Thursday, February 15, 2024
HomeSportsCDW Company (NASDAQ:CDW) This autumn 2023 Profits Name Transcript

CDW Company (NASDAQ:CDW) This autumn 2023 Profits Name Transcript

CDW Company (NASDAQ:CDW) This autumn 2023 Profits Name Transcript February 7, 2024

CDW Company isn’t probably the most 30 most well liked shares amongst hedge finances on the finish of the 3rd quarter (see the main points right here).

Operator: Hi, and welcome to these days’s CDW Fourth Quarter 2023 Profits Name. My title is Jordan, and I will be coordinating your name. [Operator Instructions] I am now going at hand you over to Steve O’Brien, Investor Members of the family to start out. Steven, please pass forward.

Steve O’Brien: Thanks, Taylor. Just right morning, everybody. Becoming a member of me these days to check our fourth quarter and whole yr 2023 effects are Chris Leahy, our Chair and Leader Government Officer; and Al Miralles, our Leader Monetary Officer. Our fourth quarter and whole yr income unlock was once disbursed this morning and is to be had on our website online, investor.cdw.com, in conjunction with the supplemental slides that you’ll use to persist with alongside all the way through the decision. I might love to remind you that sure feedback made on this presentation are regarded as forward-looking statements beneath the Personal Securities Litigation Reform Act of 1995. The ones statements are topic to numerous dangers and uncertainties that might motive exact effects to vary materially.

Additional info relating to those dangers and uncertainties is contained within the income unlock and Shape 8-Okay we furnished to the SEC these days and within the corporate’s different filings with the SEC. CDW assumes no legal responsibility to replace the tips introduced all the way through this webcast. Our presentation additionally contains sure non-GAAP monetary measures, together with non-GAAP running source of revenue, non-GAAP running source of revenue margin, non-GAAP web source of revenue and non-GAAP income in keeping with proportion. All non-GAAP measures had been reconciled to essentially the most immediately similar GAAP measures based on SEC laws. You can in finding reconciliation charts within the slides for these days’s webcast and in our income unlock and Shape 8-Okay. Please be aware, all references to development charges or greenback quantity adjustments in our remarks these days are as opposed to the similar length in 2022 until another way indicated.

Replay of this webcast might be posted to our website online later these days. I wish to remind you that this convention name is the valuables of CDW and will not be recorded or rebroadcast with out particular written permission from the corporate. With that, let me flip the decision over to Chris.

Chris Leahy: Thanks, Steve. Just right morning, everybody. I will start our name with an summary of our fourth quarter and whole yr functionality and proportion some ideas on our strategic development and expectancies for 2024. Then I can hand it over to Al, who will take you via a extra detailed overview of the financials in addition to our capital allocation technique and outlook. We will transfer briefly via our ready remarks as all the time to make sure now we have a number of time for questions. Fourth quarter web gross sales have been $5 billion, 7.7% under 2022. Robust development and running source of revenue margins mitigated the have an effect on of top-line functionality on income, and we delivered gross benefit of $1.15 billion, 2% decrease year-over-year, non-GAAP running source of revenue of $519 million, 1% under prior yr, and non-GAAP web source of revenue in keeping with proportion of $2.50, up 3% year-over-year.

Our effects mirror constant, robust execution via the workforce, our monetary rigor, and our talent to ship answers and products and services around the complete existence cycle, complete stack. Effects delivered beneath asymmetric industrial and world marketplace prerequisites, which proceed to force wary visitor habits. Buyer priorities remained laser-focused on running potency and expense elasticity. Priorities more and more met via as-a-service and consumption-based answers like cloud and SaaS, in addition to nascent, ratable, on-premise answers. The workforce’s talent to pivot to handle those priorities drove very good functionality throughout answers, together with classes that repeatedly web down on a earnings foundation. The have an effect on of this achievement, mixed with ongoing softness in conventional {hardware} classes, led to additional drive on web gross sales.

