Participants

Steve O’Brien; Vice President, Investor Relations; CDW Corp

Christine Leahy; Chairman of the Board, President, Chief Executive Officer; CDW Corp

Albert Miralles; Chief Financial Officer, Senior Vice President; CDW Corp

Adam Tindle; Analyst; Raymond James

Erik Woodring; Analyst; Morgan Stanley

Amit Daryanani; Analyst; Evercore

Matt Sheerin; Analyst; Stifel

Keith Housum; Anallyst; Northcoast Research

Samik Chatterjee; Analyst; JPMorgan

Presentation

Operator

(Operator Instructions)
Good morning all and thank you for joining us for the CDW Q3 2024 earnings call.
My name is Carly, and I'll be co-ordinating your call today.
(Operator Instructions)
I'd now like to hand over to your host, Steven O'Brien, Vice President of Investor Relations to begin.
Steven floor is yours.

Steve O’Brien

Thank you, currently.
Good morning, everyone.
Joining me today to review our third quarter 2024 results are Chris Corley, our Chair and Chief Executive Officer, and Al Miralles, our Chief Financial Officer. Our earnings release was distributed this morning and is available on our website, investor.cdw.com, along with supply rental slides that you can use all along during the call, I'd like to remind you that certain comments made in 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 8-K we furnished the SEC today and in the Company's, other filings with SEC. CDW assumes no obligation to update the information presented during this webcast. 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 8-K.
Please note, all references to growth rates or dollar amount changes in our remarks today are versus the comparable period in 2023, with net sales growth rates described on an average daily sales basis unless otherwise indicated, replay of this webcast will be posted to our website later today.
I also want to remind you that this 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.

