CDW Corporation Price & Performance (CDW)

Thank you, Carly. Good morning, everyone. Joining me today to review our fourth quarter and full year 2024 results are Chris Leahy, our Chair and Chief Executive Officer and Al Morales, our Chief Financial Officer. Our earnings release was distributed this morning and is available on our website, investor.cdw.com CDW, along with supplemental slides that you can use to follow along during the call. I'd like to remind you that certain comments made on this presentation are considered forward looking statements under the Private Securities Litigation Reform Act of 1995. Those statements are subject to a number of risks and uncertainties that could cause actual results to differ materially. Additional information concerning these risks and uncertainties is contained in the earnings release and Form eight ks we furnished with the SEC. Today and in the company's other filings with the SEC. CDW assumes no obligation to update the information presented during this webcast cast. Our presentation also includes certain non GAAP financial measures including non GAAP operating income, non GAAP operating income margin, non GAAP net income and non GAAP earnings per share. All non GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules.

You'll find reconciliation charts in the slides for today's webcast and in our earnings release and Form eight ks.

Please note all references to growth rates or dollar amount changes in our remarks today are versus the comparable period in 2023 when net sales growth rates described on an average daily basis unless otherwise indicated. Replay of this webcast will be posted to our website later today. I want to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast without specific written permission from the company. With that, let me turn the call over to Chris.

Thank you, Steve. Good morning, everyone. I'll begin our call with an overview of our fourth quarter and full year performance and share some thoughts on our strategic progress and expectations for 2025. Then I'll hand it over to Al, who will take you through a more detailed [indiscernible] as well as our capital allocation strategy and outlook We will move quickly through our prepared remarks to ensure we have plenty of time for questions. For the fourth quarter, the team continued its exceptional level of customer commitment and delivered net sales of $5,200,000,000 5% above 2023 on an average daily sales basis. Gross profit of $1,160,000,000 flat as reported and up 2% on an average daily sales base on an average daily basis. Non GAAP operating income of nearly $500,000,000 4% below 2023 and non GAAP net income per share of $2.48 down $0.09 year over year or 4%. The fourth quarter delivered a solid finish to a challenging year. During the quarter, as we have seen all year, customer priorities remained laser focused on operating efficiency and expense elasticity, continue to be met with as a service and ratable solutions like cloud and SaaS and consultative services in order to op optimize spend and minimize capital expenditures.

At the same time, customer focus on mission critical and must do priorities drove interest in resuming projects with clear short term returns on investment. This led to an uptick in demand across several hardware categories. Despite this shift in our mix, our durable and stable gross margins held strong and in fact reached its highest quarterly level in 2024. Looking back on the full year, the team's ability to deliver as a service and service offerings helped partially offset the impact hardware deprioritization had on our top line, which declined by 3%. And we delivered full year consolidated gross profit roughly 1%. Below 2023. Sustaining the resources needed to deliver exceptional service to our customers and support future growth drove slight respectively. Although 2024 P and L were again generated more than $1,000,000,000 of adjusted free cash flow. We stayed the course on our capital allocation priorities and commitment to shareholders and returned $832,000,000 to shareholders via dividends and share repurchases. A commitment that was reinforced with today's Board of Directors' action to increase our share repurchase authorization by $750,000,000 Now let's take a closer look at our fourth quarter performance. As always, there are three main drivers of our results.

Our balanced portfolio of customer end markets, breadth of our product solutions and services portfolio and relentless execution of our three part strategy for growth.

First, the balanced portfolio of our diverse customer end markets. As you know, we have five U. S. Sales channels, corporate, small business, healthcare, government and education. Each channel is a meaningful $1,000,000,000 plus per year business Within each channel, teams are further segmented to focus on customer end markets, including geographies and verticals. We also have our U. K. And Canadian operations, which together delivered sales of $2,500,000,000 U. S. Dollars The benefit of our diverse end markets was clear during the fourth quarter. Commercial markets showed signs of stability in the quarter and returned to growth. While customer behavior remained cautious, and we did not experience traditional year end budget flush, we did see greater willingness by some customers to spend the remaining budgets. Corporate and small business increased their top line both up by 4%. International or other increased by 5% and public increased 6% driven by healthcare's standout performance, up [indiscernible] Within public, unique end market factors continue to influence education and government. Education declined 2%, has high strong performance was more than offset by declines in K-twelve. As expected, the K-twelve market experienced the impact of the first full period without any stimulus based government funding programs.

