The paragraph introduces the CDW Third Quarter 2024 Earnings Call. Carly, the call coordinator, hands over to Steve O'Brien from Investor Relations, who welcomes participants and introduces Chris Leahy, the CEO, and Al Miralles, the CFO. The earnings release and supplemental slides are available on CDW's investor website. Steve reminds participants that some comments made during the presentation are forward-looking statements subject to risks and uncertainties. The presentation includes non-GAAP financial measures with reconciliations to GAAP measures available in the slides and release. All growth rates and dollar changes discussed are compared to the same period in 2023. A replay of the webcast will be posted online.

In the conference call, Chris Leahy outlines CDW's third-quarter performance amid challenging market conditions. Demand for cloud solutions was strong, but hardware solutions struggled, and anticipated improvements in the corporate channel did not happen. The company reported a gross profit of $1.2 billion, net sales of $5.5 billion, and other financial metrics which showed slight declines from last year. The shortfall in hardware volume is attributed to both external factors and specific company dynamics. CDW plans to address these issues by tackling the macroeconomic challenges and complexities in IT spending that have led to project delays and prolonged sales cycles.

The paragraph discusses the impact of various external and internal factors on market conditions and CDW's performance. Uncertainty due to the U.S. election and shifts in market conditions, driven by the rise of as-a-service and pay-as-you-go cloud models, have pressured hardware solutions and created heightened competition. This environment, compounded by pandemic-related demand fluctuations and supply chain issues, intensified challenges for CDW. The company faced additional pressures due to its financial discipline in competing markets, leading to lower sales but stable margins, and its exposure to larger deals. CDW anticipates improvements as market conditions stabilize.

The paragraph discusses CDW's strategic expansion, including the acquisition of Sirius, which has enhanced their ability to deliver large projects. However, the timing and size of these projects can cause variability in yearly performance, especially during periods of low demand, as seen with deferred or reduced deals in the commercial and federal sectors. Their cloud and SaaS businesses, although growing, haven't reached the desired scale, leading to greater financial impact when hardware demand declines. CDW acknowledges these challenges and is focusing on improving sales effectiveness, expanding capabilities in fast-growing cloud and software areas to increase service offerings, and enhancing the customer experience to drive recurring revenue.

The company is enhancing its digital capabilities and agility to better serve customers and accelerate growth. They are focusing on new opportunities with existing and new customers by leveraging their expertise to provide comprehensive solutions. While some efforts show immediate impact, others are long-term. The third-quarter results showed a 4% decline in corporate net sales due to prolonged sales cycles and declines in infrastructure investments, storage, and servers. However, there was growth in cloud solutions and high-end devices. Small businesses saw a slight sales decline, but security and services experienced strong growth due to increased cyber threats.

In the reported quarter, overall sales decreased by 5% year-over-year, with healthcare being a positive outlier, experiencing a 3% growth. Success was noted in aiding health systems with managed services and cloud solutions. Despite this, corporate, netcomm storage, and servers saw meaningful declines, though client sales grew for the second consecutive quarter. Government sales dropped 12%, with federal deals, particularly in hardware solutions, facing significant declines. State and local sales also decreased due to approval delays impacting infrastructure deals. Security and services showed strong profit growth driven by professional services, while education sales declined by 5%, with higher education experiencing budget cutbacks and slower project turnovers. Cloud solutions, however, saw increased spending and profits, especially within K-12, which faced slight sales declines after previous years' investments.

The paragraph discusses the varied performance of a tech company's different market segments. The team saw growth in refreshing Chromebooks and client devices, with cloud services and managed client device lifecycle solutions also experiencing significant growth. The U.K. and Canada markets performed better than expected, recovering from previous lows. However, despite these positive areas, the overall portfolio was offset by declines in hardware solutions and decreases in network storage and servers. Software and cloud sectors saw modest growth, while services grew due to managed services and warranties. The company expects market demand to remain flat for the rest of the year, particularly in the U.S. IT market.

The paragraph discusses the challenges and prospects for CDW in the face of market dynamics affecting gross profit growth. It mentions the company's confidence in long-term growth driven by factors such as workload expansion, data growth, increased security threats, and AI adoption. Despite current difficulties, the company is committed to delivering value and is focusing on profitable growth. Al Miralles then summarizes the third-quarter financials, noting a gross profit of $1.2 billion, which was a 2.2% decrease from the previous year and below expectations due to lower demand for solutions hardware. Gross margins remained stable at 21.8%, helped by a higher mix of sales where CDW acts as an agent.

The paragraph outlines the company's financial performance for the third quarter, highlighting a 7.1% growth in a specific category that now represents a larger portion of gross profit compared to the previous year. Despite increases in net sales and gross profit sequentially, growth was below expectations due to reduced corporate demand and cautious customer spending. While international sales outpaced U.S. sales, the company anticipates continued volatility. The paragraph also notes a reduction in non-GAAP SG&A expenses both year-over-year and quarter-over-quarter, with an efficiency ratio in line with expectations. The company acknowledges the need to better align with market conditions to achieve profitable growth.