Christine Leahy

Thank you, Steve.
Good morning, everyone, and I'll begin today's call with a brief overview of our third quarter performance in view for the balance of the year, how will provide additional detail on our results. Our capital allocation priorities and our outlook.
Will move quickly through our prepared remarks to ensure we have plenty of time for questions. Market conditions in the third quarter were challenging, while demand for cloud solutions remains strong and we continue to see a pickup in client device growth. Hardware Solutions remains under pressure, and the firmer footing we anticipated for our corporate channel did not materialize within this complex environment the team delivered gross profit of $1.2 billion, 2% lower than last year and gross margin of 21.8%, net sales of $5.5 billion, 3.5% lower on an average daily sales basis, non-GAAP operating income of $534 million down 4% year-over-year. Non-GAAP net income per share of $2.63, down 3% year-over-year. Adjusted free cash flow $261 million.
While our success in meeting customer priorities with cost, effective software and cloud solutions as well as services led to a resilient gross margin and strong cash flow results did not meet our expectations as lower than projected solutions hardware grow a shortfall in volume. The shortfall in volume reflects those external factors and CDW specific dynamics.
Let's take a look at each of these and most importantly, the actions in place to mitigate future impacts. First, the macro in IT spending environment remained challenging. Technology complexity, combined with persistent economic and geopolitical uncertainty has led to a large project delays and further extension of sales cycles. Layered on top of the uncertainty around the outcome of the US election, which has dampened not only government spending but also other public sector end markets as well as spend from commercial customers.
And finally, this limited demand environment has heightened competition and increased pricing intensity across all end markets. Beyond the current environment, market conditions continue to reflect the secular shifts we've experienced over the past several years, shifts that impact our customers consume IT and how customers pay for IT consumption shifts driven by the service and pay as you go public and private cloud focus have contributed to market pressure on hardware solutions.
And while our conviction toward a hybrid cloud approach for ITs is unwavering market demand continues to reflect unprecedented hardware cyclicality that resulted from pandemic-driven demand for work and learn from anywhere on endpoint collaboration and Netcom solutions, which resulted in an off-cycle demand boom, a period of supply chain volatility and subsequent digestion.
All of these external factors that clearly impacted our results in the quarter and over the past year, the impact has been further amplified by three CDW specific dynamics.
First dynamic relates to our long-standing financial discipline. While our North Star is to provide value to our customers in highly competitive markets, we maintain our discipline when competitors pursue transactions at on economics terms. While this contributed to lower third quarter sales and gross profit, our gross and operating margins held firm, even while we mixed into lower margin client devices. We've seen this market behavior before and expect it to dissipate as the demand environment improves.
Second, our exposure to larger deals. As we have deepened and broadened our strategic capabilities, including through the addition of serious, our ability to deliver a large full-stack full outcome projects has expanded. Projects at the higher dollar Tier that can be pushed for any number of reasons this can drive year-over-year performance lumpiness and depending on the size and timing of decisions impact results. Impact that is more acute during periods of low demand. You see this in commercial and federal this quarter were a larger deal expected to close, were deferred or reduced.
And the third specific item pertains to our cloud and SaaS-based business. While we have grown this business significantly during the past several years, we have not yet achieved the scale we desire relative to our overall portfolio.
As such when demand for hardware softened, it has a more outsized impact on our financial results. I hope this perspective helps contextualize of CDW specific dynamics amplified the impact at the low market demand environment and created a New York near term growth challenge that we had not yet been able to overcome. These are not excuses we own our results.
So, let's turn to what's important. What do we do thing. As always, our continuous improvement and seller effectiveness is ongoing. So, this means delivering repeatable solutions and further streamlining the sales processes to match this month to maximize sales professionals can take productivity.
I'd like to highlight three additional focus areas. First, we are organically and inorganically, growing our capabilities in the fastest growth highest relevance cloud and software vectors to increase scale in both our services and as-a-service offerings. This will deliver greater choice and value to our customers and lead to greater recurring and reoccurring revenue streams.
Second, we are further driving exceptional and differentiated customer experience in our digital capabilities to serve customers in the way they want to plan by consume and managed technology.
And finally, we are enhancing our agility and accelerating pipeline growth. We are building on our customer growth engine by opening new lanes, both existing and new customers and we are deepening our technical and industry expertise across all end markets. We know more than anything Customers value our unbiased highly informed point of view that enables our ability to architect and implement full stack multi-branded solutions, which cut through the noise and deliver the outcomes of our customers need.
