We're gonna have you sit here, but you're facing the wrong way. Awesome. Let's get started, guys. Welcome to day one of the Morgan Stanley TMT conference. My name is Erik Woodring. I lead the hardware research coverage here. I am delighted to be joined by Al Miralles, CFO of CDW, a longtime mainstay here at the conference. Before we start, for important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Al, thank you very much for joining us today. Yeah. You're welcome. Awesome. I think the best place to start is maybe doing a quick look back on last year. And really what I'm hoping to better understand is, you know, the, some of the challenges that you faced last year, how are you kind of course correcting, whether that's market or micro related, and then where do you actually see also the opportunities at the company level to lean into, in 2026, and we can take off from there? Yeah. Sounds good. Just playing back the last couple of years, obviously coming off of COVID growth, we had a number of factors that influenced our and impacted our business, which resulted in 2023 and 2024 being tough, right? Macro environments, a bit of decision elongation, funding cycles in the public sector, a number of factors that caused an air pocket of growth during that time. For 2025, what we're looking for was a sustainable return to growth. We did see that. We felt like we took advantage of take share opportunities. The team executed with precision. We are right back on a positive path in that regard. As we look forward, what we're focused on, 26 is gonna be interesting and dynamic as well. We're getting used to all of these variable factors. Every year. -That we've got to deal with. What we're focused on for 26 is controlling what we can control. We are the trusted advisor to our customers, and we are the channel choice to the partner ecosystem. We offer a full stack, full life cycle set of capabilities to both. We're gonna take advantage of that. We are uber focused on our execution, we've had some changes on the go-to-market side of the house that are already paying dividends and feel really positive about the changes there. We will continue to be disciplined about how we use working capital so that we can create sustainable cash flow. Use that to our advantage on the capital allocation front. That's what's really front and center for us right now in 2026. We're excited about it. We'll kinda touch on all of that in earnest over the course of the next 30 minutes. Maybe let's just start very high level, with, you know, you talked about 2026 being dynamic, to say the least, right? What are you hearing from your customers today, and what does that mean for kinda spending growth? I'd love if you could just, you know, very high level, kinda first half versus second half, then we'll go to the product side, but kinda corporate, SMB, public, kinda bake that all into that, please? Sure. I would call customers cautious and intentional here. They are definitely engaged. They are not cutting budgets. They are prioritizing budgets, and they are thoughtful about where and how they spend. Again, it plays to our strengths, helping them navigate a challenging dynamic environment that we're living in. We don't provide outlooks on the individual channels, but if I give you just some sound bites. Please, yeah. For each corporate customers, definitely engaged, definitely thoughtful and intentional in their spend. They are very focused on AI and how do they get on with building out the infrastructure to support AI, it's a cautious environment for corporate customers. Small business has been a really healthy channel for us over the last year or so. We expect that's going to continue. I think small businesses have shown up as really resilient and able to take advantage of being AI native, cloud native to get things done. Their focus areas have been on security, cloud, client devices. Healthcare, another strong grower for us. They're gonna have some compares in 2026, it's a great example where our efforts and investments in verticalization have paid off, healthcare's been a really great performer. In the public sector, otherwise, as you know, in 2025 and even the years before, it's been uneven. Right? Take government, which has been dealing with government shutdowns, DOGE, funding cycles, et cetera. While state and local's been strong, federal's been choppier because of those variables. The team's done a great job navigating through that, even with shutdowns, working closely with agencies that remained open, preparing for government opening up to take advantage of growth on the other side. They've played all of those angles to try to take share and to execute with precision. They've done just that. Really proud of the execution on the government side. If we can get an environment where a little less unevenness and more continuity of the funding environment for federal. I think there's good things on the other side of that. Education, you know, obviously it's been a challenging segment over the last couple years coming post-COVID. We continue to say that we think that education spending will eclipse pre-pandemic levels. It's taken some time to make its way through the funnel. We had some good growth the latter part of the year for education. We're hopeful that we can return to growth in 26 in earnest on the education front. Okay. That is super helpful, and I'll quickly kinda touch on each of those. I'd love to. Maybe just starting on SMB, and, you know, it sounds to me like as if it's almost the healthiest area of spend, so to speak. Maybe key upside risks, downside risks that I can imagine we all kind of might know what the downside risks would