Yahoo Finance

Christine Leahy

Thank you, Steve. Good morning, everyone. I'll begin today's call with a brief overview of our first quarter performance and provide thoughts on our view for the balance of the year. I will provide additional details on our results, our capital allocation priorities, and further perspective on our outlook. We'll move quickly through our prepared remarks to ensure we have plenty of time for questions.
The team had an excellent start to the year with strong execution during a period of rapidly changing market dynamics. Once again, the benefit of our strategic progress was evident with our industry leading margins. Strong expense management and effective use of capital drove leverage down the P&L for the quarter, net sales were $5.2 billion 8% higher than last year on an average daily sales basis.
Gross profit was $1.1 billion 7% higher than last year on an average daily basis. non-GAAP operating income was $444 million up 10%. And non-GAAP net income per share was $2.15 up 12%.
Broadly speaking, customers remained focused on mission critical projects and must-dos, and their priorities were consistent with 2024. Laser focused on operating efficiency and expense elasticity with one addition client device prioritization, which reflected three factors need for refresh, the upcoming Windows 10 exploration, and the desire to get ahead of tariff related price increases.
Underlying demand was solid. Commercial market growth was consistent with the favorable trajectory we saw late in the fourth quarter. Tariff uncertainty slowed down major infrastructure investments, but also drove demand for client devices and greater focus on expense elasticity, consumption-based solutions, and services.
Federal government market growth was subdued throughout the quarter as agencies digested the impact of new policy priorities while education growth accelerated towards the end of the quarter, driven by Chromebook demand ahead of potential price increases.
First quarter results underscore the power of our full stack, full life cycle solutions. The team's ability to provide solutions that address customers' priorities for cost optimization drove excellent performance across services, software, and cloud. Let's take a closer look at how customer priorities and market dynamics impacted and market and portfolio performance in the quarter.
As always, there are three main drivers of our results our balanced portfolio of customer and markets, the breadth of our product solutions and services portfolio, and relentless execution of our 3-par growth strategy. First, our balanced portfolio of diverse customer and markets. We have five US channels corporate, small business, healthcare, government, and education.
Each channel is a billion dollars plus business annually. Additionally, our UK and Canadian operations together delivered sales of $2.5 billion last year. Our scale allows us to segment our business into customer and markets with dedicated sellers and technical resources who deeply understand and address the unique priorities of each market.
The benefit of our diverse end markets was evident in the first quarter with all customer and markets posting average daily sales growth. Commercial topline performance, which includes corporate and small business, was strong and balanced. Corporate and small business increased by 6% and 8% respectively.
Our ability to address both customer priorities for client devices and customer priorities for cost optimization with as a service and ridable solutions drove solid profitability and our commercial gross margin was steady year over year.
Public top line increased by 11%. Healthcare was a standout performer with net sales up 20%, driven by client devices, cloud, and services. Education increased top line by 11% with balanced performance across both K-12 and higher education. K-12 growth was driven by Chromebook, reflecting both customer refresh needs and buying ahead of anticipated tariff price increases, while higher ed growth was driven by security, data center, and services.
Government net sales increased slightly as the impact of pauses in federal agency decision making due to new administration priorities was offset by state and local growth. Other, which represents our UK and Canadian operations, posted a 10% increase led by the UK. The second driver of performance was our broad and deep portfolio of solutions and services, a key point of differentiation for us in the marketplace.
This quarter we had balanced performance across hardware, software, and services, with each increasing by high single digits or better. Hardware increased top line by 7%. Excellent growth in client devices, which increased more than 20%, was partially offset by declines in both netcom and storage.
Software top line increased by 10%. Topline growth was primarily driven by the ongoing shift in spend from traditional networking to software defined networking architectures. Software growth profit increased faster than net sales. Security performance was strong, consistent with the 4th quarter, with both top line and gross profit growing by low double digits.
Priorities met by as a service and ratable solutions to optimize spend drove excellent performance and cloud with spend, top line, and gross profit all up meaningful double digits. Customers continue to lean into CDW services to build and execute their strategies, manage the expenses, and accomplish mission critical objectives, which drove a service's top line increase of 14%.
CDW managed and professional services topline and gross profit both increased by double digits.
The third driver of performance is our ongoing investment in our customer-driven strategy, a strategy designed to maximize our relevance and differentiation in the marketplace and continuously fortify our leading position as vendor partner of choice and trusted adviser to our customers.
