Q3 2024 CDW Corp Earnings Call
Carly: Good morning. Thank you for joining us for the CDWC, of course, 2024 earnings call. My name is Carly and I'll be caught met in your calls today.
Carly: You got a special request and during the call you can do so by pressing star for the one we are going to have to keep that and to move yourself a line of questioning it is star followed by two. I'd now like to hand over to your host, Steve O'Brien and the relations to begin. Steve for visuals.
Steve O'brien: Thank you, Carly. Good morning everyone. Joining me today to review our third quarter, 20, 24 results are Chris Leahy, our chair and chief executive officer and Al Morales, our chief financial officer.
Steve O'brien: Our earnings release was distributed this morning in this available on our website investor.cdw.com along with supplemental slides that you can use to fall along during the call.
Steve O'brien: but like to remind you that certain comments made in this presentation are considered forward-looking statements under the private securities litigation reform act of 1995. Those statements are subject to a number of risks and uncertainties. It could cause actual results to differ materially.
Steve O'brien: Additional Information to Attorney News Wriths and uncertainties is contained in the earnings release and form a K-A refers to the SEC today and in the company's other findings with SEC.
Steve O'brien: CDW assumes no obligations update the information presented during this webcast.
Steve O'brien: Our presentation also includes certain non-gap financial measures including non-gap operating income.
Steve O'brien: on Gap Operating in Commargin.
Steve O'brien: Non-gap net income and non-gap earnings per share. All non-gap measures have been reconciled to the most directly comparable gap measures in accordance with FCC rules. You'll find reconciliation charts in the slides for today's webcast and in our earnings release informate.
Steve O'brien: Please note, all references to growth rates or dollar amount changes in our remarks today are versus the comparable period in 2023 when net sales growth rates described on an average daily sales basis, unless otherwise indicated.
Speaker Change: Replay of this webcast will be posted to our website later today. I also want to remind you that this conference call is the property of C.D.W. and may not be recorded or re-brunked with out specific written permission from the company. With that, let me turn the call over to Chris.
Chris Leahy: Thank you Steve, good morning everyone. I'll begin today's call with a brief overview of our third quarter performance and view for the balance of the year. How will provide additional detail on our results, our capital allocation priorities, and our outlook? We'll move quickly through our prepared remarks to ensure we have plenty of time for questions.
Chris Leahy: Market Conditions in the 3rd Quarter were challenging, while the man's for cloud solutions remained strong and we continue to see a pick-up and client device growth. Hardware solutions remained under pressure, and the firm of fit footing we anticipated for our corporate channel did not materialize.
Chris Leahy: Within this complex environment the team delivered gross profit of $1.2 billion, 2% lower than last year and gross margin of 21.8%.
Chris Leahy: and that sales of $5.5 billion, 3.5% lower on an average daily sales basis.
Chris Leahy: NonGap operating income of $534 million down 4% year over year. NonGap met income for share of $2.63 down 3% year over year. Adjust the free cash flow of $261 million.
Chris Leahy: While our success meeting customer priorities with cost-effective software and cloud solutions, as well as services led to a resilient, gross margin and strong cash flow, results did not meet our expectations, as lower than projected solutions hardware drove a shortfall in volume.
Chris Leahy: This shortfall in volume reflects both external factors and CDW specific dynamics. Let's take a look at each of these and most importantly, the actions in place to mitigate future impacts.
Chris Leahy: First, the macro and IT spending environment remain challenging. Technology complexity combined with persistent economic and geopolitical uncertainty has led to large project delays and further extension of sale cycles.
Chris Leahy: Lered on top was the uncertainty around the outcome of the U.S. election, which is dampened not only government spending but also other public sector and markets, as well as spend from commercial customers.
Chris Leahy: And finally, this limited demand environment has heightened competition and increased pricing intensity across all and markets.
Chris Leahy: Beyond the current environment, market conditions continue to reflect the secular shifts we have experienced over the past several years. Shifts it impact our customers' consumer's team and how customers pay for IT.
Chris Leahy: Consumption shifts driven by as a service and pays you go public and private cloud focus have contributed to market pressure on hardware solutions.
Chris Leahy: and while our convictions were to hybrid cloud approach for IT is unwavering, market demand continues to reflect unprecedented hardware cyclicality.
Chris Leahy: [inaudible]
Chris Leahy: All of these external factors have clearly impacted our results in the quarter and over the past year.
Chris Leahy: The impact has been further amplified by three CDW-specific dynamics.
Chris Leahy: The first dynamic relates to our longstanding financial discipline.
Chris Leahy: While our North Star is to provide value to our customers, in highly competitive markets we maintain our discipline when competitors pursue transactions on uneconomic terms.
Chris Leahy: While this contributed to lower third quarter sales and gross profit, our growth and operating margins held firm, even while we mixed into lower margin client devices.
Chris Leahy: Second, our exposure to larger deals. As we have deepened and broadened our strategic capabilities, including through the addition of Sirius, our ability to deliver large, full-stack, full-outcome projects has expanded.
Chris Leahy: Projects at the higher dollar tier that can be pushed for any number of reasons.