be there. From a, from an execution standpoint and your ability to serve that customer base, how do we think about upside risks this year? First I would say, we said for many years when the economy recovers, if the economy is growing, that small usually leads the way. I'm not sure I'd characterize our growth there as tied so much to the macro. I would say it's a combination of things. You have customers here that can and are being nimble, again, kind of think AI native, cloud native. They can move more quickly on things. We're seeing agentic workloads in the cloud with small customers that are full on cloud, obviously, not on-prem. You have that phenomena. I would just say, look, we know, you know that small mid-market has been historically our sweet spot. We're seeing that come through in spades. The execution of the team has been fantastic. They're turning on the new acquisition engine. They're taking advantage of opportunities environment where customers need assistance, from small all the way up to large. In small, there's a lot of complexity and there's a lot of choice, we're helping those customers see through. Okay. I'll I'm gonna ask healthcare about healthcare in a second, but I wanna touch on kinda double-clicking on the rest of the public business, because as you said, there's a lot of kind of headwinds and tailwinds, and I'm just curious, they're all kind of interre-related somewhat. Is there... At a very high level, is there kind of clarity emerging in terms of spend for this year and being able to get budgets as we've moved kind of now away from some of the concerns about being able to fund our government? Just help us understand maybe the momentum where we stand today, because again, education, state, local, federal, they're all somewhat intertwined with one another. Sure. Let's start with government first. State and local has been strong. Many, many states have been operating with continuity and consistency, and our performance in turn has been really strong in state and local. A few states kinda look like and operate like federal government, and so we've taken advantage of that. There's clearly tech needs and demand in state and local, and we have done a great job fulfilling those needs of those customers. On the federal side, likewise, we would say that the demand is there. We work with a variety of different agencies. The shutdowns that we've seen and the pauses in funding have caused more friction. What the team's done is basically navigated around that, doubled down on the agencies that have been open for business, got prepared for when the shutdowns ceased, and we could pick up business with the agencies that were not operating and haven't missed a beat in the process. The unevenness we see is when you have a shutdown and agencies are impacted, that it takes time to rebuild your pipeline. We said in Q4, with the shutdown, it didn't impact our Q4 results. It would have more of an impact in Q1, and therefore our outlook was more modest in the federal space. The team's done a great job rebuilding that pipeline and preparing for more continuity through 2026. Okay. I wanna maybe use healthcare as a great example of, as you mentioned earlier, kinda success in verticalizing. Is there an opportunity to take what you've learned in your healthcare practice, which has driven multiple years of outperformance there, and apply it to the rest of this customer base? Or where do we stand in that? You talked about go-to-market changes. Where do we kinda stand in that shifting of leveraging where you've had a lot of success in some of these end markets and almost pushing it through and taking that and expanding it? For sure. Definitely is opportunity to replicate that. Look, we would already say we have deep verticalization when we think about education, government, et cetera. On healthcare as an example, just because those investments have been more pronounced over the last number of years, one of the things that we've put in place is this concept of healthcare strategists that are kind of tip of the spear in terms of working with large healthcare organizations and helping them navigate in a more broader strategic scale to drive their innovation. If you think about healthcare organizations, right, they had many cases dire need to innovate to try to make their way out of difficult cost pressures, reimbursements, declining revenues, et cetera. Technology has been a lever. Our timing of deeply verticalizing in healthcare when the industry needed it was well-placed. We are playing that same playbook in other areas. We just talked about our go-to-market changes. We will now report on financial services. It's another area where we are building. We've built verticalization. We have the same concept of those strategists that deeply know the business across financial services and can really build deep relationships that are at a strategic level with these customers. Okay. last one before we get into maybe the end markets and whatnot is, just touching on international. Again, I know it's not the biggest part of your business, but, where does your kind of international business stand in terms of the spending curve relative to what you're seeing in the U.S. business? It's been resilient. I think for a number of quarters, I said you can expect that international is likely gonna be uneven and probably a bit more volatile. We've been pleased that it's been more consistent and resilient than that. Many aspects of the go-to-market and just our foundation of how we operate internationally looks much like the U.S. It's not a tremendously different playbook. The team's done a great job executing. There are likewise plenty