Q4 2024 Earnings Summary
- Hardware demand is showing signs of recovery, with hardware gross profit growing for the first time in eight quarters in Q4 2024, and management expects the device refresh cycle to gain momentum throughout 2025 and into 2026. ,
- Improving pipeline coverage and bookings momentum, particularly in devices, are expected to lead to growth in other segments. Management is optimistic about demand improving throughout the year. ,
- Structural improvements and cost reductions of approximately $25 million in annualized savings, along with further opportunities to enhance profitability, are expected to lead to operating leverage and margin expansion as growth returns. ,
- The company anticipates that its cloud gross profit will be flat to slightly down in 2025 due to the decline of enterprise agreements and program changes from key partners like Google and Microsoft, resulting in an approximate $70 million negative impact. Excluding this impact, cloud growth would be in the mid-teens, but these headwinds may challenge overall cloud performance.
- The settlement of convertible notes and associated warrants is expected to increase interest expense to between $70 million to $75 million in 2025, significantly higher than previous years, which will constrain EPS growth despite share count reductions. The higher borrowing costs due to shifting from low-rate convertible debt to higher-rate ABL facilities will be a headwind to earnings.
- Management expects growth and profitability in 2025 to be heavily weighted toward the second half of the year, with the first half, particularly Q1, facing tough comparisons and ongoing impacts from partner program changes. This reliance on second-half improvements introduces execution risks and uncertainty in achieving full-year targets.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | -7% | Total revenue fell from $2,236.1 million in Q4 2023 to $2,072.6 million in Q4 2024, likely due to overall lower sales volumes across segments amid challenging macroeconomic conditions and shifts in product mix that had previously affected revenue performance. |
Software Revenue | -23% | Software revenue dropped significantly from $679.35 million to $521.4 million, reflecting a marked reduction in on-premise software sales and the ongoing migration to cloud solutions, in addition to vendor relationship changes that shifted revenue from software to services—a trend hinted at in prior periods. |
Geographic Revenue – EMEA | -18% | EMEA revenue declined from $390.52 million to $319.83 million, driven by weakened demand in the region, which may include factors such as lower sales volumes to enterprise and public sector clients and negative currency impacts, echoing earlier regional performance challenges. |
Operating Income | -50% | Operating income nearly halved from $131.86 million to $64.67 million, reflecting the dual pressures of lower high-margin product revenues and increased operating expenses (including restructuring and integration costs), a continuation of margin pressures observed in previous periods. |
Net Income | -59% | Net income dropped from $90.61 million to $37.01 million, primarily due to the sharp decline in operating income combined with increased financing and other expenses, further exacerbating profitability issues noted earlier. |
EPS – Basic | -57.7% | Basic EPS fell drastically from $2.77 to $1.17, driven by the significant reduction in net earnings along with potential dilution factors, which together highlight the overall deterioration in financial performance relative to the previous period. |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Gross Margin | FY 2024 | 19% to 20% | 20.3% (calculated from Q1–Q4 2024 revenue & COGS) | Beat |
Interest Expense | FY 2024 | $58 million to $60 million | ~$58 million (sum of Q1–Q4 2024 interest expense) | Met |
Capital Expenditures | FY 2024 | $35 million to $40 million | $79 million (sum of Q1–Q4 2024 CapEx) | Missed |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Hardware Demand and Device Refresh Cycles | Q1: Muted hardware demand, slight improvement in devices. Q2: 8% decline in hardware revenue, but signs of improvement in July. Q3: Delayed hardware recovery, especially for large enterprise, now expected in 2025. | Q4: Modest hardware growth, though North America revenue declined as refresh cycles are delayed to 2025 and 2026. | Clients remain cautious, with slight optimism for a 2025 recovery. |
Cloud Growth Challenges and Partner Program Changes | Q1: No challenges mentioned; cloud gross profit grew 33% to $117M. Q2: Cloud growth moderated due to SADA underperformance. Q3: Reduced SADA resale in enterprise, pivot to mid-market. | Q4: Declines in legacy Microsoft EAs and Google enterprise resale expected to impact $70M in cloud gross profit for 2025, though cloud GP grew 21% in 2024. | Shift to CSP and other consumption models continues, creating short-term headwinds but potential long-term benefit. |
Services Growth and Integration of Acquisitions (SADA, Infocenter, Amdaris) | Q1: Services gross profit grew 24%, with Infocenter expansion, SADA slightly below expectations. Q2: Double-digit growth in cloud and core services; SADA expected to be accretive in the second half. Q3: Services GP up 14%, pivoting SADA to corporate/mid-market, accelerating cost synergies. | Q4: Services gross profit up 12%, aided by acquisitions and expanded capabilities in GCP, ServiceNow, and AWS. | Overall steady growth, though SADA resale remains a drag; acquisitions drive broader services footprint. |
Profitability Initiatives, Cost Reductions, and Margin Expansion | Q1: Margin up 170 bps to 18.5%; disciplined SG&A. Q2: Structural pricing changes, gross margin up 260 bps to 21%. Q3: Gross margin at 20.7%, planning $20M–$25M in annualized savings by 2025. | Q4: Pricing and profitability initiatives drove gross margin up 170 bps to 21.2%, with completed $25M SG&A reduction. | Continuous margin improvement supported by cost control and favorable mix. |
Interest Expense Related to Convertible Notes Settlement and Shift to New Financing | Q1: Considering convertible notes, $52M–$54M interest expense guidance. Q2: No direct mention of settlement. Q3: No mention. | Q4: Interest expense projected at $70M–$75M, $0.40 EPS impact due to funding shift to ABL. | Financing costs increasing with new debt structure. |
