The operator introduces the CDW Second Quarter 2024 Earnings Call and hands it over to Steve O'Brien of Investor Relations. Steve is joined by Chris Leahy, the CEO, and Al Miralles, the CFO, to review the company's second quarter results. The earnings release and supplemental slides are available on the company's website. The presentation includes forward-looking statements and non-GAAP financial measures, which have been reconciled to the most directly comparable GAAP measures. The webcast will be available for replay on the website later today.

The speaker begins by reminding listeners that the conference call is the property of CDW and cannot be recorded or rebroadcast without permission. He then hands the call over to Chris, who discusses the company's performance and strategic progress in the second quarter. He mentions cautious customer behavior and a focus on cost savings over expansion, as well as challenges in the UK and federal funding. Despite these challenges, the company continues to help customers with technology roadmaps and has a strong pipeline in the solution space. The team's value as a trusted adviser and their ability to deliver solutions in areas such as cloud, security, and services has contributed to strong profitability and cash flow. This success is attributed to strategic investments made over the past five years.

The team delivered flat gross profit and a decline in net sales for the quarter, but saw improvements in gross margin and non-GAAP operating income. This was driven by a balanced portfolio of end markets, including corporate, small business, healthcare, government, and education, each with their own unique customer segments. For example, corporate saw a decline in net sales, but increases in cloud and security supported profitability, and client device sales increased. Small business also saw a decline in net sales, but improvements in gross profit and margin due to the team's focus on helping customers with security and productivity solutions.

Small businesses did not see much activity in terms of refreshing their devices, and there was a slight decline in client devices compared to the previous year. The postponement of infrastructure investments in netcomm and servers led to a decline in sales. Public sales also decreased, with state and local government seeing growth but federal government experiencing a decline due to delayed budget authorizations. This has caused delays in hardware and software orders, leading to uncertainty and a lack of federal catch-up in the second half of the year. The state and local team had a strong quarter, driven by increased spending on improving citizen experience and security. Healthcare sales remained flat, but there was growth in security assessments and client devices due to refresh.

The team's successful delivery of cloud migration and focus on security and cloud has led to increased profitability. Education sales declined slightly, but client device sales increased due to school system refreshes. Higher education institutions are investing in enhancing student experience while managing costs. The UK and Canadian international operations saw declines due to challenging market conditions, particularly in the UK. These conditions are expected to continue in the second half of the year.

The diversity of the company's end markets and broad portfolio of products and solutions are key drivers of their performance. Hardware, software, and services all saw growth, with cloud being a major contributor. The company's three-part strategy for growth involves acquiring new customers, enhancing solution capabilities, and expanding services. An example of this strategy in action is when the company helped an insurance company facing budget constraints due to an early end of life for their infrastructure equipment.

The company's cloud, hybrid infrastructure and services group successfully implemented a comprehensive cloud solution for a customer, generating significant revenue and establishing a strong partnership. The company's expectations for the rest of the year have been adjusted to reflect current market conditions, but they remain confident in their ability to grow above market levels.

In the paragraph, the author discusses various factors that are affecting the IT industry, such as workload and data growth, security threats, and adoption of AI technology. The customers are seeking clarity and confidence in terms of economic conditions and the impact of AI on their tech roadmap. The company remains focused on delivering value to its customers and executing its growth strategy. The author then provides details on the company's financial performance in the second quarter and its capital allocation priorities. Finally, the author updates the company's outlook for 2024, mentioning potential uncertainties in the market.

In the second quarter, CDW's net sales were down 3.6% compared to the previous year, but up 11.3% sequentially due to increased demand in education and government channels. Gross margin increased by 80 basis points, driven by higher sales in the netted down category. This trend is expected to continue, but may fluctuate over time. Gross profit was up 11.3% compared to the first quarter, but slightly lower than expected due to delays in federal spending and lower performance in the UK. Expenses for the second quarter will be discussed next.

In the second quarter, the company's non-GAAP SG&A increased by 3.2% and expenses were in line with expectations. The company's coworker count and customer facing coworker count also increased slightly. Non-GAAP operating income decreased by 3.7% due to flat gross profit and higher expenses. The company's net debt decreased by $93 million and liquidity remains strong. The cash conversion cycle was 17 days, reflecting effective working capital management. However, working capital can be influenced by timing and market dynamics.

The company is confident in their target cash conversion range and their adjusted free cash flow was consistent with expectations. They utilized cash according to their 2024 capital allocation objectives, including returning money to shareholders through dividends and share repurchases. Their main capital allocation priorities are increasing the dividend, maintaining a strong capital structure, and pursuing M&A opportunities. The company has utilized a significant amount of cash for share repurchases and still has a large amount remaining under their current program. The company's outlook is uncertain due to ongoing market conditions.

The company's customers are being cautious and careful with their spending, particularly in certain markets. The company expects flat-to-low single-digit gross profit growth for the full year, with the first half contributing 48% of net sales. They also anticipate flat or slightly higher non-GAAP earnings per diluted share. The company expects similar gross margins to the previous year and the first half of the current year. For the third quarter, they anticipate low single-digit gross profit growth and comparable gross margins to the previous year and first half of the current year.