of take share opportunities in international, and that's both U.K., Europe, and Canada, and the teams have done really well. It has shown the benefit of diversification for us, obviously, and we knew that, but we've been quite pleased with the performance. Okay, perfect. Let's touch on PCs first. Obviously, a key topic of debate, given you have kind of still Windows 11 refresh demand, Windows 11 and refresh demand, let's say. You also have the threat of rising memory prices. You know, we've kind of maybe alluded to perhaps a tale of two halves this year, so to speak. Just what are you seeing in terms of PC demand today? What inning of that refresh are we in? What are your customers telling you? What does your pipeline tell you? Kind of how is that factored into your outlook right now? Sure. First, I would just say after two-plus years of pretty solid growth. Yeah. On the PC front. Very. This memory environment, you know, one of the big takeaways you should have is that there is definitely meaningful demand there on the PC front, and the level of customer activity, engagement, discussions, and buying is meaningful. If there's ever a question of the, has it run its course, I think we can say that it has not. There is still opportunity there. Where is that showing up or kinda where does it manifest itself? Look, there's still one eleven opportunity there. There is classic generic refresh from units that came out of COVID, and there's a growing interest in AI PCs. The demand dimensions are there. The memory phenomena, pricing, supply questions has definitely lit that up. The activity's been fantastic. Our outlook for first half versus second half is predicated on where is the visibility. Right now, we have very good visibility what's right in front of us. We have very good visibility into second quarter. The visibility gets murkier as we get into the back half. That doesn't mean that it couldn't play out more positively. Erik, you know we are more modest on our outlooks, and where there's a lack of visibility often translates into a level of prudence, and that's what, that's what we're doing. How does that show up in terms of PCs? Look, with the price increases that we're seeing and the potential for them to go up, it would probably manifest itself in a muting of demand in the back half with the potential that you could see supply constraints. There's already some supply constraints. It's pockets. That is the premise, the underlying foundation for the outlook we gave and why we think first half versus second half, will be stronger Okay. Then what about the kind of enterprise infrastructure side of the world, meaning servers, storage, networking? Where are we in the refresh cycle for each one of those? 'Cause I know they're all kind of on a bit of a different cadence. Similarly, memory has a different impact on each one of them as well. Just your kind of outlook as you look at 2026 and how you've embedded that, what your customers are telling you, et cetera? Sure. Well, first, if we play back the last year or two on infrastructure, it certainly has been softer, more volatile, more uneven than we would have hoped. I think that part of that was customers elongating decisions, sweating assets a bit on the infrastructure side, optimizing their dollar spend, 'cause obviously, modernizing your data center on-prem spend can be more cash flow intensive than just going to the cloud. The last couple years, we would have expected that would have come to fruition, that spending would have moved along, it has not. To some extent, AI was a factor, but it's not the only factor. Part of it was just, an environment with a lot of overhang and a lot of variables and wild cards. Customers have said, "I'm not gonna put out more cash flow. I'm going to expend my dollars in a different way. That has kicked the can on some infrastructure spend. Now we scroll forward, we've got the memory phenomena going on. It definitely is driving more engagement, activity, discussions on should we get on with our infrastructure spend, number one, because there's a fear for prices moving up, maybe supply being constrained. Number two, there's greater clarity on how customers, and I'll say namely larger corporate customers, might align their capacity to support AI. More and more, it's clear that will be fulfilled with a combination of on-prem and on cloud. Early days in terms of infrastructure spend vis-à-vis AI, but we are seeing an inflection point in that regard. Let's, I'd love to touch on this point on AI because there's, you know, there's investor debate in the market around whether channel partners like CDW are AI enablers or whether you get disrupted by AI. Obviously, you have a much better insight into what's going on internally at CDW, what you hear from your customers, what you're doing than we do. I'd love to just maybe hear your side of the world on the spend associated with AI from your customers, the investments you're making to enable that, make sure that you guys remain at the top of that food chain, and maybe address that kind of enabler versus disruptor question, so to speak. Sure. Sure. A couple things. Number one, many have kind of provided the parallels of cloud to AI. I do think that there are some parallels there. If you actually look back at cloud, it's been 10+ years that it's played out, and cloud adoption is still sub 50%. AI, we do believe, is going to be more pervasive, more embedded in everything we do than cloud. Make no mistake, in terms of the spend on AI, it's still early days. If I recount where we are and what we've seen in the way of AI monetization, the journey started for us a couple years ago, and it started with