CDW Corporation

Good morning, all, and thank you for joining us for the CDW third quarter 2024 earnings call. My name is Carly, and I'll be coordinating your call today. If you'd like to register a question during the call, you can do so by pressing star followed by one on your telephone keypad. And to move yourself and learn the questioning, it is star followed by two. I'd now like to hand over to your host, Steve O'Brien of Investor Relations, to begin. Steve, the floor is yours.

Thank you, Carly. Good morning, everyone. Joining me today to review our third quarter 2024 results are Chris Leahy, our chair and chief executive officer, and Al Morales, our chief financial officer. Our 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 this 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 in form 8K we furnished to the SEC today 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 FCC 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 2023 when net sales growth rates described on an average daily sales basis 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 third quarter performance in view for the balance of the year. Al will provide additional detail 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 in this third quarter were challenging. While demands for cloud solutions remained strong, and we continued to see a pickup in client device growth, hardware solutions remained under pressure, and the firmer footing we anticipated for our corporate channel did not materialize. Within this complex environment, the team delivered gross profit of $1.2 billion, 2% lower than last year, and gross margin of 21.8%. Net sales of $5.5 billion, 3.5% lower on an average daily sales basis. Non-GAAP operating income of $534 million, down 4% year over year. Non-GAAP net income per share of $2.63, down 3% year over year. adjusted free cash flow of $261 million. While our success meeting customer priorities with cost-effective software and cloud solutions, as well as services, led to a resilient gross margin and strong cash flow, results did not meet our expectations as lower-than-projected solutions hardware drove a shortfall in volume. This shortfall in volume reflects both external factors and CDW-specific dynamics. Let's take a look at each of these, and most importantly, the actions in place to mitigate future impacts. First, the macro and IT spending environment remain challenging. Technology complexity combined with persistent economic and geopolitical uncertainty has led to large project delays and further extension of sales cycles. Layered on top was the uncertainty around the outcome of the U.S. election, which has dampened not only government spending, but also other public sector and markets, as well as spend from commercial customers. And finally, this limited demand environment has heightened competition and increased pricing intensity across all end markets. Beyond the current environment, market conditions continue to reflect the secular shifts we've experienced over the past several years, shifts that impact how customers consume IT and how customers pay for IT. Consumption shifts driven by as a service and pay as you go public and private cloud focus. have contributed to market pressure on hardware solutions. And while our conviction toward a hybrid cloud approach for IT is unwavering, market demand continues to reflect unprecedented hardware cyclicality, cyclicality that resulted from pandemic-driven demand for work and learn from anywhere on endpoint, collaboration, and NetCon solutions, which resulted in an off-cycle demand boom, a period of supply chain volatility, and subsequent digestion. All of these external factors have clearly impacted our results in the quarter and over the past year. The impact has been further amplified by three CDW-specific dynamics. The first dynamic relates to our longstanding financial discipline. While our North Star is to provide value to our customers, in highly competitive markets, we maintain our discipline when competitors pursue transactions on economic terms. While this contributed to lower third quarter sales and gross profit, our growth and operating margins held firm, even while we mixed into lower margin client devices. We've seen this market behavior before and expect it to dissipate as the demand environment improves. Second, our exposure to larger deals. As we have deepened and broadened our strategic capabilities, including through the addition of Sirius, Our ability to deliver large, full-stack, full-outcome projects has expanded. Projects at the higher dollar tier that can be pushed for any number of reasons. This can drive year-over-year performance lumpiness and, depending on the size and timing of decisions, impact results. Impact that is more acute during periods of low demand. You see this in commercial and federal this quarter where larger deals expected to close were deferred or reduced. And the third specific item pertains to our cloud and SaaS-based business. While we have grown this business significantly during the past several years, we have not yet achieved the scale we desire relative to our overall portfolio. As such, when demand for hardware softens, it has a more outsized impact on our financial results. I hope this perspective helps contextualize how CDW-specific dynamics amplify the impact of the low market demand environment and created a near-term growth challenge that we have not yet been able to overcome. These are not excuses. We own our results. So let's turn to what's important. What are we doing? As always, our continuous improvement in seller effectiveness is ongoing. This means delivering repeatable solutions and further streamlining the sales processes to maximize sales professional productivity. I'd like to highlight three additional focus areas. First, we are organically and inorganically growing our capabilities in the fastest growth, highest relevance cloud and software vectors to increase scale in both our services and as a service offerings. This will deliver greater choice and value to our customers and lead to greater recurring and reoccurring revenue streams. Second, we are further driving exceptional and differentiated customer experience in our core business. We are aligning our digital capabilities to serve customers in the way they want to plan, buy, consume, and manage technology. And finally, we are enhancing our agility and accelerating pipeline growth. We are building on our customer growth engine by opening new lanes with both existing and new customers, and we are deepening our