Government's decline was driven by federal end market uncertainty where we saw spending pauses as agencies awaited clarity around priorities from the incoming clearly a quarter of varied end market performance. The second driver of our performance this quarter was our broad and deep portfolio of solutions and services. Hardware increased to top line by 4% with client devices, NetComm and storage all increasing the single digits or better in The U. S. Client devices growth was primarily driven by normal refresh of aging units. Software net sales were up 5% as robust double digit SaaS and IaaS growth continued to be impacted by the market transition away from licenses. Customer spend and gross profit both increased mid single digits. Cloud remained an important driver of performance across the business and once again was a meaningful contributor to gross profit. Cloud profit increased by mid teens. Security was a top contributor to cloud and software results and delivered [indiscernible] digit top line and profit growth. Customers continue to leverage our growing services capabilities as part of their strategies and services top line increased 10%. Overall services delivered double digit profit growth CEW managed services increased more than 20%. As you can see, our deep and broad portfolio of solutions enabled the team to address customers' most pressing priorities, That leads to our third driver of results, relentless commitment to our growth strategy.

During 2024, we maintained our strategic fortitude and patience We continue to build upon our productivity and efficiency work and further strengthen our relevance to our customers, coworkers and partners. One way we are strengthening and differentiating our relevance is by deepening our technical and industry expertise. We know more than anything that customers value our unbiased, highly informed point of view. A point of view that enables our ability to architect and implement full stack multi branded solutions, which cut through the noise and deliver outcomes that address each customer's unique needs. Sitting side by side with the C suite at the table, CDW industry experts add value to the decision process and move us up the stack. CUW helped our offerings showcase this expertise.

Our deeply experienced healthcare subject matter experts include more than two dozen former industry executives. These former CIOs, CTOs and practitioners have been crucial in developing and launching solutions only possible by combining their deep industry specific expertise expertise with our extensive portfolio and capabilities. Solutions like our proprietary Patient Room Next AI and IoT based solution and innovative healthcare transformation centers located across The U. S. Healthcare transformation centers are collaborative spaces equipped with the latest technology and staffed by experts where healthcare organizations can explore new concepts develop strategies and test customized solutions. Solutions that improve patient care and clinical workflows across the care continuum. One center is capable of running a 2,000 bed hospital One And another center is focused on exploring scalable and evolving technologies for enhancing quality of life for those aged 50 and older. These transformation centers deliver measurable clinical outcomes. Outcomes like reduced readmission rates, where real time access to patient data is combined with advanced analytics so providers can identify at risk patients and intervene before they are readmitted. And outcomes like enhanced patient satisfaction, where mobile communication tools and solutions deliver greater engagement and streamlined care coordination, driving higher patient approval scores.

Expertise and our capabilities in the fastest growth, highest relevance cloud and software vectors. [indiscernible] During 2024, we maintained a patient and opportunistic stance towards capital When the target and the timing was right, we leveraged our cash position and strong free cash flow. And on November 27, we closed our acquisition of Mission Cloud Services. A premier AWS partner and leader in driving cloud adoption and migration. Mission complements recent investments we have made to drive greater scale in our services and as a service offerings. Investments in capabilities that include cloud migration, full stack and cloud native software development, DevOps engineering, robust consulting and cloud based workflow automation expertise and resources. Mission expands our AWS Connect opportunities and delivers a compelling managed service offering that can be purchased through AWS Marketplace allowing customers to burn down their cloud commits. We know how powerful this can be. Let me share an example of a solution that combined professional and managed services with AWS Connect and AI. It's an example of how we help a customer drive efficiency find cost savings and improve the customers' experiences and outcomes in today's challenging environment. A financial solutions company's on premise contact center needed an upgrade After careful evaluation, the CDW team designed a flexible custom solution that improved both customer service and streamlined operations.

The solution includes cloud based compute, database and business intelligence that uses AI driven analytics and natural language understanding. The project began with a multi hundred thousand dollars initial investment in CDW delivered technical and implementation services that provided strong ROI to the customer.

The solution represents a significant monthly spend commitment to CDW for cloud based customer service agent access to customer data and managed services for continuous performance monitoring. This integrated hardware, software and services solution reduces high maintenance Maintenance costs. Improved scalability, agent performance, customer experience, and enabled innovative customer service solutions from a data driven insight. It's an excellent example of the power of integrating managed professional services with our full portfolio of cloud and AI offers. Offerings. Solutions made even more compelling with mission, in the family. While we have more to do, our investments in high relevance, high growth areas over the past five years have positioned us well to deliver value to our customers. However they need us. That leads us to our view for 2025. We currently look for The U. S. IT market to grow by low single digits in 2025 on a customer spend basis and for us to outpace market growth by 200 to 300 basis points. This outlook factors in expected impact from unique market dynamics on the public spending side, particularly in federal and education, as well as expected intensified pressure for our U. K. And Canadian operations given their market space increased uncertainty driven by macro factors and political change.

