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    CDW Corp (CDW)

    Q2 2024 Earnings Summary

    Reported on Jan 6, 2025 (Before Market Open)
    Pre-Earnings Price$232.47Last close (Jul 30, 2024)
    Post-Earnings Price$221.50Open (Jul 31, 2024)
    Price Change
    $-10.97(-4.72%)

    What went well

    • CDW is gaining market share across virtually every category, including security, services, and cloud, even in a low-demand market.
    • Strong pipeline and customer engagement suggest that as customer cautiousness decreases, CDW is well-positioned to convert its pipeline into growth.
    • Sustained growth expected in cloud, security, and services, which are not slowing down and provide cost optimization opportunities for customers, aligning with CDW's broad portfolio and capabilities.

    What went wrong

    • Delayed Revenue Conversion Due to Customer Caution: Despite a strong pipeline, CDW is not seeing customers' "appetite to convert," indicating potential delays in revenue realization due to cautious customer spending.
    • Persistent Weakness in Networking and Server Demand: CDW continues to face slow demand in networking and server products as customers digest prior purchases and exercise caution in new spending, with a pivot towards cloud solutions over traditional infrastructure upgrades.
    • Shift Towards Cloud Solutions Affecting Traditional Revenue Streams: Customers are increasingly opting for cloud and elastic solutions instead of on-premise infrastructure investments, which may negatively impact CDW's traditional hardware revenue segments.

    Q&A Summary

    1. Guidance and Forecasting Changes
      Q: Why did you miss guidance, and what's changed in forecasting?
      A: Al acknowledged recent volatility impacting their guidance, noting that the miss was due to unanticipated weakness in the federal business and international markets. Excluding these factors, results were close to historical seasonality. Going forward, they expect mid-single-digit sequential growth, following a more normal glide path with a 48-52 split between first and second half.

    2. Pipeline Conversion and Demand Outlook
      Q: What's the outlook for demand and pipeline conversion?
      A: Christine stated that while the business feels more stable, the appetite to convert pipeline into sales is lacking. They continue to engage closely with customers, focusing on cost optimization solutions. As stability increases, she expects pipeline conversion to improve, leading to growth.

    3. Gross Margin Sustainability
      Q: Can core gross margins continue to grow?
      A: Al expects gross margins to remain similar to the first half and much like 2023 overall. Netted down revenues, particularly from cloud and SaaS renewals, are expected to remain strong. Product margins have held firm, and they anticipate this trend to continue.

    4. Impact of AI on Business
      Q: How is AI affecting your business and customers?
      A: Christine mentioned they're in the early stages of AI monetization, investing in people and enablement. AI is causing customers to reevaluate their compute, storage, and networking architectures. While this assessment phase may delay some sales cycles, they see AI as an accelerant that will be embedded in every layer of the stack.

    5. End Markets Performance and Recovery
      Q: Any signs of recovery in networking and server markets?
      A: On networking, customers prioritize modernization but are still digesting previous purchases. Supply chain normalization hasn't yet translated into increased demand. In mid-market servers, there's some strength, but customers are cautious, pivoting towards cloud solutions.

    6. Market Share Gains
      Q: Are you gaining market share despite the sluggish macro?
      A: Christine is confident they're continuing to gain share across virtually every category, including security, services, cloud, and client devices. This is validated by both their data and partner reviews.

    7. Operating Expenses and Leverage
      Q: How should we think about your OpEx trajectory?
      A: Al explained that the first half showed higher expenses due to seasonality and lower gross profit production. They expect operating leverage to improve in the back half as expenses balance out and gross profit increases.

    8. Security Business and CrowdStrike Impact
      Q: How did the CrowdStrike issue affect you?
      A: Christine noted that the impact was minimal, but it reinforced the importance of their trusted adviser role. They swiftly helped customers with fixes and see such events as opportunities to strengthen customer relationships. Customers are on high alert around cybersecurity, leading to heightened conversations but not delaying other projects.

    9. Netted Down Revenues Mix
      Q: Can you elaborate on netted down revenues?
      A: Al clarified that netted down revenues include software assurance, warranty, SaaS, and cloud. The strength is primarily in SaaS and cloud, covering various workloads. Software assurance and warranty have lagged due to their attachment to hardware and licensed software, which have been slower.

    10. Government Business Outlook
      Q: Are there offsets to federal weakness?
      A: Al stated they expect normal seasonality in government business, with strength in state and local offsetting federal softness. Overall, they foresee regular seasonality with a slight downtick in federal for Q3 and Q4.

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