CDW, the global technology solutions provider, has reported a challenging second fiscal quarter of 2024, with cautious customer demand and particularly difficult conditions in the UK and federal government sectors.
Christine Leahy, chair and CEO of the Vernon Hills, Illinois-based company, stated during the quarterly earnings call that market dynamics played out as expected. She highlighted a trend of extended sales cycles, driven by customers prioritizing essential needs over discretionary wants and cost savings over expansion. Capital investment in complex solutions, particularly those related to data center and network modernisation, remained subdued or postponed. Meanwhile, there was a rise in demand for device refreshes.
Despite a generally expected market climate, Leahy acknowledged two unforeseen challenges. Firstly, a worsening economic environment in the UK and, secondly, difficulties related to federal funding in the US. "Within a limited demand environment, we continue to help our customers build out technology roadmaps, and our pipeline remains solid in the solution space," she stated. "However, conversion remains challenging with uncertainty weighing on our customers' appetite to spend."
Despite the challenging market, CDW reported strong performance in cloud, security, and services, driven by the company's position as a trusted advisor and its ability to deliver solutions aligned with customers' most urgent priorities. Leahy emphasised the company's balanced portfolio and markets, with five key sales channels: corporate, small business, healthcare, government, and education, each contributing significantly to overall revenue.
The company experienced a 2% decline in corporate net sales, with increases in cloud and security, as well as client devices and storage sales, offset by decreases in server and network communications. Small business net sales dropped by 3%, with persistent postponement of infrastructure investments and a slight decline in device sales offsetting improvements in software and cloud solutions.
Public sector sales also saw a 2% decline, with mixed performance. Government sales decreased by 6%, with growth in state and local sectors more than offset by a decline in federal spending. This decline was attributed to delays in fiscal 2024 budget authorisation, resulting in several key customers receiving funding releases only in late June, weeks later than expected. The delayed funds, coupled with the normal government procurement processes, led to processing delays.
While Leahy expressed confidence that ongoing projects will eventually progress, she acknowledged that some agencies may pause new projects as they await clarity on the next administration's priorities. As a result, CDW does not anticipate a catch-up in federal spending during the latter half of 2024.
State and local government sales showed mid-single-digit growth, with security remaining a key performance driver. Client device sales also increased by mid-single digits, driven by budget allocations for enhancing citizen experience at state and municipal agencies through AI-powered automated response and messaging platforms.
Healthcare sales remained flat, with security remaining a key focus area, including security assessments for cloud migration and identity management. A client device refresh led to double-digit growth in this segment.
Education sales declined by 1%, with K-12 sales remaining relatively flat year-over-year. Client device sales showed mid-single-digit growth as school systems refreshed older Chromebooks, while security and cloud continued to be top priorities, delivering strong growth and profit. Collaboration hardware, primarily smart whiteboards and interactive flat panels, experienced a significant decline.
Higher education spending remained focused on investments to enhance student experience and drive enrollment while managing financial constraints.
CDW's UK and Canadian operations declined by 13%, with the demand environment in the UK worsening during the quarter, exacerbated by the early general election. UK sales declined by high teens in US dollars, while Canada saw a 4% decline. Given current conditions, CDW expects the UK market to remain volatile and under pressure through the remainder of the year.
Overall, hardware sales decreased by 5% during the quarter, with high single-digit client device growth and mid-single-digit storage growth more than offset by declines in network communications and collaboration. Software spending increased by mid-single digits, while services increased by 6%, driven by cloud and security related services.
Looking ahead, CDW has lowered its expectations for the remainder of the year, adjusting its forecast for US IT market growth to the lower end of a low single-digit range. The company still maintains its target to grow 200 to 300 basis points above market. However, Leahy remains confident that growth will return, citing drivers such as workload and data growth, increased security threats, client device obsolescence, and the adoption of AI-powered assistance and applications.
"But customers need greater clarity and confidence," she stated. "Clarity around economic conditions and clarity around the impact of AI roadmaps, and confidence that investments made today will deliver the right foundations and economic returns in an AI-powered future."
For the second fiscal quarter of 2024, ending June 30, CDW reported revenue of $5.42 billion, down 3.6% from the previous year. This missed analyst expectations by $10 million.
CDW also reported GAAP net income of $281.1 million or $2.07 per share, up from the previous year. On a non-GAAP basis, net income was $349.0 million or $2.50 per share, down from the previous year. Non-GAAP earnings per share missed analyst expectations by 3 cents per share. CDW's stock price closed Wednesday at $218.11 per share, down $14.36 per share or 6.2% over Tuesdayâs close.