Chris Leahy: Impact that is more acute during periods of low demand. You see this in commercial and federal this quarter where larger deals expected to close were deferred or reduced.
Chris Leahy: And the third specific item pertains to our cloud and SaaS-based business. While we have grown this business significantly during the past several years, we have not yet achieved the scale we desire relative to our overall portfolio.
Chris Leahy: I hope this perspective helps contextualize how CDW-specific dynamics amplified the impact of the low market demand environment and created a near-term growth challenge that we have not yet been able to overcome.
Chris Leahy: These are not excuses. We own our results. So let's turn to what's important. What are we doing?
Chris Leahy: I'd like to highlight three additional focus areas.
Chris Leahy: First, we are organically and inorganically growing our capabilities in the fastest-growth, highest-relevance cloud and software vectors to increase scale in both our services and as-a-service offerings.
Chris Leahy: This will deliver greater choice and value to our customers and lead to greater recurring and reoccurring revenue streams.
Chris Leahy: Second, we are further driving exceptional and differentiated customer experience in our core business.
Chris Leahy: We are aligning our digital capabilities to serve customers in the way they want to plan, buy, consume, and manage technology.
Chris Leahy: And finally, we are enhancing our agility and accelerating pipeline growth. We are building on our customer growth engine by opening new lanes with both existing and new customers, and we are deepening our technical and industry expertise across all end markets.
Chris Leahy: These are not new efforts but we have ramped up intensity. Work is underway and progress is on track. Some actions will have fairly immediate impact and some will take more time to produce results. In the meantime, we remain laser focused on finding pools of profitable growth and converting sales with rigor and speed.
Chris Leahy: Now let's take a deeper look at quarterly results.
Chris Leahy: Third quarter corporate net sales decreased 4% as sales cycles further elongated, most notably for large infrastructure investments. Netcom storage and servers all declined by significant double digits.
Chris Leahy: We helped customers with client refresh, driving growth of high single digits. ASPs remained strong as customers' preference continued to drive higher-end devices.
Chris Leahy: Cloud solutions was a priority and gross profit from cloud increased by double digits.
Chris Leahy: Small business continued to bounce along the bottom with net sales down 2%. Cloud solutions remain strong given their low upfront commitment and customers continue to sweat data center assets.
Speaker Change: Unlike other channels, Client Refresh continues to be pushed out as customers remain in a cash preservation mood.
Speaker Change: Security was strong as cyber threats increased for lower-profile businesses.
Speaker Change: The team's success delivering services drove strong double-digits growth in both professional and managed services.
Speaker Change: Public performance was less than seasonal and sales decreased 5% year-over-year.
Speaker Change: Healthcare was a bright spot in the quarter delivering top-line growth of 3%. The team continued its success helping health systems adopt managed services and cloud solutions to better control expenses and they delivered strong double-digit growth in services and cloud spend.
Speaker Change: Similar to corporate, NetCon storage and servers all declined meaningfully.
Speaker Change: Client was strong, up double digits for the second quarter in a row.
Speaker Change: Government declined 12% with both state and local and federal government performance below seasonal in the quarter.
Speaker Change: Market conditions were challenging for the federal team. Demand impact was felt most acutely in large hardware solutions deals with federal posting double-digit declines in both NetComm and servers.
Speaker Change: Several agencies moved ahead with refresh and for the third quarter in a row client devices increased by double digits.
Speaker Change: Cloud Solutions posted a double-digit increase in cloud gross profit.
Speaker Change: State and local sales declined by low double digits. Delays due to increased scrutiny and multiple approvals impacted large infrastructure hardware deals with netcom, storage, and servers all posting significant declines.
Speaker Change: Security remained a top priority, posting a strong double-digit increase in gross profit. Services performance was strong, up high double digits, driven by professional services.
Speaker Change: Education sales declined 5%.
Speaker Change: Higher Ed's top line declines high single digits.
Speaker Change: Client devices were flat and slow project materialization and budget constraints and cutbacks at some public universities contributed to double digit declines in netcoms and servers.
Speaker Change: The team's success helping institutions implement cloud solutions to drive cost elasticity, deliver double-digit growth in cloud spend, and gross profit.
Speaker Change: K-12 net sales declined by low single digits, largely driven by declines in audio, visual, and netcom as school systems digested investments made over the past few years. The team continued to help refresh aging Chromebooks and delivered high-teens client device
Speaker Change: Cloud-delivered double-digit gross profit growth.
Speaker Change: Services adoption was also up double digits driven by our managed client device lifecycle solution which streamlines the configuration, deployment, management, and refresh process so school systems can focus on what really matters, their students.
Speaker Change: Other, our combined UK and Canada business performed above our expectations, up 5%. Both markets experienced stronger demand, albeit off depressed results in the prior year and prior quarter. Both the UK and Canada increased by similar amounts in local currency.
Speaker Change: As you can see, end market performance was mixed during the quarter. Let's take a look at how this translated to category performance.
Speaker Change: growth that was more than offset by hardware solutions decline. A low single-digit increase in transactions was more than offset by solution sales decreases of double digits.
Speaker Change: Hardware decreased 7%.
Speaker Change: High single-digit client device growth was more than offset by declines in netcom, storage, and servers.
