‘We know how to bridge the gap between the promise of technology and transformational outcomes. And since deploying AI drives a need for technology investments across the full stack, with entry points across the entire stack, we are uniquely positioned to serve our customers,’ says CDW Chairperson and CEO Christine Leahy.

Global IT solution provider CDW Wednesday blamed tough economic conditions beyond its control for a tough first fiscal quarter 2024. However, the Vernon Hills, Ill.-based company said future prospects look brighter as the positive impact from AI is only now starting to be felt.

CDW Chairperson and CEO Christine Leahy said in her prepared remarks to analysts during the company’s quarterly financial analyst call that financial results came in below CDW’s expectations as market conditions remain challenging.

“In the first quarter, customers demonstrated caution and concern given tightened macro uncertainty waiting on capital investment decisions,” Leahy said. “At the same time, the complexity of the tech landscape continued to ratchet up, particularly given the additional layer of AI and changes in the IT market landscape. This lengthened decision-making as customers deliberated on both how to navigate technology road map and when to spend on infrastructure in a challenging economic environment.”

[Related: CDW’s Executive Shakeup: Meet The New Team]

Investors Wednesday showed their disappointment at CDW’s first fiscal quarter financial results by driving the company’s share prices down by 11.3 percent, or $27.25 per share, to end the trading day at $214.61 per share.

CDW is ranked No. 4 on CRN’s 2023 Solution Provider 500.

While CDW’s sales activity was reflected in a solid pipeline, a delay in customers signing deals pushed out the company’s sales and caused gross profit to lag, Leahy said. The quarter’s results were also impacted by the federal budget stalemate, which led to a pause in its federal channel, she said.

Broadly speaking, customer priorities included cost optimization, data protection and workforce productivity, which drove a focus on security, cloud, as-a-service and AI, Leahy said. Those priorities, she said, had different impacts in CDW’s five sales focuses: corporate, small business, health care, government, and education end markets.

Corporate top line declined 3 percent year over year as decision-making further elongated with a heightened focus on ROI and a high level of project scrutiny given interest rate expectations, Leahy said.

“Cloud and security prioritization continue to drive excellent increases in customer spend, and the team capitalized on client device demand, and year-over-year client sales were up low double digits,” she said. “Corporate saw declines as hardware categories undergoing transition and absorbing capacity, notably servers and netcomm [network and communications]. Storage, however, was a standout category, up double digits, driven by data and workload growth as customers improve efficiency and captured savings from newer solutions.”

Small business posted a 7 percent year-over-year top-line decline for CDW, but the company remained focusing on addressing customers’ mission-critical priorities around security and productivity, which drove meaningful increases in cloud and software customer spend, Leahy said. As with CDW’s corporate business, servers and network and communications sales declined while storage sales increased, she said.

Public sales declined 5 percent from the prior year, while health care declined 2 percent, Leahy said.

“Transactional performance was positive with an increase in client devices, while solutions declined,” she said. “Health-care performance was similar to commercial, with customer caution given the significant focus on cost optimization. … Public safety remained a key focus area, with security up substantially double digits. Cloud adoption continued to gain traction.”

CDW’s federal business saw a midteens decline in sales driven by the Congressional budget impasse, which was not resolved until late March, Leahy said.

“Larger-scale network and data center projects paused,” she said. “Engagement remains strong, and we expect a pickup in spend once agencies are able to allocate their appropriated funds.”

Education continues to be a challenging environment, with a 10 percent year-over-year decline in sales for the segment, Leahy said.

“Hardware categories declined across the board, while ongoing focus on cost elasticity led to a strong double-digit increase in cloud,” she said. “K-12 top line decreased by high single digits. Client device sales increased by low single digits, with some school systems refreshing aged Chromebooks, several funded via normal operating budgets and not stimulus programs. Audiovisual solutions like smart whiteboards and interactive flat panels posted a substantial decline as schools continued to digest purchases from the past several years.”

Massive Opportunities For AI

AI is poised to become a driving force for future growth, Leahy said.

Most of CDW’s customers are at the initial stages of the AI assessment process, developing and analyzing use cases and adopting data governance best practices to deliver insight and ensure end-to-end security, she said.

“Essentially, they’re exploring the art of the possible and working through the science of exactly how do we do this,” she said.

The complexity of adopting AI plays to CDW’s strengths, Leahy said.

“We know how to bridge the gap between the promise of technology and transformational outcomes,” she said. “And since deploying AI drives a need for technology investments across the full stack, with entry points across the entire stack, we are uniquely positioned to serve our customers.”

CDW already offers two AI-focused consulting services, Leahy said. The first is connecting AI to outcomes and ROI via the company’s AI Discovery service. CDW also offers a practical approach to implementing AI including data governance and security it calls Master Operational AI Transitions, or MOAT.

“While still early innings, these services are gaining traction,” she said.

CDW sees a broad AI opportunity in workforce productivity, notably end-user assistance and edge devices; high-value use cases; broad-scale vertical solutions; and full stack, where customers rely on CDW to provide the infrastructure underlying applications and solutions, Leahy said. The company’s broad-scale solutions are vertically based, she said.

“We have expertise across many verticals including health care, financial services and many key industry segments, expertise that enables us to deeply understand the unique needs and challenges faced by organizations in these sectors and tailor solutions and services that directly address their opportunities and pain points,” she said.

CDW is already offering solutions for some specific verticals, Leahy said.

For instance, the company’s education team has leveraged its expertise and relationships to offer a safe AI platform specifically designed for K-12 classrooms with a custom large language model that generates responses from vetted educational content, not the entire internet, she said.

CDW has also developed a proprietary solution, Patient Room Next, which Leahy said addresses the intense pressure institutions face to manage costs while sustaining high levels of patient outcomes.

“Our solution combines AI and connected devices to transform patient rooms, improve care d-livery and enhance overall health-care experiences,” she said. “The solution is HIPAA compliant, and runs on an end-to-end intelligent platform powered by GPUs, a platform that provides real-time insights from data and automated documentation. … Add to that the services and equipment we provide for an end-to-end solution like cameras, network connections and servers, and you can see the opportunity this represents to deliver value for our customers and for CDW.”

AI will take time to become embedded across CDW’s entire customer set, Leahy said.

“We have been here before as we’ve helped our customers adopt cloud,” she said. “And while the hype cycle is much shorter than cloud, the arc of adoption is very similar. Bottom line, we are here for our customers today, and we’ll be there for them in the future as they continue to ramp their efforts.”

CDW By The Numbers

For its first fiscal quarter 2024 ended March 31, CDW reported total revenue of $4.87 billion, down 4.5 percent compared with the $5.10 billion the company reported for the same quarter of fiscal 2023.

That missed analyst revenue expectations by $160 million, according to Seeking Alpha.

By segment, CDW reported corporate segment revenue of $2.14 billion, down 3.1 percent over last year; small-business segment revenue of $380.9 million, down 7.4 percent; government segment revenue of $543.3 million, down 1.5 percent; education segment revenue of $596.8 million, down 10.4 percent; health-care segment revenue of $584.6 million, down 1.8 percent; and other revenue including the company’s U.K. and Canadian operations of $631.2 million, down 6.5 percent.

CDW also reported GAAP net income of $216.1 million, or $1.59 per share, up from last year’s $230.1 million, or $1.68 per share. On a non-GAAP basis, the company reported net income of $260.8 million, or $1.92 per share, down from last year’s $278.7 million, or $2.03 per share.

Non-GAAP earnings missed analyst expectations by 23 cents per share, according to seeking Alpha.