When this occurs, we enjoy what we noticed this quarter, meaningfully dampened web gross sales development with very robust gross margins. This phenomenon was once no longer distinctive to the fourth quarter. Marketplace dynamics drove {hardware} deprioritization and choice for answers that web down all over 2023, and our web gross sales of $21 billion have been over $2 billion lower than 2022. However our muted peak strains, robust execution via the workforce underpinned via our complete stack, complete lifecycle, complete results, go-to-market way delivered flat, non-GAAP running source of revenue, a 1% building up in non-GAAP web source of revenue in keeping with proportion, and robust adjusted loose money waft of $1.4 billion. Results pushed via the strategic investments now we have made over the last 5 years to extend the worth we ship to our shoppers.

That’s the energy of our technique when mixed with our resilient industry fashion. 2023 was once a yr that really drive examined our technique. The fourth quarter is an exemplary instance of this inactivity. There have been 3 primary drivers of effects, our balanced portfolio of purchaser finish markets, breadth of our product answers and products and services portfolio, and constant execution of our three-part technique for development. First, the balanced portfolio of our various visitor finish markets. As , now we have 5 U.S. gross sales channels, company, small industry, healthcare, executive, and schooling. Every channel is a significant billion-dollar-plus industry by itself. Inside of each and every channel, groups are additional segmented to concentrate on visitor finish markets, together with geographies and verticals.

We even have our U.Okay. and Canadian operations, which in combination ship gross sales of US$2.6 billion. Continuously, our visitor finish markets carry out otherwise given macroeconomic or industry-specific headwinds or tailwinds. This quarter, all however one visitor finish marketplace skilled a decline in web gross sales. The benefit tale was once very other, with gross margin expanding throughout all visitor finish markets. Let’s check out the places and takes of the way each and every finish marketplace carried out within the quarter. Company web gross sales reduced 8%. Best-line functionality endured to mirror the have an effect on of each netting down and {hardware} drive. Momentum remained for tasks targeting expanding productiveness, in addition to tasks targeting enhanced visitor and co-worker reports.

The workforce’s talent to fulfill visitor call for for those priorities with as-a-service and ratable answers drove robust cloud functionality. 12 months-over-year consumer software declines moderated down mid-single digits in comparison to the double-digit declines of the primary 3 quarters. For netcomm, whilst community modernization stayed a peak precedence, shoppers targeting digesting investments made over the last few years, resulting in a long-expected backlog of normalization, and gross sales declined year-over-year. Small industry web gross sales declined 13%. Marketplace prerequisites have been in line with the primary 3 quarters of the yr, and visitor habits remained wary. Priorities remained squarely targeting value control and tasks that want to get completed. As soon as once more, tasks that have been extra introduced than wishes remained paused.

Buyer call for for tasks with shorter-term go back on funding drove very good functionality in cloud and in overall safety — overall instrument, excuse me. Safety remained a peak precedence, and the workforce delivered robust functionality throughout our extensive portfolio of {hardware}, instrument, and products and services safety choices. Very similar to company, small industry consumer software declines moderated within the quarter, down-high unmarried digits in comparison to the prior 3 quarters double-digit decline. Public gross sales reduced 4% year-over-year as executive’s mid-single-digit web gross sales building up was once greater than offset via declines throughout our different public-ed markets. The federal workforce delivered a double-digit web gross sales building up as they endured their achievement aiding businesses put in force extra environment friendly answers to control and give protection to knowledge.

This drove very good netcomm functionality up robust double digits. The workforce endured its efforts to assist businesses optimize their current cloud environments in addition to ship new cloud answers. The state and native workforce delivered a mid-single-digit building up. The workforce’s success-enabling cloud-based answers, particularly with funds constrained towns, delivered a triple-digit building up in cloud functionality. For the second one quarter in a row, the workforce delivered gross sales development in consumer units. Healthcare web gross sales reduced via 5%, augmenting skill wishes, modernizing knowledge facilities, riding value financial savings and potency tasks, all remained center of attention spaces for our shoppers. The workforce drove an important building up in cloud functionality. Enlargement pushed via their success-helping methods undertake deep cloud portfolio, which contains proprietary healthcare answers.