Speaker Change: Software increased 3.5% with healthy gross profit growth. Cloud was an important driver of this performance up double digits in gross profit.
Speaker Change: Services increased by 13% driven by managed services and warranties.
Speaker Change: As you can see, while demand varied, the diversity and completeness of our portfolio enables us to meet our customers where and how they need us.
Speaker Change: We expect our results to continue to reflect the market and CDW-specific dynamics I referenced, with gross profit growth challenged, given our mix of hardware and the pronounced cyclicality the market is experiencing. As we always do, we will provide our view on 2025 market conditions in our next call.
Speaker Change: There's no denying that we are operating in a tough environment, but we are confident that growth will return. The demand drivers are there. Workload expansion and data explosion, increased security threats, client device obsolescence, and adoption of AI-powered assistance and applications.
Speaker Change: While this past year has been challenging for us, it has also been challenging for our customers.
Speaker Change: As their trusted advisor, customers need us now more than ever. Our relationships are bolstered by our commitment to deliver value to our customers regardless of the demand environment. Now let me turn it over to Al, who will provide more detail on our financials and outlook.
Al Morales: Thank you, Chris, and good morning, everyone. I will start my prepared remarks with details on our third quarter performance, move to capital allocation priorities, and then finish with our updated 2024 outlook.
Al Morales: Third quarter gross profit of $1.2 billion was down 2.2% versus the prior year. This was below our original expectations of low single-digit growth. A strength in cloud and client devices across most channels was offset by lower demand for solutions hardware.
Al Morales: Gross margin of 21.8% was flat year-over-year and quarter-over-quarter, and broadly in line with both full-year 2023 levels and our expectations for 2024.
Al Morales: Third quarter margin was aided by a higher mix into sales for CDW Axis agent, also known as netted down revenues.
Al Morales: This category grew by 7.1% on a reported basis, once again outpacing overall net sales growth and representing 35.7% of our gross profit, compared to 32.6% in the prior year third quarter.
Al Morales: Year-over-year expansion came from our teams continuing to successfully serve customers with cloud and SaaS based solutions.
Al Morales: This led to our highest quarterly netted down revenues we've seen as a company as we met customers where they needed us most.
Al Morales: The Netting Down category of solutions continues to represent an important and durable trend within our business.
Al Morales: Third quarter gross profit was up 1.5% sequentially compared to the second quarter of 2024 on a reported basis. Net sales were up 1.7% sequentially as well.
Al Morales: Higher year-over-year demand in health care and international channels alongside a sequential increase in government drove growth over the second quarter.
Al Morales: However, this growth is below both historic seasonal levels and our own expectations as the firmer footing in the corporate space that we saw at the end of the second quarter did not persist through the later months of the third quarter.
Al Morales: We experience deals getting pushed out and downsized as customers deliberate on where and when to spend and primarily in the solution space.
Al Morales: While international outpaced the U.S. business in the third quarter, we still expect volatility in this space as customers face economic and political uncertainty.
Al Morales: Overall, we're competing in a challenging low-growth environment and we are focused on achieving profitable growth. We acknowledge that we have work to do to better calibrate market conditions and deliver on our own expectations.
Speaker Change: Turning to expenses for the second quarter, non-GAAP SG&A totaled $667 million.
Speaker Change: down 0.7% year-over-year. Expenses were down year-over-year and quarter-over-quarter, and the efficiency ratio of non-GAF SG&A to gross profit of 55.5% was relatively in line with our expectations.
Speaker Change: We continue to look to align our cost structure with demand, and have taken actions early in the fourth quarter to better align expenses to market conditions.
Speaker Change: Coworker count at the end of the third quarter was approximately 15,400, up slightly over the second quarter and modestly above year-end.
Speaker Change: Customer facing co-worker count was also up slightly at approximately 11,200. Our goal is to balance growth and exceptional customer experience with greater efficiency and cost leverage from our broader operations.
Speaker Change: Non-GAAP operating income totaled $534 million, down 4% versus the prior year, driven by our volume shortfall, offset by slightly lower expenses year over year.
Speaker Change: Non-GAAP operating income margin of 9.7%, but down from 9.9% in the prior year, but up from 9.4% in the second quarter.
Speaker Change: Our non-GAAP net income of $355 million in the quarter, down 3.9% on a year-over-year basis.
Speaker Change: With third quarter weighted average diluted shares of $134.9 million, non-gap net income per diluted share was $2.63.
Speaker Change: Moving ahead to the balance sheet. At period end, net debt was roughly $4.9 billion. Net debt is down $91 million from the second quarter, and it's decreased by approximately $184 million since year-end 2023.
Speaker Change: During the quarter, we issued $600 million of 2030 Senior Notes and $600 million of 2034 Senior Notes.
Speaker Change: We issued the combined $1.2 billion to settle the tender offers of both the 2024 and 2025 senior notes and for general corporate purposes that will maximize strategic flexibility.
Speaker Change: Since Q3end, we have fully redeemed the 2024 notes.
Speaker Change: Equity remains strong with cash plus revolver availability of approximately 2.2 billion dollars.
Speaker Change: The three-month average cash conversion cycle was 17 days, up two days from the prior year, and at the lower end of our targeted range of high teens to low 20s.
