Chris Leahy
Chair and Chief Executive Officer at CDW
Thank you, Steve. Good morning, everyone. I'll begin today's call with a brief overview of our third quarter performance and view for the balance of the year. Al will provide additional detail on our results, our capital allocation priorities and our outlook. We'll 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 remained strong and we continue to see a pickup in client device growth, hardware solutions remained 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 of $261 million.
While our success 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 drove a shortfall in volume. This shortfall in volume reflects both 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 and IT spending environment remain challenging. Technology complexity combined with persistent economic and geopolitical uncertainty has led to large project delays and further extension of sales cycles. Layered on top was 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 how customers consume IT and how customers pay for IT. Consumption -- consumption shifts driven by as-a-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 IT is unwavering, market demand continues to reflect unprecedented hardware cyclicality. 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 have clearly impacted our results in the quarter and over the past year. The impact has been further amplified by three CDW specific dynamics. The 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 uneconomic 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 expected 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 Sirius, our ability to deliver 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 larger deals 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 softens, it has a more outsized impact on our financial results. I hope this perspective helps contextualize how CDW specific dynamics amplified the impact of the low market demand environment and created a near term growth challenge that we have not yet been able to overcome. These are not excuses. We own our results.
So let's turn to what's important. What are we doing? As always, our continuous improvement in seller effectiveness is ongoing. This means delivering repeatable solutions and further streamlining the sales processes to maximize -- to maximize sales professional 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 core business. We are aligning our digital capabilities to serve customers in the way they want to plan, buy, consume and manage technology.
And finally, we are enhancing our agility in accelerating pipeline growth. We are building on our customer growth engine by opening new lanes with 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, a 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 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% as sales cycles further elongated, most notably for large infrastructure investments. Netcomm storage and servers all declined by significant double-digits. We helped customers with client refresh driving growth of high-single-digits. ASPs remained strong as customers' preference continued to drive higher end devices. Cloud solutions was a priority and gross profit from cloud increased by double digits.
Small business continued to bounce along the bottom with net sales down 2%. Cloud solutions remained strong given their low upfront commitment and customers continue to sweat data center assets. Unlike other 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 teams success delivering services drove strong double-digit 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 systems 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, netcomm 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 and local and federal government's 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 posting double-digit declines in both netcomm 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 a 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 netcomm, storage and servers all posting significant declines. Security remained 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 ed's top line declined 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 netcomms 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.
K-12 net sales declined by low-single digits, largely driven by declines in audio visual and netcomm as school systems digested investments made over the past few years. The team continued to help refresh aging [Indecipherable] and delivered high teens client device growth. Cloud delivered double digit gross profit growth. Services adoption was also up double digits, driven by our managed client device lifecycle solution, which streamlines the configuration, deployment, management and refresh process so school systems can focus on what really matters, their students.
Other, our combined UK and Canada business performed above our expectations, up 5%. Both markets experienced stronger demand, albeit off depressed results in 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 digits. Hardware decreased 7%. High single digit client device growth was more than offset by declines in netcomm, 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, while demand varied, 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 the market is experiencing. As we always do, we will provide our view on 2025 market conditions in our next call.
There is no denying that we are operating in a tough environment, but we are confident that growth will return. The demand drivers are there, workload expansion and data explosion, increased security threats, client device obsolescence and adoption of AI-powered assistance and applications. And when demand picks up, we will be there to profitably capture these opportunities. In the meantime, we are doubling our efforts to drive 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.
