The paragraph is an introduction to CDW's Fourth Quarter 2024 Earnings Call. The operator, Carly, introduces Steve O'Brien from Investor Relations, who will be discussing the results along with Chris Leahy, the CEO, and Al Miralles, the CFO. The earnings release is available online, and they will be discussing forward-looking statements that involve risks and uncertainties. They also mention that non-GAAP financial measures will be used and reconciled with GAAP measures. Growth rates mentioned will be compared to the same period in 2023. A replay of the webcast will be available on their website.

The conference call is the property of CDW and cannot be recorded or rebroadcast without permission. Christine Leahy begins by discussing CDW's performance in the fourth quarter and full year, along with strategic goals for 2025. The fourth quarter saw CDW achieve net sales of $5.2 billion, a 5% increase from 2023, with gross profit remaining stable. Non-GAAP operating income and net income per share saw slight declines year-over-year. The company focused on customer priorities like operating efficiency and expense management, emphasizing solutions like cloud and SaaS. There was increased demand for hardware driven by projects with clear short-term ROI, maintaining a strong gross margin, the highest in 2024.

In the past year, the company offset some impact from deprioritizing hardware by focusing on service offerings, leading to a 3% decline in top-line revenue and a 1% decrease in gross profit compared to 2023. There was a slight decline in expense leverage, with a 5% drop in operating income and a 4% decline in net income per share. Despite these issues, the company generated over $1 billion in adjusted free cash flow and returned $832 million to shareholders through dividends and share repurchases. The Board has increased share repurchase authorization by $750 million. In the fourth quarter, their diverse U.S. sales channels and international operations in the U.K. and Canada contributed significantly, with commercial markets stabilizing and returning to growth. The strategy focuses on a balanced customer portfolio, a wide range of product solutions, and executing a three-part growth strategy.

The article discusses varied quarterly performance across different business segments. While customer behavior was cautious, some increased their spending towards the year-end. Corporate and Small Business revenue rose by 4%, the International sector by 5%, and the public sector by 6%, largely due to Healthcare's significant growth of 30%. In contrast, Education declined by 2% as gains in higher education were offset by K-12 declines, attributed to the absence of stimulus funding. Government spending decreased due to federal uncertainty. Hardware sales increased by 4%, driven by the refresh of aging units, while software sales rose by 5%, impacted by a market shift towards SaaS and IaaS. Cloud services significantly contributed to profit growth, and security solutions saw high single-digit growth. Overall, services revenue increased by 10%, with double-digit profit growth, and CDW Managed Services grew by over 20%.

The paragraph highlights CDW's strategic focus on growth by enhancing productivity, efficiency, and industry relevance, particularly in healthcare. By deepening technical and industry expertise, CDW delivers tailored, unbiased solutions that address unique customer needs. The company's healthcare offerings are reinforced by experienced subject matter experts and innovative solutions, including AI and IoT-based technologies, showcased in healthcare transformation centers throughout the U.S., which aim to improve patient care and clinical workflows.

The paragraph discusses the capabilities of two transformation centers that focus on healthcare and technology for adults aged 50 and older. These centers achieve clinical outcomes like reduced readmission rates through data analytics and improved patient satisfaction via mobile communication tools. In 2024, the organization strategically invested in capital, leading to the acquisition of Mission Cloud Services, an AWS partner. This acquisition enhances their cloud services, including migration, software development, and cloud-based workflow automation, expanding AWS Connect opportunities and managed service offerings through the AWS Marketplace. An example of combining professional and managed services with AWS Connect and AI is mentioned.

The paragraph discusses how CDW helped a financial solutions company upgrade its on-premise contact center by implementing a flexible, AI-driven cloud-based solution that enhances customer service and operational efficiency. This solution involves significant investment, yielding strong ROI and ongoing spending with CDW for cloud services and performance monitoring. It underscores the benefits of integrating managed and professional services with a comprehensive portfolio of cloud and AI offerings. The paragraph also highlights CDW's strategic positioning in high-growth areas and projects that they will outpace the anticipated low single-digit growth of the U.S. IT market in 2025, with notable impacts from public sector spending dynamics.

The paragraph discusses the company's cautious but confident outlook on IT growth amidst uncertainties in the Canadian and broader market due to macro factors and political changes. Despite uncertainties like policy changes, inflation, tariffs, and project hesitancy from customers seeking short-term ROI, the company remains focused on outperforming the market by leveraging its competitive advantages. It highlights the growing complexity of customer needs, including data management, cybersecurity, and AI, and emphasizes its role as a trusted adviser. The paragraph concludes with a transition to Albert Miralles, who will provide a detailed financial overview and outlook for the upcoming years.

In the fourth quarter, the company achieved a gross profit of $1.2 billion, which was flat year-over-year but increased by 2% when accounting for one fewer sales day. Gross margin improved to 22.3% quarter-over-quarter, though it remained below the previous year's record. The increase in demand for cloud, security services, and certain hardware products contributed to better-than-expected results. Netted down revenues increased slightly, reflecting strong trends in solutions like cloud and SaaS, though variance was noted in other categories like warranties. The commercial business experienced top-line growth for the first time in two years, while education and government sectors saw seasonal or less-than-typical declines. The healthcare sector was notably strong due to strategic investments.

