Christine A. Leahy
Chair and Chief Executive Officer at CDW
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 2024, then I will hand it over to Al, who will take you through a more detailed review of the financials as well as our capital allocation strategy and outlook. We'll move quickly through our prepared remarks, as always, to ensure we have plenty of time for questions.
Fourth quarter net sales were $5 billion, 7.7% below 2022. Strong gross and operating income margins mitigated the impact of topline performance on profits, and we delivered gross profit of $1.15 billion, 2% lower year-over-year. Non-GAAP operating income of $519 million, 1% below prior year, and Non-GAAP net income per share of $2.50, up 3% year-over-year.
Our results reflect consistent strong execution by the team, our financial rigor, and our ability to deliver solutions and services across the full lifecycle, full stack. Results delivered under uneven commercial and international market conditions, which continue to drive cautious customer behavior. Customer priorities remained laser-focused on operating efficiency and expense elasticity. Priorities increasingly met by as a service and consumption based solutions like cloud and SaaS, as well as nascent routable on-premise solutions.
The team's ability to pivot to address these priorities drove excellent performance across solutions, including categories that commonly net down on a revenue basis. The impact of this success, combined with ongoing softness in traditional hardware categories resulted in further pressure on net sales. When this happens, we experience what we saw this quarter, meaningfully dampened net sales growth with very strong gross margins. This phenomenon was not unique to the fourth quarter. Market dynamics drove hardware de-prioritization and preference for solutions that net down throughout 2023, and our net sales of $21 billion were over $2 billion less than 2022.
Notwithstanding our muted topline, strong execution by the team, underpinned by our full stack, full lifecycle, full outcomes go-to-market approach delivered flat non-GAAP operating income, a 1% increase in non-GAAP net income per share and strong adjusted free cash flow of $1.4 billion. Outcomes driven by the strategic investments we have made over the past five years to increase the value we deliver to our customers. That is the power of our strategy when combined with our resilient business model. 2023 was a year that truly pressure tested our strategy. The fourth quarter is an exemplary example of this in action.
There were three main drivers of 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 US sales channels, corporate, small business, healthcare, government and education. Each channel is a meaningful billion dollar plus business on its own. Within each channel, teams are further segmented to focus on customer end markets, including geographies and verticals. We also have our UK and Canadian operations which together delivered sales of $2.6 billion.
Often, our customer end markets perform differently given macroeconomic or industry specific headwinds or tailwinds. This quarter, all but one customer end market experienced a decline in net sales. The profit story was very different, with gross margin increasing across all customer end markets. Let's take a look at the puts and takes of how each end market performed in the quarter.
Corporate net sales decreased 8%. Topline performance continued to reflect the impact of both netting down and hardware pressure. Momentum remained for projects focused on increasing productivity as well as projects focused on enhanced customer and co-worker experiences. The team's ability to meet customer demand for these priorities with as a service and routable solutions drove strong cloud performance. Year-over-year, client device declines moderated, down mid single digits compared to the double digit declines of the first three quarters.
For NetComm [Phonetic], while network modernization stayed a top priority, customers focused on digesting investments made over the past few years, leading to a long expected backlog normalization, and sales declined year-over-year. Small business net sales declined 13%. Market conditions were consistent with the first three quarters of the year, and customer behavior remained cautious. Priorities remained squarely focused on cost management and projects that need to get done. Once again, projects that were more wants than needs remained paused.
Customer demand for projects with shorter term return on investment drove excellent performance in cloud and in total security -- total software, excuse me. Security remained a top priority and the team delivered strong performance across our broad portfolio of hardware, software and services, security offerings.
Similar to corporate, small business client device declines moderated in the quarter, down high single digits compared to the prior three quarters' double digit decline. Public sales decreased 4% year-over-year as government's mid single-digit net sales increase was more than offset by declines across our other public end markets.
The federal team delivered a double-digit net sales increase as they continued their success helping agencies implement more efficient solutions to manage and protect data. This drove excellent NetComm performance up strong double digits. The team continued its efforts to help agencies optimize their existing cloud environments as well as deliver new cloud solutions.
The state and local team delivered a mid single-digit increase. The team's success enabling cloud-based solutions, especially with budget constrained cities, delivered a triple-digit increase in cloud performance. For the second quarter in a row, the team delivered sales growth in client devices.
Healthcare net sales decreased by 5%. Augmenting talent needs, modernizing data centers, driving cost savings and efficiency projects all remained focus areas for our customers. The team drove a significant increase in cloud performance, growth driven by their success helping systems adopt deep cloud portfolio, which includes proprietary healthcare solutions.
Our broad portfolio of solutions also contributed to security growth as the team helped customers address heightened cybersecurity needs. Education net sales decreased by 12% with K-12 posting a mid single-digit decline and higher ed down mid-teens. For k through 12, the team continued their success helping schools in their efforts to sustain technology gains of the past several years. This delivered excellent growth in services and cloud, both posting double digit gains, gains that were offset by the combined impact of a double digit decline in NetComm and low single digit decline in client device sales. The Hi Ed team's success helping universities address business process transformation efforts contributed to double digit growth in services, and cloud. Client devices showed stability. These encouraging trends were more than offset by declines in NetComm this quarter.
