The multi-year cost management and efficiency plan 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,” says Leahy.
CDW CEO Christine Leahy told analysts Wednesday 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 supercharge 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.”
CDW Chief Financial Officer Albert 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.”
Translates Into ‘Real Productivity Improvements’
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.”
The comments from Miralles and Leahy on the cost savings failed to drive investor confidence, with CDW shares plummeting 19 percent or $25.98 to $110.82, just above the 52-week low of $107.52, in the wake of gross-margin pressure.
CDW’s market capitalization was down $3.21 billion to $14.29 billion in intraday trading.
CDW reported gross margin for the first quarter ended March 31 of 21 percent, down 60 basis points, compared with 21.6 percent in the year ago period.
Even with the gross margin pressure, CDW reported first quarter gross profit of $1.2 billion, at the high end of analyst estimates, up six percent compared with $1.1 billion in the year ago quarter.
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.
The decline in gross profit margin was driven by a lower mix of “netted down” revenues, which includes cloud and Software as a Service (SaaS), where CDW records an agent commission or fee rather than full contract value.
A Focus On Acquiring Hardware In Wake Of ‘Volatile’ Pricing
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 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.
CDW also faced non-GAAP sales, general and administrative (SG&A) expenses of $738 million in the quarter, up 8.8 percent year over year.
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.
“Netted down” sales 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 which declined amid growth in hardware sales and software licenses, said Miralles.
CDW expects “netted down” revenue, alongside professional and managed services, to be “higher priorities” for customers in the second half of the year and to continue to outpace business growth in the longer term, said Miralles.
“The phenomenon that we are dealing with right now is just prioritization of customers around hardware spending and getting in front of price increases and potential supply concerns,” he said. “As that works its way through the funnel in second quarter and beyond we think we’ll see that prioritization balance back to broader array of product categories, namely those that fall into netted down. Given our continued engagement activity with customers we have line of sight to see that will pick up in the back half and thereafter.”
Leahy also addressed the recent hire of former HPE COO Hang Tan as chief strategy and transformation officer, reporting directly to her.
“We moved one of our leaders over to a business environment so we had to fill the position of chief strategy and transformation officer,” she said. “Hang has been a great add. 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.”
