Great. Good morning, everyone. Thank you again for joining the UBS Global Tech Conference. I'm David Vogt. I'm the hardware networking analyst here. And we're excited to have with us today CDW. From the management team, we have Chris Leahy, Chairman and Chief Executive Officer. And to her right, Al Miralles, Chief Financial Officer. I've got a series of questions. If you do have a question, you can please put it on the app, and it'll get sent up here. But we'll take those later. So why don't we just start, Chris? So again, thank you for joining us. The macro has been tough for everyone in IT spending. You were pretty crystal clear on your last quarterly call about kind of the headwinds that you're facing.
Maybe why don't we just start there and kind of get an update on what you're seeing from a macro perspective, how you're thinking about how the industry kind of progresses as we move into 2025, and then we can jump off from there.
Yeah, sure, and thank you for having us. We're delighted to be here. Yeah, it's been two choppy years, really, if I could say it that way, with fits and starts and heightened scrutiny against technology spending across the board, really all of our segments, and as we go into 2025, there are a couple of things that, at a high level, we'll share more on our call, but at a high level, we feel confident we're going to start to see, number one, when it comes to hardware refresh, when it starts mid-year, later in the year, but PCs really are at a refresh cycle now, and we've started to see some good traction there, so we do expect that to be a driver in 2025 and beyond. We also expect at some point the data center refresh to start to pick up.
It's been quite some time since these things have been refreshed, and we think that will be quite a driver. On a macro level, now the election's over. That's good. A certain level of clarity. I think once we get into the new administration and we're very clear on taxes, tariffs, et cetera, that will bring another layer of clarity, which will be good for the macro environment. But what I would say is that technology continues to be more essential to everything and anything, whether it is driving efficiency, whether it's driving innovation, whether it's driving agility, whether it's driving customer experience. No one is cutting back on technology. They might be taking budgets from other departments, but technology is really now the root of all the competitive advantages that companies are seeking and the missions that our governments are seeking or educational institutions.
So we are feeling fairly prudent but optimistic about 2025 and beyond. The other thing is there are so many catalysts that are not dissipating. Data is exploding. AI is just really at early innings coming into its own in terms of use cases, ROI, et cetera. Security is not getting any less important, and it's actually getting harder, especially given the use cases of AI in security. Endpoint devices I've talked about, hybrid work is here to stay. There's just a lot of catalysts that will continue to drive growth in the industry.
That's helpful. Before going into the segments, maybe can you share with us any kind of perspective from Trump 1.0 versus Trump 2.0, what a unified sort of government might look like? I know it's obviously very early days. We're not even there yet. But does that, in your mind, maybe change the dynamic within the U.S. federal market, which has been a sore spot for a lot of companies, including CDW? Are you optimistic that maybe some unified government kind of breaks sort of the stranglehold on IT disbursement going forward? And should we think about it that way?
Yeah, let me take the question at a macro level and come down to the federal government. I think that the view right now seems to be that a unified government and a pro-business administration will be good for business. That will be good for technology spending. On the federal side, once there's clarity on the priorities, I do think we'll see technology spend start to flow. The issue this year, as you all know, is it was a very late budget approval. You can't get the elephant through the snake fast enough. So the money is sitting with systems integrators, but it's sitting there. It's not that it disappeared. It's sitting there. It's just a matter of now what projects is it going to be applied against, and yes, I do think it will move more quickly once the administration's in office.
Is there any way to quantify this efficiency narrative out there in the marketplace? It seems a lot of throwing stuff at the wall to start. I didn't want you to roll your eyes at me, but I mean, I feel like there's a lack of clarity on what that could mean and how instrumental a lot of these departments and policies and programs are, where it seems it's going to be tough.
Yeah, I would say I don't have a view on whether it will work, whether this will take off, whether it will crumble. But let's just assume that it moves forward. For purposes of this discussion, if it moves forward, I think you've got two sides of a coin. Number one, efficiency is driven by technology. So an efficiency effort in the federal government should point to technology usage, purchasing, et cetera. That's good for our industry. The other side of the coin is if you reduce drastically and quickly the number of people who are currently sitting in different agencies, et cetera, you get backlog. I think you end up with a freeze. So you could see a period of time where less gets done and approved, followed by a period of time where it really technology becomes a main, actually grows within the government needs.
