The market may be **overlooking the near-term impact of mix-driven margin pressure** and the potential for expense leverage to improve as growth stabilizes.
- **Upcoming catalysts** include: (1) tangible progress in AI and cloud services adoption, and (2) signs of stabilization or recovery in public sector demand.
- Overall, this is a **solid but transitional quarter** for CDW, with long-term growth investments well underway but near-term profitability requiring close monitoring.

CDW Q2: Revenue Beat, Margin Pressures, AI/Cloud Focus

CDW’s Q1 2025 results highlight resilient revenue growth, margin improvement, and strong public sector momentum, with operational discipline and strategic partnerships driving further upside potential.

# CDW Corporation: Strategic Partnerships and Segment Strength Set the Stage for a Resilient Quarter

## Executive Summary

We maintain a **Bullish** outlook on CDW Corporation for the upcoming quarter, driven by robust revenue momentum and disciplined operational execution. **Q1 2025 revenue of $5.20B (+6.7% YoY)** and **adjusted operating margin of 8.5%** exceeded consensus, signaling continued strength across key segments. Strategic partnerships in AI and cloud, alongside double-digit growth in public sector and healthcare, position CDW for further outperformance. However, the market may be underestimating the positive impact of improved working capital management on near-term margins—a subtle but material driver for EPS upside.

## Recent Trends Signal What’s Next

CDW’s last two quarters have demonstrated accelerating top-line growth and stable margin performance, setting a constructive tone for the next quarter. **Q1 2025 revenue grew 6.7% YoY to $5.20B**, with public sector and healthcare segments leading. **Gross margin contracted slightly to 21.6%**, but **adjusted operating margin improved to 8.5%**, reflecting effective cost management despite product mix headwinds. EPS of **$2.15** beat consensus by $0.19.

### Quarterly Financial Trends Table

| Quarter    | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS ($) |
|------------|--------------|------------------|----------------------|---------------|---------|
| Q2 2024    | 4.95         | 22.0             | 8.2                  | 5.6           | 2.01    |
| Q3 2024    | 5.00         | 21.8             | 8.3                  | 5.7           | 2.05    |
| Q4 2024    | 5.08         | 21.7             | 8.4                  | 5.8           | 2.10    |
| Q1 2025    | 5.20         | 21.6             | 8.5                  | 5.9           | 2.15    |

**Trend:** Revenue and operating margin have steadily increased over the past four quarters, while gross margin has seen minor compression.

## Management’s Forward Tone and Positioning

Management’s recent commentary reflects **cautious confidence** and a focus on execution. In the Q1 2025 call, leadership stated, **“Our value proposition is stronger than ever as we help customers navigate a rapidly evolving environment.”** This marks a shift from the prior quarter’s more defensive tone, where management cited “uncertainty in federal budgets.” The current messaging emphasizes leveraging partnerships and operational discipline to outpace the IT market, suggesting a more proactive growth stance.

Additional guidance signals include a “laser focus on evolving customer needs” and a commitment to “incremental improvements in operating margins.” The absence of explicit full-quarter guidance is consistent with prior quarters, but the tone is incrementally more constructive.

## KPI Trends & Upcoming Quarter Drivers

Three KPIs are most relevant for the next quarter:

- **Free Cash Flow:** Q1 2025 free cash flow was **$260.3M**, with capex down 9% YoY, indicating improved operational efficiency and potential for EPS upside.
- **Segment Growth:** Public sector revenue grew **+10.6% YoY** (healthcare +19.5%), and corporate segment grew **+6.3% YoY**. These trends are likely to support continued revenue expansion.
- **Short Interest & Valuation:** Short interest at **3.18% of float** (below peers) and a P/E of **22.29** (vs. industry 35.53) suggest the market is not pricing in significant downside risk.

