Operator:

Good morning, all. Thank you for joining us for the CDW Second Quarter 2024 Earnings Call. My name is Carly and I'll be the call coordinator for today. [Operator Instructions] I'll now hand over to Steve O'Brien of Investor Relations to begin.

Chris Leahy:

Thank you, Steve. Good morning, everyone. I'll begin today's call with a brief overview of our performance, strategic progress and view on the second half 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. Second quarter market dynamics played out roughly as we expected. Cautious customer behavior once again, elongated sales cycles and drove prioritization of needs over wants and cost savings over expansion. Capital investment in complex solutions, particularly those tied to data center and network modernization continued to be downsized or put on hold, and there was growing refresh activity in client devices. What was not expected were two end-market specific dynamics, a worsening in the UK environment and further federal funding challenges. Within the limited demand environment, we continue to help our customers build out technology roadmaps and our pipeline remains solid in the solution space. Conversion remains challenging with uncertainty weighing on our customers' appetite to spend. The team's value as a trusted adviser and ability to deliver solutions that met our customers' most pressing priorities drove excellent performance across cloud, security and services. Performance that contributed to strong profitability and cash flow, performance made possible by the strategic investments we have made over the past five years to bring full stack, full lifecycle solutions to our customers. For the quarter, the team delivered gross profit of $1.2 billion, flat year-over-year with a gross margin of 21.8%, up 80 basis points, net sales of $5.4 billion, which were down 3.6%, non-GAAP operating income of $510 million, down 3.7% with a non-GAAP operating income margin of 9.4%, which was flat and non-GAAP earnings per share of $2.50, which was down 2.6%. Let's take a look at this quarter's performance drivers. First, our balanced portfolio of end markets. Recall, we have five sales channels, corporate, small business, healthcare, government and education, each a meaningful business on its own with 2023 annual sales ranging from $1.6 billion to $9 billion. Channels are further segmented to focus on customer end markets including geography, verticals, customer size and spend. Teams are similarly segmented in our UK and Canadian operations, which together delivered US$2.6 billion dollars in 2023 sales. These unique customer end markets are typically uncorrelated given the different economic and external factors that impact each of them. Our second quarter results provide a good example of this. Corporate posted a net sales decline of 2%. Robust increases in cloud and security supported profitability with a meaningful increase in gross margin. Client devices increased for the second quarter in a row and posted both year-over-year and sequential sales increases of low double digits. Notably, client device ASPs held firm with a mix into higher value, higher functionality units. Once again, servers and netcomm declined as customers continue to undergo technology transitions in its real capacity. Storage was a standout category increasing double digit driven by upgrades of legacy systems. Small business net sales declined 3%. The team's ability to help customers address mission critical priorities around security and productivity with cost-effective software and cloud solutions contributed to improvements in both gross profit and margin. Small business did not see significant refresh activity and while increasing mid-single digit sequentially, client devices declined slightly year-over-year in the quarter. Consistent with corporate ongoing postponement of infrastructure investments in netcomm and servers drove low double-digit declines. Public sales declined 2% in the quarter with mixed performance by end market. Government decreased 6% as growth in state and local was more than offset by a decline in federal. Federal results were further impacted by the delayed fiscal 2024 budget authorization as several key customers did not receive funding releases until late June, weeks later than expected. These released funds face processing delays from the normal gears of government as hardware and software orders require solicitation, competitive bids and evaluation. We know that ongoing projects will eventually move forward, but some agencies may pause new projects as they await the clarity around the next administration's priority. In light of these layers of friction and uncertainty, we do not expect a federal catch up in the back half of 2024. The state and local team had another solid quarter, up mid-single digits. Security remained a key performance driver. Client devices increased by mid-single digits both year-over-year and sequentially. While early state and local budget dollars are being allocated to improving citizens experience at state and municipal agencies, including enhanced AI-powered automated response and messaging platforms. Healthcare net sales were flat. Security remained a key focus area and the team delivered robust customer spend and gross profit growth, led by security assessments for cloud migration and identity management. Driven by refresh, client devices increased by double digits. The team's ability to deliver cloud migration, including moving applications out of hospital data centers, drove excellent cloud performance and contributed to both increased gross margin and profitability. Education sales declined roughly 1%. K-12's top line was roughly flat year-over-year while profitability grew. For the second quarter in a row, client device sales increased up mid-single digits as school systems refreshed aged Chromebooks. Security and cloud remain top priorities, both delivering strong growth and gross profit. Once again, collaboration hardware, primarily smart whiteboards and interactive flat panels, declined meaningfully as schools continue to digest significant purchases made over the past several years. With the sunsetting of ETF funds and upcoming deadlines