technical and industry expertise across all end markets. We know more than anything, customers value our unbiased, highly informed point of view. a point of view that enables our ability to architect and implement full-stack, multi-branded solutions which cut through the noise and deliver the outcomes our customers need. These are not new efforts, but we have ramped up intensity. Work is underway and progress is on track. Some actions will have fairly immediate impact and some will take more time to produce results. In the meantime, we remain laser-focused on finding pools of profitable growth and converting sales with rigor and speed. Now let's take a deeper look at quarterly results. Third quarter corporate net sales decreased 4% as sales cycles further elongated, most notably for large infrastructure investments. Netcom storage and servers all declined by significant double digits. We helped customers with client refresh, driving growth of high single digits. ASPs remained strong as customers' preference continued to drive higher end devices. Cloud solutions was a priority and gross profit from cloud increased by double digits. Small business continued to bounce along the bottom with net sales down 2%. Cloud solutions remained strong given their low upfront commitment and customers continued to sweat data center assets. Unlike other channels, client refresh continues to be pushed out as customers remain in a cash preservation mode. Security was strong as cyber threats increased for lower profile businesses. The team's success delivering services drove strong double digits growth in both professional and managed services. Public performance was less than seasonal and sales decreased 5% year over year. Healthcare was a bright spot in the quarter delivering top line growth of 3%. The team continued its success helping health systems adopt managed services and cloud solutions to better control expenses, and they delivered strong double-digit growth in services and cloud spend. Similar to corporate, NetCon storage and servers all declined meaningfully. Client was strong, up double digits for the second quarter in a row. Government declined 12% with both state and local and federal government performance below seasonal in the quarter. Market conditions were challenging for the federal team. Demand impact was felt most acutely in large hardware solutions deals, with federal posting double-digit declines in both Netcom and servers. Several agencies moved ahead with refresh, and for the third quarter in a row, client devices increased by double digits. Cloud Solutions posted a double-digit increase in cloud gross profit. State and local sales declined by low double digits. Delays due to increased scrutiny and multiple approvals impacted large infrastructure hardware deals, with Netcom, storage, and servers all posting significant declines. Security remained a top priority, posting a strong double-digit increase in gross profit. Services performance was strong, up high double digits, driven by professional services. Education sales declined 5%. Higher ed's top line declined high single digits, client devices were flat, and slow project materialization and budget constraints and cutbacks at some public universities contributed to double-digit declines in netcoms and servers. The team's success helping institutions implement cloud solutions to drive cost elasticity delivered double-digit growth in cloud spend and gross profit. K-12 net sales declined by low single digits, largely driven by declines in audio, visual, and net comp as school systems digested investments made over the past few years. The team continued to help refresh aging Chromebooks and delivered high-teens client device growth. Cloud delivered double-digit gross profit growth. Services adoption was also up double digits, driven by our managed client device lifecycle solution, which streamlines the configuration, deployment, management, and refresh process so school systems can focus on what really matters, their students. Other are combined UK and Canada business performed above our expectations, up 5%. Both markets experienced stronger demand, albeit off depressed results in the prior year and prior quarter. Both the UK and Canada increased by similar amounts in local currency. As you can see, end market performance was mixed during the quarter. Let's take a look at how this translated to category performance. Portfolio performance reflected our ability to meet customers where and how they wanted, with client device, cloud and software, and services growth. Growth that was more than offset by hardware solutions decline. A low single digit increase in transactions was more than offset by solution sales decreases of double digits. Hardware decreased 7%. High single digit client device growth was more than offset by declines in netcom, storage, and servers. Software increased 3.5% with healthy gross profit growth. Cloud was an important driver of this performance, up double digits in gross profit. Services increased by 13%, driven by managed services and warranties. As you can see, while demand varied, the diversity and completeness of our portfolio enables us to meet our customers where and how they need us. And that brings us to our expectations for the rest of the year. Given current conditions, we do not anticipate market demand to improve for the balance of the year, and we now look for the US IT market to be roughly flat with 2023. We expect our results to continue to reflect the market and CDW specific dynamics I referenced, with gross profit growth challenged, given our mix of hardware and the pronounced cyclicality the market is experiencing. As we always do, we will provide our view on 2025 market conditions in our next call. There's no denying that we are operating in a tough environment, but we are confident that growth will return. The demand drivers are there. Workload expansion and data explosion, increased security threats, client device obsolescence, and adoption of AI-powered assistance and applications. And when demand picks up, we will be there to profitably capture these opportunities. In the meantime, we are doubling our efforts to drive profitable growth. While this past year has been challenging for us, it has also been challenging for our customers. As their trusted advisor, customers need us now more than ever. Our relationships are bolstered by our commitment to deliver value to our customers regardless of the demand environment. Now let me turn it over to Al, who will provide more detail on our financials and outlook.

