CDW Corporation

I will now hand you over to your host, Steve O'Brien, with investor relations to begin. Steve, please go ahead.

Thank you, Carla. Good morning, everyone. Joining me today to review our first quarter 2024 results are Chris Leahy, our chair and chief executive officer, and Al Morales, our chief financial officer. Our first quarter earnings release was distributed this morning and is available on our website, investor.cdw.com. along with supplemental slides that you can use to follow along during the call. I'd like to remind you that certain comments made in the presentation are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. Those statements are subject to a number of risks and uncertainties that could cause actual results to differ materially. Additional information concerning these risks and uncertainties is contained in the earnings release and Form 8-K, which we furnished to the SEC today in the company's other filings and in the company's other filings with SEC. CDW assumes no obligation to update the information presented during this webcast. Our presentation also includes certain non-GAAP financial measures, including non-GAAP operating income, non-GAAP operating income margin, non-GAAP net income, and non-GAAP earnings per share. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You'll find reconciliation charts in the slides for today's webcast and in our earnings release in form 8K. Please note all references to growth rates or dollar amount changes in our remarks today are versus the comparable period in 2024 unless otherwise indicated. Replay of this webcast will be posted to our website later today. I also want to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast without specific written permission from the company. With that, let me turn the call over to Chris.

Thank you, Steve. Good morning, everyone. I'll begin today's call with a brief overview of our performance, our strategic progress, and view for the balance of the year. Al will provide additional details on our results, our capital allocation priorities, and our outlook. We'll move quickly through our prepared remarks to ensure we have plenty of time for questions. Market conditions remained challenging, and first quarter results came in below our expectations. For the quarter, gross profit was $1.1 billion, 2% lower than last year. Non-GAAP operating income was $404 million, down 7%, and non-GAAP net income per share was $1.92, down 6%. In the first quarter, customers demonstrated caution and concern given heightened macro uncertainty, weighing on capital investment decisions. At the same time, the complexity of the tech landscape continued to ratchet up, particularly given the additional layer of AI and changes in the IT market landscape. This lengthened decision-making as customers deliberated on both how to navigate technology roadmaps and when to spend on infrastructure in a challenging economic environment. While activity was reflected in a solid pipeline with deals being pushed out, our sales and gross profit lagged. Results were also impacted by the federal budget stalemate, which led to a pause in our federal channel. Bottom line, while many of these factors are beyond our control, we are never satisfied. And as we do not expect decision cycles to improve in the near term, we remain focused on accelerating pipeline growth and using all of our competitive advantages to take share in this low growth environment. During the quarter, our teams maintained a high level of engagement, working with customers to implement mission-critical projects, help prioritize and evaluate options, develop multi-year plans, and prove out use cases. You see the impact of this in our gross margin, which was a first quarter record, and our excellent cash flow, which together reinforced the durability of our underlying profitability and integrity of our strategy. Whatever the market condition, we are laser focused on delivering exceptional value to our customers. To ensure we continue to deliver on this commitment, we remain resolute in our strategy and continue to invest to ensure we have the capabilities to deliver full stack solutions and services. Broadly speaking, customer priorities included cost optimization, data protection, and workforce productivity. This drove focus on security, cloud, and as a service, as well as client demand and interest in AI. Let's take a look at how all of these priorities impacted performance. First, customer and market performance. Recall we have five sales channels, corporate, small business, healthcare, government, and education and markets, each a meaningful business on its own with 2023 annual sales ranging from $1.6 billion to $9 billion. Within each channel, the teams are further segmented to focus on customer end markets, including geography and verticals. Our commercial operations are organized around geographies, verticals, customer size, and spend. Teams are similarly segmented in our UK and Canadian operations, which together delivered 2.6 billion US dollars in 2023 sales. These unique customer end markets often act in a counter cyclical way given the different macroeconomic and external factors that impact each of them. Corporate top line declined 3% year over year. Decision making further elongated with heightened focus on ROI and a high level of project scrutiny given interest rate expectations. Cloud and security prioritization continue to drive excellent increases in customer spend. and the team capitalized on client device demand, and year-over-year client sales were up low double digits. Corporate saw declines in hardware categories undergoing transition and absorbing capacity, notably servers and netcom. Storage, however, was a standout category, up double digits, driven by data and workload growth as customers improved efficiency and captured savings from newer solutions. Small business posted a 7% year-over-year top line decline, but with sequential improvement versus the fourth quarter. The team continued to help customers address mission-critical priorities around security and productivity, which drove meaningful increases in cloud and software customer spend. Consistent with corporate, net common servers declined and storage increased. Small business continued to be accretive to overall margins. Client devices posted a sequential increase, yet remained down year over year. Public sales declined 5% from the prior year. Healthcare declined 2%. Transactional performance was positive with an increase in client devices while solutions declined. Healthcare performance was similar to commercial with customer caution given the significant focus on cost optimization. Security was also a major focus area, delivering double-digit increases in spend and gross profits. State and local's mid-teens increase was more than offset by a decline in federal top line and total government declined 1.5%. State and local's performance was broad-based with strike across transactional and solutions categories. Client devices sales increased for the third quarter in a row, up high teens. Public safety remained a key focus area with security up substantially double digits. Cloud adoption continued to gain traction. Federal's mid-teens decline was driven by the Congressional budget impact, which was not resolved until late March. Some activity related to