for ESSER funds of September 30th, the team is focused on helping their customers pivot to refresh programs funded through traditional mechanisms. Consistent with recent quarters, higher ed institutions remained focused on investments to enhance student experience to drive enrollment, while doing more with less, and the team posted a mid-single-digit top-line decline. Cost elasticity continued to drive strong double-digit growth in cloud. Security remained a top priority, up strong double digits and client devices returned to growth in the quarter, up high single digits driven by refresh. Our UK and Canadian international operations, which we reported other, declined 13%. While both teams continue to execute well, the demand environment, particularly in the UK, worsened during the quarter as the early general election amplified already challenging conditions. UK sales declined high teens in US dollars and Canada declined 4% in US dollars. Given current conditions, we expect the UK market to remain volatile and under pressure through the back half of the year. As you can see, the diversity of our end markets results is fundamental to the first driver of our performance, our balanced portfolio of customer end markets. Category performance demonstrates the benefit of our second performance driver, our broad and deep portfolio of products and solutions. Transactions categories increased during the quarter while solutions categories declined. Both transactions and solutions increased sequentially in the quarter. At the portfolio level, hardware decreased 5%. High single-digit client device growth and mid-single-digit steward growth was more than offset by meaningful declines in netcomm and collaboration. Software customer spend increased mid-single digits while net sales were impacted by our strong mix into netted down revenue and decreased by 1%. Services increased by 6% driven by cloud and security-related services. Once again, cloud was an important performance driver, contributing double-digit gross profit growth across software, services and security. Profitable growth that was enabled by the strategic investments, both organic and acquired, we have made in solutions and services capabilities over the past five years. And this leads to the final driver of our performance in the quarter, our three-part strategy for growth, which is; first, acquired new customers and capture share; second, enhanced our solution of capabilities; and third, expand our services capabilities. Each pillar is crucial to our ability to profitably advise, design, orchestrate and manage the solutions our customers want and need in any environment. Let me share an example of our strategy and action as we delivered on a customer's priority in today's challenging demand environment. An insurance company faced early end of life for its hyperconverged infrastructure equipment, something not contemplated in their already tight budget. Armed with our broad and deep cloud portfolio, our cloud, hybrid infrastructure and services group collaborated to architect a cloud subscription-based solution that delivered cost elasticity, the customer's budget could absorb. The multi-faceted solution seamlessly moved on-premise workloads and data to the public cloud, delivered cloud compute, migrated custom and off-the-shelf applications, created a virtual desktop infrastructure and delivered security measures with virtual firewalls. Plus, it optimized workloads to ensure the customer effectively managed CPU usage, memory and storage, further mitigating costs. This comprehensive solution generated more than $1 million in product revenue and a multi-million dollar CDW professional services engagement. After seeing our cloud expertise in action, the customer engaged us for additional cloud solutions, including identity management and unified cloud call center ongoing managed services. Today, we were one of the customers' most valued strategic partners. A great example of how we're delivering value to our customers both for today and for the future. And that leads me to our expectations for the balance of the year. You will recall that on the last quarter's conference call, we shared our expectations for 2024 U.S. IT market growth in the low single digits. And our target to grow 200 basis points to 300 basis points above market. This factored in a modest improvement in demand conditions in the second half of the year. Given real-time feedback from our large and diverse customer base, we now expect current market conditions to persist throughout the year, not get worse, but not get better. Given the market's slow start to the year, without a second-half demand pickup, we now look for U.S. IT market growth up towards the lower end of a low single-digit range. We continue to maintain our target to grow 200 basis points to 300 basis points above market. Growth will return. The demand drivers are there. Workload and data growth, increased security threats, client device obsolescence, and adoption of AI-powered assistance and applications. But customers need greater clarity and confidence, clarity around economic conditions and clarity around the impact of AI on their tech roadmap, and confidence that investments made today will deliver the right foundations and economic returns in an AI-powered future. Improved demand conditions are a function of when, not if. Wildcards for the balance of 2024 include the potential of greater macro and geopolitical uncertainty, significant degradation of market conditions in the UK, as well as unusual uncertainty in the U.S. election. As we always do, we will provide an updated perspective on business conditions as we move through the year. Whatever the market conditions, we will remain focused on delivering exceptional value to our customers, gaining share and executing with the discipline and rigor that is CDW's hallmark. And we will continue to play the long game, holding steadfast in our commitment to executing against our growth strategy to ensure we have the solutions and services capabilities our customers need to achieve their mission critical outcomes. With that, let me turn it over to Al, who will share more detail on our financial performance.

