The operator introduces the CDW First Quarter 2024 Earnings Call and hands it over to Steve O'Brien, who is joined by Chris Leahy and Al Miralles to review the company's first quarter results. The earnings release and supplemental slides are available on the company's website. Certain comments made during the presentation are considered forward-looking statements and non-GAAP financial measures are included. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures. A replay of the webcast will be posted on the website later today.

The speaker, Chris Leahy, begins by acknowledging that the conference call is the property of CDW and cannot be recorded without written permission. He then provides an overview of the company's performance, which fell below expectations due to cautious customers and a complex tech landscape. The federal budget stalemate also had an impact on their results. Despite these challenges, the company remains focused on increasing their pipeline and gaining market share.

The company's teams remained actively engaged with customers during the quarter, resulting in a record gross margin and strong cash flow. The company is committed to delivering exceptional value to customers and continues to invest in capabilities to provide full stack solutions and services. Customer priorities included cost optimization, data protection, and workforce productivity, leading to a focus on security, cloud, and AI. The company's five sales channels and segmented teams cater to various customer end markets, with commercial operations organized by geographies, verticals, and customer size. Corporate top line experienced a 3% decline due to elongated decision making and increased project scrutiny.

The company saw increases in customer spending due to their focus on cloud and security prioritization. Corporate saw declines in hardware categories, but storage was a standout category. Small business also saw declines but showed improvement. Public sales and healthcare also declined, but transactional performance was positive. Security was a major focus area and saw double digit increases in spend and gross profit. State and local sales saw an increase, while federal sales declined due to budget impact.

Despite some ongoing activity related to existing contracts, larger scale projects were put on hold due to budget constraints. The education segment saw a decline of 10%, with higher education institutions focusing on cost efficiency. Hardware categories declined, while there was a strong increase in cloud services. K-12 sales also decreased, but there was a slight increase in client device sales due to some school systems refreshing their technology. Audio visual solutions and security remained top priorities. International operations in the UK and Canada also experienced declines. Overall, transactional product sales performed better than solutions, but both saw year-over-year declines. Hardware and services each saw a 4% decrease in top line revenue.

In this paragraph, the company discusses their performance in the software market and their focus on AI. They mention their strengths in bridging the gap between technology and desired outcomes, and their consulting services for AI adoption. The company sees potential in four areas for AI implementation: workforce productivity, high value use cases, full stack solutions, and broad scale vertical solutions. They also provide an example of a specific AI solution they have developed.

CDW has expertise in multiple industries, including healthcare and financial services, allowing them to understand the unique needs of organizations in these sectors. They have developed AI solutions for the K-12 education market and healthcare, addressing specific challenges and providing value for customers. CDW recognizes that AI adoption will take time, similar to the adoption of cloud services.

The article discusses CDW's commitment to their customers and their expectations for the IT market in 2024. Despite a slow start to the year, they still anticipate potential for market growth and plan to update their view as the year progresses. CDW aims to serve their customers' needs in areas such as cloud workload, security, and data management, and believes their portfolio and expertise make them well-equipped to navigate the changing IT landscape. The article also mentions CDW's first quarter performance and their capital allocation priorities.

The first quarter of the year saw caution and uncertainty in the market, leading to delays in decision making and longer sales cycles. Despite this, the company was able to capitalize on demand for client devices, but sales of more complex solutions were weaker. Gross profit and net sales were down compared to the previous year, but gross margin increased due to higher mix in netted down revenues. This was driven by the success of the company's teams in providing cloud and SaaS solutions to customers.

The company expects a mix of netted down revenues to continue being a significant trend, but it may fluctuate depending on customer priorities and product demand. Despite a higher mix of client devices, margins remained strong in the first quarter. Gross profit was down compared to the previous quarter, but this was expected due to traditional seasonality and uncertain conditions affecting customer spending. Expenses were consistent with expectations, but the expense efficiency ratio was higher due to lower gross profit production. The company is managing expenses carefully while balancing future growth opportunities. The number of employees at the end of the first quarter was slightly lower than the previous year.

In the first quarter, the customer facing coworker count and expenses remained unchanged while non-GAAP operating income and net income decreased compared to the previous year. Net debt decreased by $230 million and liquidity remains strong. The cash conversion cycle was 16 days, below the target range, but effective working capital management resulted in strong adjusted free cash flow of $364 million.

The company's adjusted free cash flow was 104% of non-GAAP net income in the last 12 months, exceeding their target of 80-90%. They returned a significant amount of cash to shareholders through dividends and share repurchases and remain committed to returning 50-75% of adjusted free cash flow in 2024. Their capital allocation priorities include increasing the dividend in line with earnings, maintaining a targeted net leverage ratio, and prioritizing M&A and share repurchases. The market conditions and customer sentiment continue to be uncertain, resulting in a slow start to IT spending in 2024.

The company expects low single digit gross profit growth in 2024 due to factors such as cloud workload growth and security threats. They anticipate customer spending to follow historical seasonality and maintain their financial outlook on a constant currency basis. The second quarter is expected to have similar trends, with slightly more weight on the second half and a lower fourth quarter compared to the third. Operating expenses are expected to be moderately higher, but with a more normalized ratio. Non-GAAP earnings per diluted share are expected to grow in the low single digit range year-over-year.

The paragraph discusses the financial summary for 2024 and the expectation for adjusted free cash flow. The speaker also mentions the strong spending on AI during tech earnings season and addresses concerns about CDW's participation in AI spending. They explain that the Q1 results were impacted by uncertainty in the market and among customers, particularly related to interest rates and inflation.