To meet the accelerated pace of change over the last five years, we have concentrated our strategic investments on key high growth, high relevance areas like cloud adoption and optimization, cybersecurity, IT workflow optimization, and AI expertise.
Given the vital role services play in today's interconnected solutions, recent investments have been focused on embedding services throughout our entire portfolio, including Mission Cloud Services, which closed last November.
And just as our previous investments have done, Mission, a leader in AI and a premier AWS partner, furthers our ability to deliver mission critical outcomes for customers. An ability that is more important than ever in today's dynamic environment where customers continue to move forward with mission critical projects.
Moment we are seeing across our portfolio and especially in security, where the need to deliver seamless access for employees while ensuring data protection is crucial, a need that our full suite of security solutions underpinned by products, services, and deep expertise addresses. A great example of this in action is the solution CDW developed for an American designer and manufacturer of heavy duty commercial trucks.
An industry leader for more than 100 years, the company had multiple HR systems with employees logging in daily across offices in the United States and around the world. Managing trust and identity required manual intervention and made it difficult to get a global view of the data.
Working closely with the company CISO, our team engineered, designed, and implemented a solution that migrated data from on-premises identity governance to cloud hosted centralized control, utilizing artificial intelligence to streamline processes, the solution delivered a zero trust environment for nearly 25,000 users.
Not only did the solution deliver significant measurable outcomes through enhanced user access, compliance, and operational efficiencies, the scalable automated platform also set the company up for future growth.
For CDW, the solution represents a multi-million dollar, multi-year software transaction and professional services fees that exceeded $1 million for our team's engineering and implementation work. This is a great example of the power of our strategic investments helping customers achieve mission critical outcomes.
And that leads me to a topic that's on everyone's mind our outlook for the remainder of the year. We are maintaining our 2025 outlook, which calls for US, IT market growth to be in the low single digits on a customer spend basis with a CDW growth premium of 200 to 300 basis points.
While market parameters have changed since we first shared our outlook with you in February, our current view is underpinned by what we are seeing and hearing in the market, our first quarter performance, and a continued level of prudence.
Well, the start of the second quarter, with the start of the second quarter, the overall rhythm of the business has been solid, and spend in the commercial market remains healthy.
Despite the pull forward of client devices at the end of the first quarter, both written and shipped orders have been consistent with overall first quarter performance. Customers indicate that while they are watchful of the environment, they do not intend to alter their course for now.
Maintaining our full year outlook balances are better than expected first quarter results in current customer sentiment with two countervailing factors. First, it recognizes that our federal and education customers will need more time to adjust to recent government efficiency initiatives that will impact their IT planning, prioritization, and in some cases their budgets. Second, it incorporates a level of general economic uncertainty and caution that could mute growth.
Our outlook does not factor in potential wildcards such as recessionary conditions. Of course, the environment remains fluid and as always we'll continue to monitor the market and update our view as necessary throughout the year.
There is no doubt that we are operating in uncertain times, but we have experienced uncertainty in the past during prior periods of uncertainty, most recently, the pandemic and post-pandemic supply chain crisis. And before that, the financial crisis of 2008 and 2009, our partners and customers turned to us. They recognized the vital role we play in their success and knew that leveraging our strengths would lead to better outcomes for them.
Once again, customers and partners are turning to us to help them navigate the challenges of today's dynamic landscape so they can effectively address cloud workload growth, increased security threats, and aging client device base, and significant data challenging, including how to manage data to leverage AI for insights and productivity aspirations.
As they always do, our team has rolled up its sleeves. They are working with their customers to scenario plan, determine how to optimize spend, and identify sources of funds. They are also working with customers to test multiple brands for future projects, providing product optionality depending on different tariff scenarios.
And to prepare for a potential economic slowdown, the team continues to help customers evaluate the economics of various architectures and procurement models. As our customers navigate this dynamic period, we are ready and confident in the power of our strategy and strength of our business model to weather uncertainty and serve our customers. Regardless of market conditions, we will do what we have done successfully in the past and focus on what we can control.
We will manage the business to ensure we remain a vital valued partner to both customers and vendors and ensure we are well prepared to capitalize on our strengths and accelerate out of the curve.
With that, let me turn it over to Al.