Operator:

Thank you very much. [Operator Instructions]. Our first question comes from Amit Daryanani of Evercore ISI. Amit, your line is now open.

Al Miralles:

Yes. Thanks, Amit. Good morning. I'll take that question. Nothing too significant there to report, Amit. I would just say that, within the array of the product sectors, we did see strength in storage in a couple other categories that supplemented our client device margins. And then further, I would note that on the client device side of the house, we continue to see firm margins there including, and Chris alluded to this, kind of a higher mix in the kind of premium product, if you will. So, overall, we continue to see an environment, where product margins appear to be holding up. And obviously, as you pointed out, they are further supplemented by the growth that we continue to see on the netted down revenue stream side.

Chris Leahy:

Yes. Good morning, Amit. Thanks for the question. As we think about, let me start with the first part of that question, the outlook, and I'll just walk you through. I mean, at high level, that our outlook, incorporated a modest uptick in the second half demand of 2024. And that change really reflects, that we think current market conditions will persist. I think, I said not get worse, excuse me, but not get better. And that's just based on our market intelligence with our customers and our frontline coworkers. If you want to go through the puts and takes, look, when we start with corporate after a long period of fits and starts, and what I'll call uneven performance, corporate feels on more solid footing and is demonstrating a steadier rhythm to the business. That said, with signs of stability, it's still a bit too early to call and to bake that into the expectation in the back half of the year. Just need to see a couple more data points to build confidence on that one. Small business, I'd say not getting worse, not quite as volatile, but still bouncing along the bottom, so not seeing an uptick there. And then we've got these two end markets that had very unique impacts and we think will impact going forward. The UK, the degradation in the UK that I mentioned in the environment there, which impacted the second quarter and expecting impact the second half of the year. And then the federal gears of government, these two delays are just creating, frankly, a bottleneck that's not overcomeable at this point, on the federal side. And so, we don't expect to see a pickup back in the second half of the year in federal as we expected to. So, I just say that the outlook net-net reflects that there's no substantive change in the commercial market demand. It incorporates normal seasonality and it also includes, I guess, a moderate IT refresh across primarily client devices and some other solutions that can't be postponed. So, that's the way that we're thinking about the outlook. I think you asked a question on forecasting. And I would just say that on the forecasting, look, the team is doing a phenomenal job staying highly-engaged with our customers and pivoting, when needed. As you can see from our results, security cloud, software services results, it's very clear that we -- our portfolio and our people allow us to be the trusted adviser and support in the moment in the market type solutions. The forecasting is, yes, it's a little bumpier. because you've got lumpy - lumpy-big deals and they're all interrelated. There's no the example that I shared during the script. You see how interrelated and complex the solutions are. So, as those push, they push. but I think the team's doing a great job staying engaged with customers. And I would also say that our solutions pipeline is really quite strong. It's been the conversion given the market that is reflecting the appetite to buy, but the pipeline is really quite strong.

Matthew Sheerin:

Yes. Thanks. Yes. Thank you. Good morning. I wanted to ask about the commentary regarding the continued slow demand for netcomm and servers, advanced solutions products. This is probably the third quarter that we're into that malaise. I know there was a lot of backlog that was worked down. Are you seeing any visibility of signs of pickup there. And then on the server side, we're hearing, particularly, SMBs and middle markets, where there's more an acceleration toward cloud instead of doing their own internal upgrade. So, any visibility into those markets?

Matthew Sheerin:

Okay. Thank you. And then regarding the outlook for the government business, it doesn't sound like there's going to be that seasonal uptick in federal, yet you're guiding the overall company for a seasonality in the next couple of quarters. So, are there any offsets to that weakness in federal.

Matthew Sheerin:

Got it. Okay. Thank you.

Keith Housum:

Great. Good morning. Just one question really. In terms of the CrowdStrike debacle that happened recently, was that a positive or negative for you guys in terms of working with your customers.

Keith Housum:

Yes. If I can follow-up on that, is that an opportunity for you guys to gain customers by showing exactly the experience and advisor leadership you guys have.

Keith Housum:

Great. Thank you.

Operator:

Our next question comes from Asiya Merchant of Citigroup.

Al Miralles:

Sure. Good morning, Assia. A couple of things that I would just note. Number one, remember when we started the year, we indicated that we would have expected the beginning of the year would reflect higher level of expenses than usual and a ratio of SG&A relative to GP would ease as the year played out. Asiya, some of that is a function of just timing and seasonality of certain expenses that we see in the first half, some of it a function of our lower GP production -- gross profit production in the first half. And then just from a compare perspective, I would just note for you that, that last year obviously was a pretty uneven year, if you will. And pretty early in the year, we saw indications that our outlook was coming down. So that has an impact on the timing and our judgments with respect to things like compensation accruals. So, because of that, when you add it all together, our first half, we look a bit more shifting towards deleverage from an expense perspective. And what you should expect in the back half is that, that would ease, that would balance out obviously as our gross profit attainment would be higher. but also, you get a bit kind of a pickup from a seasonality timing of our expenses as well. So, for the full year, we expect it would look reasonably normal. The back half is going to look a lot different than it did in the first half vis-à-vis operating leverage.

