CDW CEO: Challenging Demand, Federal Funding Become 2024 Headwinds

‘Cautious customer behavior once again elongated sales cycles, then drove prioritization of needs over wants and cost savings over expansion. Capital investment in complex solutions, particularly those tied to data center and network modernization, continued to be downsized or put on hold. And there was growing refresh activity in client devices,’ says CDW Chair and CEO Christine Leahy.

Cautious customer demand, especially from federal government clients, made the second fiscal quarter 2024 a challenging one for CDW.

Christine Leahy, chair and CEO of the Vernon Hills, Ill.-based global solution provider, Wednesday told attendees of CDW’s quarterly earnings conference call that second quarter market dynamics played out roughly as the company expected.

“Cautious customer behavior once again elongated sales cycles, then drove prioritization of needs over wants and cost savings over expansion,” Leahy said in her prepared remarks. “Capital investment in complex solutions, particularly those tied to data center and network modernization, continued to be downsized or put on hold. And there was growing refresh activity in client devices.”

CDW did not expect the two key end-market specific dynamics of a worsening of the U.K. environment and challenges related to federal funding, Leahy said.

“Within a limited demand environment, we continue to help our customers build out technology roadmaps, and our pipeline remains solid in the solution space,” she said. “Conversion remains challenging with uncertainty weighing on our customers’ appetite to spend.”

However, Leahy said, her team’s value as a trusted adviser and ability to deliver solutions that met customers’ most pressing priorities drove excellent performance across cloud, security, and services.

“Performance that contributed to strong profitability and cash flow,” she said. “Performance made possible by the strategic investments we have made over the past five years to bring full stack, full lifecycle solutions to our customers.”

Leahy said CDW has balanced portfolios and markets, including five key sales channels: corporate, small business, healthcare, government, and education. Each of those are meaningful businesses on their own, with 2023 annual sales ranging from $1.6 billion to $9 billion.

CDW’s corporate net sales declined 2 percent in the quarter over last year, with increases in cloud and security business as well as client device and storage sales being offset by server and netcomm (network communications) decreases, she said.

Small business net sales declined 3 percent, as persistent ongoing postponement of infrastructure investments in netcomm and servers and a slight decline in client device sales offset improvements in software and cloud solution revenue, Leahy said.

Public sales declined 2 percent in the quarter with mixed performance, Leahy said. Government decreased 6 percent as growth in state and local was more than offset by a decline in federal, she said.

“Federal results were further impacted by the delayed fiscal 2024 budget authorization as several key customers did not receive funding releases until late June, weeks later than expected,” she said. “These released funds increased processing delays from the normal gears of government as hardware and software orders require solicitation, competitive bids, and evaluation. We know that ongoing projects will eventually move forward, but some agencies may pause new projects as they await clarity around the next administration's priorities. In light of these layers of friction and uncertainty, we do not expect a federal catch up in the back half of 2024.

State and local government sales rose by mid-single digits, with security continuing to be a key performance driver, Leahy said.

“Client devices increased by mid-single digits both year-over-year and sequentially, while early state and local budget dollars are being allocated to improving citizens experience at state and municipal agencies, including enhanced AI-powered automated response and messaging platforms,” she said.

Healthcare sales were flat, with security remaining a key focus area, including security assessments for cloud migration and identity management, while a client device refresh led to double-digit growth in devices, she said.

CDW’s education sales declined by about 1 percent with K-12 top line remaining roughly flat year-over-year, with client device sales up by mid-single digits as school systems refreshed aged Chromebooks, Leahy said. Security and cloud remain top priorities, both delivering strong growth and gross profit, she said.

“Once again, collaboration hardware, primarily smart whiteboards and interactive flat panels, declined meaningfully,” she said. “Schools continue to digest significant purchases made over the past several years. With the sunsetting of ECS (education cost sharing) funds and upcoming deadlines for ESSER (elementary and secondary school emergency relief) funds of September 30, the team is focused on helping their customers pivot to refresh programs funded through traditional mechanisms.”

Higher education institution spending, meanwhile, remained focused on investments to enhance student experience to drive enrollment while doing more with less, she said.

CDW’s U.K. and Canadian operations declined 13 percent, Leahy said.

“The demand environment particularly in the U.K. worsened during the quarter as the early general election amplified already challenging conditions.,” she said. “U.K. sales declined high teens in US dollars and Canada declined 4 percent in US dollars. Given current conditions, we expect the U.K. market to remain volatile and under pressure through the back half of the year.”

CDW’s overall hardware sales decreased 5 percent in the quarter as high single-digit client device growth and mid-single digit storage growth was more than offset by meaningful declines in netcomm and collaboration, Leahy said. However, she said, software spend increased mid-single digits, services increased by 6 percent driven by cloud and security related services.

“Cloud was an important performance driver contributing, double-digit gross profit growth across software services and security, profitable growth that was enabled by the strategic investments both organic and acquired we've made in solutions and services capabilities over the past five years,” she said.

Looking Ahead

Leahy said CDW has lowered its expectations for the balance of the year.

“You will recall that on last quarter’s conference call, we shared our expectations for 2024 U.S. IT market growth in the low single digits, and our target to grow 200 to 300 basis points above market,” she said. “This factored in a modest improvement in demand conditions in the second half of the year. Given real-time feedback from our large and diverse customer base, we now expect current market conditions to persist throughout the year, not get worse, but not get better. Given the market’s slow start to the year without a second-half demand pickup, we now look for U.S. IT market growth towards the lower end of a low-single-digit range. We continue to maintain our target to grow 200 to 300 basis points above market.”

However, Leahy said, growth will return.

“The demand drivers are there: workload and data growth, increased security threats, client device obsolescence, and adoption of AI-powered assistance and applications,” she said. “But customers need greater clarity and confidence. Clarity around economic conditions and clarity around the impact of AI roadmaps, and confidence that investments made today will deliver the right foundations and economic returns in an AI-powered future. Improved demand conditions are a function of when, not if. Wildcards for the balance of 2024 include the potential of greater macro and geopolitical uncertainty, significant degradation of market conditions in the U.K., as well as unusual uncertainty in the U.S. election.”

CDW By The Numbers

For its fiscal second quarter 2024, which ended June 30, CDW reported revenue of $5.42 billion, down 3.6 percent from the $5.63 billion the company reported for its fiscal second quarter 2023. That missed analyst expectations by $10 million, according to Seeking Alpha.

This included corporate segment sales of $2.20 billion, down 2.2 percent; small business segment sales of $383 million, down 3.4 percent; public segment sales of $2.24 billion, down 2.3 percent lower driven by a 6.2-percent drop in government sales and a 0.9-percent drop in education sales; and U.K. and Canada sales of $602 million, down 12.7 percent.

CDW also reported GAAP net income of $281.1 million or $2.07 per share, up from last year’s $262.6 million or $1.92 per share. On a non-GAAP basis, CDW reported net income of $349.0 million or $2.50 per share, down from last year’s $349.0 million or $2.56 per share. Non-GAAP earnings per share missed analyst expectations by 3 cents per share, according to Seeking Alpha.

CDW's stock price closed Wednesday at $218.11 per share, down $14.36 per share or 6.2 percent over Tuesday’s close.