As always, we base our view of IT growth on what we are seeing in the market and what our customers are telling us about their plans and priorities for 2025. Right now, our commercial and public customers' decisions remain deliberate. With ongoing project scrutiny, pursuit of short term ROIs and continued large project buying. While our market view recognizes the potential for meaningful exogenous factors to impact demand, including policy uncertainty, the level of inflation, the impact of tariffs and other potential disruptors. It does not weigh these wild cards too heavily. Now, we are comfortable with our prudent outlook. As we always do, we will provide an updated perspective on business condition and refine our view of the market as we move through the year. In the meantime, we will continue to do what we do best. Out execute the competition. Whatever the conditions, we will use all of our competitive advantages to outperform the market. Our customers face proliferating data and ever expanding cybersecurity needs. They face expanding workloads and hardware apps and obsolescence. At the same time, they face the potential and promise of AI and other exciting innovative technologies. With our broad and deep portfolio of solutions and services and capabilities, capabilities, we will be there for our customers as their trusted advisor.

Today and tomorrow wherever their priorities lie. Now let me turn it over to Al, who will provide more detail on the financials and outlook. [indiscernible] Thank you, Chris, and good morning, everyone. I will start my prepared remarks with details on our fourth quarter provide a brief twenty twenty four full year summary, move to capital allocation priorities and then finish our 2025 outlook. Fourth quarter gross profit of $1,200,000,000 is roughly flat year over year but up 2% compared to the prior year, factoring in one less day.

This was above our original expectation of low to mid single digit declines as our teams captured increased demand for cloud, security services, certain hardware products. In line with our expectations, gross margin of 22.3% was up 50 basis points on a quarter over quarter basis, the highest margin quarter of the year, but below the record level of 23% achieved in the fourth quarter of twenty twenty three. Compared to the prior year, we decline in gross margin was due to a higher contribution from notebook, and desktop sales and a modest contraction in margin rate across a few product categories. [indiscernible] 35.8% of our gross profit compared to 35.4% in the prior year fourth quarter. We continue to meet customers where they need us most. The netted down category of solutions represents an important and durable trend within our business.

While we expect netted down revenue streams to outgrow the rest of the portfolio over time, driven by consistently strong cloud and SaaS growth we may see variance in growth from some of the other netted down categories, including warranties, and software assurance. As we did this quarter. Moving to a quick review of our channels for the quarter.

An average daily sales basis, the commercial business achieved top line growth for the first time in two years, alongside firm gross margins In the public space, education was roughly seasonal in its sequential decline, And while government remained challenged, the sequential decline was less than historical levels. Healthcare was a standout performer this quarter, as our team outperformed in a challenging end market reflecting the strategic investments we've made in this space. International net sales grew for the quarter driven by product volume growth or behind historical fourth quarter sequential growth rates due to a lack of budget flush activity.

We still expect volatility in the international end markets as customers in these regions face ongoing economic, and political uncertainty. Overall, I want to credit our teams for delivering Rx above our expectations a tough environment. Turning to expenses in the fourth quarter. Non GAAP SG and A totaled $656,000,000 up 3.3% year over year.

Compared to our prior expectation for SG and A to be roughly flat year over year, this increase was mostly due to higher gross profit achievement. The efficiency ratio of non GAAP SG and A to gross profit was 56.8%.

Co worker count at the end of the year was approximately 15,100 while customer facing co worker count was approximately 10,900.

Both down 300 coworkers from the third quarter and flat to last year. These numbers take into consideration both our acquisition of Mission Cloud Services and the actions taken in the fourth quarter Our goal is to balance growth expansion of capabilities and exceptional customer experience with greater efficiency and cost leverage from a broader operations. Non GAAP operating income was approximately $500,000,000 down 3.8% versus the prior year driven by lower gross margins year over year combined with higher expenses. Non GAAP operating income margin of 9.6% was down from the record 10.3% in the prior year Our non GAAP net income was $333,000,000 in the quarter, down 4.7% on a year over year basis impacted by slightly higher interest expense following our debt refinancing and lower interest income due to modestly lower rates.

With fourth quarter weighted average diluted shares of $134,400,000 Non GAAP net income per diluted share $2.48 down 3.7% versus the prior year.

Shifting gears to briefly review full year results. 2024 was the second consecutive year we experienced a challenging environment. Demand was below what we initially anticipated and customer sentiment was cautious throughout the year with more deliberation and decision making, and elongated sales cycles Net net, this led to a 1.8% decline in net sales and a 1.1% decline in gross profit.

Despite these declines, gross margins held firm year over year at 21.9% versus 21.8% showing that even when client devices are stronger, and solution hardware is weaker, our margins remain resilient. Our strategy investments are working.