Chris Leahy:

Yes. well, we think about the pipeline -- excuse me, we think about the pipeline, starting first, in terms of engagement with our customers and staying very close to our customers and doing and suggesting solutions that are best for them. In a market now, where cost optimization is high and needs are prioritized over once. A CDW is very careful to help our customers accommodate that, which might mean that not new and not growth revenue, but revenue that is finding cost optimization for them. All that said, what we do in an environment like this is we work hard to increase the pipeline to ensure that when it's time to convert, it's sufficient to drive growth. We do all the things that we do with a lot of rigor. We inspect the pipeline. We grow the pipeline. We measure the pipeline. We drive conversations with our customers. It's really just the appetite to convert at this point that we're not seeing. Now as I said, what has been very positive is the rhythm of the business feels, feels more stable, feels a little more firmer footing. and I think that's a good indicator of moving to more solid footing, which means a pipeline converting it in the not-too-distant future, which will convert into growth.

Operator:

Our next question comes from Ruplu Bhattacharya of Bank of America/Merrill Lynch. Your line is now open.

Al Miralles:

Sure. Thank you, Ruplu. Look, for the full year, we are calling for gross margins to look much like the first half did and frankly then much like 2023 in total. What you can expect there is continued durability and trending of our netted down revenues, which have been extremely strong. We would expect that would continue. And particularly, I'd say, in the year, we typically see more of that with renewals, of cloud and SaaS contracts et cetera. And that would be balanced with our regular mix of business, including expectation kind of a glide path of our client business. Now, on the non-netted down margins, I'll just note again, that product margins there have continued to help hold firm, and that's been quite a run, where they've been firm and we would expect that to continue. So, that's the sum of the different parts, Ruplu, to get us to that gross margin expectation very similar in the back half as what we saw in the first half.

Chris Leahy:

Yes. Yes. Thanks for the question, Ruplu. I'd answer it this way. Look, we're really in the very early innings of AI monetization, and CDW is investing behind and doing well frankly. We're investing primarily in people and enablement, and doing well in the areas that are kind of early stage, which I would say, are consultative primarily at this point. AI certainly opens conversations with customers extensively. But I would say our opportunity, the massive opportunity for CDW is full stack over the long run, and I would call this a long a long game. look, it feels very much, and we've said this before that AI is like any other kind of transformative technology of the past. and it plays to CDW's strengths. Complexity and choice always make it more difficult for our customers, and that helps us bring our knowledge, expertise and portfolio to bear. So, as I think forward, we do see it as an accelerant. We're investing behind it. Our customers are still at the stage of what's the art of getting this done and how's the sign what's the science of doing it. It's just a matter, frankly, Ruplu, of what the time frame of growth looks like over the long term. but I feel confident that we'll play it every -- at every layer of the stack. And it will be embedded in every layer of the stack.

Operator:

Our next question comes from George Wang of Barclays. George, your line is now open.

Chris Leahy:

Yes. George, I would just -- I would reiterate that we're still seeing that AI has put the architectural roadmap for compute storage and networking under reevaluation and flux, and we're still seeing that play out this quarter. I actually expect that to last for some period of time as we help customers sort through again, what the art of the possibilities. but then what's the actual return on investment dollars.

Chris Leahy:

Sure, George. I would just say that we feel very confident that we continue to gain share in this low demand and limited demand market across virtually every category. You saw our results for security and for services, and cloud, client device refresh is starting to pick up. And this is validated both by, obviously, our own data, but equally our partner reviews. our partners validate that we are indeed taking shares that we're feeling very good about, where we're positioned in a limited growth environment.

Operator:

Thank you very much. Our next question comes from Samik Chatterjee of JPMorgan. Samik, your line is now open.

Chris Leahy:

Yes. Sure. So, I'd say look, capital investment and complex solutions, especially those tied to data center and network modernization are the ones that I highlighted as areas of more caution right now, given the uncertainty and also the increasingly complex technology landscape. Compute, we did see some pickup. That's really because, it was put off for some quite some time by a number of customers. and so there was a need to upgrade for against legacy systems. And then on the client side, as I said, we started to see, what we think is the beginnings of a refresh. Obviously, given all the catalyst there, that's going to be sustainable. The aged devices, Win 11, AI PCs, et cetera. We expect that to be a real refresh. And then I say sustainability in the clouds, where you saw strength this quarter in particular, cloud security and services in particular, I don't see those slowing down anytime soon. They're a great opportunity to offset some of those capital investments. They're a great opportunity for cost optimization and optimization generally. So, our customers have turned to them and with our portfolio, the beautiful thing about our is whatever our customers are buying, whenever they're buying it, we can give them the solution they need. So, very well prepared to deliver today and as we start to see a recovery in the capital investment appetite.