These are not new efforts, but we have ramped up intensity. Work is underway and progress is on track. Some actions will have fairly immediate impact and some will take more time to produce results. In the meantime, we remain laser focused on finding pools of profitable growth and converting sales with rigor and speed.
Now let's take a deeper look at quarterly results. Third quarter, corporate net sales decreased 4% of sales cycles, further elongated, most notably for large infrastructure investments, NetCom, storage and servers all declined by significant double digits.
We help customers with client refresh strength, driving growth of high single digits. AIPC remained strong as customers' preference continue to drive higher end devices. Cloud Solutions was a priority in gross profit from cloud increased by double digits. Small business continues to bounce along the bottom, with net sales down 2%. Cloud solutions remains strong given their low upfront commitment and customers continue to sweat data center assets. Unlike our channels, client refresh continues to be pushed out as customers remain in a cash preservation mode.
Security was strong as cyber threats increased for lower profile businesses. The team's success delivering services drove strong double digits growth in both professional and managed services. Public performance was less than seasonal and sales decreased 5% year over year. Healthcare was a bright spot in the quarter, delivering top line growth of 3%. The team continued its success, helping health system adopt managed services and cloud solutions to better control expenses, and they delivered strong double-digit growth in services and cloud spend. Similar to corporate NetCom, storage and servers all declined meaningfully. Client was strong, up double digits for the second quarter in a row.
Government declined 12% with both state local and federal governments performance below seasonal in the quarter. Market conditions were challenging for the federal team. Demand impact was felt most acutely in large hardware solutions deals with federal posted double-digit declines in both Netcom and servers. Several agencies moved ahead with refresh and for the third quarter in a row, client devices increased by double digits. Cloud Solutions posted double digit increase in cloud gross profit, state and local sales declined by low double digits, delays due to increased scrutiny and multiple approvals impacted large infrastructure hardware deals with NetCom storage and servers all posting significant declines.
Security remains a top priority, posting a strong double digit increase in gross profit. Services performance was strong, up high double digits driven by professional services. Education sales declined 5% higher as top line decline, high single digits. Client Devices were flat and slow project materialization and budget constraints and cutbacks at some public universities contributed to double-digit declines in NetCom and servers. The team's success, helping institutions implement cloud solutions to drive cost elasticity delivered double digit growth in cloud spend and gross profit.
Q2 net sales declined by low single digits, largely driven by declines in audio, visual and Netcom a school systems digested investments made over the past few years. The team continued to help refresh agent Chromebooks and delivered high Teen's client device growth.
Cloud delivered double digit gross profit growth. Service SaaS adoption was also up double digits, driven by our managed client device lifecycle solution, which streamlines the configuration deployment management, and a refresh process fiscal system can focus on what really matters for students.
Others our combined UK and Canada business performed above our expectations, up 5%. Both markets experienced stronger demand, albeit off depressed results from the prior year and prior quarter. Both the UK and Canada increased by similar amounts in local currency. As you can see end market performance was mixed during the quarter.
Let's take a look at how this translated to category performance. Portfolio performance reflected our ability to meet customers where and how they wanted with client device cloud and software and services growth. Growth that was more than offset by hardware solutions decline. A low single digit increase in transactions was more than offset by solution sales decreases of double-digit hardware decreased 7%. High single digit client device growth was more than offset by declines in Netcom, storage and servers. Software increased 3.5% with healthy gross profit growth. Cloud was an important driver of this performance, up double digits in gross profit. Services increased by 13%, driven by managed services and warranties.
As you can see what demand very, the diversity and completeness of our portfolio enables us to meet our customers' where and how they need us. And that brings us to our expectations for the rest of the year. Given current conditions, we do not anticipate market demand to improve for the balance of the year, and we now look for the US IT market to be roughly flat with 2023.
We expect our results to continue to reflect the market and CDW specific dynamics I referenced with gross profit growth challenged. Given our mix of hardware and the pronounced cyclicality to market is experiencing. As we always do, we will provide our view on 2025 market conditions in our next call.
There's no denying that we are operating in a tough environment, but we are confident that growth will return. The demand drivers are their workload expansion and data explosion, increased security threats, client device obsolescence and adoption of a AI-powered assistance and applications. And when demand picks up, we will be there to profitably capture these options opportunities.
In the meantime, we are doubling our efforts to drive profit of profitable growth. While this past year has been challenging for us, it has also been challenging for our customers as their trusted advisor customers need us now more than ever our relationships are bolstered by our commitment to deliver value to our customers regardless of the demand environment.
Now let me turn it over to Al, who will provide more detail on our financials and outlook.