Interesting. Okay, so when we think about your different sort of customer segments, we'll just stick with U.S. federal for a second. I think, Al, in the guide, you assume no change in sort of the demand drivers going into the balance of this year into 2025. Is that still the case post the election? And how should we think about that category holistically to Chris's point about you can't get the money out fast enough, the elephant through the python, so to speak? And normally that's a relatively healthy market for you over time. Do you think longer term, maybe not 2025, I don't want to ask you for 2025 guidance, but for longer-term perspective, to Chris's point, efficiency matters, productivity matters. That's what technology enables, but I would imagine that the U.S. federal government over time is still a relatively good growth business for CDW.
I mean, has anything changed on the margin in your perspective?
Yeah, David, first, thanks for having us here. Appreciate it. No, we would say we think that there's still significant upside in that market, and we've certainly grown our capabilities. Our guide for the rest of 2024, as you noted, is cautious, and that would include expectation that you continue to see this air pocket from a federal perspective. I think the risk as we go into 2025 and what we're gearing for is the could it continue to be a low-growth environment overall, and could you continue to see some of this friction, if you will, from a federal perspective? So while we'll be appropriately geared for that, we do think there are pretty significant catalysts on the other side of that. We'll drive growth just becomes a kind of when.
We think that we continue to have and are building upon our capabilities that will serve those customers well as we see the turn.
And then, along those lines, to Chris's point about a unified government potentially should be more pro-business, lower regulation, more, I think, economic growth. How do you think about that plays into the rest of your segments in 2025? Let's start with your corporate enterprise segment. How are you thinking about that over the next 12 to 18, 24 months with this new administration?
Yeah, I think first we are still being prudent for 2025 because in our view, it will take some time for the optimism around pro-business environment to take hold. But that said, if we do end up with lower corporate taxes, for example, let's say tariffs end up very targeted versus widespread, very surgical, that should be good for business. I would expect that will be good for business. And that would impact our corporate segment. Small businesses and business startups will start to accelerate again, we believe, and that would be good.
Have customers, I know it's very early days, and this is hard to wrap our head around, but have customers in communication with you kind of expressed their view of what the tariff environment might look like and how they might handle it? Or is it just very early days? And to your point, it's like blanket versus targeted. It's different than the last time. And how do we think about what the early conversations might sound like?
Yeah, we talk to our partners a lot. I talk to our partners a lot and how they're navigating through it in terms of where they manufacture, where they gain components from, and they all have varying strategies. After last administration, they were all very quick to come up with resilience plans for the future, but again, it's too hard right now to tell what's going to land where. Last time we had some exceptions for different types of manufacturers, et cetera. At the end of the day, we are a cost-plus model, so whatever we're seeing in ASPs, that will get passed on to the customer.
So actually, that was going to be my follow-up. So we've heard from some distributors that they're going to pass through tariffs. So an inflationary environment is actually good for revenue. And the nature of their relationship with their partners is kind of a relatively fixed margin structure. So it's not actually margin-dilutive to them. Would you feel is that the same way that your margin structure would look going forward?
Yes. It's the same. It's not margin-dilutive.
It's not margin-dilutive.
No, no, no.
That's what I thought. Okay. Maybe just pivoting to each of the different categories. You mentioned PC refresh cycle. You're starting to see it. Let's go back to the one area where it's been weak, NetComms. We're starting to see evidence from other from OEMs and even from some distribution partners that the networking market's getting healthier as we move into 2025. As we sit here today, kind of how are you thinking about that particular market from an inventory digestion perspective, which had been the real problem for 18 months or so versus where we are today? From your conversations with your partners, inventory sounds clean. I don't want to paraphrase and put words in your mouth, but it certainly sounds like it from the last call.
Is that an accurate depiction of where we are in the cycle and we should see a cyclical upswing at some point in 2025?
I think describing it as a healthier market is accurate. CDW in particular, if you look through the COVID era and the kind of massive outperformance we were able to deliver during that period because we had access to inventory, et cetera, and how we were able to deal with the supply chain, particularly networking, we had a large number of customers that were digesting the inventory. I think we're turning the corner on that now. For our business, our overhangs get somewhat muted this quarter and beyond, but we also believe that the networking area is starting to get healthy again, and we will see a refresh.
If we put, David, the Hardware Solutions together, server storage and Netcomm, obviously it's been pretty dramatic, particularly in Netcomm, to Chris's point. There are plenty of catalysts that ultimately will fuel investment from customers in that space. Again, it becomes when, not if. So we think that that's there. We're certainly planning that it could take more time, and you can continue to see friction, but we do think that there is a significant upside on the outside.
If my memory is correct, have you had eight down quarters in Hardware Solutions, I think?
Correct.
So we should be theoretically closer to the bottom than I think maybe people are giving you credit for at this point. I mean, obviously, I don't want to throw out incredibly aggressive numbers for 2025, but obviously, when you think about storage, server, Netcomm, we're kind of starting to see maybe not the right phrase, green shoots, that demand is starting to uptick.