In the fourth quarter, the company focused on aligning costs with market demand, resulting in a slightly higher coworker count compared to previous periods. The non-GAAP operating income decreased by 4% to $534 million due to a volume shortfall, though expenses were slightly lower year-over-year. Despite a decline in non-GAAP net income to $355 million, the income per diluted share was $2.63. Net debt reduced by $91 million from the second quarter, reaching $4.9 billion. The issuance of $1.2 billion in senior notes was used to settle prior notes and enhance strategic flexibility. The company's liquidity remained strong, with $2.2 billion available. The cash conversion cycle increased to 17 days, reflecting efficient working capital management.

The company acknowledges that timing and market dynamics affect working capital, with a focus on long-term cash conversion targets. In the recent quarter, adjusted free cash flow was $261 million, aligning with expectations, bringing the year-to-date total to $764 million. The company is on course to meet 2024 goals, having returned around $100 million in share repurchases and $83 million in dividends, committing to return 50% to 75% of adjusted free cash flow to shareholders in 2024. Their primary capital priorities are increasing dividends in line with non-GAAP net income growth, maintaining a target net leverage of 2 to 3 times, and making strategic M&A and share repurchases to enhance shareholder value.

The company has spent over $350 million on share repurchases in 2023, with $730 million still available under the current program. Despite persistent uncertain market conditions from 2023 into 2024, and worse-than-expected demand in the third quarter, the company expects a low single-digit decline in gross profit for 2024, with gross margins similar to 2023. Full-year non-GAAP earnings per share are expected to decline in the mid-single digits. For the fourth quarter, they anticipate low to mid-single-digit declines in gross profit compared to the previous year, with gross margins slightly above the first three quarters of 2024 but below the fourth quarter of 2023.

The paragraph discusses the expectation for lower fourth-quarter performance compared to the third quarter, traditionally due to decreased demand from education and government sectors, which is not anticipated to be balanced by the usual increase in demand from corporate and small business customers. The operating expenses for the fourth quarter are expected to be similar to those of the prior year's fourth quarter, while non-GAAP earnings per diluted share are projected to decline in the high single-digit range year-over-year. Following the financial summary, the operator opens the session for a Q&A, and Adam Tindle from Raymond James asks a question regarding the negative operating leverage of the company and seeks clarification on its cost model and the rationale behind recent restructuring measures, as these have appeared as a pattern over recent quarters.

The paragraph is a discussion about adjustments to operating expenses and workforce within a company. Al Miralles provides insights on the quarter, mentioning a commitment to a variable cost model, with SG&A expenses at around 55% of GP, slightly higher than expected due to lower GP. Despite demand changes, the company has made efforts to align fixed costs by reducing the workforce by about 2%, not as high as the previously mentioned 10%-15%. Chris Leahy adds that the company is carefully adjusting its business operations while continuing to invest in potential growth areas.

The paragraph consists of a Q&A session involving Adam Tindle, Chris Leahy, and David Vogt. Adam asks about whether increased pricing intensity and competition is happening among VARs or OEM vendors, to which Chris responds it's both. David then asks Chris about his expectation of the U.S. IT market being flat in 2024 and the company's ability to outgrow it despite challenges. David is concerned because it seems the company might underperform compared to the market this year, which might disappoint investors. He's seeking clarity on how hardware solutions are impacting this outlook and mentions feedback that networking, storage, and servers might be improving. Chris responds by emphasizing their commitment to exceeding the market's growth rate.

The paragraph discusses the current state and future outlook of a company's various business sectors. Despite low hardware demand, the company is confident about its performance in areas like cloud and Software as a Service. Networking and storage show some progress, though not an inflection point, while data center activities are slow due to customer hesitancy and cloud spending. The company expects growth due to factors like digital transformation and increasing data needs, with more certainty post-election. Additionally, although demand in network communications isn't significantly improving, comparisons will be easier after Q3.

The paragraph discusses the current state of the hardware market, noting eight consecutive quarters of decline. David Vogt inquires about potential recovery indicators for 2025, amid uncertainties like economic conditions and geopolitical factors, including upcoming elections. Chris Leahy mentions that economic perceptions and global volatility are key factors affecting recovery confidence. He also notes that the complexity of IT decision-making leads to longer decision cycles, which is now considered the norm. The conversation concludes with thanks and an introduction to the next questioner, Erik Woodring from Morgan Stanley.