Thank you, Chris, and good morning, everyone. I will start my prepared remarks with details on our third quarter performance, move to capital allocation priorities, and then finish with our updated 2024 outlook. Third quarter gross profit of $1.2 billion was down 2.2% versus the prior year. This was below our original expectations of low single-digit growth as strength in cloud and client devices across most channels was offset by lower demand for solutions hardware. Gross margin of 21.8% was flat year-over-year and quarter-over-quarter and broadly in line with both full-year 2023 levels and our expectations for 2024. Third quarter margin was aided by a higher mix into sales where CDW acts as agent, also known as netted down revenues. This category grew by 7.1% on a reported basis, once again outpacing overall net sales growth and representing 35.7% of our gross profit compared to 32.6% in the prior year third quarter. Year-over-year expansion came from our teams continuing to successfully serve customers with cloud, and SaaS-based solutions. This led to our highest quarterly netted down revenues we've seen as a company as we met customers where they needed us most. The netted down category of solutions continues to represent an important and durable trend within our business. Third quarter gross profit was up 1.5% sequentially compared to the second quarter of 2024 on a reported basis. Net sales were up 1.7% sequentially as well. Higher year-over-year demand in the healthcare and international channels, alongside a sequential increase in government, drove growth over the second quarter. However, this growth is below both historic seasonal levels and our own expectations as the firmer footing in the corporate space that we saw at the end of the second quarter did not persist through the later months of the third quarter. We experienced deals getting pushed out and downsized as customers deliberated on where and when to spend and primarily in the solution space. While international outpaced the US business in the third quarter, we still expect volatility in this space as customers face economic and political uncertainty. Overall, we're competing in a challenging low growth environment and we are focused on achieving profitable growth. We acknowledge that we have work to do to better calibrate market conditions and deliver on our own expectations. Turning to expenses for the second quarter. Non-GAAP SG&A totaled $667 million, down 0.7% year-over-year. Expenses were down year-over-year and quarter-over-quarter, and the efficiency ratio of non-GAAP SG&A to gross profit of 55.5% was relatively in line with our expectations. We continue to look to align our cost structure with demand and have taken actions early in the fourth quarter to better align expenses to market conditions. Coworker count at the end of the third quarter was approximately 15,400, up slightly over the second quarter and modestly above year end. Customer-facing coworker count was also up slightly at approximately 11,200. Our goal is to balance growth and exceptional customer experience with greater efficiency and cost leverage from our broader operations. Non-GAAP operating income totaled $534 million, down 4% versus the prior year, driven by our volume shortfall offset by slightly lower expenses year-over-year. Non-GAAP operating income margin of 9.7%, but down from 9.9% in the prior year, but up from 9.4% in the second quarter. Our non-GAAP net income of $355 million in the quarter, down 3.9% on a year-over-year basis. With third quarter weighted average diluted shares of 134.9 million, Non-GAAP net income per diluted share was $2.63. Moving ahead to the balance sheet. At period end, net debt was roughly $4.9 billion. Net debt is down $91 million from the second quarter and has decreased by approximately $184 million since year-end 2023. During the quarter, we issued $600 million of 2030 senior notes and $600 million of 2034 senior notes. we issued the combined $1.2 billion to settle the tender offers of both the 2024 and 2025 senior notes and for general corporate purposes that will maximize strategic flexibility. Since Q3 end, we have fully redeemed the 2024 notes. Equity remains strong with cash plus revolver availability of approximately $2.2 billion. The three-month average cash conversion cycle was 17 days up two days from the prior year and at the lower end of our targeted range of high teens to low 20s. This cash conversion reflects our effective management of working capital, including active management of our inventory levels. As we've mentioned in the past, timing and marketing dynamics will influence working capital on any given quarter or year. We continue to believe our target cash conversion range remains the best guidepost for modeling working capital longer term. Adjusted free cash flow was $261 million in the quarter, roughly consistent with our expectations. Year to date, adjusted free cash flow was a healthy $764 million and 80% of our non-GAF net income within our stated rule of thumb of 80 to 90% non-GAF net income. We are on track to meet our 2024 objectives. For the quarter, we utilized cash consistent with our 2024 capital allocation objectives, including returning approximately $100 million in share repurchases and $83 million in the form of dividends. We remain committed to our target to return 50 to 75% of adjusted free cash flow to shareholders via the dividend and share repurchases in 2024. That brings me to our capital allocation priorities. Our first capital priority is increase the dividend in line with our non-GAAP net income growth. We're announcing an approximate 1% increase of our dividend to $2.50 annually, our 11th consecutive year of increasing the dividend. We will continue to prudently manage our dividend with respect to the growth environment and target a roughly 25% payout ratio of non-GAAP net income going forward. Our second priority is to have the right capital structure in place. We ended the third quarter at 2.3 times net leverage within our targeted range of two to three times. We will continue to proactively manage liquidity while maintaining flexibility as evidenced by our recent debt financings. Finally, our third and fourth capital allocation priorities of M&A and shared purchases remain important drivers of shareholder value. We continually evaluate opportunities that could accelerate our three-part strategy for growth. Year to date, we've utilized over $350 million of cash on share repurchases and have over $730 million of authorization remaining under our current share repurchase program. And that leads us to our outlook. The uncertain market conditions we operated under throughout 2023 have persisted well into 2024. Demand has been below what we originally anticipated, and customer sentiment remains cautious across the majority of end markets. Last quarter, we spoke about the slow start to the year for 2024 IT spending and shared our expectations for tough conditions to persist in the near term. That was the case and was moderately worse than we even expected in the third quarter. Customers still have a compelling need to address priorities such as cloud workload growth, increasing security threats, aging client devices, but uncertain macroeconomic conditions and a complex technology landscape continue to weigh on customer demand for solutions hardware. Given these conditions, our updated 2024 expectation is for a low single-digit gross profit decline. This implies seasonality slightly below historical levels for the fourth quarter and second half gross profit at net sales. We maintain our expectation for 2024 gross margin to be similar to the full year 2023 and much like we've seen year to date in 2024. Finally, we expect our full year non-GAAP earnings per diluted share to be down mid single digits year over year. Please remember, we hold ourselves accountable for delivering our financial outlook on a full year constant currency basis. Moving to modeling thoughts for the fourth quarter. we anticipate low to mid single digit gross profit declines compared to the prior year, with gross margins slightly above the first three quarters of 2024, but below the fourth quarter 2023 level. This leads to a slightly worse than seasonal sequential fourth quarter. Traditionally, the fourth quarter is meaningfully lower than the third quarter, principally due to seasonally lower demand from education and government customers. But this first fourth quarter We also do not anticipate this being offset by seasonally strong demand from corporate and small business customers. Moving down the P&L, we expect fourth quarter operating expenses to be similar to the level of fourth quarter of 2023 on a dollar basis. Finally, we expect fourth quarter non-GAAP earnings per diluted share to decline in the high single digit range year over year. That concludes the financial summary. As always, we'll provide up updated views on the macro environment and our business on our future earnings calls. And with that, I will ask the operator to open it for questions. We ask each of you to limit your questions to one with a brief follow-up. Thank you.