Our extensive portfolio of answers additionally contributed to safety development because the workforce helped shoppers deal with heightened cybersecurity wishes. Training web gross sales reduced via 12%, with Okay-12 posting a mid-single-digit decline and better ed down mid-teens. For Okay-12, the workforce endured their success-helping faculties and their efforts to maintain era beneficial properties of the previous a number of years. This delivered very good development in products and services and cloud, each posting double-digit beneficial properties, beneficial properties that have been offset via the mixed have an effect on of a double-digit decline in netcomm and low-single-digit decline in consumer software gross sales. The excessive ed workforce’s success-helping universities deal with industry procedure transformation efforts contributed to double-digit development in products and services and cloud.

Shopper units confirmed steadiness. Those encouraging tendencies have been greater than offset via declines in netcomm this quarter. Different are mixed UK and Canada industry, declined via 14%. Whilst the groups endured to execute effectively, marketplace prerequisites have been as anticipated, and gross sales in each the United Kingdom and Canada reduced via double digits in native foreign money. As soon as once more, our various finish markets contributed to our functionality amid an unsure and asymmetric setting. The second one driving force of functionality was once our extensive and deep portfolio. Let’s check out how each and every class carried out. The marketplace didn’t enjoy the stabilization in {hardware} we anticipated, and web gross sales of our {hardware} portfolio declined via high-single digits. This was once essentially pushed via double-digit year-over-year declines in netcomm because the normalization of backlog adversely impacted year-over-year development.

Shopper software functionality advanced sequentially with a low-single-digit decline. Tool visitor spend greater via high-single digits, however given the numerous portion of the class that nets down, web gross sales declined. Power was once broad-based throughout instrument as we endured to assist shoppers organize knowledge, toughen productiveness, and protected their IT environments. Enlargement was once specifically robust throughout safety, virtualization, and alertness suites. Cloud remained crucial driving force of functionality around the industry and was once a significant contributor to development’s benefit. Buyer spend greater throughout all finish markets, with more or less part a spend from industrial shoppers. Infrastructure as-a-service, productiveness, and safety have been the end 3 cloud workloads all the way through the length.

Safety stays peak of thoughts for our shoppers as cyber threats proceed to emerge, evolve and building up, and visitor spend greater via low-single digits. Our groups proceed to behavior vulnerability exams, put in force identification and get admission to control answers, and supply coaching to our shoppers to assist organize cloud deployments and toughen endpoint and alertness safety. Products and services was once a standout class this era, with double-digit will increase in skilled and controlled products and services. Integral to these days’s complicated era answers, shoppers proceed to lean into CDW as an extension of their very own groups and leverage our products and services features as a part of their methods. Our portfolio functionality ends up in the 3rd driving force of our effects this quarter, relentless execution of our development technique.

Core to our development technique, our purpose is to make bigger and toughen our answers and products and services features. Over the last 5 years, investments each biological and non-organic, together with 10 acquisitions, have strengthened our experience and sources in those two key spaces to strengthen our complete stack, complete existence cycle, complete results, go-to-market way. Investments that experience grown our features in high-growth complicated spaces like cloud migration and cyber safety, that experience enhanced features like complete stack and cloud-native instrument construction, DevOps engineering, powerful consulting, and cloud-based workflow automation, experience and sources, and investments that experience expanded our products and services footprint around the U.S. and Canada. As you’ll see, each and every funding we made is functional and delivers a particular capacity that furthers our technique.

A technique designed to make sure we evolve with the marketplace and repeatedly beef up our main place as relied on marketing consultant to our shoppers and supplier spouse of selection. Evolving with features that underpin our relevance and make sure we’re there for our shoppers these days and as new applied sciences come to marketplace. New applied sciences like synthetic intelligence. With its extraordinarily quick excessive cycle, our shoppers are more and more looking for alternatives to make use of AI to reach their targets. And whilst maximum shoppers are within the discovery section, some are already adopting AI with our assist. There is a nice instance. An industry-leading semiconductor and instrument fashion designer wanted coaching and construction for a domain-specific huge language fashion to strengthen a spread of inner use circumstances.

An IT Executive reviewing blueprints and schematics for a hardware solution.

An IT Government reviewing blueprints and schematics for a {hardware} answer.