There's plenty of conversations with customers. There's been ongoing conversations. We've seen some green shoots on storage for a few quarters, and then it kind of stepped back in Q3, but there certainly are some signals there, but I think that customers continue to want to get greater clarity what the environment's going to be, what the AI landscape's going to look like, but there's certainly the catalyst behind growth.
Got it. And then another question that we get a lot post the last couple of quarters is margins. You've done a great job with netted down. I think netted down is 35%-36% of gross profit dollars in the most recent quarter. How should we think about your mix, given the commentary on the product side versus the netted down component of your business as we go into 2025? And is there a roadmap where that continues to be a significantly larger portion of your business? I would imagine it's going to be tougher as the product business just comes back. But how should we think about the impact of that mix shift on margins as we move forward over the next couple of years?
I'll just start with the mix. Our strategy is firm. We continue to focus on areas of higher growth, higher margin, value-added relevant services for our customers in the areas of high growth, such as cloud, security, automation, AI. And we will continue to do that. I'm sure you all saw that we had an acquisition announced yesterday, Mission Cloud. It's a cloud services company, AWS Premier Partner. And our goal is to continue to increase the business we do there for many reasons. It's highly valuable to the customers. It's very sticky, and it's scalable, particularly when you think about managed services. In terms of what that could mean to the mix next year when we have hardware coming back, we won't be able to grow faster, perhaps, in the netted down.
But what we will continue to see is, I think, a strong margin, at least where we're holding now. And we continue to do a number of operational improvements across the organization. That's evergreen effort for us. So continuing to see bottom line margin improve as well.
Yeah. And I'll just add, David, probably for two years, we've talked about that we expected netted down revenues would outpace our overall sales. And that has certainly played out. Again, solutions has been softer. We expect there's going to be an upcycle there at some point to balance things out. And look, we are quite proud with the progress we've made on our margins over time, which speaks to our growth of our services business. Notwithstanding this office and solutions, just the growth over time in that area, then I would say our product margins, kind of the remaining piece of that, have held up strong. And that speaks to the importance and confidence that customers have in purchases in hardware and the trend that we've seen of kind of customers buying upmarket, if you will, higher configured product.
I want to come back to Mission in a second, but I want to stick on margin and pricing. So last quarter, you called out competitors pursuing deals maybe on an uneconomic basis. We heard that from one of your peers also as well. Where do you think the market is today? As the economy gets hopefully stronger and demand gets stronger in 2025, how are you thinking about your pricing discipline going after deals in 2025? I would imagine the brunt of it is probably felt in the most recent quarter, maybe a little bit in this calendar quarter of the fourth quarter. I just want to get a sense for how you're thinking about the pricing environment, what competitors are doing, and what we should expect going forward.
Yeah. So on the pricing commentary that we made, excuse me, David, on the pricing commentary, it was really more transparency. And we've seen this kind of behavior different periods of time. Typically, when you have a fairly challenging market with dampened demand for an extended period of time, you'll start to see very much on economic terms, typically on highly transactional business. And CDW is and will remain disciplined. We often say it's not a race to the bottom. So we expect this to dissipate over the near term. I mean, we're in the eighth quarter of a tough environment. But again, if we get to an environment next year under this administration that is more that feels pro-business, that will just disappear. Sometimes you just get the pressures of the current environment.
But you held up really. I mean, if I run my numbers, I won't comment for Al, but if I strip out your netted down, it looks like your product gross margin held up relatively well last quarter despite this uneconomic pricing risk.
That's correct. And despite strength in solutions.
Yeah.
Got it.
And with our product, one of CDW's strategies is to ensure that we are wrapping services around every product, whether it's PCs, whether it's data center, services wrapping around. And that also helps to keep the.
Great question. I never thought about that. Is there a way to metric? Can we think about a metric for that? Every product sale, every engagement, there is.
A tax rate of X. Can we disclose that?
Right now, we don't have that disclosed, but right now, where you see that, it would be in the margin itself. Just the aggregated margin remains high because you know we're running if we have a time period where we are over-indexed to hardware, for example, but we will maintain our margin, and that will be because we're wrapping services.
If I look at your product gross margin today versus two years ago, it is higher ex netted down.
Correct.
Yes.
That's a function of pricing discipline and service management.
Yes.
Okay. Understood. Also, okay, Mission Cloud, obviously, I didn't get a lot of time to spend on it talking to you yesterday. I would love to kind of get your perspective on where Mission Cloud sits in your strategy, what it brings to CDW and your partners, and how do we think about this kind of fitting into what you're doing going forward?