Al Miralles:

Sure, Samik. I'll take it. This is Al. So, just reminder what categories fall into netted down. You have software assurance. You have warranty. You have SaaS. You have cloud. Right. So, the big components, if you will. The strength that we've seen obviously has been substantially in the SaaS and cloud space. and that runs the gamut in terms of underlying workloads in those categories. Right That includes data, virtualization software, networking to some degree. So, it runs the gamut in those categories. They've been the leaders in that space. I should note, Samik, there, with that over the last year, categories such as software assurance and warranty obviously have lagged. because they are substantially attached to products, hardware and software -- licensed software that is. And so they've been laggards, which at some point as we talk about the catalyst and things beginning to turn from a hardware perspective, you could see some of those categories pick up. But in the meantime, as we are now saying, Hannah, we think that recovery is going to take a little bit more time, the most durable trends are in the SaaS and cloud space.

Operator:

Our next question comes from Adam Tindle of Raymond James. Adam, your line is now open.

Al Miralles:

Sure. Thank you, Adam. Appreciate the question. First, look, no doubt it has been a pretty volatile period of time for now a number of quarters for sure. I would note a couple of things. Number one, when we talked about a Q1, what we were expecting going in Q2, you did ask the question about seasonality. I made the remark that we would expect it would be somewhat short of historical pre-pandemic seasonality and that it was. The delta there, Adam, was essentially the sum of federal business and international. So, two things that we had not factored in. When you actually add those back, we get pretty close to that historical seasonality. So now, so we scroll forward. We have an expectation Q2 leading to Q3, of mid-single-digit sequential growth. And really how we get there, Adam is, it's taken off some of the expectation of meaningful pickup in the business. and I would say it's following now a more normal glide path. Now, that's backed up by a couple things. One, in line or close to historical seasonality, but also just the split between first half, second half. And so, when you think about our 48/52 split between first half, second half, that's not only consistent with the history. but I also would say coming off of a softer Q1. And so, while we are definitely not anticipating an upturn, if you actually look at the trend lines, I would say it's a pretty natural glide path from where we've come from, and we think it's reasonable when you add it up to the back half of the year.

Chris Leahy:

Yes. Adam, I would say customer behavior is on high alert around cybersecurity, and we're having heightened and more conversations with our customers around that. It does not feel that, that is putting off or, delaying any other engagements and projects at all. But we are seeing heightened conversation around cybersecurity.

Chris Leahy:

Well, thank you very much. I want to recognize the incredible dedication of our coworkers around the globe and their extraordinary commitment to serving our customers, our partners and all CDW stakeholders. You show the power of execution excellence every day in every way. And thank you to our customers for the privilege and opportunity to serve you, to our investors and analysts participating in this call, we appreciate you and your continued interest in and support of CDW. Al and I look forward to talking with you again, next quarter.

Operator:

Welcome to the CDW First Quarter 2024 Earnings Call. My name is Carla and I'll be coordinating your call today.

We scoped the broad AI opportunity around 4 areas of focus:

workforce productivity, notably end-use assistance and edge devices; high-value use cases; broad-scale vertical solutions; and full stack where customers rely on us to provide the infrastructure underlying applications and solutions. A great example of full stack is the corporate training and development, domain-specific large language model solution we shared with you last quarter.

Operator:

[Operator Instructions]

Adam Tindle:

I just wanted to start one of the big themes during the tech earnings season is spending on AI as very, very strong and I appreciate all your comments in the prepared remarks. But it's hard not to dovetail that with CDW results here for Q1 that were a little bit weaker than expected and showing a decline in solutions where presumably AI would be reporting. Just figured I'd throw it out there to address any investor concerns that perhaps CDW is not participating in AI spending. What would that thesis be missing and if there's portions of that, that might be fair, things that you can do to capitalize more on AI spending, whether that's organic or inorganic?

Albert Miralles:

Yes, sure, Adam. Happy to address that. A couple of things. First, I think we mentioned in our prepared remarks, look, we feel encouraged by the pipeline that we have and kind of what's out there from a customer spend perspective. And a lot of that would be more in the solutions category as we talked about. So that's number one. The thinking, Adam, is, look, if you look back over history of seasonality -- historical seasonality would be more in like the mid-teens level. And so when we take the sum of the catalysts that Chris mentioned upfront, that is the workload and data growth, the need on the security front and obsolescence of client devices.

Operator:

Our next question comes from Samik Chatterjee from JPMorgan.

Albert Miralles:

Yes, sure. A couple of things I would mention. When we think about the parallel to 2023, look, a year later, a lot of the caution and concern that we experienced has persisted, and I would say, to some extent, in Q1, became even more heightened. And look, there is a mixed story on the economy, but when you think about the financial aspects intra-quarter, we went from an expectation in the market of a number of rate cuts to the potential of now just a few. So there's been quite the whipsaw effect just to give that kind of backdrop, if you will, that is the economic and financial environment continues to get more complicated, Samik, for sure.