In this dialogue, Erik Woodring asks Chris Leahy about the rates of decline in product demand, particularly in Infrastructure Solutions like netcomm, servers, and storage. He inquires if these declines are reflective of the broader market or specific to CDW due to them avoiding less profitable deals. Chris confirms that the declines are both market-wide and partly due to CDW's strategy of not compromising profitability. Erik also questions the increased market competition, noting CDW's historical strong performance in competitive environments, and asks what is different now. Chris acknowledges the question's validity and implies ongoing reflection on their competitive strategy.

In the paragraph, a discussion unfolds about the competitive market dynamics impacting a company over recent quarters. Chris Leahy and Erik Woodring address the issue of irrational pricing in the market, which diverges from the company's typical business model. This pricing pressure is observed across the value chain, affecting value-added resellers and direct competitors, but not as much among distributors. All participants in the market are experiencing elongated sales cycles and efforts to save money, such as deferring spending and seeking short-term returns on investments. Amid this context, it's noted that the company is on track to experience two consecutive years of gross profit declines, a situation not seen historically at CDW in similar market conditions.

In the paragraph, Chris Leahy discusses the challenges CDW is facing due to macroeconomic uncertainty and a decline in gross profits. The company is undergoing a transformation and has been investing heavily in its cloud and SaaS business over the past five years, but has not yet achieved the desired scale. With a high mix of hardware in their portfolio, the muted demand for hardware has a significant impact on results. Additionally, strategic investments have led to developing deeper capabilities for full-scale projects, which tend to be large and unpredictable in terms of timing and size. This has resulted in fluctuating results, particularly seen in their commercial and federal sectors this quarter.

The paragraph discusses the company's focus on maintaining financial discipline and strategic investments, particularly in fast-growing and high-relevance areas, despite challenges in the hardware market. Chris Leahy suggests that as growth resumes, potentially in 2025, gross profit dollars should increase. Amit Daryanani mentions changes in channel pricing and strategy by major vendors like Cisco and Microsoft, which could drive growth, especially in agent sales. Leahy emphasizes investing in the cloud business to offer a seamless customer experience, aligning with vendor strategies and incentives.

The paragraph features a discussion from a conference call involving Matt Sheerin from Stifel and CDW executives Chris Leahy and Al Miralles. They talk about client device growth, noting that there is growth across most end markets, including corporate, but small businesses are delaying client device purchases due to cash preservation. The growth is primarily driven by the need to refresh aging devices rather than new AI PCs or Windows 11. The expectation is that AI PCs will further drive PC refreshes next year. Al Miralles mentions that the guidance for Q4 gross margin is lower year-over-year due to a decrease in high-margin advanced hardware solutions and services relative to the previous year.

The paragraph discusses a conversation about business performance and competition strategies. Al Miralles explains that the company expects continued softness in the solutions side, which has higher margins, and a steady performance on the client side. They anticipate a typical increase in netted down revenues by the fourth quarter, but not as significant as the previous year. Keith Housum raises a concern about competition affecting deals, questioning how much of CDW's business depends on transactional pricing versus relationship-driven value. Chris Leahy responds that over 90% of their relationships are based on value provided through their portfolio, expertise, ease of doing business, and delivery agility. He acknowledges that some larger rollout deals are more price-sensitive.

The paragraph discusses the shift from hardware sales to an "as-a-service" model, which is anticipated to grow, impacting hardware sales by causing pronounced cyclicality with significant upfront spending. Al Miralles explains that while historically the business involved upfront recognition, there's now a move towards a recurring revenue model where customers gradually consume cloud services. This shift isn't materially significant yet but is growing, suggesting a transition in how revenue is recognized and reported. They plan to provide more detailed reporting on recurring versus reoccurring business as the sector grows.

In the dialogue between Samik Chatterjee and Chris Leahy, Samik questions Chris about the company's strategy for handling exposure to large projects given the market's current conditions. Chris responds that they are actively working on improving their strategy, particularly focusing on digital capabilities to enhance customer experiences. The plan involves accelerating their digital work to enable personalized recommendations and better align their digital tools and sales professionals. This aims to serve both large and small deals effectively by creating a seamless and self-serve digital experience for customers, while simultaneously enabling sales professionals to engage at higher value levels.

The paragraph discusses uncertainties in federal spending due to the election-related situation, with the federal government being paused amid delayed budgets and awaiting the administration's priorities. The conversation suggests that while there was strong spending in the Department of Defense, overall spending was less than expected. It's uncertain whether a budget flush will occur post-election. The outlook for the fourth quarter is cautious, taking into account potential political uncertainties. The company plans for various scenarios, with caution incorporated into its quarterly projections. Samik Chatterjee and others appreciate the responses and conclude the discussion.

The paragraph includes closing remarks from Chris Leahy, Chair and CEO of CDW, who expresses gratitude for the dedication of the company's 15,000 employees and appreciation for their customers, emphasizing the commitment to customer success. Chris also thanks the audience for their time and interest in CDW and mentions looking forward to the next quarterly discussion. The operator concludes the call by thanking participants and instructing them to disconnect their lines.

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