professional services work, workshops, assessments, evaluating the implications, thinking through use cases. It started there. It moved into helping customers get use of the frontier AI models, Copilot, ChatGPT, Gemini, Anthropic. We're seeing that. We are now seeing AI start to show up across the partner ecosystem in terms of just about any product having some element of AI. While we'd still say that's early days, it is showing up in those product generations and stuff that we sell, as well as AI PCs, right? From a hardware perspective, you have that phenomena. What... Then I would say cloud. Obviously, I've talked about there are customers that are going straight to cloud with their AI workloads. Small business is a great example, right? They can hit the easy button and say, "We're gonna put these agentic workloads on cloud. We are benefiting, and when you think about our Mission Cloud acquisition, we are benefiting from an increase of agentic AI workloads in the cloud. What has not yet in earnest come to fruition is meaningful infrastructure spend as yet to support AI. Make no mistake, we do think that we're at an inflection point. You heard a couple stories on our earnings call, including large corporates that we've worked with to build out on-prem capabilities to support AI workloads. We're seeing and we're hearing a lot more interest in that regard. The memory, just to bring it back to the memory 'cause we like to do that, the memory phenomena is likely going to be a catalyst to that. That is the should we get on with these decisions where there might have been a bit of an air pocket and indecision around how on-prem would support AI, we're seeing that pick up. I, and I maybe wanted to touch on that because maybe two parts related to memory in this spend. One is just historically you've had this cost plus model. you know, there are clearly flavors of input cost inflation that are different than history. Does that change the approach that you have in a cost plus model when it comes to higher input costs, higher prices, what it does for CDW margins? Then second, related to this kinda catalyst as you're speaking to it, is that catalyzing, you know, on-prem spend? Is that kind of what you're saying in the near term because the risk is prices will be higher in the future? Or maybe playing devil's advocate, could that accelerate a shift to the cloud? I'd just love to know your thoughts on kind of both of those sides. I think it's going to be balanced, right? It's gonna depend on the end markets and how they adopt it. I talked about small business and, you know, their more propensity for cloud. On the corporates, I think it has the potential to catalyze the making decisions on how they are gonna handle capacity in the cloud. Look, we have this phenomenon where many would say the ultimate economic cost of being on the cloud can be higher than on-prem. I'm not gonna tell you the conclusion or our view on that, but there are definitely scenarios where it can be more expensive. I think it's weighing more and more on corporates and enterprise players that you have to contemplate some workloads being on-premise so you can control the cost. On cloud, that cost can escalate, and the volume of what goes to cloud can escalate quickly. Memory prices, even with the memory increase, prices, memory prices are causing more corporates to say, "Should we contemplate hybrid environment?" I think our view would be ultimately, particularly for corporates, that is going to be the logical environment. Yeah. Support many of these AI workloads. It's probably just too early to necessarily know or so. For sure. Right. Okay. For sure. Okay. I wanna move away from the traditional business and focus on netted down revenue because if you take a big step back and look at CDW, it's been a clear tailwind to margins over time. It's been a clear tailwind to growth. Just the general outlook that you see in that business, where does that stand today? Are there is there an opportunity for an inflection anywhere or is the mix underlying that business what you're selling or at least helping customers contract? Is that changing at all, whether it's what's going on with memory, the future of AI, et cetera? It's not changing significantly. I think it's probably three years and counting that I've said on our earnings calls that we believe that the durability of netted down revenues will persist and will likely eclipse overall growth of sales, and that has held up during that time. We will let you know if we think we reach an inflection point, that could change, but we don't believe that will be the case in the near term. We've gone from netted down revenues, and I'll just remind you, cloud, SaaS, warranty, Software Assurance, partner-delivered services being, you know, mid to high 20% of our gross profit to well into the thirties. I think last quarter, these guys can keep me honest, 36% of our gross profit came from netted down revenue. Highly weighted in cloud and SaaS, so no surprise in that regard. I think within that SaaS, you've got, you know, network, networking software, you've got security, you've got a number of flavors in that SaaS bucket. Not enterprise applications, it's more infrastructure-related SaaS. Cloud and SaaS, the biggest drivers there. It's been a really durable trend. All indications would suggest that that will continue, including in 2026. When we say we think the back half could be, you know, a bit more muted, that's notwithstanding that netted down revenues will probably rule the day in the back half, which will drive our gross margins higher. Okay. Maybe just quickly underlying that because you mentioned cloud and SaaS, and, you