Albert Miralles

Thank you, Chris, and good morning, everyone. I will start my prepared remarks with details on our first quarter performance, move to capital allocation priorities, and then finish with our 2025 outlook.
First quarter gross profit of $1.1 billion was up 5.5% year-over-year on a reported basis and 7.2% year over year on an average daily sales basis. This was above our original expectations of low single digit growth as our teams captured increased demand for client devices, cloud security, and services in a dynamic environment.
We also saw a pull forward a demand for client devices that was most acute in the education channel but also had a minor influence on other channels. In total, we estimate that we benefit by approximately $100 million in net sales or 2% points of growth in the quarter.
In line with our expectation, gross margin of 21.6% was relatively consistent with 2024 levels, down 20 basis points year-over-year. Gross margins held firm even with strong client device performance, which comprised 33% of net sales, up from 29% of net sales in the first quarter of 2024.
The higher contribution from client device sales was partially offset by a higher contribution from netted down revenues. Netted down revenues contributed a record 36.5% of our gross profit compared to 35.1% in the prior year first quarter and 35.8% in the fourth quarter of 2024.
Our netted down category solutions listed as transferred at a point in time where CDW's agent in our earnings release and filings represents an important and durable trend within our business alongside our professional and managed services listed as transferred over time or CDW's principle.
We continue to expect netted down revenue streams to outgrow the rest of the portfolio driven by consistently strong cloud infrastructure and fast growth. It down revenues increased 12% year over year in the first quarter on an average daily sales basis.
Moving on to a quick review of our end markets for the quarter. On an average daily sales basis, all of our channels grew on a year over year basis. Corporate and small business produced top line growth for the 2nd consecutive quarter. In the public space, education had a strong above seasonal quarter as schools both refresh aging devices and tried to get ahead of potential tariff related price increases.
While the government channel remained challenging, the team achieved our expectations and helped customers navigate a complex environment.
Healthcare was a standout performer again this quarter as the team delivered. Mission critical outcomes enabled by our strategic investments. International grew, driven by strength in the UK from PC refresh activity and full stack wins with public sector customers while Canada faced macroeconomic impacts that muted spending.
We still expect volatility international and markets. Customers in these regions face ongoing economic and political uncertainty. Overall, I want to credit our teams for delivering above our expectations in a rapidly changing market. Our performance shows we continue to meet our customers where they need us most.
Turning to expenses for the first quarter, non-gap SG&A totaled $678 million up 2.8% year over year. This increase was due to higher gross profit achievement. The efficiency ratio of non-GAAP SGNA to gross profit was 60.4%, down 170 basis points from the 62.1% in Q1 2024, reflecting typical leverage and our disciplined approach to expenses.
Co-worker count at the end of the quarter was approximately 15,100, and customer facing co-worker count was 10,850, both relatively unchanged quarter over quarter and year over year. 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 $444 million up 10% versus the prior year driven by expense leverage on our gross profit growth. Non-GAAP operating income margin of 8.5% was up from 8.3% in the prior year first quarter. Her non-GAAP net income was $287 million in the quarter, up 9.9% on a year-by-year basis, impacted by slightly higher interest expense following our debt refinancing last year and lower interest income primarily due to lower cash balances.
With first quarter weighted average diluted shares of $133.5 million non-GAAP net income per diluted share was $2.15 up 11.9% versus the prior year first quarter. Moving to the balance sheet, at period end net debt was roughly $5.2 billion up roughly $40 million from the fourth quarter of 2024.
Liquidity remains strong with cash plus revolver availability of approximately $1.7 billion.
The three month average cash conversion cycle was 15 days, down one day from the prior year first quarter, down three days from year end 2024 and below the low end of our target range of high 10s to low 20s. This cash conversion reflects our effective management of working capital, including discipline management of our inventory levels, even as client device sales accelerated.