Potential Generative AI Opportunities and AI PCs | Q1: AI PCs a small factor; NVIDIA recognition for AI solutions. Q2: Building generative AI proofs of concept, but not yet financially meaningful. Q3: No mention. | Q4: No specific details on generative AI or AI PCs, only references to AI infrastructure. | Still exploratory, less emphasis in current quarter. |
Shifts in the Macro Environment and Cautious IT Spending | Q1: Uncertain IT spending, delayed large engagements. Q2: Choppy demand environment but margin strength. Q3: Delayed hardware recovery, 8% revenue decline, uncertain on year-end flush. | Q4: Clients remain cautious, with major hardware refresh cycles pushed to 2025 and 2026. | Continued careful spending, especially among large enterprise clients. |
Second-half Weighted Performance Expectations in 2025 | Q1: Ramp in second half not as strong as hoped; Q2 and Q4 more balanced. Q2: No specific mention for 2025. Q3: Broader market recovery delayed until 2025, with improvement in 2H. | Q4: Expect stronger second half of 2025, partly due to tough Q1 comps and large enterprise caution. | Maintained 2H 2025 optimism following subdued 1H outlook. |
On-premises Software Deals | Q1: One-time large deals, not guaranteed. Q2: Sequential/year-over-year declines, deal timing remains lumpy. Q3: Down 9%, partner consolidation shifted product revenue to services. | Q4: 23% decline, ongoing partner consolidation shifting revenue from product to net agency services. | Further decline as partner relationships evolve. |
ServiceNow Capabilities Expansions | Q1: Infocenter acquisition greatly enhances ServiceNow expertise. Q2: Example of major rollout to a payment company, phased expansions. Q3: No mention. | Q4: Continued focus on ServiceNow integration, along with GCP and AWS expansions. | Ongoing build-out of ServiceNow offerings. |
Earn-out Performance Shortfalls for Acquisitions | Q1: No mention. Q2: Gain of $25M due to lower-than-target performance for SADA and Amdaris earn-outs. Q3: No mention. | Q4: No mention. | No new developments on earn-out shortfalls. |
-
2025 EPS Guidance and Headwinds/Tailwinds
Q: Could you summarize the major headwinds and tailwinds for 2025 EPS guidance?
A: James explained that one of the largest headwinds is the pivot due to partner program changes, requiring significant work. Interest expense is also a headwind, resulting from settling convertible notes through cash and using their ABL facility, which has a higher borrowing cost. However, share count reductions from settling associated warrants are expected to largely offset this. Joyce added that they are seeing encouraging signs in the commercial business, with growth anticipated to move into corporate and enterprise segments, providing tailwinds. Their services business is strong, bolstered by acquisitions, which should help offset headwinds. Cash flow is expected to return to historical levels as hardware growth resumes, bringing cash flow back into the normal range. -
Cloud Program Changes Impact
Q: Where do you expect the larger impact between Microsoft and Google regarding cloud headwinds, and what actions are you taking to offset them?
A: Joyce stated that the $70 million impact is more heavily weighted toward Microsoft enterprise agreements, which have been the biggest change. Mitigation involves transitioning enterprise agreements in the small and medium business space into CSP agreements, with plans to accelerate this throughout 2025 and into 2026. They've received strong support from Microsoft in making CSP the primary motion for that segment. Additionally, they've invested in their cloud commerce platform to support clients efficiently, seeing excellent customer satisfaction and renewal rates. -
Operating Expenses vs. Gross Profit Growth
Q: Is OpEx expected to outpace gross profit growth next year, and what are the drivers?
A: James clarified that OpEx is expected to grow slightly slower than gross profit, with operating leverage improving as the year progresses. Early in the year, program changes impact operating leverage, but this should improve over time. Confidence comes from $25 million in cost-saving actions they've taken, expected to be fully realized in 2025. Headcount reductions have focused on support functions while preserving sales and technical talent. As acquisitions reach their anniversary dates, OpEx will normalize. -
Device Refresh Cycle Timing
Q: Can you revisit the timing and magnitude of the device refresh cycle?
A: Joyce noted they had expected the device refresh cycle to start earlier but have seen growth for three consecutive quarters in the commercial business, particularly around devices. They now anticipate the refresh cycle to extend into 2026 due to delays in upgrading before Windows 11 support requirements kick in. They are optimistic, seeing improvement in pipeline coverage and bookings, expecting this to eventually lead to growth in corporate and enterprise segments. -
Bookings Momentum and Revenue Timing
Q: When will the solid bookings momentum translate to revenue?
A: Joyce expects demand to improve throughout the year, indicating that revenue growth will likely accelerate as the year progresses. -
Opportunities for Structural Improvements
Q: Are there further opportunities for structural improvements in the business?
A: Joyce affirmed they have ample opportunities for improvement, benchmarking against the best in hardware, software, and services profitability. They believe that growth will allow them to leverage OpEx further, continuing with more growth. James added that they expect a stronger second half of the year, with Q1 facing tough comparisons and an outsized impact from program changes. -
Impact of Tariffs on Business
Q: How should we think about the potential impact of existing tariffs, and how much is reflected in your guidance?
A: Joyce stated they have thoroughly modeled the tariff impact and are working closely with OEM partners to understand product exposure. They pass on incremental costs to clients, resulting in higher ASPs in affected categories. With current tariffs, they don't expect significant impact on demand. Their guidance contemplates minimal impact from tariffs as they currently stand.
Research analysts covering INSIGHT ENTERPRISES.