In the fourth quarter, the company expects lower demand from education and government customers, leading to a decrease in earnings. Operating expenses are expected to be moderately higher compared to the previous year, but non-GAAP earnings per diluted share are predicted to grow in the mid-single-digit range. Adjusted free cash flow is expected to be in the range of 80% to 90% of non-GAAP net income for the full year. The company's gross margin for its core business was up sequentially and flat year-over-year, thanks to strength in storage and other categories.

The company is seeing firm margins on the client device side, with a higher mix of premium products. Product margins are holding up and are supplemented by growth on the netted down revenue stream side. The company's gross profit dollar outlook has been revised downward in the past few quarters, with a modest uptick expected in the second half of 2024. This reflects the belief that current market conditions will persist, based on market intelligence and customer and coworker feedback. Corporate performance has been more steady and consistent.

The company is cautiously optimistic about signs of stability in the market, but it is still too early to make any solid predictions for the rest of the year. Small business is not improving, but also not getting worse. The UK market and federal government delays are expected to continue to impact the company's performance. The outlook includes normal seasonality and a moderate IT refresh, but there is no significant change in commercial market demand. The forecasting process is more challenging due to lumpy deals and the complexity of solutions, but the team is doing a great job staying engaged with customers.

The speaker says that the company's solutions pipeline is strong, despite slow demand for netcomm and servers. Customers are still digesting previous purchases, but network modernization remains a high priority. There is some strength in the mid-market server side, but customers are being cautious and shifting towards cloud solutions.

During a recent earnings call, CDW executives discussed the outlook for the government business and the impact of the recent CrowdStrike debacle. They noted that there may be a seasonal uptick in federal business, but overall the company is expecting normal seasonality in the next few quarters. The strength of state and local business will offset any weakness in federal business. When asked about the impact of the CrowdStrike incident, CDW executives stated that it did not have a significant impact on their business, but they were quick to help customers with workarounds and reinforce their strong relationships with customers.

In response to a question about the potential for gaining customers through demonstrating their experience and leadership, Chris Leahy of CDW states that they have been able to help customers in these situations and highlight potential vulnerabilities to resolve them. They also mention their focus on security. In regards to operational expenses, Al Miralles notes that they expected higher expenses at the beginning of the year, but they will ease as the year progresses due to timing and seasonality. He also mentions that last year's uneven performance impacted their compensation accruals.

The company's first half showed a shift towards deleverage in expenses, but this is expected to balance out in the second half due to higher gross profit attainment and seasonal timing of expenses. The company has a strong pipeline of customers, but they are being cautious in helping them with cost optimization. They are working to increase the pipeline and have rigorous processes in place to drive growth, but are currently not seeing an appetite for conversion from customers.

The speaker discusses the positive rhythm and stability in the business, indicating a move towards more solid footing and potential growth in the near future. A question is asked about gross margins, and the speaker explains that they are expected to remain similar to the first half of the year and 2023 overall, with strong netted down revenues and product margins helping to hold firm.

Chris Leahy, CDW's CEO, was asked about the company's plans for AI-related spending in 2024 and how it would impact their hardware and services revenues. Leahy responded by stating that they are in the early stages of AI monetization and are investing in people and enablement. He believes that AI is a long-term game and will be an accelerant for their growth. CDW sees AI as an opportunity to play to their strengths of dealing with complexity and choice for their customers. They are confident in their ability to handle AI at every layer of the stack and believe it will be embedded in all aspects of their business.

The speaker, Chris Leahy, discusses the impact of AI on CDW's business and how it has caused a reevaluation of their architectural roadmap. He also mentions that CDW continues to gain share in a slow market and has seen growth in security, services, and cloud. This is supported by both their own data and partner reviews.

Chris Leahy, the speaker, identifies areas of strength in the company's product offerings, such as storage and compute, but also acknowledges caution in capital investment and complex solutions due to uncertainty and a complex technology landscape. The company is seeing a potential refresh in client devices, driven by factors such as aged devices, the release of Windows 11, and the rise of AI PCs.

The speaker discusses the sustainability of cloud security and services, which have shown strength this quarter. They are expected to continue growing and provide opportunities for cost optimization and meeting customer needs with their portfolio. The netted down revenue mix is made up of software assurance, warranty, SaaS, and cloud, with the strongest components being SaaS and cloud. These categories include data, virtualization software, and networking. However, categories such as software assurance and warranty have lagged due to their attachment to hardware and licensed software.

The speaker responds to a question about the company's guidance and recent misses on expectations. He acknowledges that the business has been volatile in recent quarters and notes that they had expected Q2 to be below pre-pandemic seasonality, which it was. The difference was due to federal business and international sales.

The speaker discusses two factors that were not previously considered in their growth projections, leading to a closer alignment with historical seasonality. They anticipate mid-single-digit sequential growth in the second quarter and attribute this to a more normal glide path. The split between the first and second half of the year is consistent with historical patterns, and the trend lines suggest a natural progression. The speaker also mentions the impact of the recent global outage on the cybersecurity business and notes that customers are currently on high alert and having more conversations about cybersecurity.

The speaker thanks their coworkers for their dedication and commitment to serving customers and stakeholders. They also express appreciation to customers and investors, and look forward to the next quarter. The call is then concluded.

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