Other, our combined UK and Canada business declined by 14%. While the teams continued to execute well, market conditions were as expected and sales in both the UK and Canada decreased by double digits in local currency. Once again, our diverse end markets contributed to our performance amid an uncertain and uneven environment.
The second driver of performance was our broad and deep portfolio. Let's take a look at how each category performed. The market did not experience the stabilization in hardware we expected and net sales of our hardware portfolio declined by high single digits. This was primarily driven by double digit year-over-year declines in NetComm, as the normalization of backlog adversely impacted year-over-year growth. Client device performance improved sequentially with a low single-digit decline.
Software customer spend increased by high single digits, but given the significant portion of the category that nets down, net sales declined. Strength was broad-based across software as we continue to help customers manage data, enhance productivity and secure their IT environment. Growth was particularly strong across security, virtualization and application suites.
Cloud remained an important driver of performance across the business and was a meaningful contributor to gross profit. Customer spend increased across all end markets with roughly half of spend from commercial customers. Infrastructure as a service, productivity and security were the top three cloud workloads during the period.
Security remains top of mind for our customers as cyber threats continue to emerge, evolve and increase, and customer spend increased by low single digits. Our teams continue to conduct vulnerability assessments, implement identity and access management solutions, and provide training to our customers to help manage cloud deployments and enhance endpoint in application security.
Services was a standout category this period, with double-digit increases in professional and managed services. Integral to today's complex technology solutions, customers continue to lean into CDW as an extension of their own teams and leverage our services capabilities as part of their strategies.
Our portfolio performance leads to the third driver of our results, this quarters' relentless execution of our growth strategy. Core to our growth strategy are our objectives to expand and enhance our solutions and services capabilities. Over the past five years, investments, both organic and nonorganic, including ten acquisitions, have bolstered our expertise and resources in these two key areas to support our full stack, full lifecycle, full outcome go-to-market approach. Investments that have grown our capabilities in high growth complex areas like cloud migration and cybersecurity that have enhanced capabilities like full stack and cloud native software development, DevOps engineering, robust consulting and cloud based workflow automation expertise and resources, and investments that have expanded our services footprint across the US and Canada.
As you can see, each investment we made is purposeful and delivers a specific capability that furthers our strategy. A strategy designed to ensure we evolve with the market and constantly fortify our leading position as trusted advisor to our customers and vendor partner of choice. Evolving with capabilities that underpin our relevance and ensure we are there for our customers today and as new technologies come to market, new technologies like artificial intelligence.
With its extremely short hype cycle, our customers are increasingly seeking opportunities to use AI to achieve their objectives. And while most customers are in the discovery phase, some are already adopting AI with our help. Here's a great example. An industry-leading semiconductor and software designer needed training and development for a domain specific large language model to support a range of internal use cases. The data intensive and highly proprietary nature of the company's designs and intellectual property made the use of a hyperscalers LLM and cloud-based compute and storage resources less optimal. The CDW hybrid infrastructure team worked with the customer to build a custom platform that supports both training and inference workloads for generative AI. The team designed the underlying architecture, which included a best-in-class 16-node supercomputer with a high performance parallel file system storage solution. The successful installation and customer handoff resulted in a multimillion dollar hardware and software engagement and services opportunity. With both usage and use cases growing quickly, the company has engaged CDW to support further expansion of their existing infrastructure and to evaluate new solutions.
Clearly, investments in our customer-centric growth strategy have elevated our relevance to customers to the highest level it's ever been. Our focused and disciplined execution of our strategy continues to make us a vital technology partner, whether enabling customer priorities that require high complex or transactional solutions, and that leads us to our 2024 outlook. The uneven market conditions we experienced throughout 2023 have persisted into 2024. Customer decisions remain deliberate and restrained with ongoing project scrutiny, pursuit of short term ROIs and continued buying hesitancy, particularly around hardware. With this backdrop, we currently look for the US IT market to grow by low single digits in 2024 on a customer spend basis, including the expectation of a slow start to the year. A view that incorporates the potential impact of some of our recent wildcards, including upcoming elections and geopolitical issues.
For CDW, these conditions set up a year that thematically looks much like 2023, and our outlook assumes the growth of customer spend outpaces our net sales growth. Our customers face proliferating data and ever-expanding cybersecurity needs. They face expanding workloads and hardware obsolescence and they face the potential and promise of exciting new technologies. With our broad and deep portfolio of solutions and services, we are there for our customers today and tomorrow, wherever their priorities lie. We are there for our customers as their trusted advisor to help them navigate increasingly complex technologies. Whether growth comes from consumption based or as a service solutions or from hardware sales, we are well positioned to continue our track record of profitably outpacing US IT market growth by 200 basis points to 300 basis points.
As we always do, we will provide an updated perspective on business conditions and refine our view of the market as we move through the year. In the meantime, we'll continue to do what we do best, leverage our competitive advantages and out execute the competition.
Now, let me turn it over to Al, who will provide more detail on our financials and outlook. Al?