Thank you. We're now allowed to open the lines for Q&A. If you would like to ask a question, please press star followed by one on your telephone keypad. And to remove yourself from that line of questioning, it is star followed by two. Our first question, excuse me, our first question comes from Adam Tindall of Raymond James. Adam, your line is now open.

Okay, thanks and good morning. I just wanted to start, you know, as we analyze this quarter, understand, you know, a tough macro to predict volumes, but I really wanted to ask about the negative operating leverage down the P&L. And taking a step back, I think what investors really like about CDW is the variable cost model and ability to kind of flex up and down the volumes. Understand some of the rationale and the prepared remarks that this seems to be a pattern for the past few quarters. So I guess the question would be twofold. One for Chris, if you could maybe just assess what is changing and why the negative drop through is increasingly severe down the P&L. Sounds like you decided to implement some restructuring, so maybe you can tie in some of the rationale for that. And then secondly, for Al, on that restructuring, if you could just help us with the size and what it does to the model in 2025, I think it's about a 10 to 15% of head count based on the reports that we've seen. So just trying to right-size how we should think about OpEx moving forward. Thank you.

Yeah, Adam. Actually, this is Al. I will start just to give you a little bit of commentary on the quarter and operating leverage, and I'll let Chris jump in. thereafter. So first, on the quarter first, I would just say, Adam, we continue to hold strongly to our variable cost model and the impact therein. For the quarter, if you actually look at our non-GAAP SG&A expenses relative to GP, we came in just about at that 55% range, which we've talked about that being kind of the the target that we would have. It's maybe slightly higher than we would have anticipated for the quarter, but that was more of a, I'll call it denominator factor. That is the GP was lower than expected. So in the quarter, we did get the movement in our variable expenses as we would expect. I think the challenge there otherwise, Adam, is that we have a fixed cost base. And while the demand environment has moved pretty dramatically. We certainly have taken action on our fixed cost to try to align with what we were seeing in current demand and what we were seeing as we go forward. It becomes a matter of just the timing therein on that fixed cost base. That said, as you know, going into the fourth quarter, we did take some actions that would reduce our fixed cost base, and that included reduction in our workforce Just to size that for you, Adam, it was about 2% of our workforce, so it was not at the level that you quoted there, but certainly that would align us more closely with where we think we need to be from a fixed cost-based perspective.