Investments like the recent acquisition of Mission Cloud Services brings capabilities, which should position us well for growth in the future.

As always, we will continue to pivot to meet customers where they need us. No matter the environment, Down the P and L, we saw higher year over year non GAAP expenses as we pivoted to adjust our fixed cost base to align to an uneven demand environment and made judicious investments in support of our strategy.

This led to year over year over year declines of 4.54.43.6% in our non GAAP operating income, non GAAP net income, and non GAAP net income per diluted share respectively. Moving to the balance sheet. Period end net debt was roughly $5,100,000,000 up roughly $253,000,000 from the third quarter and approximately $69,000,000 since year end 2023. This was driven by our use of cash during the quarter notably to fund our acquisition of Mission Cloud Services. Liquidity remains strong with cash, plus revolver availability of approximately $1,700,000,000 The three month average cash conversion cycle is eighteen days.

Up one day from the prior year and at the low end of our targeted range of high teens to low 20s. This cash conversion reflects our effective management of working capital, including proactive management of our inventory levels, As we've mentioned in the past, timing and market dynamics will influence working capital any given quarter, We continue to believe our target cash conversion range remains the best guidepost for modeling working capital longer term.

Adjusted free cash flow was $315,000,000 in the quarter, consistent with our expectations. For 2024 in total, adjusted free cash flow was a healthy $1,100,000,000 and 84% of our non GAAP net income. Achieving our stated rule of thumb of 80% to 90% of non GAAP net income.

For the quarter, we utilized cash consistent with our 2024 capital allocation objectives.

Including returning approximately hundred and $46,000,000 in share repurchases and $83,000,000 in the form of dividends.

For the year, with $332,000,000 of dividends, and $500,000,000 of share repurchases, we exceeded our target of returning 50% to 75% of adjusted free cash flow to shareholders, finishing the year at approximately 77%. That brings me to our capital allocation priorities.

Our first capital priority is to increase the dividend in line with our non GAAP net income growth. We announced on our last earnings call an approximate our eleventh consecutive year in increasing the dividend.

We will continue to prudently manage our dividend, respect to the growth environment, and target a roughly 25% payout ratio, versus non GAAP net income going forward. Our second priority is ensure we have the right capital structure in place. We ended the fourth quarter at 2.5 times net leverage. Within our targeted range of two to three times. Will continue to proactively manage liquidity while maintaining flexibility. As evidenced by our 2024 debt refinancing and redemption actions. Finally, our third and fourth third and fourth capital allocation priorities of M and A and share repurchases remain important drivers of shareholder value.

We continually evaluate M and A opportunities that could accelerate our three part strategy for growth as shown by our recent acquisition of Mission Cloud Services.

Likewise, remain committed to our target to return 50% to 75% of our adjusted free cash flow to shareholders via the dividend and share repurchases. As such, we are pleased to announce an additional $750,000,000 share repurchase authorization program approved by our Board of Directors on top of the approximately $588,000,000 of authorization remaining under our current program for 2025, and beyond.

And that leads us to our outlook.

Customer sentiment remains cautious across end markets.

Conditions to persist in the near term, but are cautiously optimistic about '25 as an inflection point for the demand cycle. Customers still have a compelling need to address priorities. Such as workload growth, increasing security threats, and aging client devices. And while uncertain macroeconomic conditions and a complex technology landscape may continue to weigh on we anticipate leveling demand for these products. [indiscernible] in areas like NetComm that saw depressed growth rates in 2024 driven by product digestion and after lapping tough 2023 compares. With these factors in mind, our full year 2025 expectation is for the IT market to grow low single digits. Basis points on a customer spend basis. Based on the anticipated mix of products and solutions, we expect low single digit gross profit growth. We also expect gross margins to remain relatively stable and within the range of 2024 levels.

As we continue to scale up our cloud, SaaS and services businesses, while balancing the prospect of a return to growth in solutions hardware.

We expect first half gross profit to be slightly lower than the second half reasonably in line with our historical seasonal splits of 48% versus 52%. Finally, we expect our full year non GAAP earnings per diluted share to grow low single digits year over year. As we focus on profitable growth exceptional customer outcomes and an effective execution of our capital allocation priorities. Full year constant currency basis. On that note, we expect currency to be a slight headwind to reported growth throughout the year. Moving to modeling thoughts for the first quarter. We anticipate mid single digit gross profit decline sequentially relatively in line with historical levels. We leading to low single digit year over year growth.

We expect gross margin to be similar to overall 2024 levels.

