Q3 2024 Earnings Summary
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Gross Profit Growth | Q3 2024 | Low single-digit year-over-year growth | -2.2% year-over-year (Q3 2023: US$1,227.7 million, Q3 2024: US$1,200.7 million derived from 5,516.6- 4,315.9) | Missed |
Gross Margin | Q3 2024 | Remain comparable to full year 2023 and first half 2024 levels | 21.8% in Q3 2023 vs. 21.8% in Q3 2024 (calculated from revenue- COGS) | Met |
Operating Expenses (SG&A) | Q3 2024 | Moderately higher than Q3 2023 on a dollar basis but similar ratio | Q3 2023: US$749.3 million, Q3 2024: US$719.1 million(down ~4% year-over-year, lower than guided) | Surpassed |
Non-GAAP EPS | Q3 2024 | Mid single-digit year-over-year growth | ~1% growth (Q3 2023 diluted EPS: US$2.32, Q3 2024 diluted EPS: US$2.34) | Missed |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Persistent focus on cloud, SaaS, and security solutions | Cited as key growth driver in Q2, Q1, and Q4, with netted-down (cloud/SaaS) revenue outpacing overall growth | Emphasized scaling cloud & SaaS with strong double-digit cloud growth; security also up due to rising cyber threats | Continued emphasis |
Hardware demand volatility and client device refresh cycles | Highlighted in Q2, Q1, and Q4. Noted high single-digit client device growth and cautious hardware spend | Hardware under pressure for eight consecutive quarters; client devices grew due to refresh of aging fleets, small businesses delaying purchases | Sustained caution |
Emerging AI theme (including AI PCs) as a new growth avenue | Q2: Early AI monetization stage; Q1: Consulting and vertical AI solutions; Q4: Full-stack AI opportunity with advisory services | AI PCs expected to boost future refresh cycles; current device demand driven more by aging fleets | Increasing emphasis |
Negative operating leverage and workforce reductions | No specific mention in Q2 or Q1; Q4 mentioned workforce optimization for cost alignment | Reduced workforce ~2% to align fixed costs with demand; negative operating leverage tied to fixed cost base in weaker demand | Newly highlighted issue |
Competition and pricing pressure from OEM vendors and resellers | No Q2 or Q1 mention; Q4 described stable pricing environment | Intense “irrational” pricing from both VARs and OEMs; CDW avoids uneconomic deals | Heightened competitive pressure |
Strong but unscaled strategic investments in cloud and SaaS | Q2: Netted-down revenues (cloud/SaaS) fueling margin gains; Q1 and Q4 also showed strong netted-down growth | Cloud & SaaS have grown significantly but not at sufficient scale to offset hardware softness | Ongoing growth, still unscaled |
Over 90% of customer relationships described as value-driven | Not cited in Q2, Q1, or Q4 | CDW reiterated that 90%+ of purchases center on value (portfolio, expertise, ease), not just price | New mention in Q3 |
Cautious customer spending due to macro uncertainty and elongated sales cycles | Persistently noted in Q2, Q1, and Q4 with elongated sales cycles and cost-focused decisions | Macroeconomic and election uncertainties delaying large deals; customers cautious, especially SMB | Sustained caution |
Consecutive years of gross profit declines introduced in Q3 2024 | No prior reference in Q2, Q1, or Q4 | Two consecutive years of gross profit declines, described as unprecedented; linked to muted hardware and large-project variance | New and concerning |
Shifts in solutions versus transactional sales impacting margins | Q2 margins benefited from netted-down solutions; Q1 also showed solutions softness but strong netted-down; Q4 saw higher margins from cloud/SaaS | Less robust solutions demand (higher margin) and more transactional deals in some cases | Mixed impact on margins |
Government and federal spending uncertainty persisting across periods | Q2: Funding delays; Q1: 6–8 week pause in federal spend; Q4: Mixed results with some federal growth | Election uncertainty and delayed large federal hardware deals noted, below seasonal expectations | Continues to weigh on results |
Sunsetting of Windows 10 no longer cited after Q4 2023 | Not cited in Q2 or Q1; Q4 expected Windows 10 sunsetting to drive future device upgrades | No mention in Q3 | Topic dropped |
AI solutions expected to have a significant future impact | Q2: Early AI investments; Q1: Consulting focus; Q4: Full-stack AI opportunity with incremental budgets | AI PCs viewed as a future growth catalyst; not significant yet | Growing momentum |
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Operating Leverage and Workforce Reduction
Q: Why is negative operating leverage increasing and what's the workforce reduction impact?