International net sales grew in the quarter due to increased product volume, although growth was below historical rates because of the absence of budget flush activity. Economic and political uncertainties continue to affect international markets. Despite challenges, the company surpassed expectations. SG&A expenses increased by 3.3% year-over-year to $656 million, mainly due to higher gross profit. The non-GAAP SG&A to gross profit efficiency ratio was 56.8%. The coworker count decreased by 300 from the third quarter to 15,100, with customer-facing roles at 10,900. This reflects the acquisition of Mission Cloud Services and cost-alignment actions. Non-GAAP operating income was $500 million, down 3.8% from last year, with a margin of 9.6%, and net income was $333 million, down 4.7%, affected by higher interest expenses and lower interest income. The non-GAAP net income per diluted share was $2.48, a 3.7% decrease. The paragraph ends by indicating a shift to reviewing full-year results.

In 2024, the company experienced a challenging environment with lower-than-expected demand and cautious customer sentiment, leading to a 1.8% decline in net sales and a 1.1% decline in gross profit, though gross margins remained stable at 21.9%. Despite this, strategic investments, including the acquisition of Mission Cloud Services, are expected to support future growth. Non-GAAP expenses increased as the company adjusted its cost base and made strategic investments, resulting in a decline in non-GAAP operating and net income. The company's net debt rose to $5.1 billion, primarily due to funding the acquisition, but liquidity remains strong with $1.7 billion in available cash and revolver. The cash conversion cycle was 18 days, indicating effective management of working capital and inventory levels.

The company details its financial performance and capital allocation strategy. They maintain a strong adjusted free cash flow, achieving their goal of 80% to 90% of non-GAAP net income for 2024. They allocated substantial cash towards share repurchases and dividends, surpassing the target return to shareholders. Their capital priorities include increasing dividends in line with non-GAAP net income growth, optimizing capital structure, managing liquidity, and pursuing M&A opportunities to enhance growth, as evidenced by the acquisition of Mission Cloud Services. The company emphasizes its commitment to maintaining a healthy balance sheet and shareholder value.

The company is committed to distributing 50% to 75% of its adjusted free cash flow to shareholders through dividends and share repurchases, having approved an additional $750 million share repurchase program. Despite cautious customer sentiment, the company remains optimistic about 2025 as a potential turning point for demand, with growth expected in IT markets. They anticipate outperforming the market by 200 to 300 basis points in customer spending, with low single-digit growth in gross profit and stable gross margins, driven by their cloud, SaaS, and services expansion. The company expects the first half of 2025 to have slightly lower gross profit than the second half, aligning with historical seasonal patterns.

The company anticipates a low single-digit year-over-year increase in full-year non-GAAP earnings per diluted share, focusing on profitable growth, customer outcomes, and capital allocation. They expect currency fluctuations to slightly hinder reported growth. For the first quarter, they predict a mid-single-digit sequential decline in gross profit and low single-digit year-over-year growth, with gross margins aligning with 2024 levels. Operating expenses for the first quarter are expected to be comparable to the first and fourth quarters of 2024, resulting in the highest non-GAAP SG&A as a percentage of gross profit for the year. Non-GAAP earnings per diluted share are projected to grow in the low single-digit range year-over-year. Updates on the macro environment and business outlook will be provided in future earnings calls.

The paragraph discusses the challenges and uncertainties faced in the public sector, particularly in education, due to evolving funding cycles and policy changes. The speaker emphasizes the fluidity and rapid changes in the environment, necessitating ongoing analysis and cautious decision-making. They acknowledge potential slowdowns from workforce reductions but see efficiency improvements as beneficial for technology in the long run. The approach is to remain measured, not overly reactive, and continuously evaluate funding and policy adjustments. With decades of experience, the organization is actively engaging with federal, state, and local customers to navigate these complexities and identify opportunities and risks.

The paragraph is part of a conversation between Amit Daryanani, Albert Miralles, and Samik Chatterjee during a financial results discussion. Albert Miralles addresses a question about the factors influencing low single-digit gross profit dollar growth. He explains that there isn't a significant variance in growth rates across different financial line items, attributing this to a shift in sales mix and some compression in net sales. He notes that any impact on non-GAAP operating income would be offset by leverage at the EPS level. Samik Chatterjee then asks about the strong performance in the healthcare vertical, which had a notably strong end to the year with a 30% increase on a day-adjusted basis.

In the paragraph, Christine Leahy and Albert Miralles discuss the strong performance in the Healthcare sector, attributing it to a balanced strategy that combines cloud expertise and Healthcare proficiency. They emphasize investments in capabilities, technologies, and partnerships as key contributors to success, despite challenging past years. While Healthcare has seen some large transactions, not all are recurring. Additionally, the strong performance in Healthcare has helped offset declines in the government and education sectors within the overall public sector.