Moving down the P and L, we expect first quarter operating expenses to be similar to both the first quarter and fourth quarter of twenty twenty four on a dollar basis. As we've seen in the last few years, this will result in the first quarter being the highest level of non GAAP SG and A as a percentage of gross profit for the year. Finally, we expect first quarter non GAAP earnings per diluted share to grow in the CDW single digit range year over year. That concludes the financial summary. As always, we will provide updated views on the macro environment and our business on our future earnings calls. With that, I will ask the operator to open it for questions. We would ask each of you to limit your questions to one, with a brief follow-up.

Thank you very much. We'd now like to open the lines for Q and A. A. Our first question comes from Eric Dariani of Evercore ISI.

Thanks a lot. Good morning, everyone. So I guess just to start with Chris, when I think about the calendar 2025 guide that folks have provided, how are you thinking about different parts of the public vertical kind of stack here in that growth profile? I guess, given the focus on efficiencies and the impact from [indiscernible] how do you see that kind of playing out for CW CDW the near to medium term? That would be really helpful.

Yes. On the public sector side, we've taken into consideration those areas that we can in our typical seasonality and some of the the unique factors that we're facing in terms of education being at the end of its that large funding cycle, etcetera. But here's what I would say. I'd say, look, it's it's too early to tell where all these things are coming out. We've got a lot of lack of clarity Things are moving fast. They're very fluid. And so we're basically taking it and analyzing as we go and we'll update as we go through the year. I would say that when it comes to Doge, there are going to be puts and takes Anytime you reduce workforce that flow tends to slow things down in the government space and we have factored that in. But on the other side, anything driving efficiency is positive for technology over the long run. So we've tried to be prudent and cautious in our federal approach knowing full well that we just don't have all the clarity and we're going continue to assess and update you as we go through the year. On education, we're getting news every single day around the education side.

And so we're just going to we're just going to be very measured. We're going to stay aware. We're going to stay attuned but not be overly reactive. And we're going to continue to assess funding sources and policy changes across the board. I said, there are going to be puts and takes. There's going to be you'll have you'll have You'll have reductions, but you'll also have realignments and it'll be our job figure out where the opportunities and risks are. And we got a strong we got a very strong federal, state and local and education business. We have forty years of of finding where the funds are and helping our CDW. Now. There's a lot of discussion with customers. There's a lot of analysis. They really are turning to us to understand on a daily basis and longer term. Certainly, I think you're going to see some air pockets as people figure things out. But over the long run, we think that technology is going to be a winner across the federal and education landscape.

Got it. That's really helpful. If I could just follow-up When I think about the low single digit gross profit dollar guide for the year, are you expecting the broader IT spend and CDW that your top line to be better than that So what's kind of driving a bit more muted gross profit dollars worth if you may? Is it mix or is there some other factors that we should be aware about? Help us think about that low single digit profit dollar growth would be helpful. Thank you.

Yes, good morning, Amit. It's Al. I would say, look, as you think about our outlook and down the P and L, the actual variance between the line items from customer spend, gross profit all the way down to EPS, The variance in those growth rates are not significant. So that's number one. So there's nothing there too meaningful to report beyond maybe a little bit of a shifting of mix. So and then and I maybe would just note that with that shifting of mix, we would probably continue to see a little bit of compression in net sales as we continue to lead in. Lean into netted down, which will bolster gross profit.

A little bit of a continued pressure on the expense line that would depress non GAAP operating income a bit, but then you pick up some leverage as you get further down into EPS. So the variance between those categories not too meaningful overall.

Perfect. Thank you very much.

Thank you very much. Our next question comes from Samik Chatterjee of JPMorgan. Samik, your line is now open.

Great. Thanks for taking my questions. I guess maybe to start off on the 4Q results, you had a strong end to the year, but it also seemed like within the verticals that you called out, healthcare was particularly strong up think close to 30% on a day adjusted basis. Can you just go through sort of what drove that? Was it a lot of transaction business or any sort of anything else that drove that number to be that strong? And I have a quick follow-up.

Yes, sure. Look, healthcare was a standout healthcare has been performing for several quarters now. The net sales number reflected the mix, so we saw a really nice number there. But at the end of the day, it's been a very balanced success over the last couple quarters with healthcare, which is a reflection of our strategy and how we bring value to our customers. The broad and deep portfolio, particularly around cloud, when you couple that with our deep healthcare expertise, those enable that healthcare teams to be real trusted partners and help our healthcare customers on their cloud journeys. We've made a number of investments behind healthcare in the capabilities and technologies and partners, frankly, that we bring to bear. And that is just bearing fruit. Now I would say that we are overlapping a couple of very difficult years. So the number, it does seem high. But at the end of the day, very, very proud of the healthcare team and the focus and that are really earlier in their journey on cloud and we're right there to help them along the way. And maybe, Usmanik, I'll just add on that, Chris' point about the the comps.