Speaker Change: This cash conversion reflects our effective management of working capital, including active management of our inventory levels.
Speaker Change: As we've mentioned in the past, timing and marketing dynamics will influence working capital in any given quarter or year.
Speaker Change: We continue to believe our target cash conversion range remains the best guidepost for modeling working capital longer term.
Speaker Change: Adjusted free cash flow is $261 million in the quarter, roughly consistent with our expectations.
Speaker Change: Your date adjusted free cash flow was a healthy $764 million and 80% of our non-GAF net income within our stated rule of thumb of 80 to 90% non-GAF net income.
Speaker Change: We are on track to meet our 2024 objectives.
Speaker Change: For the quarter, we utilized cash consistent with our 2024 capital allocation objectives, including returning approximately $100 million in share repurchases and $83 million in the form of dividends.
Speaker Change: We remain committed to our target to return 50 to 75 percent of adjusted free cash flow to shareholders via the dividend and share repurchases in 2024.
Speaker Change: That brings me to our capital allocation priorities. Our first capital priority is to increase the dividend in line with our non-GAAP net income growth.
Speaker Change: We're announcing an approximate 1% increase of our dividend to $2.50 annually, our 11th consecutive year of increasing the dividend.
Speaker Change: We will 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.
Speaker Change: Our second priority is to have the right capital structure in place.
Speaker Change: We ended the third quarter at 2.3x net leverage, within our targeted range of 2-3x. We will continue to proactively manage liquidity while maintaining flexibility as evidenced by our recent debt financings.
Speaker Change: Finally, our third and fourth capital allocation priorities of M&A and shared purchases remain important drivers of shareholder value. We continually evaluate opportunities that could accelerate our three-part strategy for growth.
Speaker Change: Year-to-date, we've utilized over $350 million of cash on share repurchases and have over $730 million of authorization remaining under our current share repurchase program.
Speaker Change: and that leads us to our outlook. The uncertain market conditions we operated under throughout 2023 have persisted well into 2024. Demand has been below what we originally anticipated and customer sentiment remains cautious across the majority of end markets.
Speaker Change: Last quarter we spoke about the slow start to the year for 2024 IT spending and shared our expectations for tough continued conditions to persist in the near term.
Speaker Change: That was the case and was moderately worse than even than we even expected in a third quarter
Speaker Change: Customers still have a compelling need to address priorities such as cloud workload growth, increasing security threats, aging client devices, but uncertain macroeconomic conditions and a complex technology landscape continue to weigh on customer demand for solutions hardware.
Speaker Change: Given these conditions, our updated 2024 expectation is for a low single-digit gross profit decline.
Speaker Change: This implies seasonality slightly below historical levels for the fourth quarter and second half first profit at net sales.
Speaker Change: We maintain our expectation for 2024 gross margin to be similar to the full year 2023 and much like we've seen year-to-date in 2024.
Speaker Change: Finally, we expect our full-year non-GAAP earnings per diluted share to be down mid-single digits year-over-year.
Speaker Change: Please remember, we hold ourselves accountable for delivering our financial outlook on a full-year constant currency basis.
Speaker Change: Moving to modeling thoughts the fourth quarter. We anticipate low to mid single-digit gross profit declines compared to the prior year with gross margins slightly above the first three quarters of 2024 but below the fourth quarter 2023 level.
Speaker Change: This leads to a slightly worse-than-seasonal sequential fourth quarter.
Speaker Change: Traditionally, the fourth quarter is meaningfully lower than the third quarter principally due to seasonally lower demand from education and government customers.
Speaker Change: But this first fourth quarter, we also do not anticipate this being offset by seasonally strong demand from corporate and small business customers.
Speaker Change: Moving down the P&L, we expect fourth-quarter operating expenses to be similar to the level of fourth quarter of 2023 on a dollar basis.
Speaker Change: Finally, we expect fourth quarter non-GAAP earnings per diluted share to decline in the high single-digit range year-over-year.
Speaker Change: That concludes the financial summary. As always, we'll provide updated views on the macro environment and our business on our future earnings calls.
Speaker Change: And with that, I will ask the operator to open it for questions. We ask each of you to limit your questions to one with a brief follow-up. Thank you.
Speaker Change: Thank you. We'd now like to open the lines for Q&A. If you would like to ask a question, please press star followed by one on your telephone keypad, and to remove yourself from that line of questioning, it is star followed by two.
Speaker Change: Our first question...
Speaker Change: Excuse me. Our first question comes from Adam Tindall of Raymond James. Adam, your line is now open.
Adam Tindall: Okay, thanks and good morning. I just wanted to start, you know, as we analyze this quarter, understand, you know, a tough macro to predict volumes, but I really wanted to ask about the negative operating leverage down the P&L. And taking a step back, I think what investors really like about CDW is the variable cost model, ability to kind of flex up and down the volumes.