In the paragraph, Samik Chatterjee asks about the impact of changes in cloud subscription practices from companies like Microsoft on net sales. Albert Miralles responds that these changes were anticipated and are not significantly affecting their results for 2025. They are adjusting by pursuing other growth opportunities with Microsoft and other partners. The conversation then shifts to another analyst, Harry Reid, who asks about the potential threat of clients procuring directly from AWS Marketplace instead of using their services. Christine Leahy emphasizes that the company maintains its competitive advantage through the additional services they provide around marketplace purchases, and they were recently recognized as AWS Marketplace Partner of the Year, highlighting their value in managing procurement complexities for customers.

The paragraph discusses CDW's focus on helping customers make informed decisions about their hybrid cloud infrastructures, which include both cloud and on-premise solutions. The company notes a trend of some customers repatriating to on-premise due to advancements in AI and efficiency. CDW emphasizes the importance of understanding customers' entire hybrid systems and highlights its investment in Mission Cloud as a strategic move to enhance differentiation in this area. The conversation shifts to Ruplu Bhattacharya from Bank of America asking Chris about the growth in the SMB segment, noting a 3% year-on-year revenue increase after two years of weakness. Christine Leahy responds, indicating signs of stabilization and improved rhythm in the SMB and corporate businesses, suggesting a positive shift in market demand.

The paragraph discusses the cautious optimism surrounding business activities, particularly with small businesses being prudent due to economic uncertainties such as inflation, interest rates, and policy impacts. While small businesses are cautious, they are focusing on cost efficiency, often aided by cloud and subscription services. Regarding fiscal 2024, the core business's gross margin decreased by 40 basis points year-over-year to 15.4%, but it saw a sequential increase in the fourth quarter to 15.5%. Looking ahead to fiscal 2025, the expectation is for margins to remain stable, without significant acceleration despite potential improvements in certain markets like PCs.

The paragraph discusses the acquisition of Mission Cloud Services by CDW. Christine Leahy expresses excitement about the acquisition, highlighting its profitability, fast growth, and strong AWS expertise, which complement CDW's business strategy. Although the acquisition might not significantly impact CDW's bottom line profitability immediately due to foregone interest, the company expects it to contribute positively to their strategy and future growth. Albert Miralles adds that Mission Cloud is in a growth phase and is profitable, emphasizing its potential benefits for CDW.

The paragraph discusses a conversation involving Keith Housum, Albert Miralles, and Erik Woodring regarding financial performance and expectations for a company. Albert Miralles explains that despite some gross margin pressure, particularly in product margins, the impact is not considered substantial for 2025. He acknowledges that after several strong years, a slight compression in margins was anticipated, but it's not expected to be a significant issue. The conversation then shifts to Erik Woodring's observation, noting that 2024 was the first year where the company's earnings growth did not surpass revenue growth, and the forecast for 2025 suggests earnings per share (EPS) growth will be in line with gross profit and revenue growth.

In the paragraph, Christine Leahy explains that the lack of leverage in the company's model is due to balancing growth investments with operational efficiency in a low-growth environment. While significant investments have been made in areas like healthcare, cloud, and security, these efforts have happened during a period of macro uncertainty and minimal growth, impacting leverage. However, Christine expresses confidence that these strategic investments will eventually lead to increased operating leverage in the future, depending on a supportive economic environment.

The paragraph discusses CDW's approach to mergers and acquisitions (M&A). Christine Leahy notes that while CDW always has a strong appetite for M&A, they are currently well-positioned due to their scale and growth in areas like cloud, security, and data capabilities. This puts them in an opportunistic position to enhance these areas further and look for specific industry-focused acquisitions, particularly in sectors like Education and federal. The company's focus on industry capabilities has been successful, and they plan to continue this strategy. Albert Miralles adds that 2024 exemplifies CDW's comprehensive capital allocation priorities, especially during challenging times when stock prices are attractive. Overall, CDW remains patient and opportunistic in seeking valuable assets.

The paragraph discusses a company's financial strategy and outlook, focusing on share repurchases and potential acquisitions to boost operating income and earnings. During a Q&A, George Wang from Barclays inquires about the company's fourth-quarter performance, specifically regarding hardware growth, including NetComm and storage, and their outlook for the full year. Albert Miralles responds by highlighting strong performance in the commercial sector and signs of stabilization in corporate and small businesses. Exceptional results were also noted in the healthcare sector, due to strategic investments. Looking forward to 2025, the company expects continued mid-single-digit growth in client categories.

In the discussed paragraph from an earnings call, the company expressed optimism about a reasonable growth path for 2025, particularly within hardware solutions. They reported 3-4% growth in the recent quarter, mainly driven by NetComm and storage, while expressing caution over server performance, which remains challenging. In response to a question about competition and pricing pressure, Albert Miralles clarified that the competitive environment has been difficult over the past two years but saw no significant changes in Q4. He emphasized that competition has not significantly impacted their margins. The company concluded by expressing satisfaction with their performance relative to expectations amidst these challenges.

The paragraph expresses gratitude towards coworkers for their dedication, acknowledges customers for their trust, and thanks listeners for their interest in CDW. It also mentions that the speakers look forward to the next quarterly call. The operator then concludes the call, inviting participants to disconnect.

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