As we think about overcoming the comps on net comp, healthcare would be a big one in that regard. It also add that business as we've invested behind it has built a nice client base including some larger transactions. So So while we are definitely pleased with the execution and the outcomes there, there is an element there of of transactions that may not be fully recurring. And then finally, I would just note, while the business is really strong in healthcare, it tended to somewhat offset some of the declines from government education. So that would be like round out kind of that overall public sector.

Got it. Got it. And probably this one, the follow-up for you. I'm just following up on Amit's last question. You mentioned the mix sort of on the netted sales side. And I think what you're referring to, which you refer in your prepared remarks is the change in practices from like some some Microsoft on the subscription on the cloud subscriptions I think a lot of investors are curious sort of what that magnitude exposure looks like and how you're sort of navigating through those changes and policies from some of these sort of cloud companies?

Sure, Samik. I think we mentioned that last call. On some of the Microsoft changes where we got the question with respect to that. Look, we see program changes and changes incentive from partners very commonly. This one was telegraphed for quite a while and so the impact on '25 from that is not material to our overall results. We had been seeing that coming. We were contemplating that. And as usual, we are pivoting to both the other opportunities for growth with Microsoft, but also with other partners.

Okay, great. Thank you. Thanks for taking my questions. Our next question comes from Harry Reid of Redburn. Harry, your line is now open. Hi, good morning, everyone. Just following up on a comment made helping clients run down that annual commit on AWS. I'm just thinking about the moats in the business and is there's any spread of disintermediation. Is the by nature the value added service of the reseller essentially protecting that moat and why your clients wouldn't directly from AWS marketplace for some of their software?

Just any comments there would be very helpful. Thank you.

Yes. Good morning. It's great to have you on.

I would characterize it this way. The moat that CDW has is all of the services that we wrap around the marketplace purchase In fact, we were just named AWS Marketplace Partner of the Year. And our customers really turned to us because marketplace is another complexity, if you will, in the procurement chain. And CDW brings to bear all the input and expertise that have helped customers make customers make good decisions. The other thing to remember is that our clients are really squarely hybrid cloud, meaning multi cloud and on prem and while cloud is obviously growing very quickly. We have many customers who are also repatriating back to on premise and have particular reasons that they want stay on premise, including some of the advances in AI and efficiency around models that etcetera. So the interconnectivity that our customers have across Third's higher hybrid infrastructure is critically important to have knowledge around. And the only ones who can do that are folks like us who understand the customers' full estate and how things work together. So we're we are investing behind that. MissionCloud is a great example of a strategic invest [indiscernible] pleased to have them as part of the family and they're they've joined us and taken off well.

That's very clear. Thank you.

Thank you very much.

Our next question comes from Blupu Bhattacharya of Bank of America. Blupu, your line not open. Hi. Thank you for taking my questions. First one for Chris. In the past SMB has been a bellwether for a change in end market demand. Looks like revenues in that segment this quarter grew about 3% year on year and that's after essentially two years of weakness. So Chris, was there any one time in this quarter? And do you think that that segment can now grow year on year? And do should we think this as a positive indication for overall market demand?

And I have a follow-up for Al.

Yes. I would say, look, our small business and corporate businesses, both showed signs of stabilization. This past quarter. And we'd said before that we saw small business kind of bumping along the bottom and now in Q4 a little bit of stabilization. We are seeing when I say stabilization, I want to be clear that what I mean is the rhythm of the business. We're seeing less unevenness, more stability in the rhythm of the business. The activities in the business, etcetera. So we find that really encouraging. At the same time, Ruplu, I'd just say that customers remain cautious and we are taking that into account as we think about our outlook and being very prudent, particularly with everything that's happening in the environment. It's unclear what's going to happen with inflation, clearly interest rates is an issue out there. And then just add all the policy uncertainty. And impact downstream impact uncertainty, I think we're going to see small businesses continue to be cautious. But the good news is, as they're cautious and they're optimizing for cost and cost efficiency. We've been helping them significantly using cloud and ratable and subscription offerings. So I wouldn't call it a rebound just yet with small business.

But we are cautiously optimistic. Okay. Thanks for that, Chris.

Al, if I can ask you a question on margins.

Specifically, if we look at the gross margin of the core business, ex the netted down items, looks like fiscal twenty twenty four overall came in at 15.4%, so it was down about 40 bps.

Year on year. But the fourth quarter, I think came in the core business margins at 15.5%. So that grew sequentially. My question to you is fiscal twenty twenty five should see an improvement in some end market or end device products like PCs. So how are you thinking about core business margins trending in fiscal twenty twenty five?

Thank you. Sure. Thanks, Rupu.