A: CDW is experiencing negative operating leverage due to lower-than-expected gross profits and a fixed cost base that hasn't adjusted quickly to the declining demand environment. They have implemented actions to reduce fixed costs, including a workforce reduction of about 2%, not the 10-15% reported elsewhere. This aligns them more closely with their fixed cost needs and preserves profitability while investing in growth areas. -
Gross Profit Declines and Market Position
Q: Why is CDW seeing consecutive gross profit declines, and what's expected for 2025?
A: CDW is undergoing a transformation, investing heavily in cloud and SaaS businesses, which haven't yet scaled to offset hardware declines. The persistent softness in hardware, combined with strategic investments leading to lumpier, larger deals, has impacted results. Despite these challenges, CDW expects gross profit dollars to increase as growth resumes, likely in 2025. -
Competitive Landscape and Pricing Pressure
Q: What has changed with competition and pricing intensity recently?
A: CDW is facing increased competition characterized by irrational pricing, with competitors offering low-margin deals. This intense pricing pressure is unique compared to previous years and is occurring up and down the value chain, including among value-added resellers. CDW is maintaining financial discipline by walking away from uneconomic deals to protect profitability. -
Market Outlook and Hardware Demand Recovery
Q: How is CDW performing relative to the market, and what's the outlook for hardware demand?
A: CDW continues to aim for delivering a premium to the IT market growth rate. While hardware demand has been low, they are performing well in cloud, SaaS, and services. They've seen eight quarters of hardware declines but expect an eventual recovery as catalysts like data growth and security needs drive demand. They are cautious about timing, noting that uncertainty may persist until after the election. -
Strategic Transformation and Digital Investment
Q: What actions is CDW taking to balance large projects and smaller transactions?
A: CDW is accelerating important parts of their strategy by investing in digital capabilities to deliver personalized recommendations and improve customer experience. This allows sales professionals to focus on higher-value deals while increasing velocity in smaller transactions through digital tools. The goal is to drive growth across all deal sizes while enhancing profitability. -
Impact of Vendor Channel Changes
Q: How will changes in vendors' channel strategies affect CDW's growth?
A: CDW's investments in their cloud business align with vendor strategies from companies like Cisco and Microsoft. By delivering seamless cloud services and managed solutions, CDW is positioned to benefit from these channel changes, which should drive better economics and growth in 2025 and beyond. -
Gross Margin Guidance for Q4
Q: Why is Q4 gross margin expected to decline year-over-year?
A: CDW anticipates continued softness in their solutions business, which carries moderately higher gross margins. While client sales are expected to continue, the mix shift results in lower overall gross margins. Additionally, last year's Q4 had an outsized pickup in netted-down revenues that may not repeat at the same level. -
Move to As-a-Service Models
Q: How is the shift to as-a-service models impacting CDW's hardware sales?
A: The move to consumption-based services like SaaS and cloud is growing, leading to revenue being recognized over time rather than upfront. While not yet a material dollar amount, this shift creates a temporary gap when hardware sales decline and as-a-service revenues are still growing. CDW expects this segment to grow and contribute more significantly over time. -
Federal Government Spending and Election Impact
Q: How is election uncertainty affecting federal government spending?
A: Federal government spending is currently paused due to delayed budgets and awaiting policy priorities post-election. CDW is cautious about immediate changes, noting that this election cycle is unique and timing depends on administrative and congressional actions. They have factored political uncertainty into their Q4 outlook. -
Client Device Growth and AI PCs
Q: What is driving client device growth, and how will AI PCs impact this?
A: CDW is seeing client device growth across most end markets, driven by the refresh of aging fleets. Small businesses are more cautious due to cash preservation. The current growth is less influenced by Windows 11 or AI PCs, but CDW expects AI PCs to be an accelerant for PC refreshes in the next year.