Yeah, and Adam, I would just add that we're being very prudent as we look at where we right-size the business while we continue to invest behind areas that we see fully pockets of growth So, a lot of focus on the demand environment, preserving profitability, and also delivering exceptional customer experience for our teams.

Got it. Thank you. Just a quick clarification since I know that was a long one. When you were talking about the increased pricing intensity and competition, just to clarify, higher competition between VARs or is that higher competition in pricing amongst the OEM vendors? Thanks.

Yeah, Adam, it's a little of both. It's a little of both.

Thank you. Our next question comes from David Vogt of UPS. David, your line is not open.

Great. Thanks guys for taking the question and maybe one for Chris to start. So Chris, I think I heard in your prepared remarks that you'd expect sort of the US market to be flat in 2024. And yet you're confident that you can continue to outgrow it, but obviously the macro has been tough and it looks like you're going to undergrow the market this year. Did I hear that correctly? And how should we think about, you know, what that means going forward? I know you're not giving 2025 guidance, but I think that's a little bit disappointing relative to where investors might've been thinking. Given the challenging backdrop, is it just really a reflection of where the hardware solutions are ending up? And then along those lines, you know, we're hearing from some of our techs that, you know, networking and even to a lesser degree storage and servers getting a little bit better. Maybe what are you seeing a little bit differently than maybe what we're picking up and what others are maybe communicating in the marketplace? Thank you.

Yeah, let me just start with the market share. That was the beginning of the question. Look, we continue to hold ourselves accountable for delivering a premium to the IT market rate of growth. And looking at this year and this quarter, given the low hardware demand and taking into account our mix, I'd say we're holding serve. and feeling very confident that we've performed extremely well in certain areas, take cloud, software as a service, services as an example. But other areas have been challenged for us. And, you know, our view is that hardware will come back. It's a matter of when will that inflection point take place and we'll be well positioned to help our customers in those circumstances. You asked specifically about networking and storage. Look, what we are seeing is we're seeing traction in clients. And I wouldn't yet call it the inflection point, but we do think we're outperforming in that area. Data center has really been the area where customers have paused, have moved spend to the cloud, and are taking longer times to make decisions. That means we're seeing storage, networking, and servers all quite muted. But once we see the client refresh start, one would expect to see data center begin to pick up again. As I said before, you know, the catalysts are all there. Explosion in data, the need for, you know, massive bandwidth for networking, digital transformation isn't going anywhere. Security continues to get, you know, more and more focused. So the catalysts for growth are all there. I think we just got to get to the other side of the the uncertainty that we sit in. And certainly after we get through the election, there'll be a little more certainty.

And David, maybe I'll just add a couple data points there.

Oh, sorry, go ahead, Al.

It's okay, just add a couple data points there. So obviously, all of those categories Chris mentioned in the solution space have been softer. We also have the tough comps from a net comp perspective. Q3 is the last quarter with those tough comps. So while we would not say that demand is picking up meaningfully on net comp, at least the comps get a bit easier. And then the other data point I would just give you is from our vantage point, just hardware overall, we've now seen eight quarters of declines on hardware. And so, again, Chris noted some of the catalysts we think ultimately will play out, we've seen a pretty prolonged period of hardware cyclicality.

Great. And just as a quick follow-up, so when we think about looking at the recovery or the potential recovery or the timing of the recovery, I know you're not giving 25 outlook, but what are some of the milestones that you're looking at that gives you increased confidence heading into 25? I know obviously the election's coming up and hopefully that kind of changes maybe customer conversations. Anything else sort of maybe at a high level that you're thinking about in your conversations that give you some degree of maybe a leading edge or leading indicator in terms of what you're thinking about for 2025?

Yeah, you know, I think about the things that are creating the current environment and whether or not those change. So uncertainty around the economic environment and geopolitical will have an impact. Obviously, the elections Uh, policy outcomes of the election are going to be very different that that will have an impact most likely. Um, those are the things that are at the forefront of our mind, how the economy is doing, frankly, how it's perceived to be doing going to be doing in the future. And the volatility across the world are the 2 things that we look at most closely. Now, the complexity and it is not going anywhere. So the. Uh, the requirement now to have more business and it leaders involved in decision making, you know, it's our new norm is a kind of longer decision cycles for these larger complex projects. And so we're, we're getting used to that, but we don't see that going away anytime soon. That's what we focus on.