Yeah. Well, so Mission Cloud is AWS Premier Cloud Services provider. It's a great company. And it fits squarely within our three-prong strategy for growth, in particular, extending our services capability. It augments our Digital Velocity Group at CDW, which is our cloud AI automation team. And our strategy has always been with customers to be full stack, full lifecycle, full outcome, which means we go in as a trusted advisor and provide analysis and design on what's best for the customer, how to optimize for the customer. Whether it is on-prem or cloud, it is the whole infrastructure discussion that we are interested in having, and more and more customers want to have that conversation because of the complexity and choice that they have to make. This acquisition creates a real stronghold, I'd say, in our AWS cloud services.
We have deep ties with Microsoft, a really strong practice there. We have deep ties with Google. An acquisition we did, Amplified IT, deep ties there. This actually rounds it out and positions CDW as one of, if not, I would say, I would dare say the only provider in this space that has got the depth and certifications across all three of the mega hyperscalers, which is what our customers have been asking for, so we're really excited about it.
That's fantastic. So do you think you need, and I was trying to think about this last night, you have the hyperscalers covered. Is there a need to go down market from the hyperscalers like Tier 2 Cloud? So we always hear from a lot of investors, Oracle is a much larger player in infrastructure with OCI. You've got these native cloud companies out there, Lambda, CoreWeave. I know it's a very different model than AWS and Microsoft, but there's a proliferation of capital chasing and building out these sort of infrastructure assets. So how do you think about that from your role? Obviously, AWS, Microsoft, Google, they matter clearly far more. I'd love to kind of get your perspective on how to think about maybe the next level down.
Well, two things you asked, I think. First was Mission Cloud's customer set, and they are very much focused on small and medium-sized businesses and some certifications in specific verticals like healthcare, which is great. So it fits nicely again into our model and our ability to scale up across our customer base, particularly when I think about managed services and the ease of scaling that. Excuse me. That's the customer base that they focus on. And then with regard to the second-tier cloud providers, it's not a space that we play in particularly strongly right now, but it's something that we're examining. The other players, the mega cloud providers move the needle a lot. But it is an area we're reflecting on and thinking about. It's a good question.
Yeah. So Mission Cloud is part of your multi-pronged strategy, fits into the capital allocation strategy. What else are we looking at from a capital allocation strategy besides dividend buyback? Obviously, I would imagine your sales funnel is relatively full in this environment. Your net leverage is towards the lower end of your range. How do we think about what your priorities look like into 2025 and 2026 from a cash flow and balance sheet perspective?
Yeah. First, David, I'd just start with that our framework hasn't changed, right? And you hit the highlights, right? Growing our dividend with our net income, maintaining and managing our capital structure. And to your point, we're at a good spot there, lower in our range of leverage, if you will. And then share buybacks and M&A. M&A, obviously, very top of mind. For us, it's about filling in the puzzle of capabilities that will help to serve our customers best. And that's why Mission Cloud is a really important one. We talked about it on the call. We've grown significantly in SaaS and cloud, but the contribution effect in our results is less significant just given the need to scale it further. So it's about filling in the puzzle from an M&A perspective and creating scale in all those key growth vector areas.
Has the environment helped with the sales funnel? Right. So the economic environment's been tough. Are you seeing sellers potentially more receptive to working with a CDW or being bought by a CDW? I'm just trying to get a sense for the silver lining of this cloud from a macro perspective.
Yeah. CDW would be an acquirer of choice. And if you think about our funnel of M&A opportunities, it's huge. It's a matter of really being discerning about buying high-quality companies and companies that fit neatly within our strategy. And that includes both financial return expectations, but equally cultural. Yeah.
Yeah. I mean, David, and you should think about me. Just on top of our capital allocation framework, we lead with patient and opportunistic. So even Mission, that's months and months and months of studying and diligence and really thinking through how this will fit in. We are buying capabilities. We are definitely buying talent. We're buying platform. We think it could be a significant catalyst for our customers.
And just to be clear, there are differentiated capabilities. So when I think about Mission and what they bring to bear, they have more AWS certifications than any other player, period. That's a differentiator. They have software that helps to manage and optimize your AWS estate, I'll call it. That's different than anyone has. And in fact, customers can actually buy Mission services to draw down commits at AWS. So that's another benefit they bring to bear. But these are things that also differentiate the benefits that we bring to bear to our customers.