Speaker Change: understands some of the rationale and the prepared remarks that this seems to be a pattern for the past few quarters. So I guess the question would be two-fold one for Chris
Speaker Change: If you could maybe just assess what is changing and why the negative drop-through is Increasingly severe down the PNL. Sounds like you decided to implement some Restructuring so maybe you can tie in some of the rationale for that and then secondly for Al on that Restructuring if you could just help us with the size and what it does the model in 2025 I think it's about a 10 to 15 percent of headcount based on the reports that we've seen So just trying to right-size how we should think about off X moving forward. Thank you
Al Morales: Yeah, Adam, actually this is Al. I will start just to give you a little bit of commentary.
Al Morales: on the quarter and operating leverage, and I'll let Chris jump in.
Al Morales: model and the impact therein. For the quarter, if you actually look at our non-GAAP SG&A expenses relative to GP,
Al Morales: We came in just about at that 55% range, which we've talked about that being kind of the target that we would have. It's maybe slightly higher than we would have anticipated.
Al Morales: for the quarter, but that was more of a, I'll call it denominator.
Al Morales: factor, that is the GP was lower than expected. So in the quarter, we did get the movement in our variable expenses as we would expect.
Speaker Change: I think the challenge there, otherwise, Adam, is that we have a fixed cost base.
Al Morales: and while the demand environment has moved.
Al Morales: what we were seeing in current demand and what we were seeing as we go forward becomes a matter of just the timing therein on that fixed cost base.
Al Morales: That said, as you know, going into the fourth quarter, we did take some actions that would reduce our fixed cost base, and that included reduction in our workforce.
Speaker Change: Just to size that for you, Adam, it was about 2% of our workforce, so it was not at the level that you quoted there, but certainly that would align us more closely with where we think we need to be from a fixed cost-based perspective.
Speaker Change: Yeah, and Adam, I would just add that we're
Speaker Change: We're being very prudent as we look at where we right size the business.
Speaker Change: So, a lot of focus on the demand environment, preserving profitability, and also delivering exceptional customer experience for our teams.
Adam Tindall: Adam, thank you. Just a quick clarification, since I know that was a long one. When you were talking about the increased pricing intensity and competition, just to clarify, is that higher competition between VARs, or is that higher competition in pricing amongst the OEM vendors? Thanks.
Adam Tindall: Yeah, Adam, it's a little of both.
Speaker Change: Thank you. Our next question comes from David Fook of UPS. David, your line is now open.
David Fook: Great thanks guys for taking the question and maybe one for Chris to start. So Chris I think I heard in your prepared remarks
David Fook: that you'd expect sort of the US IT market to be flat in 2024 and yet you're confident that you can continue to outgrow it but obviously the macro has been tough and it looks like you're going to undergrow the market this year. Did I hear that correctly and how should we think about...
David Fook: you know, what that means going forward. I know you're not giving 2025 guidance, but I think that's a little bit disappointing relative to where investors might have been thinking given the challenging backdrop. Is it just really...
David Fook: a reflection of where the hardware solutions are ending up. And then along those lines, you know, we're hearing from some of our checks that, you know, networking and even to a lesser degree storage and servers getting a little bit better. Maybe what are you seeing a little bit differently than maybe what we're picking up and what others are maybe communicating in the marketplace? Thank you.
Speaker Change: Yeah, let me just start with the market share. That was the beginning of the question. Look, we continue to hold ourselves accountable for
Speaker Change: Delivering a premium to the IT market rate of growth and looking at this year in this quarter
Speaker Change: Given the low hardware demand and taking into account our mix, I'd say we're, you know, we're holding serve.
Speaker Change: and feeling very confident that we've performed extremely well in certain areas, say cloud, software as a service, services.
Speaker Change: as an example, but other areas have been challenged for us. And, you know, our view is that hardware will come back. It's a matter of when will that inflection point take place, and we'll be well-positioned to help our customers.
Speaker Change: in the circumstances.
Speaker Change: You asked specifically about networking and storage. Look, what we are seeing is we're seeing traction in clients.
Speaker Change: pick up, and I wouldn't yet call it the inflection point, but we do think we're outperforming in that area. Data center has really been the area where customers have paused.
Speaker Change: have moved
Speaker Change: and they are taking longer times to make decisions. That means we are seeing storage networking and servers all quite muted.
Speaker Change: But once we see the client refresh start, one would expect to see data center begin to pick up again. As I said before, you know, the catalysts are all there. Explosion in data, the need for, you know, massive bandwidth for networking.
Speaker Change: Digital transformation isn't going anywhere. Security continues to get, you know, more and more focused. So the catalysts for growth are all there. I think we just got to get to the other side of the uncertainty that we sit in and certainly after we get through the election, there'll be a little more certainty.
Speaker Change: and David maybe I'll just add a couple of points there.
David Fook: It's like I just add a couple data points there. So obviously all all of those categories Chris mentioned in the solution space
David Fook: have been softer. We also have the tough comps from a net-com perspective.
David Fook: Q3 is the last quarter with those tough comps, so while we would not say that
David Fook: is picking up meaningfully on Netcom, at least the comps get a bit easier. And then the other data point I would just give you.
David Fook: is from our vantage point, just hardware overall, we've now seen eight quarters of declines on hardware. And so again, Chris noted some of the catalysts we think ultimately will play out. We've seen a pretty prolonged period of hardware cyclicality.
Speaker Change: Great, and just as a quick follow up, so we think about.