As we've mentioned in the past, timing and market dynamics will influence working capital in any given quarter or year. We continue to believe our target cash conversion range remains the best guidepost for modeling working capital long longer term.
Adjusted free cash flow is $249 million in the quarter, consistent with our expectations and reflecting 87% of non-gap net income within our stated rule of thumb of 80 to 90% of non-GAAP net income. For the quarter, we utilize cash consistent with our 2025 capital allocation objectives, including returning approximately $200 million in share repurchases and $83 million in the form of dividends. As a reminder, we're targeting 50-75% of adjusted free cash flow to shareholders in 2025. We are clearly ahead of pace through Q1.
That brings me to our capital allocation priorities. Our first capital priority is to increase the dividend in line with non-gap net income growth. We have increased the dividend for 11 consecutive years through 2024. We continue to prudently manage our dividend with respect to the growth environment and target a roughly 25% payout ratio of non-gap net income going forward.
Our second priority is to ensure we have the right capital structure in place. We ended the first quarter at 2.5 times net leverage within our targeted range of 2 to 3 times. We will continue to proactively manage liquidity while maintaining flexibility, as evidenced by our 2024 debt refinancing and redemption actions.
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 could accelerate our three-part strategy for growth, as shown by our recent acquisition of Mission Cloud services.
Likewise, we remain committed to a target to return 50% to 75% of adjusted for cash flow shareholders via the dividend and share repurchases. Now turning to our outlook, while the strength we saw in the first quarter emanated from solid underlying demand, we also saw some customers trying to get ahead of potential tariff-related price increases, contributing roughly 2 points of our year over year net sales growth.
We have contemplated this pull forward into our seasonal view, understanding it does not change the full year 2025 overall. We came into 2025 with an appropriately prudent outlook, and despite the strong start to the year, we believe this environment calls for continued prudence. We are laser focused on controlling what we can control and supporting our customers as only we know how to do in this dynamic environment.
Our outlook assumes frictional impacts in the government and education channels and a level of general economic uncertainty and caution, but it does not factor in re recessionary conditions.
As always, as the landscape changes, we will provide you updates each quarter. With these factors in mind, we are holding to our full year 2025 view of low single digit growth for the IT market. We continue to target market outperformance of 200 to 300 basis points on a customer spend basis.
Based on the anticipated mix of products and solutions, we continue to expect low single digit gross profit growth for the full year 2025 and gross margins to remain relatively stable and within the within the range of 2024 levels.
We expect first half gross profit to be slightly lower than the second half, but higher than the historical split of 48% versus 52%. Finally, we expect our full year non-GAAP earnings per diluted share to grow low single digits year over year as we focus on profitable growth, exceptional customer outcomes, and an effective execution of our capital allocation priorities.
Please remember we hold ourselves accountable for delivering our financial outlook on a full year constant currency basis. On that note, we expect currency to be roughly neutral to reported growth rates for the year. Moving the modeling thoughts for the second quarter. We anticipate mid to high single digit gross profit growth sequentially, leading to low single digit year over year growth.
This factors in the pull forward in client device demand. ahead of tariffs and subseasonal spending in the government and education channels. We continue to expect Bruce Martin to be similar to overall 2024 levels.
Moving down the P&L, we expect second quarter operating expenses to increase quarter to quarter seasonally aligned to gross profit, but for non-gap SGNA as a percentage of gross profit levels to be lower than in the first quarter.
Finally, we expect second quarter non-gap earnings for diluted share to grow at a mid-teens rate sequentially to a level that is nearly flat with the second quarter of 2024. That concludes the financial summary. As always, we'll provide updated views on the macro environment and our business on our future earnings calls, and with that, I will ask the operator to open it up for questions.
We would ask each of you to limit your questions to one with a brief follow up. Thank you.