Got it. So since we have you here, we've gotten questions over the last couple of weeks, and we were talking about this internally. I don't know the answer, so I'm going to ask you. So there is a lot of discussion about Microsoft in the marketplace changing kind of their Enterprise Agreement strategy and their commission structure. What can you share with us? What can you help clarify in terms of what's going on in the marketplace? Because it's hard for us as an outsider looking in, and we've been getting a lot of questions from investors on it.
Sure. Well, I'll zoom way out to start. I mean, every partner has programs where they're incenting us to help them drive their strategy. And the feedback they often get from us is how to do that in a way that is also in the best interest of customers. And Microsoft has for several years now been moving from a licensing EAs, Enterprise Agreements, traditional licensing model to a recurring subscription cloud model. This has been going on for about five years. And incrementally, they've been degrading the funding, the incentive dollars that they provide the channel for these licenses, Enterprise Agreements, and increasing the funding for CSPs, cloud solutions. And CDW has been building and quite successfully delivering on cloud CSP consumption of Azure, which is exactly where Microsoft would like us to continue to play.
And this year right now is going to be a year where they cut the incentive in the EAs down to zero. They want them to go away. We are really well prepared for that. This is what we do. We work with Microsoft along the way to make sure that we're not going to have a total degradation in our partner funding, and we're delivering against the plans. We feel very good about our agreement with them. So CDW has got a very large product partner team. We're always negotiating these programs. It's part and parcel of our core competency and what we do. But it is confusing, I think, to the street because it sounds like Microsoft is just stopping something, cutting it off, when in fact this has been kind of a slow movement towards cloud and subscription.
Does that help you, though, competitively, given your size, scale, scope, deep relationship versus maybe some of your competitors in the marketplace?
Absolutely. A number of LSPs are actually going to be deauthorized. That's also a positive for us because that's business that we otherwise could pick up.
Really, David, nothing's changed from the standpoint of the value we bring to partners and customers and sitting in the middle of that. What's changed is you're going to have partners that want to focus on different growth factors, and we work closely with them to understand where they're going and how do we get in front of that and how do we position with them, and making sure we continue to, Chris's point, maintain kind of our foothold from a partner funding perspective, but also that we're investing behind capabilities that will serve our customers well for where those partners are going.
I just would add that it reinforces the trust relationship with the customers because it's just as confusing to customers, and so having CDW there, we've seen this with a number of OEMs, partners over the last year, combinations, changing models, et cetera, and it's very disruptive to customers sometimes. We sit right in the middle, and we can help the customers figure it out, sort it out, and make decisions.
I'll paraphrase. So complexity is good for you.
Complexity. Complexity and choice, good for CDW.
Got it. I've got a ton of questions, but I want to give you an opportunity to maybe highlight anything that we didn't cover that you think post-earnings going into 2025 that maybe the market hasn't really fully understood. Maybe there's some variant perception kind of. I think that people understand the macro. Anything that we're kind of missing from an investment community standpoint in terms of how CDW is positioned going into 2025, given kind of the challenges that we just talked about?
Yeah. I mean, I would just say that I think that at the end of the day, CDW is likely underappreciated and therefore undervalued given the scale, scope, and strength of what we bring to bear. Oftentimes, I hear questions or focus on very particular categories when in fact the way we think about our business is a whole IT estate and ensuring that we can bring to bear for the customer the best choices for them, which means it is a full stack, full lifecycle solution. And we really have evolved to that full lifecycle with our customers, not just purchasing and delivering, but planning, buying, managing, and creating a real flywheel effect, if I could say it that way. And the way that we maximize that is through drag. If you're selling in a particular category, we're always wrapping services around it.
If you're selling services, you're always wrapping, you're always pulling through product. We never like anything to go out naked, as we said. There always should be something that's attached and then a next move and a next move.
There's nothing in the portfolio that can go out as unattached effectively, right? PC, netcom?
No. I mean, you could buy PCs, but we want to configure them. We want to edge them. And the other thing is to just reinforce that CDW is a company that doesn't stand still. We are evolving always. I always say our go-to-market is evergreen, and it is. We've had to move our sellers from more transaction-oriented sellers to consultative sellers. We've had to grow our technical teams. It was double the size of our salesforce now, which our customers appreciate because of the portfolio and the depth. But this is what we do. We're not waiting for the world to change. We're changing ahead of the world.
I would just end by saying, and I've said this to a couple of you already today, for 23 years I've been at CDW, every single customer I've met with has been appreciative of the fact that we are an extension of their team, that we are invested in their success, and they view us that way. And that's why we have customer relationships that last so long.
So I think we're out of time. Chris, Al, thank you very much. Thank you, everyone, for joining. And thank you again once again.
Thank you. Thank you.