Speaker Change: Looking at the recovery or the potential recovery or rather timing of the recovery. I know you're not giving 25 outlook
Speaker Change: But what are some of the milestones that you're looking at that gives you increased confidence heading into 25? I know obviously the election is coming up and hopefully that kind of changes maybe customer conversations. Anything else sort of maybe at a high level that you're thinking about in your conversations?
Speaker Change: that give you some degree of maybe a leading edge or a leading indicator in terms of what you're thinking about for 2025?
Speaker Change: Yeah, you know, I think about the things that are creating the current environment and whether or not those change. So, uncertainty around the economic environment.
Speaker Change: and geopolitical will have an impact. Obviously, the election policy outcomes of the election are gonna be very different. That will have an impact most likely.
Speaker Change: complex projects, and so we're getting used to that, but we don't see that going away anytime soon.
Speaker Change: That's what we focus on.
Speaker Change: Great, thank you guys.
Speaker Change: Thank you. Thank you very much. Our next question comes from Eric Woodring of Morgan Stanley. Eric, your line is now open.
Eric Woodring: Great. Thank you so much for taking my questions. I have two as well. Chris, if we could just go back to some of your comments on product demand. You know, obviously lots of commentary about challenges in infrastructure solutions, double-digit declines with many customers across netcoms, servers, and storage. I just want to make sure I understand, are those rates of declines that you're referencing reflective of the broader market, or are you seeing those declines simply because you are walking away from some lower profitability deals, and therefore you are underperforming in those specific end markets, and maybe at the end market they aren't declining nearly as much as maybe you're seeing? I'd just love to get a better understanding of this.
Eric Woodring: is kind of CBW's view or if this is the broader market view. And then I just have a follow-up, thanks.
Chris Leahy: Yeah, sure. I would say it is the broader market view, possibly tempered a bit by CDW, not, you know, racing to the bottom, because we are walking away from economic deals. It's important to keep protect profitability, etc. So, I would say it's a bit of both. I would say it is market and consistent with market, but also we are we are not racing to the bottom.
Speaker Change: Okay, all right, that's helpful. And then maybe just, you know, on the second question, you know, I'd love if you could maybe elaborate a bit on the market competition comments, because you're highlighting market competition, which I can't necessarily remember you citing explicitly before, and to be fair, you know, you guys have encountered several challenging and competitive market environments in the history of the company and still managed to materially outperform peers over those years. And so maybe my question is just what has changed with competition that is new? And and really, why would that competitive intensity ever go away, even in a period of stronger demand? Thanks so much.
Speaker Change: Yeah, you know, it's a great question and we do reflect on that.
Speaker Change: We know how to compete in the market, but we are seeing, we are seeing deals at the low margin, low margin, et cetera. And that just is not our business model. I, the last time I thought intensity and pricing like this was years ago.
Speaker Change: So it is a little bit more unique over the last couple of quarters and we're very good with our discipline around financial. So we're holding firm. That's really the answer here. It's a little unique over the last couple of quarters. We've seen it really kick up.
Speaker Change: Thank you.
Speaker Change: And just to clarify, that is a rational pricing from VARs, from DISPs, or from both?
Speaker Change: I would say it's up and down the value chain. So competitors who are value-added resellers, direct competitors, distributors I wouldn't perceive as in that chain as much.
Chris Leahy: Thank you so much, Chris.
Speaker Change: Yeah, the behaviors that are going on every every competitor is feeling
Chris Leahy: the elongation in the sales cycle, the chunking up agreements to make them smaller, the deferrals, the reductions, the different ways they want to go at saving money or deferring spending, short-term ROIs, that is a market dynamic right now that everybody is feeling.
Speaker Change: Thank you very much.
Speaker Change: Understood. Thank you, Chris.
Speaker Change: Thank you.
Speaker Change: Thank you. As a reminder if you would like to raise a question please press star followed by one on your telephone keypad and to remove yourself from that line of questioning it is star followed by two.
Speaker Change: Our next question comes from Amit Dhariai
Speaker Change: of Evercore. Your line is now open.
Speaker Change: Thank you.
Amit Dhariai: I understand all the macros that you're talking about, but it feels like the way CDW is navigating this macro uncertainty volatility
Amit Dhariai: is worse than what you've seen before. And why do you think that's happening? And what's changed, perhaps, in the company that, you know, you've had multiple years of gross profit declines, which frankly, you haven't had historically?
Speaker Change: Yeah, fair question. I'll tell you we're a company in transformation and we have been in transformation for several years now. So when you think about the CDW date...
Speaker Change: CDW specific
Speaker Change: factors I mentioned.
Speaker Change: they have been having a real impact on results.
Speaker Change: amplified by the muted hardware demand environment. So if we just think about the third one I mentioned, which is our cloud and SaaS business, we've been investing behind that business and it growed incredibly rapidly over the last five years. All of our acquisitions have had a cloud services hook to them. Nonetheless, given the
Speaker Change: full portfolio that we have, we have not yet attained the scale that we want to be at relative to the full portfolio. So when hardware is muted, it now has even more of an outsized impact because of the secular movement towards
Speaker Change: Cloud
Speaker Change: and we're growing that but we still have a very high mix of hardware. The other thing is the strategic investments that we've made over the year have been
Speaker Change: full-stack, full-outcomes projects.