Question and Answer Session

Operator

(Operator Instructions)
David Vogt of UBS.

David Vogt

Great, thanks guys. Good morning. Maybe both for Chris and I don't want to go into the tariffs because you talked a lot about tariffs, but I want to talk about some of the product categories. I thought you had relatively easy compares against Netcom and storage last year.
Obviously I just want to kind of get your thoughts on what's going on in those markets. Are they seeing a pause in spending by customers ahead of tariffs, uncertainty, just kind of what are the dynamics going on in those particular and markets that seemed a little bit weaker than I would have thought, given some of the checks that we had done. Thank you.

Christine Leahy

Yeah, David, good morning, and I can start with that. I would say you're absolutely right on the compares for networking. We still see some customers that are digesting number 1. number 2, I'd say that if you look at our networking results, it reflects a continuing shift to software defined architectures and a bit of a pause in the infras larger infrastructure deals that we've been that we mentioned in terms of the cautiousness right now.
We don't see it as a harbinger or a problematic. It's just a timing issue in the first quarter, but it's, we are continuing to have what I would say are design discussions extensively, which to us is a leading indicator of what's to come. So not concerned about the categories, in fact, feeling that the services work that we're doing is foreshadowing what will be coming in the future quarters.

Albert Miralles

Great thank you very.

Operator

Erik Woodring from Morgan Stanley

Hi, good morning. This is Maya on for Eric one question from me, what are you seeing kind of across the pricing landscape, and given some of the competition comments you've made in recent calls, is there any risk that, you would not be able to pass through any tariff related costs to end customers, just any color you can share that would be helpful.

Christine Leahy

Yeah, let me, I would start with the resiliency of our gross margin that you saw this quarter notwithstanding, tick up in client devices so regardless of the. I'll call it competitive environment that we are in. We are still continuing to be able to drive profitability and as we see tariffs implemented down the line, we might continue to, we might see a tick up in competitiveness, but we feel fairly confident that we'll be able to, pass along price increases.
You might have customers, for example, buying fewer units of something, etc. But they're going to spend their budget. And as as the cost of goods sold goes up and the price goes up, the gross margin itself might reduce a little bit mathematically, but otherwise we feel very confident, as we have in prior circumstances like this that we'll be able to maintain our profitability.

Albert Miralles

And maybe I, my, I would just add to that, we would observe that in the quarter, despite quite a bit of variability, a pretty orderly market, certainly a variability across the different OEMs product categories as well as in markets.
But really not the level of variability or, concern there that you might expect in this type of environment. And just a reminder we're a cost plus provider, so what we did see in that kind of orderly environment is pretty much where customers were taking actions that we were passing through the impact and maintained our margin to Chris's point, we're able to hold firm in that regard.

Operator

Asiya Merchant from Citigroup.

Asiya Merchant

Great, thank you very much for taking the question and good results here. Just, healthcare has been up strong. I think you referred to that being strong again. Just if you can parse out what's going on in this healthcare, is it specific to CDW and how you guys are thinking about, it ahead in terms of your channel performance looking ahead to the rest of '25. Thank you.

Christine Leahy

Yeah, sure, I think, look, I think health care, there is, there are the results reflect several things that are specific to CDW, in particular, our strategic strategic progress over the last several years.
We have invested behind both our sales organization, our technologists within healthcare, and our industry experts in healthcare. We've invested in things like the transformation centers where our customers can come together and test out technologies with CDW experts and their peers.
We have focused our go to market on size and type of customer in the healthcare space, and you're seeing really good results based on the tremendous execution of that strategy. Quarterly results, for Q1, we did see a nice uptick in client devices, so that reflects top line growth significantly. And the other thing is we've mentioned this before, but healthcare organizations were a little behind in the adoption of cloud.
And cloud optimization and so we've seen an acceleration over the last couple of years for CDW customers in our ability to help them actually accelerate workloads to the cloud, make decisions around that, and then finally I just say security has been a big driver for our healthcare results.

Operator

(Operator Instructions)
Amit Daryanani from Evercore ISI.

Amit Daryanani

Yes, thanks a lot. Good morning, everyone. I guess maybe to stop it, Chris. I realize it's a tough evolving macro environment, but as you look at the S&D and corporate vertical specifically, are you seeing any change in the orders of buying behavior in Q2 versus what you saw in March? And did this bull in potentially sustain into the month of April, given liberation Day technically was in the first week of April?

