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    CDW Corp (CDW)

    Q4 2023 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$230.50Last close (Feb 6, 2024)
    Post-Earnings Price$234.84Open (Feb 7, 2024)
    Price Change
    $4.34(+1.88%)

    What went well

    • CDW anticipates significant growth catalysts, including digital transformation, network modernization, increasing cybersecurity threats, aging client devices, and the promise of AI, positioning the company for future growth as customer spending resumes.
    • Despite a challenging environment with decreased net sales, CDW has maintained profitability through strong execution and cost controls, resulting in increased gross margins and stable non-GAAP operating income, demonstrating the resilience and effectiveness of their strategy.
    • CDW is actively pursuing strategic M&A to expand capabilities in high-growth areas like security, cloud, and AI, which have proven effective in driving customer value and revenue growth in the past, positioning the company for future success in these markets.

    What went wrong

    • CDW's growth is slowing, with earnings growth projected to be mid-single-digit in 2024, compared to historical double-digit growth, suggesting a potential shift in the company's long-term growth trajectory.
    • The company expects continued weakness in hardware sales, including PCs and client devices, persisting through at least the first half of 2024, which could negatively impact revenues given their exposure to hardware.
    • CDW is undertaking workforce optimization and real estate rationalization, including layoffs and office closures, indicating underlying pressures on margins and efforts to align costs with lower business activity.

    Q&A Summary

    1. Earnings Growth Expectations
      Q: Should investors reset expectations for earnings growth?
      A: Management views 2024 as a transitory period with mid-single-digit earnings growth. They anticipate significant catalysts beyond this period that will enhance returns and remain confident in long-term growth prospects.

    2. AI Investment Impact
      Q: Are AI investments cannibalizing IT budgets?
      A: AI is a hyper-focus, but budgets are not shifting from IT. Instead, funds come from functional areas like HR, finance, and marketing, viewing AI as business transformation with incremental investments.

    3. Market Share Gains and Gross Profit
      Q: How are market share gains and gross profit trending?
      A: CDW gained share in 2023, delivering 200–300 basis points above IT market growth. Gross profit is expected to accelerate through the year, bolstered by netted-down revenues and strong gross margins.

    4. Strategic M&A Plans
      Q: What are the strategic M&A priorities?
      A: CDW focuses on M&A to drive growth in areas like security, cloud, and AI. They have a pipeline of targets and are open to geographic expansion and capability bolstering.

    5. Gross Margin Expansion Drivers
      Q: Is gross margin expansion secular or cyclical?
      A: Expansion is driven by a mix shift to netted-down revenues, particularly SaaS and cloud, and softer hardware sales. Product margins are holding firm, and these trends are expected to be durable.

    6. Catalysts for Second-Half Recovery
      Q: What will drive recovery in the second half?
      A: There is pent-up demand, with customers ready to act when economic confidence improves. Elevated inflation and interest rates cause caution, but investment needs persist.

    7. NetComm Products Outlook
      Q: What's the outlook for NetComm products after weakness?
      A: Expecting headwinds due to tough comparisons from prior 20–40% growth. Underlying demand is solid but declines are expected for the next few quarters.

    8. PC Demand and Client Devices
      Q: What is the outlook for PC demand?
      A: No strength expected in hardware, including PCs, in the first half. A modest recovery is anticipated in the back half, with PCs expected to rebound eventually.

    9. AI Opportunities and Full-Stack Solutions
      Q: Is AI more consulting or hardware opportunity?
      A: Currently, demand is in advisory and consulting services due to complexity. Long term, AI is a full-stack opportunity, including hardware and software across the edge to the core.

    10. Pricing Environment and Inflation Impact
      Q: How is the pricing environment shaping up?
      A: Pricing remains firm, with no drastic changes anticipated. The environment is stable, and ASPs have held steady.

    11. Cash Flow Conversion Expectations
      Q: What are the cash flow conversion expectations?
      A: Cash flow conversion is expected to be 80–90% in 2024. This accounts for potential working capital usage due to very low inventory levels.

    12. Optimization Charges in EPS
      Q: What's behind the optimization charges?
      A: Charges stem from workforce optimization and real estate rationalization. They are aligning costs with business levels and adjusting for hybrid work models.

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