Speaker Change: These now we're seeing at much larger, higher dollar tier levels, and those are the kinds of projects that are lumpy. We used to talk about this with our federal contracts all the time. The very big deals become lumpier, and depending on when decisions are made, they can get deferred, they can move around, the size can change, and therefore it can impact results. And we saw that with commercial and federal this quarter.
Speaker Change: And, you know, the last one is what I just talked about in the prior...
Speaker Change: prior question, which is our financial discipline. We're going to continue to maintain our gross margin discipline as we move forward. And we've hit a couple of quarters where we're seeing behavior that is extreme, pricing behavior that's extreme.
Speaker Change: I'd say it is a combination of our strategic investments that are working incredibly well vis-a-vis value to the customer and growth in fast-growing, high-relevance areas.
Speaker Change: in an environment where hardware has been and continues to be muted on a persistent basis. It's a bit of a double whammy for us.
Speaker Change: But I'm confident in the growth gap as hardware turns around.
Speaker Change: Go ahead, Amit.
Amit Dhariai: No, I'll let you finish.
Amit Dhariai: No, I was just going to say a combination of growth and confidence.
Speaker Change: Go! Go Ahmed!
Amit Dhariai: I was going to say, Chris, would it be fair to say that as growth resumes, presumably in 25, that you should start to see gross profit dollars increase back to the way it normally does? You know, it'd be a fair way to think about it. And then maybe a clarification was going to be, you know, we've heard from Cisco and Microsoft, some of your bigger vendors, and how they're changing their channel pricing and the channel strategy for 2025. Do you see that being a bit of a driver for you as you think about?
Amit Dhariai: your growth, especially the Asian sales piece of the business into next year and beyond.
Speaker Change: Yeah, if I think about the changes, you know, I think about
Speaker Change: investing behind our cloud business and really the cloud flywheel where we are trying to, we are delivering.
Speaker Change: a seamless experience from professional managed services to consumption and transaction based services to managed services around the cloud.
Speaker Change: and by doing that delivering higher value to our customers, that that's precisely aligned with what our vendors are, the CSPs, the Cisco's of the world exactly aligned with what they...
Speaker Change: what they're incenting and what they want.
Speaker Change: So we think we're well positioned, and that will be a positive benefit for us as we move into 2025 and beyond, because it aligns with our strategy and our value that we can deliver to customers. And frankly, because of the services wraparound, it drives better economics for CDW and a stickier relationship with the customer.
Speaker Change: Thank you very much.
Speaker Change: Our next question...
Speaker Change: comes from Matt Sharon at Stiefel. Matt, your line is now open.
Matt Sharon: Yes, thank you. Good morning, everyone.
Matt Sharon: Just another question regarding the comments on client device growth.
Matt Sharon: I think you said mid-single-digit growth, but it sounds like that was skewed more toward the public markets and not so much corporate and SMB, and you talked about macro. Is the expectation for AI PCs, is that another reason why?
Matt Sharon: we're seeing that push out and are you seeing any kind of growth in corporate SMB versus enterprise there?
Speaker Change: Yeah, Matt, thanks for the question. On the client side, we're actually seeing
Speaker Change: We're seeing growth across almost all of the end markets. Corporate was, we saw growth in corporate. In small business is where we are seeing our customers kind of in a cash preservation mode and so pushing off the client device. But we really have seen a nice pickup in client across almost all the end markets. So that's been positive.
Speaker Change: Yeah, Matt, I'll just add the what has been driving it has been more refresh of aging fleets and need for customers to get on with this activity. It's been less in the way of Win-11 drivers and less in the way of AI PCs.
Speaker Change: and her family. Thank you. Thank you.
Speaker Change: So next year, you know, as AI PCs do come on board, that will be another nice accelerant for PC refresh.
Speaker Change: Okay, great. Thank you. And then, relative to your guidance on gross margin, Al, for Q4, which is down year over year, and you had a big bump,
Speaker Change: last year. Is that because you're expecting sort of a lower percentage of the advanced hardware solutions which carries a higher margins or services? What are the other reasons behind that?
Speaker Change: Yeah, great question, Matt. It anticipates that we'll continue to see softness.
Speaker Change: in the solution side of the business, which comes at...
Speaker Change: moderately higher gross margins.
Speaker Change: continue to tick along, not in an outsized way.
Speaker Change: But that client would continue to move along. And then we would expect that we would get your typical pickup in more of the netted down revenues in the fourth quarter. I'll just note the Delta versus Q4 of 2023 is that maybe a little bit modest pick there on the netted down revenues versus last year because it was quite outsized at the end of the year.
Speaker Change: Okay, thank you.
Speaker Change: Your attention, please. Thank you.
Speaker Change: Thank you all for coming.
Speaker Change: Thank you.
Speaker Change: Thank you. Two questions as well if I could. You know, Chris, just trying to reconcile something here. You know, CW has always taught itself as being a relationship-driven company, providing value for its customers, but yet we're hearing about transactional competition and losing deals that way. Perhaps could you, you know, break it out for us, like how much of this is more transactional, where people are just going with the lowest price, versus how much of your business is really driven by that relationship and the value you provide?