Christine Leahy

Yeah, good morning, Amit. Yeah, I would say we have been pleasantly surprised by the solid underlying demand and the rhythm of the business as we moved into the second quarter. It's been a healthy rhythm, which means activity across our commercial sector, and that's been a very positive sign, customers certainly are incrementally more cautious, but as I mentioned in my earlier comment, we are also deeply involved with customers in planning phases and design phases, and we take that as a positive sign.
For as we move throughout the year and then client devices in the in the commercial space has been very strong, for the reasons we we've discussed before. I mean, refreshes, we're probably now into the refresh in the early innings, kind of the mid cycle I guess I'd say, so we got refresh picking up and that's been a positive as well.
So I just say, look, we're cautiously optimistic. Our customers are incrementally more cautious. They are disciplined. But yet they're determined and given the breadth and depth of our portfolio and our capabilities to help customers toggle to the most optimized solution, we are feeling, I would just say, cautiously optimistic.

Amit Daryanani

Got it. And then if I could just follow up with Al, can you, when I think of the calendar '25 guide and EPS low single digits, can you talk about how are you embedding buybacks in that model? Because if I just assume you do your free cash flow conversion and your buybacks and that kind of 50% free cash flow range, you should be able to achieve your EPS guide on a flat revenue. So just talk about what are you embedding in your guide from a buyback perspective. Thank you.

Albert Miralles

Yeah, good morning, Amit. We are continuing to bake in an expectation on it that we would be within that 50 to 75% range in terms of return to shareholders now. That being said, we in Q1 took advantage of valuation opportunities and we did buy back $200 million in dollars in shares.
And so therefore we certainly are ahead of pace and I would say kind of the front loading does indeed omit benefit us kind of when you think from an averaging perspective, but we're not presuming per se that that pace will continue, so I'd say we're still within the range of our 50% to 75%, albeit with Q1, it's likely towards the top of that range.

Amit Daryanani

Perfect thanks.

Operator

Samik Chatterjee from JPMorgan.

Samik Chatterjee

Yeah, thank you and thanks for taking the questions, Chris, I wanted to go back to your response to the question from Ahmed, where you said I mean order activity and customer spending is still robust as you enter a two, but there are customers that are sounding a bit more cautious.
I mean how much of that are you interpreting as Customers want to spend the budget while they have it before they lose some of those IT budgets in the back half of the year versus sort of there being underlying demand for the equipment and there being an underlying demand that drives them to continue to invest in their infrastructure and maybe like any insights you're getting from your project driven activity versus transactional business in terms of whether customers are doing sort of choosing one versus the other and I'm a follow up.

Christine Leahy

Sure, it was a little hard to hear the question, but I think I caught it and it was on our on commercial spend and kind of dissecting how much of the April activity is related to transactional and spending budgets versus driving, projects forward. Look, let me start by saying we're sharing an outlook in our perspective based on what we've seen so far.
Like everybody else, we can't predict the future, but I would say I would. I would call what we're seeing as solid and balanced, and when I say balanced, that is across both transactional and activities that suggest that large mission critical projects will move forward at some point, the timing throughout the year are hard to say. But we're feeling a positivity and a determination amongst our customers.
Our outlook does, however, reflect a more muted environment as we go out, go throughout the year because of the pull forward that we've experienced. So we've baked that into our outlook, the incremental cautiousness, but I, and I call it solid, balanced, I'm, it feels pretty good.

Samik Chatterjee

Okay And a quick follow up for Al here, the first half versus second half split where you're expecting more revenue than the first half versus historical trends and with the pull forward in client devices, how should we think about gross margin percentage rates related to some of the sort of cadence we've seen in the last couple of years? Is there more of a sequential increase as we go through the year on account of the client devices pull forward? Thank you.

Albert Miralles

Yeah, sure. So, no, I would not expect that there's going to be much in the way of variation on gross margin, both say Q2, as well as a full year. We would expect gross margins to be reasonably similar to 2024 levels. Now what we have seen obviously in the first quarter was a pretty significant mixed shift into client devices.
And frankly away from solutions when you take those elements for the quarter, it explained almost all of the variation versus prior year and prior quarter as well. I will also note Saak that our original outlook contemplated some level of like for like compression and gross margins.
And while we didn't see a ton of that in Q1, we are continuing to make space that you could see some of that. All in when you add up all of those factors, some, I think you get back to something like 2024 levels.

Samik Chatterjee

Okay, got it, great, thank you, thanks for taking the questions.

Operator

(Operator Instructions)
Harry Read from Redburn Atlantic.