Albert Miralles

Thank you, Chris, and good morning, everyone.
I will start my prepared remarks with details on our third quarter performance, move to capital allocation priorities and then finish with our updated 2024 outlook.
Third quarter gross profit of $1.2 billion was down 2.2% versus prior year. This was below our original expectations of low single digit growth at strength in cloud and client devices across most channels was offset by lower demand for solutions hardware. Gross margin of 21.8% was flat year-over-year and quarter-over-quarter and broadly in line with both full year 2023 levels and our expectations for 2024. For third quarter margin was aided by a higher mix into sale for CDW axes also known as netted down revenues. This category grew by 7.1% on a reported basis, once again outpacing overall net sales of our gross profit compared to 32.6% in the prior year third quarter.
Year-over-year expansion came from our teams continue to successfully serve customers with cloud and SaaS-based solutions. This led to our highest quarterly netted down revenues we've seen as a company that we met customers where they're needed us most. That netted down category of solutions continues to represent an important window, durable trend within our business.
Third quarter gross profit was up 1.5% sequentially compared to the second quarter of 2024 on a reported basis, net sales were up 1.7% sequentially as well. Higher year over year demand and health care and international channels alongside a sequential increase in government drove growth over the second quarter. However, this growth is below both historic seasonal levels and our own expectations as a firmer footing in the corporate space that we saw at the end of the second quarter did not persist through the later months in the third quarter.
We experienced deals getting pushed out and downsized as customers deliberated on where and when to spend primarily in the solution space. While international outpace the US business in the third quarter, we still expect volatility in this space as customers faced economic and political uncertainty.
Overall, we're competing in a challenging low growth environment. We are focused on achieving profitable growth. We acknowledge that we have work to do to better calibrate market conditions and deliver on our own expectations.
Turning to expenses for the second quarter, non-GAAP SG&A totaled $667 million, down 0.7% year-over-year. Expenses were down year over year and quarter over quarter. And the efficiency ratio of non-GAAP SG&A to gross profit of 55.5% was relatively in line with our expectations. We continue to look to align our cost structure with demand and have taken actions early in the fourth quarter to better align expenses to market conditions.
Co-worker count at the end of third quarter was approximately 15,400, up slightly over the second quarter and modestly above year end. Customer facing coworker count was also up slightly at approximately 11,200. Our goal is to balance growth and exceptional customer experience with greater efficiency and cost leverage from our broader operations.
Non-GAAP operating income totaled $534 million, down 4% versus the prior year, driven by our volume shortfall, offset by slightly lower expenses year over year. Non-GAAP operating income margin of 9.7%, down from 9.9% in the prior year, but up from 9.4% in the second quarter.
Our non-GAAP net income of $355 million in the quarter, down 3.9% on a year-over-year basis, with third quarter weighted average diluted shares of 134.9 million. Non-GAAP net income per diluted share was $2.63.
Moving ahead to the balance sheet at period end, net debt was roughly $4.9 billion. Net debt is down $91 million from the second quarter, and I see increased by approximately $184 million since year end 2023. During the quarter, we issued $600 million of 2030 senior notes and $600 million to 2034 senior notes.
We issued the combined $1.2 billion to settle with tender offers of both the 2024 and 2025 senior notes and for general corporate purposes that will maximize strategic flexibility. Since Q3 end, we have fully resumed the 2024 notes. Liquidity remained strong, with cash plus revolver availability of approximately $2.2 billion for three months.
Average cash conversion cycle was 17 days up to date from the prior year and at the lower end of our targeted range of high teens to low 20s. This cash conversion reflects our effective management of working capital, including active management of our inventory levels. As we've mentioned in the past, signing and marketing dynamics will influence working capital on any given quarter or year. We continue to believe our target cash conversion range remains the best guidepost for modeling work capital longer term. Adjusted free cash flow was $261 million in the quarter, consistent with our expectations. Year to date, adjusted free cash flow was a healthy $764 million, an 80% of our non-GAAP net income within our stated roll some of 80% to 90% non-GAAP net income.
We are on track to meet our 2024 objectives. For the quarter, we utilized cash consistent with our 2024 for capital allocation objectives, including returning approximately $100 million in share repurchases and $83 million in the form of dividends.
We remain committed to our target to return 50% to 75% of adjusted free cash flow to share shareholders via dividends and share repurchases in 2024. That brings me to our capital allocation priorities are first, capital priority has increased the dividend in line with our non-GAAP net income growth.
We're announcing an approximate 1% increase of our dividend to $2.50 annually. Our 11th consecutive year of increasing the dividend we will see continue to prudently manage our dividend with respect to the growth environment and target a roughly 25% payout ratio of non-GAAP net income going forward.
Our second priority is to have the right capital structure in place. We ended the third quarter at 2.3 times net leverage within our targeted range of two to three times. We will continue to proactively manage liquidity while maintaining flexibility as evidenced by our recent debt financings.
Finally, our third and fourth capital allocation priorities of M&A and share repurchases remain important drivers of shareholder value. We continually evaluate opportunities that could accelerate our three-part strategy for growth.
Year to date, we've utilized over $350 million of cash on share repurchases and have over $730 million of authorization remaining under our current share repurchase program and that leads us to our outlook.
The uncertain market conditions we operated under throughout 2023 have persisted well into 2024 for demand has been below what we originally anticipated, and customer sentiment remains cautious across the majority of end markets.
Last quarter, which we spoke about the slow start to the year for 2024 for IT spending and shared our expectations for tough continued conditions to persist in the near term. That was the case and was moderately worse than even than we even expected in the third quarter.
Customers still have a compelling need to address priorities such as cloud workload growth, increasing security threats, aging client devices but uncertain macro-economic conditions and a complex technology landscape continues to weigh on customer demand for solutions hardware.
Given these conditions, our updated 2024 expectation is for a low single digit gross profit decline. It's implied seasonality slightly below historical levels for the fourth quarter and second half gross profit and net sales. We maintain our expectation and for 2023 for gross margin to be similar to like seen year to date in 2024.
Finally, we expect our full year non-GAAP earnings per diluted share to be down mid-single digits year over year. Please remember, we hold ourselves accountable for delivering our financial outlook on a full year constant currency basis.
Moving to modeling thoughts to the fourth quarter, we anticipate low to mid-single digit gross profit declined compared to the prior year, with gross margins slightly above the first three quarters of 2024, but below the fourth quarter 2023 level this leads to a slightly worse than seasonal sequential fourth quarter.
Traditionally, the fourth quarter is meaningfully lower than the third quarter, principally due to seasonally lower demand from education and government customers but this first fourth quarter, we also do not anticipate this being offset by seasonally strong demand from corporate and small business customers.
Moving down the P&L, we expect Q4 operating expenses to be similar to the level of fourth quarter of 2023 on a dollar basis.
Finally, we expect Q4 non-GAAP earnings per diluted share to decline in the high single digit range here of the year. That concludes the financial summary. As always, we'll provide up updated views on the macro environment and our business on our future earnings calls.
And with that, I will ask the operator to open opening for questions. We ask each of you to limit your questions to one with a brief follow-up.
Thank you.

Question and Answer Session

Operator

(Operator Instructions)
Adam Tindle, Raymond James.

Adam Tindle

Thanks, and good morning.
I just wanted to start, as we analyze this quarter, understand the tough macro to predict volumes, but I really wanted to ask about the negative operating leverage down the P&L and taking a step back I think what investors really like about CDW is the variable cost model ability to kind of flex up and down on the volumes. I understand some of the rationale and the prepared remarks, but this seems to be a pattern from the past few quarters. So, I guess the question would be twofold.
One for Chris. Maybe you could maybe just assess what is changing and what the negative drop-through is increasingly severe down the P&L. Sounds like you decided to implement some restructuring. So maybe you can tie in some of the rationale for that.
And then secondly, for Al, on that restructuring, if you could just help us with the size than what it does the model in 2025, I think it's about a 10% to 15% of head count based on the reports that we've seen. So just trying to right-size how we should think about OpEx of moving forward.
Thank you.

