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. [Operator Instructions] 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 Miralles, 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 and Form 8-K we furnished to the SEC today and in the company's other filings with the 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 and Form 8-K. Please note, all references to growth rates or dollar amount changes in our remarks today are versus the comparable period in 2023 with 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 and 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 the third quarter were challenging. While demand for cloud solutions remained strong, and we continue 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 end markets, as well as spend from commercial customers. And finally,…

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 or CDW act 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 health care 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.…

Thank you. We'd now like to open the lines for Q&A. [Operator Instructions] Our first question, excuse me. Our first question comes from Adam Tindle of Raymond James. Adam, your line is now open.

Okay, thanks. And good morning. I just wanted to start, as we analyze this quarter, I understand 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 with volumes. I understand some of the rationale in the prepared remarks, but 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. It 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 headcount based on the reports that we've seen. So just trying to rightsize 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 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 a 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 base perspective.

Yeah. And Adam, I would just add that we're being very prudent as we look at where we rightsize the business while we continue to invest behind areas that we see will be 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're talking about the increased pricing intensity and competition, just to clarify, is that higher competition between VARs? Or is that higher competition in pricing amongst the OEM vendors? Thanks.

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

Thank you. Our next question comes from David Vogt of UBS. David, your line is now 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 U.S. IT 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 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 have 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, we're hearing from some of our checks that networking and even to a lesser degree, storage and servers is 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 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 pick up. 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 time 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, the catalysts are all there. Explosion in data, the need for massive bandwidth for networking, digital transformation isn't going anywhere. Security continues to get 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 uncertainty that we sit. And certainly, after we get through the election, there'll be a little more certainty.

And David, maybe I'll just add there.

And maybe just - sorry, go ahead, Al.

It's okay. Just to add a couple of data points there. So obviously, all of those categories, Chris mentioned in the solutions space have been softer. We also have the tough comps from a netcomm perspective. Q3 is the last quarter with those tough comps. So while we would not say that demand is picking up meaningfully on netcomm, 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 around 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 is 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 a leading indicator in terms of what you're thinking about for 2025?

Yeah. 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 election policy outcomes of the election are going to be very different. That will have an impact most likely. 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 two things that we look at most closely. Now the complexity in IT is not going anywhere. So the requirement now to have more business and IT leaders involved in decision-making. It's our new norm is kind of longer decision cycles for these larger complex projects. And so 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 Erik 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 could just go back to some of your comments on product demand. Obviously, lots of commentary about challenges in Infrastructure Solutions, double-digit declines with many customers across netcomm, 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 CDW'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 the 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 keep - 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 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. It's a great question, and we do reflect on that. We are used to highly competitive environment. What I would say we're feeling right now and this quarter and the past couple of quarters, in particular, is irrational pricing. And we know how to compete in the market, but we are seeing deals at below 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 has been a little bit more unique over the last couple of quarters, and we're very good with our discipline around financials. 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 rational pricing from VARs, from distis 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 as in that chain as much.

Okay. Thank you so much, Chris.

Yes, 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, the 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.

Understood. Thank you, Chris.

Thank you. [Operator Instructions] Our next question comes from Amit Daryanani of Evercore. Your line is now open.

Good morning. I have two as well. I guess, Chris, just to conclude this discussion you had, you folks are on track to have 2 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 time frame. I understand all the macros that you're talking about, but it feels like the way CDW is navigating this macro uncertainty volatility 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've had multiple years of gross profit declines, which frankly, you haven't had historically?

Yeah, Amit, 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 growing it incredibly rapidly over the last 5 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 kind 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 with commercial and federal this quarter. And 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'd say it is a combination of our strategic investments that are working incredibly well vis-à-vis value to the customer and growth in 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 as hardware turns around. Go ahead, Amit.

No, I'll let you finish.

No, I was just going to say...

You know, growth.

Go Amit.

I was going to say, Chris, would it 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? I think that would be a fair way to think about it. And then maybe my clarification was going to be, 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. As I think about the changes, I think about investing behind our cloud business and really the cloud flywheel where we are trying to - 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 are the CSPs, the Ciscos of the world exactly aligned with what they - 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. Our next question comes from Matt Sheerin of 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 expectation 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 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 client across almost all the end markets. So that's been positive.

Yeah. And 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 Win 11 drivers and less in the way of AI PCs.

So next year, as 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 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 solutions 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.

Got it. Okay. Thank you.

You're welcome.

Thank you. Our next question comes from Keith Housum of Northcoast Research. Keith, your line is now open.

Thank you. Two questions as well, if I could. Chris, just trying to reconcile something here. CDW has always tied 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 the business 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 and those customers would tell you that they buy from CDW because of the value we deliver, the access to a full portfolio, 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 pricing and the transaction issues, there are times when there are large rollouts, for example, that - where the economics just gets lower and lower and lower. And those are transaction purchases that don't typically have the value wrapped around, and those are the ones that we are less interested in pursuing.

Okay. Appreciate it. And then you talked about like the move to the as-a-service model. I guess as I think about that, it's still relatively in its infancy, but it's only going to grow as we go from here. So how much of, I guess, 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 pretty significant upfront spend. Think about that as kind of CapEx from a 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 upfront and recognizing that upfront. But I would say that over the last year or 2, 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 cloud, 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 in that category, we'll report more on kind of that split in details with respect to reoccurring business versus recurring. Hopefully, that's helpful.

Yeah. 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 - or 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 we - our intention is to drive velocity in deals at all sizes, lower-tier levels while we continue to build engagements at high value, high levels.

Okay. 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 the 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 in getting a budget passed.

And maybe, Samik, I'll just add on the back end 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, TDW specific, and certainly, that would include any political uncertainty.

Got it. 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 any 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 CDW. 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.