Harry Read

Hi, good morning. Just wanted to ask on your hiring plans for the rest of the year. Do you expect to have a sequentially flat, co-worker base as you've seen, in Q1? And then what are you currently seeing in terms of wage inflation, in the market, and do you expect if you see continued growth in gross profit, to see operating leverage like we've seen in the first quarter of this year. Thank you.

Christine Leahy

Yeah, I'll start in the now can jump in in good morning. In terms of our plans for the year, we are managing expenses very prudently. And at the same time we are continuing to invest in strategic hires, so I would just call it a balanced approach to our co-worker investments during the course of the year.
And when I say investments in strategic areas, you can think of areas like technology, particular sales roles, particular industry roles, particular technology and digital rules. So we'll continue to invest behind that. In terms of wage inflation, we aren't really seeing anything of any note.
Across wage inflation at this point in time, and I didn't catch the third part of the question. How did you. Okay, well, was there a third part of the question? Oh yeah, just if you.

Harry Read

Expect to see continued operating that. Okay, can you hear me?

Albert Miralles

Oh yeah, let me pick up on there, Harry so obviously yes can you hear us? I think that's the last. Okay, well, obviously what you saw in Q1 was pretty significant operating leverage and that was partially a function, obviously from our strong growth but a little bit impacted as well by the pull forward.
So I think what you can expect on the operating leverage front is in. This environment of low single digit growth kind of remainder of the year, we wouldn't have quite the operating leverage we had in Q1 because there's a bit of a kind of asymmetry there between what we saw in growth in Q1 and then what kind of plays out for the rest of the year.
So that being said, like Chris said, we are cautiously optimistic optimistic. That the solid underlying growth we've seen could play out and certainly that would lead to stronger operating leverage for the full year. So and then maybe Ari,.
I would just add to that on Chris's comments on the on the headcount she talked about continuing to invest in the business that's super important, but really our playbook here has been while we feel good about the potential inflection point and solid underlying.
Demand we want to be cautious in terms of our spending and our hiring overall to the event to the extent that we, if we did see a pullback, we would not want to be in a place where we have to more urgently pull back on expenses. So what you're seeing is kind of a careful, thoughtful plotting of our expenses and our hiring to ensure that kind of we're balanced in this dynamic environment.

Harry Read

Okay, that makes sense, thanks. Maybe just a very short follow up is that incorporating why the guidance on EPS growth is the same as gross profit growth at this stage?

Albert Miralles

You've got it, Harry. That's spot on. It's just essentially with our really strong growth from 11, you have a bit of kind of a deceleration and a bit of an asymmetry in your operating leverage.

Harry Read

Great, thank you.

Operator

Keith Housum from Northcoast Research.

Keith Housum

Good morning guys. Just understanding that you guys are a cost plus model. Can you talk about the impact you've seen on pricing right now? I mean, have vendors on a wide scale, raise their prices and if they have, to what extent are you guys seeing and if they haven't, what are your expectations for or what conversations you're having with them in terms of when they may occur and you know what they're thinking for the rest of the year.

Albert Miralles

Yeah, good morning, Keith. A couple of things. First, look at it did vary quite a bit by OEM, by product category, etc. I will remind you too, Keith, look, more than 50% of our business in the form of gross profit comes from software and services, so you would not see it in those categories. So you have kind of the remaining less than 50% focused on hardware.
Certainly there. Were OEM's partners that had price increases as we saw tariffs. Again, I'll just point back to pretty orderly. We were way in front of those. We had a really good sense of how that was going to play out and we were in constant interaction with our customers in terms of the timing and the quantum of those.
But it is as you would expect based on the OEMs that we do business with and where they're located and kind of how tariffs may impact them. Great.

Keith Housum

And focusing on the services that you guys offer to your customers, are you guys raising the prices on lows, or are you guys kind of holding firm?

Albert Miralles

So I'm sorry, did you say services?

Christine Leahy

Yes, your question was, are we holding prices on services or raising those? Yeah, we're maintaining market competitive pricing right now.

Operator

George Wang from Barclays.

George Wang

Thanks for taking my question. I just have a question on the AIPC and the kind of increasing AI complexity in general, just curious if you have any refreshed thoughts in terms of given the dynamic and macro and the backdrop, has anything changed kind of you would like to call out versus 3 months ago, just in terms of, whether you are seeing a faster or steady or slowdown in terms of AI adoption in general.