Albert Miralles

Yes. This is Al.
I will let us start just to give you a little bit of commentary on the quarter and operating leverage, and I'll let Chris jump in thereafter. So, first on the quarter first, I would just say, Adam, we continue to hold strongly to our variable cost model and add the impact Varian. For the quarter if you actually look at our non-GAAP SG&A expenses relative to GDP, we came in just about at that 55% range, which we've talked about that being kind of that. The target that we would have is maybe slightly higher than we would have anticipated for the quarter. But that was more of that, I'll call it denominator factor that is the GP was lower than expected.
So, in the quarter, we did get the movement in our variable expenses as we would expect, I think the challenge there otherwise, Adam, is that we have a fixed cost base and while the demand environment has moved up pretty dramatically, we certainly have taken action on our fixed costs I tried to align with what we're seeing and current demand and what we were seeing as we go forward as it becomes a matter of just the timing there end on that fixed cost base.
That said, as going into the fourth quarter, we did take some actions that would reduce our fixed cost base and that income included a reduction in our workforce. Just to size that for you, Adam, it was about 2% of our workforce. So it was not at the level that you quoted there but certainly, that would align it more closely with where we think we need to be from a fixed cost base perspective.

Christine Leahy

And I would just add that we're being very prudent as we looked at where we write size the business while we continue to invest behind areas that we see for your pockets of growth from. So, a lot of focus on the demand environment, preserving profitability and also delivering exceptional customer experience for our teams.

Adam Tindle

Got it. Thank you.
Just a quick clarifications and center that was a long run when you're talking about the increased pricing intensity and competition, just to clarify, is that higher competition between [VaRs] or is that higher competition and pricing amongst the [OEM]visitors.
Thanks.

Christine Leahy

Yes, it's a little of both.

Operator

Our next question comes from David foot of GPS.
David, your line is now open.

Great. Thanks, guys, for taking the question. And maybe one for Chris to start to question. I think I heard in your prepared remarks that you'd expect sort of the US IT market to be flat in 2024, and yet you're confident that you can continue to outgrow it. But obviously, the macro has been tough and it looks like you're going to undergo the market year. Did I hear that correctly? And how should we think about what that means going forward. I know you're not giving 2025 guidance, but I think that's a little bit disappointing relative to where investors might have been thinking, given the challenging backdrop. Is it just really a reflection of where the hardware solutions are trending up.
And then along those lines, we're hearing from some of our checks and networking and even lesser degree, storage and servers getting a little bit better. Maybe what are you seeing a little bit differently than maybe what we're picking up and with other reserve maybe communicating in the marketplace.
Thank you.

Christine Leahy

Yes, let me just start with the market share that was the beginning of the question.
Look, we continue to hold ourselves accountable for delivering a premium to the IT market rate of growth.
And looking at this year in this quarter but given the low hardware demand and taking into account our mix, I'd say we are we're holding serve and feeling very confident that we've performed extremely well in certain areas, a cloud software and services, as an example, but other areas have been challenged for us. And our view is that hardware will come back it's a matter of when will that inflection point take place, and we'll be well positioned to help our customers in those circumstances.
You asked specifically about networking and storage. Look, what we are seeing is we're seeing them traction with clients pickup and wouldn't be a call at the inflection point but we do think we're outperforming in that area. Data center has really been the area where customers have paused have moved spend to the cloud and are taking longer times to make decisions.
That means we're seeing stewarded but once we see the client refresh start, one would expect to see data center begin to pick up again, as I said before, that catalyst or holes there explosion in data, the need for massive bandwidth for networking, digital transformation isn't going anywhere security continues to get more and more focus. So, the catalyst for growth or layer, right, we just got to get to the other side of the uncertainty that we sit and certainly after we get through the election, there will be a little more certainty.

Albert Miralles

I like I should add a couple of data points there.
So obviously, all of those categories Chris mentioned in this solution space have been softer. We also have tough comps from a net comp perspective. Q3 is the last quarter at with those tough comps. So, while we would not say that demand is picking up meaningfully on that comment, lease, the comps get a bit easier. And then the other data point I would just give you is from our vantage point, just on hardware overall, we've now seen eight quarters of declines on hardware. And so again, Chris noted some of the cash plus we think ultimately will play out. We've seen a pretty prolonged period of the hardware cyclicality.

Great. And just as a quick follow-up. So, we think about looking at the recovery or the potential recovering around the timing of the recovery. I know you're not giving '25 outlook, but what are some of the milestones that you're looking at that gives you increased confidence heading into '25. I know, obviously, the elections coming up and hopefully that kind of changes, maybe customer conversations, anything else sort of maybe at a high level that you're thinking about in your conversations that gives you some degree of maybe a leading edge of a leading indicator in terms of what you're thinking about for 2025.

