CDW CEO Leahy: AI, Security Were Major Customer Focus Areas

‘“While AI remains in early stages of commercialization and development and is not yet translating into meaningful customer spend, our full portfolio of security offerings contributed to a double-digit increase in security spend,’ said CDW Chairperson and CEO Christine Leahy on the company’s third fiscal quarter 2023 earnings call.

A drop in third fiscal quarter 2023 revenue but increases in GAAP and non-GAAP net income point to a CDW team that is executing extremely well under persistently challenging conditions, according to CDW Chairperson and CEO Christine Leahy.

That execution came despite a slowdown in transactional sales around client devices only partially mitigated by increased solution sales, and despite uncertainty in the federal government business side, Leahy Wednesday told analysts in her prepared remarks during the company’s quarterly financial analyst call.

It was a quarter of record profitability that underscores the power of CDW’s strategy underpinned by its resilient business model and financial rigor, Leahy said.

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“Commercial markets remained cautious, and conditions in international markets worsened,” Leahy said. “Public markets held firm.”

Vernon Hills, Ill.-based CDW is ranked No. 4 on CRN’s 2023 Solution Provider 500.

Customers maintained their laser focus on mission-critical priorities and optimizing costs, and CDW’s deep and broad portfolio helped it pivot to solutions that address such customer priorities as providing operating efficiencies and expense elasticity in modern hybrid and multi-cloud environments or usage-based solutions like SaaS and private cloud, Leahy said.

“In today’s environment where customers are closely scrutinizing their IT spend, our value as a trusted adviser is greater than ever before,” she said. “An adviser who helps customers cut through complexity and evaluate options. An adviser who designs, deploys, integrates and many times manages the solution.”

As CDW has executed its strategy, the per-customer spend has consistently grown faster than net sales, Leahy said.

“[This is] a dynamic that reflects both the success of our strategic investments and increasing customer preferences for cloud and SaaS-based solutions,” she said.

Leahy cited three main drivers of CDW’s performance in the third fiscal quarter.

The first is a balanced portfolio of end markets, including corporate, small business, health care, government and education, each of which is a meaningful business on its own, she said.

“These unique customer end markets often act counter-cyclically given the different macroeconomic and external factors that impact each,” she said. “You see the benefit of our balanced portfolio again this quarter with public performance partially mitigating declines in commercial.”

Commercial market conditions continue to weigh on customer confidence and drive cautious purchasing behavior so that instead of the expected modest improvement in hardware, CDW continued to experience pressure, particularly in client devices, Leahy said. However, she said, momentum continued around projects focused on increasing productivity, as well as projects focused on enhanced customer and co-worker experiences.

“With a shorter-term ROI lens, customers favored solutions enabled by cloud, which contributed to double-digit increases in corporate customer spend on cloud,” she said.

AI and security were also major customer focus areas, Leahy said.

“While AI remains in early stages of commercialization and development and is not yet translating into meaningful customer spend, our full portfolio of security offerings contributed to a double-digit increase in security spend,” she said.

Consistent with the second quarter, solution sales increased by low single digits while transactions declined by double digits, Leahy said.

“Focus on shorter-term ROI for mission-critical priorities drove double-digit spend in cloud and software,” she said. “Client devices continue to drive small-business top-line performance as refresh remained on the back burner and declines were on par with the second quarter.”

Public sales increased 1 percent year over year, with health-care and education sales each up 2 percent while government sales performance was flat, Leahy said. Government performed relatively in line with historical seasonality, with federal mid-single-digit growth offset by a mid-single-digit decline in state and local,” she said.

CDW’s second strategic advantage and performance driver is the company’s broad and deep portfolio, which enables it to pivot to address customers’ evolving needs, Leahy said. Similar to the second quarter, solution sales increased by mid single digits while transactions remained under pressure, down by high teens, she said. Hardware sales in particular declined by double digits, she said.

Cloud spend increased nearly 20 percent with increases across every end market, while security spend increased by double digits, with a significant portion being delivered via software and the cloud, Leahy said. Cloud and security success contributed to a mid-teens increase in software, she said.

“Solid managed and professional services growth was more than offset by the impact of continued drag through lower services attached to transactional and solutions hardware,” she said.

The third driver of CDW’s performance in the quarter was relentless execution of its growth strategy, a strategy Leahy said was centered on three pillars: capture share and acquire new customers, enhance capabilities in high-growth solution areas and expand services capabilities.

“In today’s uncertain macroenvironment, with customers increasingly reluctant to make big up-front capital investments, our ability to deliver the cost savings outcome of our ICARE [solutions-focused] framework is a major competitive advantage,” she said. “Armed with our consultative approach to problem-solving, the teams both identify and implement consumption-based solutions with lower up-front costs. Solutions that enable customers to move ahead with mission-critical projects. Solutions that deliver value to our customers and deepen customer relationships. Many of these solutions are enabled by our cloud ready assessments, enablement migration services, which are second to none in the industry.”

Following the prepared remarks, when an analyst asked why CDW’s assessment of customer client device demand is different than that of its peers, Leahy said CDW has not seen a pickup in activity around client devices.

“And as we know, that’s kind of the last place that our customers start to spend again once they’re feeling better about the business market,” she said. “But what I would say is we are certainly closer to the end of a downside than we are to the beginning. So that’s quite clear. The other point I would make is that consumer tends to react earlier to market changes than the commercial business. So when you see a bit of a lag in terms of what we are suggesting versus what you might see from OEMs, etc., a part of that is who is doing the buying.”

When asked by another analyst how CDW sees federal spending in the current quarter, Leahy said her company is used to issues such as the potential government shutdown.

“We’ve been here so many times before,” she said. “The team knows how to manage through both the uncertainty and if we do have a shutdown, how to manage through that. We’re past the [government] year-end, which is good. I would say that projects that are in flight already will stay in flight. There might be some projects that aren’t in flight that might be on hold. I’d say that’s really we’re looking at 2024. But the good news is we have a team that has executed in and out of these environments, I guess, sadly, in some regards, but in these environments many, many times.”

For its third fiscal quarter 2023, which ended Sept. 30, CDW reported revenue of $5.63 billion, down 9.4 percent from the $6.22 billion the company reported for its third fiscal quarter 2022.

This includes corporate sales of $2.23 billion, down 13.6 percent; small-business sales of $378.4 million, down 23.0 percent; public sales including government, education and health-care sales totaling $2.42 billion, down 0.1 percent; and other sales of $601.3 million, down 16.7 percent.

Total revenue missed analyst expectations by $220 million, according to Seeking Alpha.

CDW also reported GAAP net income of $315.5 million, or $2.32 per share, up from last year’s $297.8 million, or $2.17 per share. On a non-GAAP basis, the company reported net income of $556.3 million, or $2.72 per share, up from last year’s $549.0 million, or $2.60 per share.

Analysts had been expecting non-GAAP earnings of $2.59 per share, according to Seeking Alpha.