Christine Leahy

Yeah, I would say, look, the refresh that we're seeing or the uptick in client devices is coming still primarily from a refresh need and the expiration of Win 10. We are selling AIPCs. We're having more conversations about that, but I would say that the majority of what we're selling now continues to be through just refresh and moving to Win 11.

George Wang

Okay, great. And just quick follow up if I can just, in the last couple of days, we saw this news flash in terms of collaboration with the Penguin Solutions, which caught my eye. I'm just curious, it's something you can replicate towards other providers and kind of the vendors in terms of this unique setup. I'm just curious if you can double click on this partnership and kind of what's the value added from CDW.

Christine Leahy

Well, George, as we don't talk about specific partners, but I would say that in all of the various partner relationships and ecosystems, CDW is in conversations with these partners front and center to ensure that we our value proposition is appropriate.

Albert Miralles

Okay, great. Thanks a lot.

Operator

Ruplu Bhattacharya from Bank of America.

Ruplu Bhattacharya

Hi, thanks for taking my questions. First one for Al, I think, you said that in one queue, the netted down items were 36.5% of gross profit. Just my math suggests that that means that the core business ex netted down items was sequentially lower and year on year lower in terms of gross margin, maybe at like 14.9%. Can you just help us think through how you're thinking about the core business margins as.
This year you should see client devices come up, but then you've also had a very strong quarter of netted down items. So do you think that core business margins can continue to remain strong for the rest of the quarters in the year and then I will follow up for on the seasonality thank you.

Albert Miralles

Sure, thanks, Rup you are correct. Our non-netted down gross margins for the quarter were about 40 basis points lower than the prior year. I think I mentioned earlier that the delta on the year over year delta on our overall gross margins as well as on non-netted down.
Was almost entirely a mix phenomenon that is the mixing into client devices, including the pull forward effects as well as mixing out of solutions drove that decline. There was very little in the way of like for like compression. In those margins.
Again, I'll just reiterate Ruplu, that being said, we continue to kind of have some caution and are making space that you could see more like for like compression, but at this point, we're holding pretty firm.

Ruplu Bhattacharya

Okay, thanks for the clarification there, Al, and then maybe one for Chris, you've seen some pull forward in the education space. Typically the June quarter is a strong quarter for education. How is there a change in seasonality that we should think about for education this year as we model out the rest of the quarters?
And the same question, Chris, for federal, how are you seeing the impact of those, and do you think federal might remain a little bit weaker for the next quarter, but how are you thinking about growth in federal in the second half? Thank you for taking my questions, really appreciate it.

Christine Leahy

Yeah, thanks for the question. On education, I would think of it simply as a pull forward, the seasonality that we normally see in Q2. We saw a number of our customers pull that forward and buy in ahead of potential tariffs. So we've de-risked our second quarter, if you will, as a result of that.
And on the federal side we've also anticipated a more muted environment there. As there's more friction in the system as the government, determines how to respond, prioritize, manage budgets, etc. So we've factored that into our outlook for the full year as well, but expecting a little bit more muted. Sometimes you see an uptick once you have a new administration in office, and we aren't expecting that as much now and we haven't seen that as much now.
Now I would say that on the positive side in federal, a number of the agencies that are strong customers of CUW on the on the non-defense side are agencies that are not yet seeing cuts and are still going strong, so that's a positive sign for us.

Albert Miralles

And I would just maybe add when you add that up for Q2. When you add that up for Q2, including the frictional elements in federal, the pull forward for education, and some frictional elements there, we would expect Q2 to be subseasonal.

Ruplu Bhattacharya

Okay, understood thank you so much.

Operator

Thank you very much. We currently have no further questions, so I'd just like to hand back to Chris Leahy for any further remarks.

Christine Leahy

Okay, thank you. And let me close by reemphasizing my confidence in this team, our strategy, and the durability of our resilient business model.
Thank you to our CDW co-workers across the globe for your unwavering commitment to our customers. 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 CUW. Al and I look forward to talking to you next quarter.

Operator

As we conclude today's call, we'd like to thank everyone for joining me disconnect your lines.