Christine Leahy

Yes. I think about the things that are creating, the current environment and whether or not those change. So, uncertainty around the economic environment and geopolitical will have an impact obviously, the elections policy outcomes of the election are going to be very different that will have an impact most likely from those are the things that are at the forefront of our mind how the economy's doing, frankly, how it's perceived going to be doing in the future. And the volatility across in the world are the two things that we look at most closely.
Now the complexity and Infinity is not going anywhere so the liver requirement now to have more business and IT leaders involved in decision making is our new norm is a kind of longer decision cycles for these larger complex projects and so we're getting used to that, but we don't see that going away anytime soon and that's what we focus on.

Great. Thank you, guys.

Operator

Erik Woodring, Morgan Stanley.

Erik Woodring

Great. Thank you so much for taking my questions.
I have two as well. Chris, if we could just go back to some of your comments on the on-product demand. Obviously, lots of commentary about challenges and infrastructure solutions, double digit declines with many customers across NetCom, servers and storage. I just want to make sure I understand are those rates of decline that you're referencing reflective of the broader market for.
Are you seeing those declines simply because you are walking away from some lower profitability deals in there for you or underperforming in those specific end markets. And maybe at the end market knows they are declining nearly as much as maybe you're seeing. I'd just love to get a better understanding of this is going to CDW's viewer if this is the broader market deal.
And then I just have a follow-up. Thanks.

Christine Leahy

Yes, sure.
I would say it is a broader market view, possibly tempered a bit by CDW not racing to the bottom because we are walking away from on U.S. economic deals, it's important to keep protect profitability, etc. So, I would say it's a bit of both. I would say it is markets and consistent with market, but also, we are not revisions to the bottom.

Erik Woodring

Okay. That's helpful.
And then maybe just on doesn't know the second question, I'd love if you could maybe elaborate a bit on the market competition comments because you're highlighting market competition, which I can't necessarily remember you citing explicitly before. And to be fair, you guys having two hundreds, several challenging and competitive market environments and the history of the Company and still managed to materially outperform peers over those years. And so maybe my question is just what has changed. Was competition that his new role. And really why would that competitive and Tiber go away even in a period of stronger demand. Thanks so much.

Christine Leahy

Yes, it's a great question.
And we think when we do reflect on that, we are used in a highly competitive environment, but I would say we're feeling right now and in this quarter in the past couple of quarters in particular is irrational pricing.
And I'm hopeful we know how to compete in the market, but we are seeing we are seeing deals at the low margin, low margin etc. And that just is not our business model. I think last time, I thought intensity and pricing like this was years ago.
So, it is a bit in a little bit more unique over the last couple of quarters and where we're very good with our discipline around financials. So, we're holding firm, but that's really the answer here. So, it's a little unique over the last couple of quarters, we've seen a really tick up.

Erik Woodring

Just to clarify that is those are rational pricing from Barnard from distils data from both.

Christine Leahy

I would say is up and down the value chain. So, competitors who are value added resellers, direct competitors, distributors, I wouldn't proceed is in that chain as much. The behaviors that are going on every competitor is feeling the elongation in the sales cycle, the chunking up agreements to make them smaller, the deferrals that reductions the different ways. They want to go at some saving money for deferring spending short term and realize that is a market dynamic right now that everybody is feeling.

Erik Woodring

Understood. Thank you. Chris.

Operator

Amit Daryanani, Evercore.

Amit Daryanani

Good morning.
I have two as well. Of course, just to continue this discussion you had of you folks are on track to have to use of constitutive gross profit decline in some of the company, and it's something you haven't seen that [CBO than historically]. Even if I go back to '03-'04, '07-'08 timeframe, I understand all the macros if you're talking about, but it feels like the way CDW's navigating this macro. And so some of the volatility is worse than what you've seen before. And why do you thing that's happening. And what's changed perhaps in the company that you had multiple years of gross profit lines, which frankly haven't had historically.