A couple of things I would note. You were right. For the quarter, our non netted down margin was 15.5%. That sequentially was up about 30 basis points, but it was down year over year and I think the full year down about 40 basis points, you might have mentioned that. As we think about 2025, would say net net Root Blue would expect that margin to hold reasonably firm. And the reason for that would be, well, we expect that client will continue to move along the path. We wouldn't expect significant acceleration, but move along the path that's been on. We would also expect modest growth of solutions which we think will aid those non netted down margins And then we are cautiously optimistic as hardware comes back that you will see more services attached, which certainly will aid that margin as well. So all things considered, we would expect that non mid down margin to hold pretty firm during 2025.

Okay. Thanks for all the details. Appreciate it. Our next question comes from Keith Olson of Northcoast Research. Keith, your line is now open.

Thanks. Good morning, guys. Hey, Chris, just a little bit more on the Mission Cloud Services acquisition. Perhaps CDW you provide a little context about what it provides to you guys in terms of the financial statements? I mean, you've done a good job explaining the business.

But in terms of is it accretive to your gross margins and to a bottom line? CDW you guys require a significant investment to kind of make it more of a CDW type integrated product that you guys have? [indiscernible] Yes, sure, Keith. Let me start and then I'll hand it over to Al. We're really excited about MissionCloud. It's an fast growth mode. It's a profitable business. It brings incredible AWS expertise and reputation in the market. And we're really excited to bring that to bear across our customer base As you know, they are focused on mid market and small business, which is a sweet spot for us, but extensible into the rest of our our segments. In terms of accretive, the price we paid and we won't see much we won't see much addition to the bottom line profitability this year because of the forgone interest. And as a result, we're not going to see a big in impact. That said, we do expect MissionCloud to have a significant impact on our strategy and growth rates going forward.

Yes. Thanks, Kate. The only thing I would add is, look, Mission is a company that is in growth mode. But notably is profitable So we deemed it and deem it as a high quality asset but we are in the formative stages of integration. So to Chris' point, the materiality at the gross profit and the non GAAP operating income line would be not substantial in '25.

And then really pretty much flat down to EPS when you think about the interest income.

And again, and Chris hit this, as we fully integrate in '25 and we open the aperture to our vast customer base. We think the upside in the accretion possibilities for mission are really significant.

Great. I appreciate it. And then earlier on, you mentioned a little bit gross margin pressure from some price in the end markets. I just want to make sure I understood that correctly. And two, what's the expectation that will continue going forward?

Sure, Keith.

Yes, in the kind of walk of the gross margin can and the puts and takes, one of the things that I mentioned was like for like, we saw a bit of compression, particularly in the product side of the house, just recall, Keith, that we've had PED now several years of product margins holding up really, really strong. And I think we've called out some point you could see some compression. I would not note what we saw in the quarter as material and probably the most notable area where we saw a little bit of compression was client. So when we factor in all of the elements on the margin front for 2025, Certainly, we've made some space for a little compression, but we would not cause call that an outsized contributor.

Great. Thank you.

Thank you very much. Next question comes from Eric Woodring of Morgan Stanley. Eric, your line is now open.

Great. Thank you so much for taking my question. Good morning, guys.

Chris, if I look back over the last, call it, decade plus, 2024 was the first year that your earnings growth did not outpace your revenue growth.

And as I look at 2025, you are guiding as I referenced EPS growth largely in line with gross profit and revenue growth. And so when I take a step back, I'm just I'm wondering why maybe we aren't seeing as much leverage as in the model as you've seen historically. Even including past periods where there was macro and uncertainty or a dynamic market. Could you maybe just help us understand maybe why we're not seeing that leverage materialize? And anything that's unique about this environment that truly is different than we look at the past CDW? And then I have a quick follow-up. Thank you.

Yes, sure. I'd characterize it this way. We're our goal is to balance Gross investments in our capabilities with efficiency CDW, across the broad base of our operations. And [indiscernible] when you look at the investments we've made over the last several years, they've been significant and producing very good results. But we've been doing this in an environment that exacerbates the kind of deleverage and that is one where we aren't growing. And we've taken a number of measures as you know, to ensure we right size the business for the current environment for demand, but also, Eric, ensure that we are positioned for growth going forward. I think we've been investing very judiciously. We've been investing very deliberately. And I think in areas that are high growth, high relevance and healthcare is a great example seeing that strategy pay off are cloud and SaaS business growth and our security business growth, those are great examples of that strategy paying off. But the deleveraging has to do with the consulatives of factors, I'd say, which is investing while we've got initiatives going on for productivity and CDW, in an environment that is low to no growth. Thank you I appreciate that.