The knowledge-intensive and extremely proprietary nature of the corporate’s designs and highbrow assets made the usage of a hyperscaler’s LLM and cloud-based compute and garage sources much less optimum. The CDW hybrid infrastructure workforce labored with the client to construct a customized platform that helps each coaching and inference workloads for generative AI. The workforce designed the underlying structure, which integrated a best-in-class 16-node supercomputer, with a high-performance parallel document gadget garage answer. The a hit set up and visitor handoff led to a multi-million-dollar {hardware} and instrument engagement and repair with alternative. With each utilization and use circumstances rising briefly, the corporate has engaged CDW to strengthen additional enlargement in their current infrastructure and to guage new answers.

Obviously, investments in our customer-centric development technique have increased our relevance to shoppers to the best possible stage it is ever been. Our targeted and disciplined execution of our technique continues to make us a very important era spouse, whether or not enabling visitor priorities that require excessive complicated or transactional answers. And that leads us to our 2024 outlook. The asymmetric marketplace prerequisites we skilled all over 2023 have endured into 2024. Buyer choices stay planned and restrained with ongoing tasks scrutiny, pursuit of temporary ROIs, and endured purchasing hesitancy, specifically round {hardware}. With this backdrop, we lately search for the U.S. IT marketplace to develop via low unmarried digits in 2024 on a visitor spend foundation, together with the expectancy of a sluggish begin to the yr, a view that comprises the prospective have an effect on of a few of our contemporary wildcards, together with upcoming elections and geopolitical problems.

For CDW, those prerequisites arrange a yr that thematically seems similar to 2023, and our outlook assumes the expansion of purchaser spend outpaces our web gross sales development. Our shoppers face proliferating knowledge and ever-expanding cybersecurity wishes. They face increasing workloads and {hardware} obsolescence, they usually face the prospective and promise of thrilling new applied sciences. With our extensive and deep portfolio of answers and products and services, we’re there for our shoppers these days and the following day, anyplace their priorities lie. We’re there for our shoppers as their relied on marketing consultant to assist them navigate more and more complicated applied sciences. Whether or not development comes from consumption-based or as-a-service answers, or from {hardware} gross sales, we’re well-positioned to proceed our monitor file of profitably outpacing U.S. IT marketplace development via 200 to 300 foundation issues.

As we all the time do, we can supply an up to date point of view on industry prerequisites and refine our view of the marketplace as we transfer throughout the yr. Within the intervening time, we’re going to proceed to do what we do ultimate, leverage our aggressive benefits, and out-execute the contest. Now, let me flip it over to Al, who will supply extra element on our financials and outlook. Al?

Al Miralles: Thanks, Chris, and excellent morning, everybody. I will get started my preparatory remarks with element on fourth quarter functionality, in short contact on full-year 2023 effects, transfer to capital allocation priorities after which end with our 2024 outlook. The workforce’s robust execution and our monetary self-discipline delivered very robust quarterly development and running margins, and development in our fourth quarter income in keeping with proportion on a diluted foundation. We accomplished those effects on consolidated web gross sales of $5 billion, which have been 7.7% under 2022, on a reported and moderate day by day gross sales foundation. Fourth quarter web gross sales functionality mirrored each our ongoing achievement offering cloud and SaaS-based answers that drove significant visitor spend and income, and the continuing have an effect on of asymmetric marketplace prerequisites that we skilled all over 2023.

On a sequential moderate day by day gross sales foundation, fourth quarter web gross sales reduced 10.8%. Whilst traditionally fourth quarter web gross sales are less than the 3rd quarter, the sequential climb this quarter was once extra vital than we anticipated, reflecting a loss of {hardware} spending restoration, a endured combine shift into answers that web down, and typically softer financial prerequisites impacting our world finish markets. Fourth quarter gross benefit was once $1.2 billion, down 2.3% as opposed to prior yr, with our gross margin expanding 130 foundation level year-over-year, and in part offsetting the have an effect on of decrease web gross sales quantity. Gross margin of 23% was once pushed via one issue, the next combine into netted down revenues, which whilst dampening web gross sales development additionally enhanced gross benefit margin.