know, the market has been focused on AI disruption risk. Any thoughts related to AI disruption risk within that business, the broader cloud kind of SaaS? We don't really play in the enterprise SaaS space and the No. Application. ERP and some of the other big kinda enterprise applications, we don't really play there. We are a ServiceNow provider, but think of that as really supporting AI efforts and workflow optimization, operational expertise, et cetera. That's a different flavor than some of those big enterprise applications. Our SaaS is, like I said, more tied to infrastructure and security. Okay. Perfect. I wanna address cost, and I think it's a really important point, which is, you know, 2025 year is a year of heavy OpEx spend, some of it related to variable comp payments as you had a lot more success driving revenue growth than in 2023 to 2024. Yeah. -Different environment. Can you just help us understand now that we've moved beyond 2025, you know, what is the trajectory of OpEx? I realize that it is a flexible cost base, but maybe the question is, you know, what kind of revenue or top-line growth or gross profit dollar growth do we need to see from CDW to kinda return to that operating leverage, that EPS growth that you guys are so well known for? Sure. First, context matters, right? 2023, 2024, we said were tough years from a demand perspective. Right. We did a lot to rightsize our operations and including just our SG&A spend, our our coworker count, et cetera. We came into 2025, we knew we were gonna have these compares on the variable comp side of the house, from those prior years. Our coworker count's been flat, so it's not like we are going and spending outsized amounts. 25 was a bit of a tweener year. Right. Getting past those compares. We come into 2026, we feel favorable on the growth trajectory and our opportunities, albeit we've got a modest outlook. If you look at our outlook, we're calling for low single digits gross profit growth, but mid single digits if you work down the P&L. Right. The shape of the outlook would say you can expect operating leverage, and it's super important for us. Erik, make no mistake, we take seriously the importance of continually driving structural savings, streamlining operations, using AI to our advantage, as well as reinvesting back in the business. Right? 'Cause that's what's gonna fuel amplification of our growth. The last thing I'll say is with an outlook that we think is modest with low single digits GP growth, if we can take more share, and we think we did a nice job in 2025, and we can amplify that top line, that's all for the good in the way of operating leverage and really driving even greater growth down to EPS. Okay. Perfect. Last two questions. Capital allocation, just very quickly. At least at earnings, you sounded like, you really wanted to lean into buybacks. Leverage is kind of in the middle of your, of your targeted range. Just as we sit here today, you know, maybe tactically, where is the opportunity to take advantage within your capital allocation framework? Sure. We always balance the strategic with the tactical. Our perfect day is that we're hitting all of the capital allocation priorities you know, and pulling out value at all points. Over the last year. Look, we review our stock as very attractive and currently dislocated. Areas that are really important to us strategically, like M&A, are always on. We're always looking. The bar is higher with the valuation of our stock as it is here. In 2025, we took advantage of that. We returned all of our cash flow to investors, $1.1 billion in the form of dividends and buybacks. Our stock is still attractive, we're going to lean into that. That doesn't mean we've turned off M&A. Right. M&A is an important component. It's just the, you gotta get over the hurdle rate of a valuation on our stock that we deem as very attractive. Okay. Maybe just quickly touching on that before we wrap up is, maybe what is the market missing in this story? Maybe what does the market underappreciate or not fully understand as we talk about getting your stock from where it is to where you'd like it to go? You know, what, what do you want the market to maybe fully appreciate that it doesn't today? I just wanna remind investors the scale and the sophistication of the capabilities that we bring to the table. This environment with memory is a great example. Sometimes we all have short memories. If you go back to COVID and when supply was constrained, and it was, you know, whip sawing all over the place, and you had backlogs of quarters and months, we excelled. I expect we're gonna excel, right? Our scale, our sophistication, including with supply chain, really, really, really, really important. Reminder of our efforts and investments to be a services-led technology integrator. Customers need us as their trusted advisor more than ever in this environment. When we think about the full stack, full life cycle capabilities we bring to our customers, particularly in times like this, it's powerful. That's why we are seeing the engagement, the activity, the opportunity that we are right now. Lastly, reminder in the importance of us being a inherently cash flow-oriented company and generator. No matter what the environment, no matter how dynamic, the demand and supply elements are, we are super disciplined about managing our working capital and generating cash, most notably, so we can feed the engine on the capital allocations front. If we do that well, and we're smart about being opportunistic on M&A and buybacks, we think the returns are meaningful. Perfect place to end. Thank you very much. Thank you. Appreciate it, Erik. Thank you.