Christine Leahy

Yes. Fair question.
I'll tell you transition for several years now. So, new thinking about the CDW specific factors I mentioned, they have been having a real impact on results amplified by the United hardware demand environment. So, if we just think about the third one, I mentioned, which is on our cloud and SaaS business, we've been investing behind that business and growing incredibly rapidly over the last five years.
On all of our acquisitions have had a cloud services hub to them. None the less, given the full portfolio that we have, we have not yet attained the scale that we want to be at relative to the full portfolio. So, win hardware is muted. It now has even more of an outsized impact because as of the secular movement towards files and we're growing that, but we still have a very high mix of hardware.
The other thing is the strategic investments that we've made over the year have been incredibly fruitful in developing broader and deeper strategic capabilities so that we can deliver full stack full outcomes projects.
These now we're seeing a much larger, higher dollar Tier levels, and those are the kinds of projects that are lumpy. We used to talk about this with our bed federal contracts all the time. The very big deals become lumpy year end, depending on when decisions are made, they can get deferred, they can move around the five can change and therefore, it can impact results. And we saw that it was commercial and federal this quarter.
And the last one is what I just talked about in the prior question, which is our financial discipline. We're going to continue to maintain our gross margin discipline as we move forward, and we've had a couple of quarters where we're seeing pricing behavior that is extreme.
So, I just took it on, and I say I'd say it is a combination of our strategic investments that are working incredibly well these are the value to the customer and growth in fast growing high relevance areas. In an environment where hardware has been and continues to be muted on a persistent basis. It's a bit of a double whammy for us.

Amit Daryanani

I was just because it would be fair to say that as growth resumes presumably in '25, but you should start to see gross profit dollars increased back to the way it normally does be a fair way to think about it. And then maybe a clarification was going to be reward from Cisco and Microsoft and we have bigger vendors on how the tuna channel pricing in the channel strategy for 2025 of the you see that being a bit of a driver for you as you think about your growth, especially the season sales piece of the business into next year and beyond.

Christine Leahy

Yes.
As I think about the changes, I think about them investing behind our cloud business and really the cloud flywheel where we are trying to, we are delivering a seamless experience from professional services to consumption and transaction-based services to managed services around the cloud and by doing that delivering higher value our customers but that's precisely aligned with what our vendors or the CSPs decided the Cisco's of the world exactly aligned with what they what they are incenting and what they want.
So, we think we're well positioned and that will be a positive benefit for us as we move into 2025 and beyond because it aligns with our strategy and our value that we can deliver to customers. And frankly, it drives some because of the services wrapped around until it drives better economics for CDW, the stickier relationship with the customer.

Operator

Matt Sheerin, Stifel.

Matt Sheerin

Yes, thank you.
Good morning, everyone. Just another question regarding the comments on client device growth.
I think you said mid-single digit growth, but it sounds like that was skewed more toward the public markets and not so much corporate and SMB and you talked about macro. Is the on it vacation for AIPCs.
Is that another reason why we're seeing that push out in. Are you seeing any kind of growth in corporate and SMB versus enterprise sector.

Christine Leahy

Yes.
Thanks for the question. On the client side, we're actually seeing we're seeing growth across almost all of the end markets. Corporate we saw growth in corporate and small businesses where we are seeing our customers kind of in a cash preservation mode and so pushing up the client device. But we really have seen a nice pickup in client on the across almost all the end markets from. So that's been positive.

Albert Miralles

Yes, Matt, I'll just add what has been driving.
It has been more a refresh of aging fleets and need for customers to get on with this activity. It's been less than the way of when 11 drivers and less than the way of AIPCs.

Christine Leahy

So next year is AIPCs do come on board that will be another nice accelerant for PCs refresh.

Matt Sheerin

Okay, great. Thank you.
And then on relative your guidance on gross margin for Q4, which is down year over year, and you have a big bump last year. Is that because you're expecting sort of a lower percentage of the advanced hardware solutions, which carries a higher margins or services one or the other reasons behind that.

Albert Miralles

Yes, great question, Matt.
It anticipates that will continue to see softness in the Solutions side of the business, which comes in that moderately higher gross margins. It assumes that client who will continue to tick along not and an outsized way, but the client would continue to move along. And then we would expect that we would get your typical pickup in more than netted down revenues in the fourth quarter. I'll just note that delta versus Q4 of 2023 at is that maybe a little bit modest pick there on the netted down revenues versus last year quit outside at the end of the year.

Matt Sheerin

Got it. Thank you.

Operator

Keith Housum, Northcoast Research.

Keith Housum

I have two questions as well. Chris, just trying to reconcile for being here. CDW, there's always cuts over. They are relationship driven company providing value for its customers, albeit we're hearing about transaction of our competition in losing deals that way. Chris, could you break out for us like how much of the business more transactional where people are just going with the lowest price versus how much of your business is really driven by that relationship and the value you provide.

Christine Leahy

I would say that when you look at our portfolio and the spectrum of our relationships with our customers, you've had over 90% of those relationships and those customers would tell you that they buy from CDW because of the value we deliver the access to a full portfolio, the expected at the expertise that we bring to bear the ease with which they can do business, the agility with which we deliver on that as with every customer says to me when I meet with them regarding the on the pricing in the transaction issues, there are times when there are large rollouts, for example, that where the economics just gets lower and lower and those are those are transactions and purchases don't typically have the value wrapped around and those are the ones that we are less interested in pursuing.