I appreciate that. [indiscernible] That said, we do expect obviously, as we move forward for operating leverage to come back over the next year and beyond, I mean, that is our goal as well, provided that we are in an environment that supports Okay. No, thank you, Chris. Sorry for cutting you off there. And maybe Chris, just a quick follow-up is, could probably make the case for leaning more into M and A in this environment given the change in administration, your historical comments about where you see workload shifting and how that might impact client spend with CDW.

Is your appetite for M and A higher today than when we look back over the last last, call it, two to three years? And besides just consolidating a fragmented market, where are the specific product gaps you believe are most critical for CDW to address today?

That's it for me. Thank you so much.

Yes, Eric, it's really interesting question. What I would say is we always have a large app appetite for M and A. We are in a different position today because we do have scale and foundation in those areas that we've been driving growth when we think about our cloud capabilities, we think about security capabilities, we think about data capabilities. We've been growing those now over five years and have a really good base of scale. I think that puts us in a position that could be really opportunistic to add to those capabilities and fortify them, while at the same time identifying tuck ins that might be more specific to an industry or specific to a particular emerging technology. Our focal areas frankly have not changed at dramatically or at all from an M and A perspective. But I would say that we are adding a lens around industry capability specifically. You've seen us buy companies specific to education, specific to federal. This has been a very good strategy for us and we see that work quite a bit. So I just look for us to do more of that. But all said and done, we are patient we are opportunistic and we look for great assets.

And maybe, Eric, I'd just add look, I think 2024 is a great example where we did bring the full array of capital allocation priorities. So during a tough period, where we would have deemed our stock to be more attractive levels we did lean in more to share repurchases. But behind the scenes looking actively at what is the next acquisition opportunity that could fuel our operating income and really compounding of earnings. So we will continue with that drumbeat and continue to look at opportunities that fulfill our capability needs but also drive earnings power.

Makes sense. Thanks so much guys. Good luck.

Thank you very much. Our next question comes from George Blank of Barclays. George, your line is now open.

Well, hey, thanks for taking my question. Maybe to El, just maybe if you can impact kind of fourth quarter kind of in the prepared remarks, you guys talked about underlying hardware including the outcome and the storage up mid single digit. Just curious if you can unpackage by the channel, whether that's all driven by corporate and SMB or whether some from the healthcare front? And also can you give more color in terms of the full year outlook on the netcom? CDW seems like you guys are seeing some green shoots Just curious if we should expect some sort of inflation particularly just on NetComm side, consider we are probably passing some of the [indiscernible] Okay, George, just take a crack at that. That was a lie. So first, just starting with the quarter, on the end market side, I think the punch line would be most significant element that CDW our expectations would be on the commercial side. And we saw a Chris suggested, signs of stabilization on corporate and small business. That was reasonably balanced, George, across different categories of growth in that area. And then the other end markets that I'd point out and we've talked about it is healthcare.

Again, exceptional performance driven by an array of categories, if you will, and really a good reflection of our investing behind that strategy. George, as we look out in 2025, some of the elements of what we saw from a category perspective in Q4, we would expect to continue. That is on the client side, mid single digits growth or better is what we experienced. We think that's a reasonable glide path for 2025. And then we have a modest expectation on solutions hardware We saw 3%, 4% in the quarter. And in that realm, I think is quite reasonable. Where will that come from? Probably sometime com and again we're cautious on the demand there, but we think there could be some continued growth in NetComm. Storage was a strong performer for us. In Q4, And then going the other way, servers, have been challenging and so we are cautious that may continue in that space. So that would be how it round out on the hardware product category side of things.

Okay, great. If I can squeeze in for follow-up. Last quarter, you guys talked briefly on some of the slight increase of competitionpricing pressure. I just want to make sure it's not a transitory in nature kind of completely went away the December and going forward. So maybe you can address if you guys are still seeing some increased competition or that was really sort of completing the rearview mirror? Thank you.

Sure, George. I'll take that first. I would say those comments were not just specific to Q3. It was really a reflection on the broader range of the last two years and the challenge environment we've been in. We've been in a tough down cycle of hardware and with that competition quite fierce. That's continued. I wouldn't point anything out differently in Q4 and we continue to fight the good fight in that regard. I think we came out quite well versus our expectations in that regard. I would not point to when we talk about margins, George, that the competition is having any meaningful impact on our margins in that regard. Okay, great. I'll go back to Ukshay.

Thank you very much. At this time, I'd like to hand the call back to CDW for closing remarks. Okay. Thank you, Carly.

Appreciate that. Let me close by recognizing the incredible dedication and hard work of our coworkers around the globe. Their ongoing commitment to serving our customers is what makes us successful. Thank you to our customers for the privilege and opportunity to help you achieve your goals and thank you to those listening for your time and continued interest in CDW. Alan, I look forward to talking to you next quarter.

As we conclude today's call, we'd like to thank everyone for joining. May now disconnect your line.