### KPI Movement Table

| KPI                | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|--------------------|---------|---------|---------|------------|------------|
| Free Cash Flow ($M)| 210.0   | 245.0   | 260.3   | +24%       | +6%        |
| Public Sector Rev. | 1.35B   | 1.45B   | 1.49B   | +10.6%     | +2.8%      |
| Corporate Rev.     | 2.10B   | 2.18B   | 2.23B   | +6.3%      | +2.3%      |

**Impact:** Higher free cash flow and segment growth support earnings resilience, while low short interest and valuation provide downside protection.

## Missed by the Street

A key overlooked signal is CDW’s **enhanced inventory and working capital management**. While not highlighted in headline metrics, management’s “keen focus” on these levers (Q1 2025 call) is likely to drive incremental margin improvement. This operational discipline could offset margin pressure from lower-margin product mix, a nuance not fully appreciated in consensus models.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Revenue ($B) | EPS ($) | Adjusted Operating Margin (%) | Key Assumptions                                         |
|----------|--------------|---------|-------------------------------|---------------------------------------------------------|
| Bull     | 5.35         | 2.30    | 8.8                           | Continued segment strength, effective product mix, new partnerships drive incremental growth |
| Base     | 5.20         | 2.15    | 8.5                           | Steady growth, consistent product mix, stable public sector demand                          |
| Bear     | 5.05         | 2.05    | 8.2                           | Increased government scrutiny, further margin pressure from product mix                     |

**Most Likely:** The **Base case** is most probable, given current evidence of steady segment growth, disciplined cost management, and constructive management tone. Upside exists if new partnerships ramp faster than expected.

## Appendix – Data Tables & Management Quotes

### Quarterly Financials Table

| Quarter    | Revenue ($B) | EPS ($) | Gross Margin (%) | Operating Margin (%) |
|------------|--------------|---------|------------------|----------------------|
| Q2 2024    | 4.95         | 2.01    | 22.0             | 8.2                  |
| Q3 2024    | 5.00         | 2.05    | 21.8             | 8.3                  |
| Q4 2024    | 5.08         | 2.10    | 21.7             | 8.4                  |
| Q1 2025    | 5.20         | 2.15    | 21.6             | 8.5                  |

### KPI Movement Table

| KPI                | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|--------------------|---------|---------|---------|------------|------------|
| Free Cash Flow ($M)| 210.0   | 245.0   | 260.3   | +24%       | +6%        |
| Public Sector Rev. | 1.35B   | 1.45B   | 1.49B   | +10.6%     | +2.8%      |
| Corporate Rev.     | 2.10B   | 2.18B   | 2.23B   | +6.3%      | +2.3%      |

### Key Management Quotes

1. **“Our value proposition is stronger than ever as we help customers navigate a rapidly evolving environment.”**  
   - *Q1 2025 Earnings Call*  
   - Indicates management’s confidence in driving growth through customer-centric solutions.

2. **“We remain laser-focused on evolving customer needs and operational discipline.”**  
   - *Q1 2025 Earnings Call*  
   - Signals ongoing cost control and adaptability.

3. **“Incremental improvements in operating margins are a priority.”**  
   - *Q1 2025 Earnings Call*  
   - Suggests margin expansion is a near-term focus.

4. **“We are seeing robust demand in public sector, especially healthcare.”**  
   - *Q1 2025 Earnings Call*  
   - Highlights a key growth driver for the next quarter.

5. **“We continue to monitor federal contract developments closely.”**  
   - *Q1 2025 Earnings Call*  
   - Acknowledges risk from government exposure.

6. **“Inventory and working capital management remain a keen focus.”**  
   - *Q1 2025 Earnings Call*  
   - Implies potential for margin and cash flow upside.

7. **“Strategic partnerships in AI and cloud are opening new revenue streams.”**  
   - *Q1 2025 Earnings Call*  
   - Points to incremental growth opportunities.

---

**Bottom Line:** CDW’s diversified segment growth, operational discipline, and strategic partnerships underpin a resilient outlook for the next quarter. Investors should watch for further margin gains from working capital efficiency and the pace of new partnership contributions.

CDW: Margin Upside from Segment Strength & Partnerships