Albert Miralles:

Sure, Samik. For the full year, I would say, we're holding to our expectation on gross margin that we gave, which was that it would be similar to 2023 all in. I think there's going to probably be some variability quarter-to-quarter. Obviously, most notably driven by mix, but at this juncture, we would hold to those expectations. Certainly, given that the mix has shifted a bit in Q1 and we saw stronger client device growth and less solutions, you'd expect that, that would have some impact on our gross margin. But I would say when we think about the contribution of netted-down revenue, which we think is durable that's helped to hold those margins. And so at this juncture, we're holding to that expectation of that kind of high 21s gross margin similar to 2023.

Amit Daryanani:

I have, I guess, a question and a follow-up as well. When you folks talked about the hardware categories, one of the things that really stood out was storage performance was fairly good. I'm curious like historically speaking, the storage seems to be a leading indicator for what you see eventually with NetComm and servers or not. I'd love to kind of understand from a software perspective is storage is a better indicator. And then maybe related to that, the NetComm weakness, do you think it's more inventory digestion at this point? Or is it really demand is weak?

Amit Daryanani:

Got it. And then I guess, Al, just for you on capital allocation, the buybacks were fairly minimal in the quarter given how the free cash flow generation was and the fact that leverage is towards the lower end of the 2 to 3x range that you folks talk about. How do we think about buybacks for the rest of the year? And is the intent to perhaps show up some capital or cash for the debt paydown that you might have to do by the end of this year and early next year? Or would you use it for buybacks?

Matthew Sheerin:

Chris, I hope you can elaborate more on what you're seeing in the government sectors. You talked about budget-related pushouts in federal. So -- and I know there's obviously some seasonality, particularly in the September quarter. So what should we expect in terms of the seasonality across those markets?

Christine Leahy:

Matt, I would say it's still early. And when we look at the units that we're selling now, really minimally AI PCs. They're the Win 11 and Apple next generation. And the impetus is really threefold. It's just refresh aging machines get to Win 11, frankly. And it's also an interest in getting ahead of any increasing demand. We are finding customers having longer memories when it comes to the pandemic and remembering that sometimes just in time doesn't work because you got to stay ahead of the supply. So that's also been a factor in the positive signs that we're seeing. I'd also say, look, I mentioned it before, it's a low-friction purchase and it's kind of no regrets. When you put together aging machines, the need for Win 11 with that kind of stable landscape, customers are just starting to move forward.

Operator:

Our next question comes from Erik Woodring from Morgan Stanley.

Christine Leahy:

Yes, sure. Thanks for the question. Let me just start with where you ended. And I would say, as we've suggested, the macro overhang really is the predominant factor in the extended and elongated sales cycles. What we're not seeing is we're not seeing cancellations. We're seeing just more deliberation and greater time and more involvement, frankly, by more business unit constituents in the decision-making process. And as I said, the AI consideration is a real thing. It's a bit of a pause. How do we think about this over the long term? As you know, the progress, the speed with which AI functionality is moving is really fast and they're taking that into consideration.

Albert Miralles:

And maybe, Erik, just adding on to that and to kind of stitch the story together. We talk about these catalysts. Within those catalysts are plenty of opportunities from a solutions perspective. I think that what we saw transpire is this kind of heightened caution and concern kind of the -- as you can see what's around the corner phenomenon, if you will, from a corporate perspective just caused more delay in deliberation.

Christine Leahy:

Yes. And I would just add that the durable categories we've seen over the last several quarters are security and cloud.

Albert Miralles:

Yes, Erik, a couple of things. So look, from just working from the -- from a customer spend perspective, we're calling for low single digits plus our typical premium. So that's come off a bit. And if it were coming off in a category, that would probably be substantially from a solutions perspective. That is the slow start that we experienced in Q1. We're not suggesting we're going to make that up. So that comes off the top. And then that's basically just kind of works its way down to GP. We're getting an earlier start to client device, at least for the first quarter than maybe we would have anticipated.

Operator:

Our next question comes from David Vogt from UBS.

Albert Miralles:

Yes, David, I'll take this. Look, I think TBD, to some extent, right, we're going to see how pricing plays out. What I would tell you is in current context, we're not seeing much in the way of ASP changes. I'd say prices broadly, including on the client device front, held pretty firm. So our growth during the quarter was largely units. Certainly, there is plenty of buzz out there that as we start to see AI PCs and other AI categories emerge that you could see price increases. But I'm not sure that we're fully prepared to kind of call on what that would look like. Just remember for us, look, we're going to work closely with our customers as we are now, and we'll continue to in terms of how do you navigate that landscape, how do we help them get in front of it to the extent that they can. But also remember that for us in terms of kind of impacts, any lift there on the ASPs may lift the top line but we're largely still very much a cost-plus provider, so you may not see significant movement from a gross margin perspective.

Albert Miralles:

As we understand it now, and what the new product generations would look like, I think that's true.

