The operator welcomes listeners to the CDW Fourth Quarter 2023 Earnings Call and introduces Steve O'Brien, who will be reviewing the company's results. O'Brien reminds listeners of the risks and uncertainties involved and the non-GAAP financial measures used in the presentation. He also notes that a replay of the webcast will be available on the company's website later.

In the fourth quarter, CDW had a decrease in net sales but managed to mitigate the impact on profits through strong execution and financial discipline. They delivered gross profit, operating income, and net income per share that were slightly lower than the previous year. This was due to cautious customer behavior and a focus on cost efficiency, which led to an increase in demand for as-a-service and consumption-based solutions. The team's ability to adapt to these changing priorities resulted in strong performance across all solutions, despite a decline in traditional hardware sales.

The company experienced lower net sales growth in the fourth quarter due to market dynamics and a preference for solutions that have a positive impact on the bottom line. However, strong execution and strategic investments over the past five years helped the company maintain flat operating income, increase net income per share, and generate strong free cash flow. The company's balanced portfolio of customer end markets, diverse product solutions and services, and three-part strategy for growth were key drivers of these results. Despite a decline in net sales in most customer end markets, gross margin increased across all markets.

In the quarter, corporate net sales decreased by 8%, mainly due to netting down and hardware pressure. However, projects focused on productivity and customer experiences drove strong cloud performance. Netcomm also saw a decline in sales due to customers digesting previous investments. Small business net sales declined by 13%, with a focus on cost management and projects with shorter-term ROI. Public sales decreased by 4%, with government sales increasing but other public-ed markets declining.

The federal team saw a double-digit increase in net sales by implementing more efficient data management solutions. The state and local team also saw a mid-single-digit increase, with a triple-digit increase in cloud performance. The healthcare team saw a 5% decrease in net sales, but saw growth in cloud performance and solutions for talent, data centers, and cost savings. The education team saw a 12% decrease in net sales, with growth in services and cloud offset by declines in netcomm and client device sales. The UK and Canada business also declined by 14%.

The company's performance was impacted by market conditions, with sales decreasing in the UK and Canada. However, the diverse end markets helped offset this. The hardware portfolio saw a decline due to backlog normalization, while software customer spend increased. Cloud, security, and services were strong performers, with growth in infrastructure, productivity, and security workloads. Services saw double-digit increases in professional and managed services.

CDW's growth strategy is focused on expanding and enhancing their solutions and services capabilities through investments and acquisitions. This allows them to stay relevant in the market and be a trusted advisor to their customers. As new technologies, such as artificial intelligence, emerge, CDW is prepared to assist their customers in adopting them, as seen in their work with an industry-leading semiconductor and software designer.

The company's designs and intellectual property are not well-suited for a hyperscaler's LLM and cloud-based resources, so CDW worked with the customer to build a custom platform for their generative AI workloads. This resulted in a multi-million-dollar engagement and the company plans to continue expanding with CDW's support. The market conditions are expected to remain slow in 2024, but CDW's customer-centric growth strategy has made them a vital technology partner. The company's outlook for 2024 is similar to 2023, with slow customer spending growth and a focus on short-term ROI.

In the paragraph, the speaker discusses the challenges faced by their customers, such as data proliferation and cybersecurity needs, as well as the potential for growth through new technologies. They also mention their company's strong portfolio of solutions and services, which position them well for future growth. The speaker then hands over to Al, who talks about the company's financial performance in the fourth quarter and for the full year. They highlight their strong execution and financial discipline, which led to strong growth and operating margins. The speaker also mentions their capital allocation priorities and their outlook for 2024.

The fourth quarter net sales were lower than the third quarter, but the sequential climb was more significant than expected due to a lack of hardware spending recovery, a shift into solutions that net down, and softer economic conditions. Gross profit was down 2.3% compared to the previous year, but gross margin increased by 130 basis points due to a higher mix of netted down revenues. Cloud and SaaS-based revenue streams continue to outpace overall net sales growth. Non-GAAP SG&A expenses decreased by 3.5% and the company has maintained a stable co-worker count. Despite the challenging IT spending environment, the company's flexible business model and financial discipline helped to deliver a non-GAAP operating income of $519 million, down only 0.8% from the previous year.

The company saw an increase in non-GAAP operating income margin and net income in the fourth quarter, despite a challenging environment. However, for the full year, net sales declined by 10%, but gross profit remained stable due to the company's strategic investments. Net debt decreased by $200 million and liquidity remained strong.

The company's three-month average cash conversion cycle decreased by four days to 17 days, within their targeted range. They attribute this to effective working capital management. They had a record full-year adjusted free cash flow of $1.4 billion, representing 106% of non-GAAP net income. They returned a total of $822 million to shareholders through dividends and share repurchases, which is within their target range. Their capital allocation priorities include increasing the dividend in line with non-GAAP net income and maintaining a targeted net leverage ratio.

The company has a strong focus on managing liquidity and using capital allocation priorities such as M&A and share repurchases to drive shareholder value. They have announced a $750 million increase to their share repurchase program and have a total availability of $1.1 million. Due to cautious customer sentiment and slow IT spending, the company expects low single-digit growth in 2024 but aims to gain 200-300 basis points of market share. They will now use gross profit as a measure of growth instead of net sales.