existing contracts continued, including client device refreshes, which drove a mid-teen increase. Larger scale network and data center projects paused. Engagement remains strong, and we expect to pick up and spend once agencies are able to allocate their appropriated funds. It continues to be a challenging environment for education, and the segment posted a 10% decline. Consistent with recent quarters, higher ed institutions remained focused on doing more with less, and the team posted a mid-teens top line decline. Hard work categories declined across the board, while ongoing focus on cost elasticity led to a strong double-digit increase in cloud. K-12's top line decreased by high single digits, Client device sales increased by low single digits, with some school systems refreshing aged Chromebooks, several funded via normal operating budgets and not stimulus programs. Audiovisual solutions like smart whiteboards and interactive flat panels posted a substantial decline as schools continued to digest purchases from the past several years. Security remained a top priority, and both top line and gross profit increased by mid single digits. Our UK and Canadian international operations, which we report as other, continue to experience challenging market conditions and each decline by mid-single digits. Both teams continue to execute well and are leveraging their capabilities to deliver great outcomes for our customers. For the most part, portfolio performance was consistent across customer and market. Transactional product sales performed somewhat better than solutions and modestly increased sequentially. Both posted year-over-year declines with a greater decline in solutions from the fits and starts of decision making. At the portfolio level, hardware top line decreased by 4%. Services also decreased by 4% as weakness in services tied to hardware more than offset growth in managed services, which increased by low teens. Even though software net sales declined by 7%, gross profit increased slightly year-over-year. Top line performance was driven by declines in licensed software due to accelerated transitions to SAS models. Let's turn now to the topic that is getting a lot of attention, AI, and specifically what we are doing for our customers in this space. Right now, most of our customers are at the initial stages of the assessment process, developing and analyzing use cases and adopting data governance best practices to deliver insights and ensure end-to-end security. Essentially, they are exploring the art of the possibility and working through the science of exactly how do we do this. This is exciting work for all of us and our customers. The complexity of adopting AI plays to our strengths. We know how to bridge the gap between the promise of technology and transformational outcomes. And since deploying AI drives the need for technology investment across the full stack with entry points across the entire stack, we are uniquely positioned to serve our customers. And we are doing that today. To support our customers as they navigate successful AI adoption, we offer two broad areas of consulting services. First, connecting AI to outcomes and ROI, which we call AI discovery. And second, a practical approach to implementing AI, including data governance and security, which we call master operational AI transition, or MOTE. While still early innings, these services are gaining traction. We scope the broad AI opportunity around four areas of focus. workforce productivity, notably end-use assistance and edge devices, high-value use cases, broad-scale vertical solutions, and full-stack, where customers rely on us to provide the infrastructure underlying applications and solutions. A great example of full-stack is the corporate training and development domain-specific large language model solution we shared with you last quarter. Our broad-scale solutions are vertically based. As you know, we have expertise across many verticals, including healthcare, financial services, and many key industry segments. Expertise that enables us to deeply understand the unique needs and challenges faced by organizations in these sectors and tailor solutions and services that directly address their opportunities and pain points. Let's take a look at a couple of the vertical AI examples. First, our AI offering for the K-12 markets. AI presents an exciting opportunity to empower teachers and improve learning outcomes, but it must be done very carefully. Our education team has leveraged its expertise and relationships in this field to offer a safe AI platform that is specifically designed for K-12 classrooms with a custom large language model that generates responses from vetted educational content, not the entire internet. The second example is a proprietary CDW healthcare solution, Patient Room Next. While AI holds the promise of medical breakthroughs, our solution addresses the intense pressure institutions face to manage costs while sustaining high levels of patient outcomes. Our solution combines AI and connected devices to transform patient rooms, improve care delivery, and enhance overall healthcare experiences. The solution is HIPAA compliant and runs on an end-to-end intelligent platform powered by GPUs, a platform that provides real-time insights from data and automated documentation. One current application serves over 300 beds and bills $4 million in annual licensing. Add to that the services and equipment we provide for an end-to-end solution like cameras, network connections, and servers, and you can see the opportunity this represents to deliver value for our customers and for CDW. Of course, AI will take time to become embedded across our entire customer set. We know that. We have been here before as we've helped our customers adopt cloud. And while the hype cycle is much shorter than cloud, the ARCO adoption is very similar. Bottom line, we are here for our customers today and we'll be there for them in the future as they continue to ramp their efforts. And that leads me to our thoughts on the balance of 2024. You will recall that on last quarter's conference call, We shared our expectations for 2024 US IT market growth in the low single digits and our target to grow 200 to 300 basis points above market. Despite the slow start to the year, we still see potential for market growth. Let me be clear that we do not expect a demand hockey stick, but do see potential for client device refresh and for improved solutions performance. Wildcards include further dampening of capital investment from sustained high interest rates, worsening of geopolitical issues, as well as unusual election year uncertainty. As we always do, we will update our view of the market as we move through the year. A hallmark of CDW is to serve our customers wherever their priorities lie. As we look ahead, our customers face a compelling need to address cloud workload growth, protect against increasing security threats, manage an aging client device base, and navigate all things data as they build out their plans to leverage AI to capture insights and achieve their productivity aspirations. Armed with our full stack, full outcomes, full lifecycle portfolio, and unique vertical expertise, no one is more prepared to help our customers successfully navigate this period of unprecedented change. With that, let me turn it over to Al.