The market conditions in the current period are similar to those seen in 2023, with customers remaining cautious and focused on cost optimization and short term ROI. The introduction of AI has added complexity to decision-making processes for businesses. Other pressure points, such as changes in the IT landscape and delays in government budgets, have also affected the market. While there has been strong engagement with customers, there has been a pause in invoicing for complex solutions, but there are positive signs in the lower risk, lower friction client category.

CDW is well-positioned to take advantage of the growing trend of AI in the workplace, with their broad portfolio and expertise in delivering integrated solutions. They understand the pain points and opportunities of their customers and can offer both packaged and customized solutions. The four areas of opportunity mentioned are workforce, productivity tools, high-value use cases, and full-stack infrastructure. CDW is currently seeing interest in workforce AI and anticipates further growth in the future.

CDW is using their strong partner relationships and customer knowledge to influence their product roadmaps and bring suitable products to market. They are expanding their engineering and services capabilities and partnering with AI startups. Currently, their focus is on services engagements, particularly in the areas of data governance and security. They expect the use of AI to evolve from applications to inference at the edge and into the data center over time. CDW is confident in their strategy and partnerships to navigate customers through this journey. In terms of guidance, they expect low single digit year-over-year growth in gross profit for Q2, which is higher than the last couple of years.

During a recent earnings call, Al Miralles, the CFO of a company, was asked about the company's gross profit dollar guidance for the second quarter. He explained that the company has a strong pipeline and expects growth due to increased customer spending in the solutions category. He also mentioned that historically, seasonality would suggest mid-teen growth for the second quarter, but the company's outlook is slightly below that due to a slower start in the first quarter. However, they have confidence in reaching this level of growth based on the existing pipeline and the need for critical spending items. Another analyst on the call also acknowledged the challenging customer spending environment and asked for more context, to which Chris responded by mentioning the impact of COVID-19 and the company's focus on cost management to navigate through the challenges.

The challenges of budget scrutiny have impacted the transactional business, but solutions business remains robust. Customers are facing added complexity with AI as a consideration, but are also in need of refreshing client devices. This has resulted in a shift of budget towards devices. The trend for the rest of the year is uncertain, but there is cautious optimism.

The economy and financial environment have been unpredictable, with expectations of rate cuts changing to just a few. Despite ongoing macro uncertainty, there has been progress in market transitions and digestion of capacity in certain categories. As time goes on, the need for network modernization and addressing workload and data growth becomes more urgent. Customers are currently deferring decisions, but the company is confident that they will eventually act on these needs. As the economy and financial situation become clearer and customers plan their IT roadmaps, the company expects to see more balanced spending across solutions and transactions. The gross margin for the full year is expected to be similar to the first quarter's 21.8%.

Al Miralles and Samik Chatterjee discuss the expected gross margin for the full year and the impact of mix on it. They state that the gross margin will likely be similar to 2023, with some variability quarter to quarter. They also mention that the contribution of netted down revenue has helped hold the margins in. Amit Daryanani asks about the performance of storage and its correlation to Netcomm and servers. Chris Leahy responds that there are two factors at play with storage currently.

The company has seen growth in storage investments due to customers investing in networking and new products. The buybacks were minimal in the quarter, but the company plans to continue balancing strategic and tactical elements in their capital allocation plan and has enough cash on hand to create value in all four of their priorities.

Matt Sheerin asks Chris Leahy about government sector activity and seasonality. Chris Leahy explains that there was a pause due to the federal budget delay, but now there is strong activity in projects and programs. He expects federal to follow a seasonal pattern for the year, with some potential for orders to be pushed into the following year. Matt also asks about AI-enabled PCs, to which Chris responds that it is still early.

The speaker discusses the reasons behind the positive signs seen in the company's sales of AI PCs, which include the need to refresh aging machines, upgrade to Windows 11, and stay ahead of potential supply shortages. They also mention that the low friction and no regrets nature of the purchase, along with ample compute power, are driving interest from customers. The speaker then addresses a question about pushouts in the company's pipeline, stating that they are seeing this behavior across a broad range of customers and products, and that it is likely due to macroeconomic factors. They also mention that there are other factors at play, such as the need to refresh devices and modernize infrastructure.

The speaker, Chris Leahy, responds to a question about the extended and elongated sales cycles in the current market. He explains that the macro overhang is the main factor causing this and that there are no cancellations, just more deliberation and involvement in decision making. The consideration of AI is also causing some hesitation. He compares the current trend to that of last year and mentions that the uncertainty in the market is similar to previous quarters. The CEO, Al Miralles, adds that there are plenty of opportunities within the catalysts they have identified, but the caution and concern in the market has caused delays and deliberation.

The speaker discusses the impact of AI on customer spending and the IT market, and mentions that the company has seen growth in security and cloud categories. They also clarify their expectations for 2024 US IT market growth and gross profit growth, stating that it will be similar to the current year. They attribute the slight change in gross profit dollar growth guidance to a slow start in Q1.

The company is seeing an earlier start to client device sales in the first quarter, which helps increase gross profit despite not impacting gross margin. There are some fluctuations in net sales due to this, but overall there is not much change. Looking ahead to 2025 and the impact of AI on hardware categories, the company is unsure of the potential uplift in configurations and ASPs. Currently, there has not been much change in pricing and growth is mainly driven by unit sales.

The speaker discusses the potential impact of emerging AI technology on prices and the company's strategy for navigating this landscape. They express confidence in the company's business model and thank their coworkers and customers for their support.

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