CDW CEO: Economic Woes Drag Down Commercial Hardware Business

CDW CEO Thomas Richards said sales to mid-size and large corporate customers declined in the third quarter as an anticipated boost in U.S. IT spending failed to materialize.

The Lincolnshire, Ill.-based company, No. 5 on the CRN Solution Provider 500, experienced a decline in storage and networking sales as customers either delayed their refresh due to the sluggish economy or examined new, off-premise technologies, Richards said.

"When there's a tough economic environment, people tend to get really competitive trying to grab top-line revenue growth, and it pressures ASPs [average selling prices]," Richards said. "You have to be really thoughtful. You can't just chase top-line growth because it will have an impact on your business."

[RELATED: CDW Growth Surge Helped By Education, Government Business]

CDW's small business customers, though, have been more open to cloud-based solutions, Richards said, thanks to the flexibility, level of service, and ability to manage on the consumption basis it provides. Richards said CDW's small business customers have able to make the pivot to cloud services faster than their larger counterparts due to a shorter decision cycle.

Cloud and security are CDW's two fastest-growing practice areas, Richards said, delivering year-over-year growth of 40 percent and 30 percent, respectively. CDW has invested heavily in online quoting and ordering capability for cloud and other subscription services, Richards said, as well as advisory, architectural and managed services across several product areas.

Services and software led the way for CDW in the quarter ended Sept. 30, Richards said, with security services driving 12 percent growth in the former and network management and security software driving 9 percent growth in the later.

Although hardware sales only grew by 4 percent in the most recent quarter, Richards said he expects the business to rebound in future quarters thanks in part to growth in the converged and hyper-converged infrastructure space.

CDW saw overall sales in the most recent quarter grew to $3.71 billion, up 5.9 percent from $3.5 billion last year. That fell short of the consensus estimate of $3.76 billion, according to analysts polled by Seeking Alpha.

Net income fell to $125.9 million, or 88 cents a share, down 16.6 percent from $150.9 million, or 76 cents a share, a year ago. The drop was due to CDW's acquisition of the remaining 65 percent stake of Kelway, a U.K.-based solution provider, in August 2015.

On a non-GAAP basis, net income soared to $160.3 million, 97 cents a share, during the quarter, up 11.9 percent from $143.2 million, or 84 cents a share, a year ago. That beat Seeking Alpha estimates of 90 cents per share.

CDW's stock price slipped by 2.8 percent Wednesday, to $43.88 per share, following the quarterly results announcement before the market opened.

Sales for CDW's corporate business fell to $1.75 billion, down 0.9 percent from $1.76 billion a year ago.

Weaker spending in the manufacturing and oil and gas verticals impacted the medium and large business space, where CDW's sales fell by 1.8 percent from $1.49 billion last year to $1.46 billion this year. The softer demand resulted in lower selling prices in key hardware categories, with deals being done at no profit or for a slight loss, Richards said.

"The economy was indeed the wildcard, and it continued to impact buying behavior," Richards said. "I don't let us get too carried away with one quarter of great performance, or one quarter of bad performance."

Small business sales climbed by 4.1 percent from $274.1 million last year to $285.4 million this year, with transactional business up double-digits but solution sales declining. CDW's commercial customers of all sizes focused last quarter on easier-to-execute transactional products, Richards said, as the deployment of holistic solutions was often delayed due to economic concerns.

CDW's public sector revenue jumped by 10.6 percent from $1.48 billion last year to $1.64 billion this year, with robust growth across the solution provider's government, education and healthcare practices.

Education sales rose by 15.1 percent from $583.5 million last year to $671.4 million this year, with sales to K-12 schools leading the way, thanks to digital testing and digital curriculum requirements as well as inroads in the video equipment space. Networking equipment sales to K-12 schools were weaker, though, as eRate processing issues resulted in project approval delays.

Sales to the company's federal, state and local government customers grew by 8.8 percent from $493.9 million last year to $537.5 million this year thanks to concentrated spending at the end of the U.S. government's fiscal year, which concluded Sept. 30.

Healthcare segment sales picked up by 6.1 percent from $406.7 million last year to $431.7 million this year.