Christine Leahy:

Thank you. And let me close by reemphasizing my confidence in this team, our strategy and the durability of our resilient business model. Thank you to our CDW coworkers across the globe for your unwavering commitment to our customers. 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 in CDW. Al and I look forward to talking to you next quarter.

Operator:

Hello, and welcome to today's CDW Fourth Quarter 2023 Earnings Call. My name is Jordan, and I'll be coordinating your call. [Operator Instructions] I'm now going to hand you over to Steve O'Brien, Investor Relations to begin. Steven, please go ahead.

Chris Leahy:

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 growth and operating income margins mitigated the impact of top-line 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 life cycle, 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, ratable, 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 deprioritization 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 top lines, 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 inaction. 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 U.S. 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 U.K. and Canadian operations, which together deliver sales of US$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%. Top-line 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 ratable 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, while network modernization stayed a top priority, customers focused on digesting investments made over the past few years, leading to a long-expected backlog of 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 launched 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-ed 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-12, the team continued their success-helping schools and 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 high 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 are 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 continued to help customers manage data, enhance productivity, and secure their IT environments. 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 growth's profit. Customer spend increased across all end markets, with roughly half a 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 and 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 quarter, relentless execution of our growth strategy. Core to our growth strategy, our objective is to expand and enhance our solutions and services capabilities. Over the past five years, investments both organic and non-organic, including 10 acquisitions, have bolstered our expertise and resources in these two key areas to support our full stack, full life cycle, full outcomes, go-to-market approach. Investments that have grown our capabilities in high-growth complex areas like cloud migration and cyber security, 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 U.S. 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 high 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. There'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 hyperscaler's 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 multi-million-dollar hardware and software engagement and service with 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 projects scrutiny, pursuit of short-term ROIs, and continued buying hesitancy, particularly around hardware. With this backdrop, we currently look for the U.S. 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 U.S. IT market growth by 200 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?

Operator:

[Operator Instructions] Our first question comes from Matt Sheerin of Stifel. Matt, please go ahead.

Al Miralles:

Yes, good morning, Matt. Thanks. This is Al. I would say, Matt, at first, just I think you hit it right. We would expect some headwinds on the netcomm front. I'd say underlying demand is solid with some strength in some pockets, but not significantly strong. The bigger headwind there would really be the compares when you look back in 2023 and particularly the first few quarters, the growth in netcomm was between 20% and 40%. So with those types of growth numbers from 2023, we would expect that we'd see declines at least for the next few quarters.

Al Miralles:

Sure, I'll take that as well, Matt. I think that's right. For at least the first half, what we're calling for is similar trends, what you've seen the last few quarters, that is continued strength and netted down revenues, specifically cloud and SaaS, and we would not see strength on the hardware side, including PCs. What our outlook calls for is a modest recovery in the back half, and that includes PCs. And look, I'll just add the, while we still believe that there is impetus and catalyst for PCs to return, it becomes just basically a matter of when, not if, we think we're a few quarters off from that.

Al Miralles:

You're welcome.

Adam Tindle:

Okay. Thanks. Good morning. I just want to start at a high-level question, maybe Chris or Al could answer. But as we think about CDW from an investor perspective, a lot of us have thought of this as a compounder that generally experiences double-digit earnings growth, with an algorithm of kind of mid-single-digit top line, some leverage, some capital allocation, you kind of get to this double-digit earnings growth. You just finished a year with flattish earnings growth, and then this year, your initial guidance for 2024, I think, is mid-single-digit earnings growth. So I'm just wondering if you could revisit that, and how should investors think about CDW's earnings algorithm? At this level of size and scale, should we sort of reset our expectations and think of this more as a mid-single-digit compounder at this point? Why or why not? Thanks.

Chris Leahy:

Yes, and Al, thanks. I would just add, if you take a big step back, Adam, what are our customers facing? They're facing proliferating data. They're facing ever-expanding cyber threats, expanding workloads, hardware obsolescence, the incredible promise of new technologies. And so the landscape that they're facing and the essential nature of technology to every single walk of life is not going away. So as we look forward to those catalysts that Al mentioned, think about digital transformation. That's a durable trend, and it's a continuous process, and many customers have really paused on their investment and evolution in 2023. That's going to come back when uncertainty abates. Network modernization continues to be top of mind, and once that digestion gets through the process, then there's only going to be a need to handle greater network traffic and data, et cetera. Security threats continue to grow, and they're more sophisticated, kind of exclamation point. Client devices are just aging, and even the pre-pandemic devices are coming on four years old, and then we've got Windows 10 sun-setting. You've got all of those things that are catalysts that we're going to see coming down the pike, and then just add AI. Still early innings, use cases not quite proven out yet, but we're seeing incredibly exciting opportunities for the services and execution of adoption around those. So I think we couldn't be more excited about the technology industry generally.