Great Thank you guys. Thank you. Thank you very much. Our next question comes from Eric Woodring of Morgan Stanley. Eric, your line is now open.

Great. Thank you so much for taking my questions. I have two as well. Chris, if we can just go back to some of your comments on product demand. You know, obviously lots of commentary about challenges in infrastructure solutions, double-digit declines with many customers across Netcom servers and storage. I just want to make sure I understand, are those rates of declines that you're referencing reflective of the broader market? Or are you seeing those declines simply because you are walking away from some lower profitability deals and therefore you are underperforming in those specific end markets? And maybe at the end market, they aren't declining nearly as much as maybe you're seeing. I'd just love to get a better understanding of this is kind of CBW's view or if this is the broader market view. And then I just have a follow up. Thanks.

Yeah, sure. I would say it is a broader market view, possibly tempered a bit by CDW not racing to the bottom because we are walking away from economic deals. It's important to protect profitability, et cetera. So I would say it's a bit of both. I would say it is market and consistent with market, but also we are not racing to the bottom.

Okay. All right. That's helpful. And then... Maybe just on the second question, I'd love if you could maybe elaborate a bit on the market competition comments because you're highlighting market competition, which I can't necessarily remember you citing explicitly before. And to be fair, you guys have encountered several challenging and competitive market environments in the history of the company and still managed to survive. materially outperform peers over those years. And so maybe my question is just what has changed with competition that is new and really why would that competitive intensity ever go away even in a period of stronger demand? Thanks so much.

Yeah, you know, it's a great question and we do reflect on that. We are used to highly competitive environments. What I would say we're feeling right now and this quarter and the past couple of quarters in particular is is irrational pricing. And we know how to compete in the market, but we are seeing deals at the low margin, low margin, et cetera, and that just is not our business model. The last time I saw intensity in pricing like this was years ago. So it is a little bit more unique over the last couple of quarters, and we're we're very good with our discipline around financial. So we're holding firm. That's really the answer here. It's a little unique over the last couple of quarters. We've seen it really tick up.

And just to clarify, that is a rational pricing from VARs, from DISCs, or from both?

I would say it's up and down the value chain. So competitors who are value-added resellers, direct competitors, distributors I wouldn't perceive in that chain as much. Okay. Thank you so much, Chris. Yeah. The behaviors that are going on, every competitor is feeling the elongation in the sales cycle, the chunking up agreements to make them smaller, the deferrals, reductions, the different ways they want to go at saving money or deferring spending, short-term ROIs. That is a market dynamic right now that everybody is feeling.

Thank you, Chris.

Thank you. As a reminder, if you would like to raise a question, please press star followed by 1 on your telephone keypad. And to remove yourself from that line of questioning, it is star followed by 2. Our next question comes from Amit Tharyani of Evercore. Your line is now open.

Good morning. I have two as well. Chris, just to conclude this discussion you had, you folks are on track to have two years of consecutive gross profit declines at the company. And it's something you haven't seen at CDW, I think, historically, even if I go back to 03, 04 or 07, 08 timeframes. I understand all the macros that you're talking about, but It feels like the way CDW is navigating this macro uncertainty while it's literally is worse than what you've seen before. And why do you think that's happening and what's changed perhaps in the company that, you know, you've had multiple years of gross property clients, which frankly you haven't had in Starclay.

Yeah, fair question. I'll tell you, we're a company in transformation and we have been in transformation for several years now. So when you think about the CDW, CDW specific factors I mentioned, they have been having a real impact on results, amplified by the muted hardware demand environment. So if we just think about the third one I mentioned, which is our cloud and SaaS business, we've been investing behind that business and have grown incredibly rapidly over the last five years. All of our acquisitions have had a cloud services hook to them. Nonetheless, given the full portfolio that we have, We have not yet attained the scale that we want to be at relative to the full portfolio. So when hardware is muted, it now has even more of an outsized impact because of the secular movement towards cloud. And we're growing that, but we still have a very high mix of hardware. The other thing is the strategic investments that we've made over the year have been incredibly fruitful in developing broader and deeper strategic capabilities so that we can deliver Full stack full outcomes projects these now we're seeing at much larger higher dollar tier levels and those are the kinds of projects that are lumpy. We used to talk about this with our federal contracts all the time. The very big deals become lumpier and depending on when decisions are made, they can get deferred. They can move around the size can change and therefore it can impact results. And we saw that it was commercial and federal this quarter. And, you know, the last one is what I just talked about in the prior question, which is our financial discipline. We're going to continue to maintain our gross margin discipline as we move forward, and we've hit a couple of quarters where we're seeing behavior that is extreme, pricing behavior that's extreme. So I just, Amit, I say it is a combination of our strategic investments that are working, incredibly well vis-a-vis value to the customer and growth and fast-growing high-relevance areas in an environment where hardware has been and continues to be muted on a persistent basis. It's a bit of a double whammy for us. But I'm confident in the growth that hardware turns around. Go ahead, Amit.

