CDW Expects $200M Bump From Dell Partnership, Moving Away From Chromebook Sales

CDW's expanded partnership with Dell is projected to have a $200 million impact next year, while plummeting margins have prompted the company to largely forgo selling Chromebooks, said CDW Chairman and CEO Thomas Richards on the company's earnings call Wednesday.

Vernon Hills, Ill.-based CDW, No. 6 on the 2015 CRN Solution Provider 500, saw non-GAAP net income climb 29.3 percent in the quarter ended Sept. 30 to $143.2 million, or 84 cents per share. This beat Seeking Alpha estimates of 80 cents per share.

Organic sales grew 3.6 percent to $3.5 billion after factoring out changes in foreign currency exchange rates, falling short of Seeking Alpha projections of $3.62 billion.

[RELATED: Another Dell Blockbuster: An Expanded Partnership With CDW -- Rival HP Inc.'s Biggest Partner]

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"This quarter's performance reinforced our confidence that we have an effective strategy in place … a strategy that delivers excellent profitability and strong cash flows," said Richards.

Wall Street responded favorably to the numbers, with CDW's stock price climbing 3.4 percent Wednesday morning to $45.95 per share. The quarterly results were announced before the market opened.

CDW's expanded partnership with Dell, which was revealed in October and includes all Dell products and services across the globe, isn't expected to materially contribute to the company's 2015 sales given how long it will take to hire and train a Dell-oriented sales team and ramp up systems, lead-sharing, marketing investment and electronic data interchange to support a vendor of Dell's size, according to Richards.

By next year, though, Richards said Dell is expected to deliver 150 basis points – or roughly $200 million – to CDW's top line.

"We're doing this because we think it's a growth catalyst for CDW," Richards said. "We obviously think the upside is pretty meaningful."

CDW today does $120 million to $150 million of business with Dell annually in the federal space as well as with businesses Dell has acquired such as SonicWall, Wyse and Quest, according to Richards.

Richards tried to temper expectations after Michael Dell and early press reports indicated that Dell might approach the market share CDW enjoys with other vendors such as Hewlett-Packard and EMC.

"I'd be really hesitant to say 'I see it being a billion-[dollar business annually] by some time frame,' " Richards said.

The hesitancy stems in part from CDW's commitment to growing its presence with the Round Rock, Texas.-based vendor by adding net new business rather than shifting sales from other vendors to Dell. Richards said CDW has structured its Dell sales incentives to ensure its salespeople are compensated only if they contribute to overall growth and not if they're selling Dell by cannibalizing other vendors.

"People appreciate our transparency," Richards said.

CDW is HP's single biggest channel partner, delivering $1.7 billion of sales last year. CDW also generates $1 billion in revenue from several other vendor partners, including EMC, which Dell plans to acquire.

Expanding Dell's presence on CDW's line card is intended to capture business the company had been losing to other channel partners who could offer a more Dell-oriented ecosystem, Richards said.

A significant drop in the average selling price for Chromebooks contributed to CDW's education sales falling 8.5 percent in the past quarter to $579 million, Richards said. CDW responded to the sinking prices and margins by pulling back on selling Chromebooks, meaning that the number of Chromebooks transacted by CDW fell even as the overall Chromebook market continues to expand.

"It's just not worth it to chase those kinds of deals for the sheer purpose of revenue," Richards said. "Profitable growth has always been the goal."

Going forward, Richards said CDW will look for ways to cut costs in hope of finding a profitable way to sell Chromebooks.

Sales for CDW's corporate business climbed 6.3 percent to $1.72 billion due to 20 percent growth in its networking and communications practice, 35 percent growth in emerging security product sales, and triple-digit growth in flash storage sales.

That success was offset by a decline in Software-as-a-Service and licensing software revenue (CDW is a Microsoft Licensing Solution Provider), as well as low-single-digit growth in enterprise software sales, Richards said.

CDW's public sector sales remained flat at $1.47 billion, with solid alignment with federal contracts and public safety sales to state and local government contributing to the numbers. That, however, was offset by fluctuating demand for health-care products, delays in funding large eRate contracts and the market dynamics around Chromebook, Richards said.

For all of 2015, Richards said CDW expects to increase organic IT sales in the U.S. by 3 percent.

PUBLISHED NOV. 4, 2015