Speaker Change: I would say that when you look at our portfolio and the spectrum of our relationships with our customers
Speaker Change: that over 90% of those relationships and those customers would tell you that they buy from CDW because of the value we deliver. The access to a full portfolio, the expertise that we bring to bear, the ease with which they can do business, the agility with which we deliver.
Speaker Change: That is what every customer says to me when I meet with them.
Speaker Change: Regarding the pricing and the transaction issues, there are times when there are, you know, large rollouts, for example.
Speaker Change: that where the economics just gets lower and lower and lower. And those are transaction purchases that don't typically have the value wrapped around. And those are the ones that we are less interested in pursuing.
Speaker Change: Okay, appreciate it. And you talked about like the move to the as-a-service model. I guess as I think about that, it's still supposed to be in its infancy, but it's still going to grow as we go from here. So how much of a, I guess, a challenge or a headwind does that present to hardware sales as we kind of think about just the future?
Speaker Change: I didn't hear the whole question. I'm sorry, I think I think I got Keith.
Speaker Change: Here's what I would say, obviously we've seen pronounced cyclicality in hardware and that would typically be
Speaker Change: pretty significant upfront spend. Think about that as kind of CapEx from a customer's perspective. What we've seen kind of counteracting that in some respects is an increase in our nitty-down revenues including SaaS and cloud. Now Keith
Keith: Historically, a lot of that business would be what we would call reoccurring, where we are both seeing that business up front and recognizing that up front.
Keith: But I would say that over the last year or two...
Keith: More of that business has been moving to a recurring nature.
Keith: making judgments on what they want to spend on class.
Keith: and therefore I would say that is part of the calculus.
Keith: and more business that starts to come on as we go. Certainly, as we continue to grow that sector and that category, we'll report more on kind of that split in details with respect to reoccurring business versus recurring.
Keith: Hopefully that's helpful.
Speaker Change: Yeah, thank you.
Speaker Change: Thank you very much. Our next question comes from Samik Chatterjee of JP Morgan. Samik, your line is now open.
Samik Chatterjee: Hi, thank you for taking my questions.
Samik Chatterjee: I guess if I can start with one, Chris, you mentioned in your prepared remarks and in some of the responses as well, the exposure to large projects that you have on account of the capabilities that you've invested in over the years.
Speaker Change: Do you still believe that's the right sort of balance or margin mix to have in the portfolio and really just wait for the market to come back on that front? And I have a follow-up.
Speaker Change: Yes, the way I would answer that question is kind of yes and yes, in other words,
Speaker Change: We do have actions underway. Look, we're looking at this quarter in 2025 as an opportunity to accelerate the most important parts of our strategy.
Speaker Change: to deliver personalized recommendations that match how customers want to buy.
Speaker Change: plan, consume, and manage their assets. So think about this in terms of large deals and perhaps smaller deals as an intersection of our sales professionals moving up a value chain and being available to learn and enabled by digital tools to sell at the highest point of the value chain while creating a seamless digital experience for our customers, a flywheel, if you will.
Speaker Change: So that we can deliver both velocity in that digital flywheel and serve customers how they'd like to be served, self-serve, et cetera, and value with our account managers and sales professionals.
Speaker Change: working together. So that's one area as an example where we, our intention is to drive velocity and deals at all sizes, lower tier levels, while we continue to build engagements at high value, high levels.
Speaker Change: Thank you.
Speaker Change: I mean, we've seen elections in the past as well. Have you had instances or are you looking at any scenarios in which...
Speaker Change: you do end up getting like a budget flush post the election outcomes. Are there any sort of scenarios or any indications of that happening in the fourth quarter? Thank you.
Speaker Change: Yeah, hard to tell. I would say this election cycle, I wouldn't, I would say there's nothing really normal about it. So hard to tell. I mean right now what's happening with the federal government is we've got the knock-on effects from the delayed budget previously, and now we've got, well, we saw strong spending in Department of Defense. We're seeing less than we'd hoped because they're waiting to see what the administration's priorities are. So we, right now, we just see the federal government paused.
Speaker Change: One would hope we'll have some more clarity post election, but then the timing comes down to Congress and the President in getting a budget passed.
Speaker Change: I'll just add on the back in there. Obviously, we play all of the different scenarios and how things could play out when we look at the quarterly outlooks. I would say our Q4 outlook
Speaker Change: Has the appropriate level of caution baked into it, based on all the factors that we talked about, the external factors, TDW specific, and certainly that would include any political uncertainty.
Speaker Change: Correct. Thank you. Thanks for taking the questions.
Speaker Change: Thank you.
Speaker Change: Thank you very much. We currently have no further questions, so I'd like to hand back to Chris Leahy, Chair and CEO, for any closing remarks.
Chris Leahy: Thank you, operator. Let me close by recognizing the incredible dedication and hard work of our 15,000 coworkers
Chris Leahy: around the globe. It's their ongoing commitment to our customers.
Chris Leahy: in this challenging environment that makes us successful over the long term. 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 CAW. Al and I look forward to talking to you next quarter.