CDW (CDW) - 2023 Q3 - Earnings Call Transcript

Financial Data and Key Metrics - Net sales for the quarter were $5.6 billion, down 8% year-over-year [2] - Non-GAAP operating income reached a record$ 556 million, up 1% year-over-year [2] - Non-GAAP net income per share was $2.72, up 4% year-over-year [2] - Gross profit was$ 1.2 billion, with a record gross margin of 21.8%, up 200 basis points year-over-year [93][95] - Non-GAAP operating income margin reached a record 9.9%, up 110 basis points year-over-year [98] - Non-GAAP net income was $369 million, up 3.5% year-over-year [99] - Net debt was$ 5.3 billion, with a net leverage ratio of 2.4 times [101] Business Line Performance - Corporate net sales decreased 12%, driven by declines in client devices [9] - Small business net sales declined 22%, with a focus on cost management and shorter-term ROI [12][13] - Public sales increased 1% year-over-year, with healthcare and education each posting a 2% increase [14] - Healthcare net sales increased 2%, driven by cloud solutions and security spend [17][18] - Education net sales increased low single-digits, the first positive growth quarter in over eight quarters [20] - UK and Canada operations delivered $2.9 billion in 2022 sales, but declined mid-teens in Q3 2023 [24] Market Performance - Cloud spend increased nearly 20% across all end markets, with half coming from commercial customers and half from public [65] - Security spend increased by double digits, driven by software and cloud solutions [66] - Client device demand remained weak, particularly in the commercial space, with double-digit declines [64] - Network modernization led to double-digit growth in net comp performance [11] Strategy and Industry Competition - The company's strategy focuses on capturing market share, enhancing high-growth solutions, and expanding services capabilities [90] - Investments in cloud, security, and AI are driving customer spend, with cloud and SaaS-based solutions outpacing net sales growth [6][95] - The company is well-positioned to help customers with AI-enabled technology across the full stack, including client devices [52][53] - The company continues to outperform the IT market by 200 to 300 basis points on a customer spend basis [108] Management Commentary on Operating Environment and Future Outlook - The company expects the IT market to contract at the upper end of high single digits in 2023 [108] - Full-year non-GAAP operating income margin is expected to be in the low to mid-9% range, up from prior expectations [110] - Full-year non-GAAP earnings per share are expected to be flat to slightly up year-over-year in constant currency [111] - The company anticipates a mid-single-digit sequential decline in average daily sales from Q3 to Q4 [112] Other Important Information - The company returned$ 79 million to shareholders through dividends and $54 million in share repurchases in Q3 [104] - The company announced a 5% increase in its dividend, marking the 10th consecutive year of dividend growth [105] - Adjusted free cash flow for the year is expected to be approximately 6% of net sales, above prior expectations [113] Q&A Session Summary Question: Demand signals and backlog normalization [29] - The company noted that backlog is nearing normalization, with no significant impact expected [33] - Demand in international markets is worse than expected, with the UK and Canada a few quarters behind the US [32] Question: Federal spending and potential government shutdown [37] - The company is confident in managing through potential federal government shutdowns, with in-flight projects likely to continue [37] Question: Operating margin durability [38] - The company expects to continue driving efficiency while investing in its strategy, with potential dilution from transactional products and PC refreshes [41] Question: International market weakness [49] - The company saw a steep decline in international markets in Q3, with expectations for continued softness over the next few quarters [50] Question: AI-enabled PCs and upgrade cycles [51] - The company expects customers to get excited about AI-enabled client devices, but commercialization is still in early stages [51][54] Question: Share gains and M&A [56] - The company continues to take market share, with a delta of more than 5% in customer spend [57] - M&A remains a priority, with a focus on capabilities in cloud, security, and digital solutions [58][59] Question: Impact of netted down items on sales growth [74] - Netted down revenues are expected to outpace net sales growth, with a significant impact on gross profit margins [74][61] Question: Gross margin trends and cyclical vs structural factors [83] - The company expects a balance between transactional products and netted down revenues over time, with potential dilution in gross margins [84][86] Question: Protecting earnings in a muted environment [79] - The company will continue to drive efficiency while investing strategically, with operating leverage expected to vary by quarter [81][82]