Keith Housum

Okay.
Appreciate it.
And you talk about the moves that we as a service model, I guess is I think about that store growth. We have infancy, but still going to grow as we go from here. So how much of a challenge or a headwind is that it presents a hardware sales as we kind of think about just the future.

Christine Leahy

I didn't hear the whole question. I'm sorry.

Albert Miralles

Keith, here's what I would say. Obviously, we've seen for now cyclicality in hardware, and that would typically be pretty significant upfront spend and think about that as kind of CapEx from a customer's perspective from what we've seen kind of counteracting that in some respects is in it increase in our netted down revenues, including SaaS and cloud upkeep. Historically, a lot of that business would be what we would call reoccurring, where we are both seeing that business upfront and recognizing that upfront. But I would say that over the last year or two, more of that business has been moving to a recurring nature. And that is where our customers are more making judgments on what they want to spend on, but they're consuming it as they go in there for that shows up over time for us.
Now I wouldn't call that a material dollar amount at this point, but it is growing. And therefore, that would say that is part of the calculus of kind of the air pocket when you have for now cyclicalities of hardware and more business starts to come on as we go. And certainly, as we continue to grow that sector in that category out, we'll report more on kind of that split in details with respect to reoccurring business versus recurring.

Keith Housum

Hopefully, that's helpful.

Albert Miralles

Yes, Thank you.

Operator

Samik Chatterjee, JPMorgan

Samik Chatterjee

Hey, thanks for taking my questions.
I guess if I can start with of one. Chris, you mentioned in your prepared remarks and in some of those responses as well. It's nice exposure to large projects that you have on account of the good news that you've invested in over the years. I mean, as you outlined some actions you're taking on the cost structure side but as you look at the business, this ends the lumpiness that that drives it in terms to exposure to large projects. Are there any changes you're contemplating on that site in balancing of the business between larger projects or transactions versus do you still or are you still believe best the right sort of balance or margin mix to have in the portfolio and release just wait for the market to come back on that from a follow-up. Thank you.

Christine Leahy

Yes, the way I'd answer that question is on kind of. And yes, in other words, we are we do have actions underway look, we're looking at this quarter in 2025 is an opportunity to accelerate the most important parts of our strategy that we've been working on for several years. But one of them, for example, would be our digital work. We've done on it, lot of foundational work in digital and digital capabilities in our people to deliver personalized recommendations that match our customers want to buy a plan, consume and manage their assets so think about this in terms of large deals and perhaps smaller deals as an intersection of our sales professionals, moving up a value chain and being available to learn and enabled by digital tools to sell at the highest point of the value chain while creating a seamless digital experience for our customers have pilot flywheel like if you will, so that we can deliver both velocity in that digital flywheel and serve customers, how they'd like to be served seltzer, etc and value with our on our account managers and sales professionals working together. So, that's one area as an example. When are we our intention is to drive velocity and deals that all sizes lower Tier levels while we continue to build engagements at high value levels.

Samik Chatterjee

Okay, got it.
And thank you for that quickly for my clarification questions.
I know you mentioned the election related uncertainty and some of this lower spend on the public sector segment side as well. I mean we've seen elections post as well, have you had instances are looking at any scenarios in which you do end up getting lack of budget flush post the election outcomes. Are there any sort of scenario resorts and indications of that happening in the fourth quarter. Thank you.

Christine Leahy

Yes, hard to tell.
I would say this election cycle, I would say there's nothing really normal about it. So hard to tell them. I mean, right now, what's happening with the federal government is we've got the knock-on effects from the delayed budget previously and now we've got what we saw strong spending in the Department of Defense. We're seeing less than we'd hoped because they're waiting to see with the administration's priorities. So, we right now, we just see that federal government have paused. one would hope we'll have some more clarity post-election but then the timing comes down to current Congress and the president and getting about the past.

Albert Miralles

And maybe I'll just add on the back in there.
Obviously, we play all of the different scenarios and how things could play out at once we look at the quarterly outlooks, I would say our Q4 outlook has the appropriate level of caution baked into it based on all the factors that we've talked about, the external factors CDW specific and certainly that would include any political uncertainty.

Samik Chatterjee

Got it. Thank you.
Thanks for taking the questions.

Operator

Thank you very much.
We currently have no further questions. So, I'd like to hand back to Chris Leahy, Chair and CEO for any closing remarks.

Christine Leahy

Okay. Thank you, operator. And I let me close by recognizing the incredible dedication, hard work of our 15,000 coworkers around the globe for their ongoing commitment to our customers in this challenging environment that makes us successful over the long term. 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 and CDW.
Al and I look forward to talking to you next quarter.

Operator

As we conclude today's call, I'd like to thank everyone for joining. You may now disconnect your lines.