No, I'll let you finish.

No, I was just going to say a growth. Go on.

I was going to say, Chris, would this be fair to say that as growth resumes, presumably in 25, that you should start to see gross profit dollars increase back to the way it normally does it? You know, it would be a fair way to think about it. And then maybe my clarification was going to be, you know, we've heard from Cisco and Microsoft, some of your bigger vendors, and how they're changing their channel pricing and the channel strategy for 2025. Do you see that being a bit of a driver for you as you think about your growth, especially the agent sales piece of the business into next year and beyond?

Yeah, if I think about the changes, you know, I think about investing behind our cloud business and really the cloud flywheel where we are delivering a seamless experience from professional managed services to consumption and transaction-based services to managed services around the cloud. And by doing that, delivering higher value to our customers, but that's precisely aligned with what our vendors, the CSPs, the Cisco's of the world, exactly aligned with what they're incenting and what they want. So we think we're well positioned and that will be a positive benefit for us as we move into 2025 and beyond because it aligns with our strategy and our value that we can deliver to customers. And frankly, it drives, because of the services wraparound, it drives better economics for CDW and a stickier relationship with the customer.

Thank you very much. Thank you very much. Our next question comes from Matt Sharon at Stifel. Matt, your line is now open.

Yes, thank you. Good morning, everyone. Just another question regarding the comments on client device growth. I think you said mid-single-digit growth, but it sounds like that was skewed more toward the public markets and not so much corporate and SMB. And you talked about macro. Is the... for AI PCs? Is that another reason why we're seeing that push out? And are you seeing any kind of growth in corporate SMB versus enterprise there?

Yeah, Matt, thanks for the question. On the client side, we're actually seeing we're seeing growth across almost all of the end markets. Corporate was, we saw growth in corporate. It's small business is where we are seeing our customers kind of in a cash preservation mode and so pushing off the client device. But we really have seen a nice pickup in clients across almost all the end markets. So that's been positive.

Yeah, Matt, I'll just add the what has been driving it has been more refresh of aging fleets and need for customers to get on with this activity. It's been less in the way of Win11 drivers and less in the way of AI PCs.

So next year, if AI PCs do come on board, that will be another nice accelerant for PC refresh.

Okay, great. Thank you. And then relative to your guidance on gross margin, Al, for Q4, which is down year over year and you had a big bump last year. Is that because you're expecting sort of a lower percentage of the advanced hardware solutions, which carries a higher margins or services? What are the other reasons behind that?

Yeah, great question, Matt. It anticipates that we'll continue to see softness in the solution side of the business, which comes at moderately higher gross margins. It assumes that client will continue to tick along, not in an outsized way, but that client would continue to move along. And then we would expect that we would get your typical pickup in more of the netted down revenues in the fourth quarter. I'll just note the delta versus Q4 of 2023 is that maybe a little bit modest pick there on the netted down revenues versus last year because it was quite outsized at the end of the year.

Okay, thank you. You're welcome. Thank you. Our next question comes from Keith Housen of North Coast Research. Keith, your line is now open.

Thank you. Two questions as well, if I could. You know, Chris, just trying to reconcile something here. You know, CW has always taught itself as being a relationship-driven company, providing value for its customers. But yet we're hearing about transactional competition and losing deals that way. Perhaps can you break it out for us like how much of this is more transactional where people are just going with the lowest price versus how much of your business is really driven by that relationship and the value you provide?

I would say that when you look at our portfolio and the spectrum of our relationships with our customers, That over 90% of those relationships in those customers would tell you that they buy from CW because of the value we deliver the access to a full portfolio. The expertise at the expertise that we bring to bear the ease with which they can do business. The agility with which we deliver. That is what every customer says to me when I meet with them regarding the the pricing in the transaction issues. There are times when there are, you know, large rollouts, for example, where the economics just gets lower and lower and lower, and those are transaction purchases, don't typically have the value wrapped around, and those are the ones that we are less interested in pursuing.