Cloud and SaaS-based earnings streams as soon as once more outpaced total web gross sales development. For the quarter, this class represented a excessive 35.4% of our gross benefit in comparison to 30.7% within the prior yr fourth quarter, and was once additionally up from the 3rd quarter’s 32.6% stage. Whilst we think the combination of netted down revenues to be crucial long-term sturdy pattern inside our industry, you will need to acknowledge that this combination would possibly vary with visitor priorities and product call for. Turning to bills for the fourth quarter, non-GAAP SG&A totaled $635 million, down 3.5% year-over-year, prudent and diligent control of discretionary bills and our total mounted value base helped to carry the road on profitability amid the difficult IT spending setting.

Co-worker counts on the finish of the fourth quarter was once roughly 15,100, up moderately from the 3rd quarter and flat relative to year-end 2022. We proceed to make bigger our answers and products and services features whilst at the same time as riding potency and value leverage from our broader operations. Following alongside on slide 9, our versatile industry fashion and monetary self-discipline helped to ship non-GAAP running source of revenue of $519 million, down 0.8% as opposed to the prior yr, regardless of our contraction at the peak line. Non-GAAP running source of revenue margin reached 10.3%, up 70 foundation issues from the prior yr, and up 40 foundation issues from final yr’s 9.9%. As mirrored on slide 10, our non-GAAP web source of revenue was once $349 million within the quarter, up 1.7% on a year-over-year foundation.

With fourth quarter weighted moderate diluted stocks of roughly $136 million, non-GAAP web source of revenue in keeping with diluted proportion was once up 2.8% year-over-year. Moving gears in short and shifting to slip 11 to check full-year effects, we skilled a constantly difficult setting in 2023. Uncertainty for our shoppers brought about re-assessment and optimization in their tech spending, which mixed with a marked shift in spending combine resulted in a full-year decline in our web gross sales of 10% on each the reported and moderate day by day gross sales foundation. Regardless of the top-line decline, gross benefit was once roughly flat, down 0.7% for the yr. This gross benefit steadiness exemplifies the have an effect on of our technique over the past 5 years with each biological and inorganic investments underpinning the workforce’s talent to pivot to our shoppers the place shoppers want us, regardless of the surroundings.

Enhanced gross margin mixed with efficient value controls led to a full-year non-GAAP running source of revenue margin of 9.5%, with non-GAAP running benefit bucks in a similar fashion down simply 0.6% year-over-year. Shifting down the P&L, our web hobby expense was once moderately under our full-year expectancies pushed via upper hobby source of revenue earned on our money balances. Our tax charge was once inside our anticipated vary. As proven on slide 12, our non-GAAP web source of revenue was once $1.3 billion, up 0.4%, and non-GAAP web source of revenue in keeping with diluted proportion was once $9.88, up 0.9% from the prior yr. Shifting forward to slip 13, at length finish, web debt was once $5.1 billion. Internet debt declined via roughly $200 million from the 3rd quarter, reflecting our greater money place and modest debt reimbursement all the way through the quarter.

Liquidity remained robust with money plus revolver availability of roughly $1.8 billion. Shifting to slip 14, the three-month moderate money conversion cycle was once 17 days, down 4 days from the prior yr and inside our centered vary of excessive young people to low 20s. Our money conversion displays our efficient control of operating capital, specifically with admire to our stock ranges. As now we have discussed previously, timing and marketplace dynamics can affect operating capital on any given quarter or yr. We proceed to consider our goal money conversion vary stays the most efficient guidepost for modeling operating capital long run. Robust income and efficient operating capital control drove a file full-year adjusted loose money waft of $1.4 billion, as proven on slide 15, representing 106% of non-GAAP web source of revenue and effectively above our mentioned rule of thumb at 6.7% in web gross sales.

For the quarter, we applied money in line with our 2023 capital allocation targets, together with returning roughly $83 million to shareholders via dividends and $50 million in proportion repurchases. For the entire yr, this translated $322 million in dividends and $500 million in proportion repurchases. A mixed $822 million go back to shareholders for roughly 58% of adjusted loose money waft. This was once inside our preliminary goal vary for the yr and moderately under our up to date vary throughout the more potent than anticipated money waft within the fourth quarter. That brings me to our capital allocation priorities on slide 16. Our first capital precedence is to extend the dividend in keeping with non-GAAP web source of revenue. Closing November, we introduced a 5% building up of our dividend to $2.48 once a year, our 10th consecutive yr of accelerating the dividend.