The company expects low to mid single-digit gross profit growth in 2024, with a flat to slightly higher gross margin compared to 2023. They will hold themselves accountable for delivering this outlook on a full-year constant currency basis. First quarter gross margin is expected to be comparable to 2023, with lower operating expenses and a gradual improvement in operating expense leverage throughout the year. Non-GAAP earnings per diluted share are expected to be in the low to mid single-digit range year-over-year. The company is adjusting their approach to the outlook for adjusted free cash flow, and expects it to be in the range of 80% to 90% of non-GAAP net income for 2024. Despite operating in a cautious and uncertain environment, the company remains confident in their ability to deliver profitability margins and cash flow to stakeholders, as they did in 2023.

The financial summary has concluded and the operator is now taking questions. The company asks that each person limit their questions to one with a brief follow-up. The first question is about the weakness in infrastructure products and the backlog being down. The company expects headwinds in the netcomm sector due to strong comparisons from 2023. The second question is about PC demand and client devices, with the company not being optimistic for the first half of the year.

The speaker discusses the current and future outlook for CDW, a company that has experienced fluctuations in earnings due to the pandemic. They expect continued strength in certain areas, such as cloud and SaaS, but a modest recovery in others, such as hardware and PCs. They also mention that the company is in a transitory period, and it is difficult to predict the exact earnings growth for the next few years.

The current market for hardware is slow due to customers being cautious with their spending, but the company expects a return to growth in the future due to various catalysts such as digital transformation, network modernization, and increasing security threats. The need for new hardware is also driven by aging devices and the emergence of new technologies like AI.

The speaker discusses the current state of the technology industry and the potential for growth and adoption of new technologies. They also mention the company's strong financial position and potential for strategic acquisitions in areas such as international expansion and bolstering capabilities in areas like security, cloud, and AI. M&A is seen as a key driver of the company's growth strategy.

The speaker discusses the company's approach to identifying and pursuing strategic acquisitions. They also highlight the success of their cloud and security businesses, which have grown significantly in recent years. The company is focused on compounding growth and increasing their cash position, which will allow them to pursue potential M&A opportunities. The question then turns to how the company views market share gains and the importance of gross profit linearity as a metric.

The speaker is confident that the company has gained market share and will continue to do so in the future. They attribute this to strong execution and a full portfolio of products. They also expect gross profit to improve, with a potential evening out in the second half due to hardware mix. They anticipate a modest recovery in client devices, but still expect gross profit to improve sequentially throughout the year.

Chris Leahy, CEO of CDW, discussed the company's outlook for the remainder of the year during a recent earnings call. He stated that there has been a modest recovery in the back half of the year, leading to an acceleration in GP. When asked about customer priorities for IT spend in 2024, Leahy mentioned cost optimization, customer and employee experience, digital transformation, and security as top priorities. He also noted that AI is a major focus for customers, with a growing demand for consultative services and deep technical capabilities. Many customers are at the beginning stages of implementing AI and CDW is helping them through use cases and identifying potential efficiencies.

In 2023, CDW's gross margins are expected to increase by 210 basis points due to a mix shift towards SaaS and cloud, softer hardware sales, and firm product margins. This trend is expected to continue in the future. Additionally, the company is seeing budget allocations for AI improvements coming from various functional areas in organizations, rather than a shift from IT.

The speaker discusses the current state of AI and its potential for CDW. They mention that the demand for AI is currently focused on advisory and consulting services due to the complexity and speed of the technology. However, they believe that in the long term, AI will become a full stack play for CDW.

CDW is a full stack full life cycle provider with expertise in various industries. They have been moving their capabilities closer to the front end of the value chain, with a focus on AI and its potential as an accelerant in their business. The company has announced some optimization charges within their EPS, which were largely related to workforce optimization and real estate. These measures were taken to align their fixed costs and co-worker count with the level of business activity.

The company is closely examining its real estate portfolio and making changes to adapt to the hybrid workforce. They are facing some charges in this process. The next question is about AI and how it will impact the company's revenue mix. The company believes that AI will be essential for organizations to be competitive and will be embedded in all their products.

The company is unsure how their customers will consume and purchase their products, but they are prepared to deliver across the full stack. The revenue from this may not be substantial as it may be more consultative and service-oriented. The company believes that hardware will also be a significant component of their full stack opportunity. The company has not seen any changes in pricing or margins due to inflation and does not anticipate any drastic changes in the future.

The speaker is answering a question about the company's outlook and why they are confident in a recovery in the second half of the year. They mention pent up demand and the need for customers to feel more confident in the economy before moving forward with projects that have been delayed.

The speaker discusses the company's free cash flow and how it has changed over the past two years. They mention a rule of thumb of 80% to 90% conversion rate and how it may change in the future. They also mention the possibility of using more working capital this year and will update as the year progresses.

The speaker concludes by thanking the company's employees and customers for their dedication and hard work, and expresses gratitude for the opportunity to serve customers. The call has now ended.

This summary was generated with AI and may contain some inaccuracies.