Okay, appreciate it. And you talk about like the as a service model. I guess as I think about that, it's still about to be its infancy, but it's still going to grow as we go from here. So how much of a challenge or a headwind does that present to hardware sales as we kind of think about just the future?

I didn't hear the whole question. I'm sorry. I think I got it, Keith. Here's what I would say. Obviously, we've seen pronounced cyclicality in hardware, and that would typically be a pretty significant upfront spend. Think about that as kind of capex from us. customer's perspective. What we've seen kind of counteracting that in some respects is an increase in our netted down revenues, including SaaS and cloud. Now, Keith, historically, a lot of that business would be what we would call reoccurring, where we are both seeing that business up front and recognizing that up front. But I would say that over the last year or two, more of that business has been moving to a recurring nature. And that is where customers are more making judgments on what they want to spend on class, but they're consuming it as they go. And therefore, that shows up over time for us. Now, I wouldn't call that a material dollar amount at this point, but it is growing. And therefore, I would say that is part of the calculus of kind of the air pocket when you have pronounced cyclicality of hardware and more business that starts to come on as we go. Certainly as we continue to grow that sector and that category, we'll report more on kind of that split in details with respect to reoccurring business versus recurring. Hopefully that's helpful.

Yep, thank you.

Thank you very much. Our next question comes from Samik Chatterjee of JPMorgan. Samik, your line is now open.

Hi. Thank you for taking my questions. I guess if I can start with one, Chris, you mentioned in your prepared remarks and in some of the responses as well, the exposure to large projects that you have on account of the capabilities that you've invested in over the years. I mean, as you outlined some actions you're taking on the cost structure side, but as you look at the business and the lumpiness that that drives in terms of exposure to large projects, are there any changes you're contemplating on that side in balancing out the business between larger projects or transactions versus do you still believe that's the right sort of balance or margin mix to have in the portfolio and really just wait for the market to come back on that front? And I have a follow-up. Thank you.

Yeah, the way I'd answer that question is kind of yes and yes. In other words, we do have actions underway. Look, we're looking at this quarter in 2025 as an opportunity to accelerate the most important parts of our strategy that we've been working on for several years. But one of them, for example, would be our digital work. We've done a lot of foundational work in digital, and we just need to go faster. And that really means aligning our digital capabilities and our people to deliver personalized recommendations that match how customers want to buy, plan, consume, and manage their assets. So think about this in terms of large deals and perhaps smaller deals as an intersection of our sales professionals moving up a value chain and being available to learn and enabled by digital tools to sell at the highest point of the value chain while creating a seamless digital experience for our customers, a flywheel, if you will, so that we can deliver both velocity in that digital flywheel and serve customers how they'd like to be served, self-serve, et cetera, and value with our account managers and sales professionals working together. So that's one area as an example where our intention is to drive velocity and deals at all sizes, lower tier levels, while we continue to build engagements at high value, high levels.

Got it. And thank you for that. Quickly, for my clarification question, I know you mentioned the election-related uncertainty and some of the slower spend on the public sector federal side as well. I mean, we've seen elections in the past as well. Have you had instances or are you looking at any scenarios in which you do end up getting like a budget flush post the election outcomes? Are there any sort of scenarios or any indications of that happening in the fourth quarter? Thank you.

Yeah, hard to tell. I would say this election cycle, I wouldn't, I would say there's nothing really normal about it. So hard to tell. I mean, right now what's happening with the federal government is we've got the knock-on effects from the delayed budget previously. And now we've got, while we saw strong spending in Department of Defense, we're seeing less than we'd hoped because they're waiting to see what the administration's priorities are. So we, right now, we just see the federal government paused. One would hope we'll have some more clarity post election, but then the timing comes down to Congress and the president and getting a budget passed.

Maybe I'll just add on the back in there. Obviously, we play all of the different scenarios and how things could play out when we look at the quarterly outlooks. I would say our Q4 outlook has the appropriate level of caution baked into it based on all the factors that we've talked about, the external factors CDW-specific, and certainly that would include any political uncertainty.

Got it. Thank you. Thanks for taking the questions. Thank you.

Thank you very much. We currently have no further questions, so I'd like to hand back to Chris Leahy, Chair and CEO, for closing remarks.

Okay, thank you, operator. Let me close by recognizing the incredible dedication and hard work of our 15,000 coworkers around the globe. It's their ongoing commitment to our customers in this challenging environment that makes us successful over the long term. Thank you to our customers for the privilege and opportunity to help you achieve your goals, and thank you to those listening for your time and continued interest in CAW. Al and I look forward to talking to you next quarter.

As we conclude today's call, we would like to thank everyone for joining. You may now disconnect your lines.