In 2024 and past, we can proceed to focus on a 25% goal ratio, rising the dividend in keeping with income. Our 2d precedence is to make sure now we have the correct capital construction in position with centered web leverage ratio. We ended 2023 at 2.4 instances, down from 2.6 instances on the finish of 2022, and inside our centered vary of two to a few instances. Now we have rigorous processes in position to proactively organize liquidity whilst keeping up flexibility. After all, our 3rd and fourth capital allocation priorities of M&A and shared purchases stay vital drivers of shareholder price. For 2024, we can goal returning 50% to 75% of adjusted loose money waft to traders via dividends and proportion repurchases. In lockstep with this, now we have introduced the board’s authorization for a $750 million building up to our proportion repurchase program.

Combining our prior authorization with this new further authorization, we lately have roughly $1.1 million of availability beneath proportion repurchase program as we begin 2024. And that ends up in our outlook on slide 17. The unsure marketplace prerequisites we operated beneath 2023 have endured into early 2024, and visitor sentiment stays wary and prudent. And whilst signs counsel a compelling want to deal with workload and information development, emerging safety threats, and eventual consumer software obsolescence, our present expectancies for a sluggish begin to the yr for IT spending and full-year development within the low single-digit vary. With this visitor spend situation as our baseline, we moreover be expecting to profitably achieve 200 to 300 foundation issues of proportion in 2024.

As , once we combine within the netted down answers, the have an effect on is totally mirrored in our gross benefit, however it’s muted in our web gross sales development. Conversely, when {hardware} quantity is powerful as we noticed on 2021 and 2022, our web gross sales development is more potent as those merchandise are counted for on a complete gross accounting foundation. Given the have an effect on of transferring visitor priorities on our web gross sales and the inherent accounting variations that consequence from other industry combine, we consider that gross benefit has change into a simpler barometer for gauging our development expectancies. As such, starting with 2024 and pass ahead, we can align our outlook with a view on gross benefit in lieu of web gross sales. In keeping with our present view of combine and margin charges throughout our portfolio, our expectation for 2024 is for low to mid single-digit gross benefit development.

This assumes a flat to modestly upper gross margin relative to full-year 2023. After all, we think our full-year non-GAAP income in keeping with diluted proportion to be up mid single-digit proportion of a yr. Please needless to say we grasp ourselves in command of turning in our monetary outlook on a full-year consistent foreign money foundation. Further modeling ideas for annual depreciation and amortization, hobby expense, and the non-GAAP results tax charge can also be discovered on slide 18. Shifting to modeling ideas for the primary quarter, we await gross margin similar to 2023’s stage, albeit less than 2024, and resulting in low single-digit gross benefit development on a year-over-year foundation. Shifting down the P&L, we think running bills to be upper to start out 2024 in comparison to This autumn as we accrue for a reset of repayment expense that was once extra muted on the finish of 2023, in conjunction with different seasonal team of workers bills.

We think running expense leverage as a share of gross benefit to regularly support because the yr progresses and bills even out. After all, we think first quarter non-GAAP income in keeping with diluted proportion to be within the low-to-mid single-digit vary year-over-year. As we begin the New 12 months, we also are adjusting our way at the outlook for adjusted loose money waft. Once more, given the range of combine of commercial and the corresponding affects on web gross sales, we consider the connection between adjusted loose money waft to non-GAAP web source of revenue will supply a extra constant metric pass ahead. For 2024, we think adjusted loose money waft to be within the vary of 80% to 90% of our non-GAAP web source of revenue. You will need to be aware that whilst we proceed to perform in a wary and unsure setting, stay assured our talent to ship profitability margins, and money waft to our stakeholders simply as we did in 2023.

That concludes the monetary abstract. As all the time, we can supply up to date perspectives at the macro setting and our industry on our long term income calls. And with that, I can ask the operator to open it for questions. We would ask each and every of you to restrict your questions to 1 for the temporary follow-up. Thanks.

See additionally 25 Nations the place Muslim Inhabitants will Building up the Maximum via 2030 and Dorsal Capital Companions Sees a 13% Spice up in 2023: Its Best 15 Inventory Selections.

To proceed studying the Q&A consultation, please click on right here.

RELATED ARTICLES

Most Popular