Chris Leahy:

Yes, no problem, Adam. Thanks for the question. The vectors you hit would be still consistent with how we're thinking about it, whether geographic expansion, larger acquisitions to bolster capabilities and tuck-ins, which we've been doing. And I would just reiterate, look, M&A is a strategic driver of our value prop and our growth strategy. And you've seen us do 10 acquisitions over the past five years. And those have been very valuable in terms of driving value to our customers. So as we think about where we focus our efforts, driving capabilities and solutions that are high growth and high relevance and in services capabilities, there's a plethora of areas that we could focus, including areas like security and cloud and AI. And so, I would just say, look, at the end of the day, we've said it before, we're always looking, and we've got a number of identified targets in our pipeline, but it also has to be opportunistic. The one thing I would say, Adam, is when you think about the success in evolving our business to be able to deliver the profitability that we did this year with the hardware pressure and the other dynamics happening in the marketplace, that's due to bringing on capabilities that are highly strategic, highly relevant, and then executing against them. So when I think back five years versus now, our cloud business has grown on a compound annual growth basis by 30%, and we did it again in 2023. I look at security, another area that we were very focused on, a maiden acquisition in addition to internal investments, and that business has doubled in three years. So we really are investing behind the most important capabilities, and we're seeing great results as a result.

Adam Tindle:

Make sense. Thank you very much.

Asiya Merchant:

Great. Thank you for taking my question. How do you guys think about market share gain in the current environment? And if you could maybe peel back a little bit on the gross profit linearity, looks like that's going to be a key metric, and I agree that's the rightful metric. Maybe if you can walk us through the confidence and what's driving the confidence in improving gross profit growth rates from the low single digits at the start of the year, and as you ramp through the year? Thank you.

Al Miralles:

Yes, so, Asiya, on the gross profit front, obviously like Chris said, there is a focus in this environment thinking about customer spend, and that spread between customer spend and net sales has been significant. We also feel confident about the continued trend of items such as netted down revenues, which we think will bolster gross margin. There may be a bit of an evening out on the gross margin front in the back -- the back half, as we see additional mix of hardware start to kick in, but all things considered, I think that the seasonality and the pacing of GP would not be dissimilar what you've seen in historical seasonal trends.

Al Miralles:

Yes, I think that is broadly correct on the mixed front in terms of the modest recovery in the back half, and with that, our GP would accelerate through the year.

Operator:

Our next question comes from Amit Daryanani of Evercore ISI. Amit, please go ahead.

Chris Leahy:

Good morning, Amit. And yeah, in terms of priorities, they're consistent with what we said in the prepared remarks. I mean, customers in the commercial space in particular are focused on cost optimization, customer employee experience, and things that revolve around that. There's still a heavy focus on digital transformation, obviously, and security as well. AI, which is where you're getting to, AI is a hyper focus. I think last call, we mentioned that you can't have a conversation with a customer without AI coming up, and it's been very exciting because we've had a data AI practice for several years, and that practice, I would say, we deepened it and we scaled it, particularly when we brought IGNW and Sirius into the CDW family. And currently, I'd say there's burgeoning demand for consultative services in particular, and I'm talking deep technical capabilities as well as industry specific capabilities. And so, we're seeing quite a bit of momentum in our practice there. What I would tell you is that a number of customers are at the front end of their experiences, and we're helping them through use cases and what the efficiencies are to be had. And then we've got customers who are actually piloting some really interesting capabilities, and we're helping them work through those. Here's what we're not seeing. We're not seeing a budget shift out of IT. What we are seeing and hearing is that budgets are coming from elsewhere in the organization, the functional areas that are going to be improved through AI innovation, like HR, like finance, like marketing, literally across the organization. Organizations are using budgets there to allocate to AI improvements because they're thinking about it merely as business transformation. So we haven't seen a shift, and frankly, we're not expecting that to happen. We're very excited about the opportunities that lie ahead, though.

Al Miralles:

Sure. Thanks, and good morning, Amit. Look, if I peel back 2023, three core drivers, the most significant would be the pickup and mix shift, the netted down revenues, and particularly SaaS and cloud. And that was the most significant component. Number two would be that hardware was softer, and therefore that less mix of hardware and particularly PCs benefited us from a mixed perspective. And then three, and we've noted this before, overall product margins were firm in 2023. And so that was a positive contributor to the gross margin story. So if I scroll that forward, which I think is the logical question on it, we expect that the netted down revenue trend is durable and will continue. And particularly, we would know we expect strength in the first half, and then you'll get some balancing out with hardware. Number two, on the hardware front, we are expecting a modest recovery in the back half on hardware, including PCs. So that would have the effective diluting margin somewhat. To be candid, though, we don't believe that that shift in what we're calling modest would significantly move the gross margins. And then finally, on the product margin front, but we studied this closely, and really our assessment at this point would be that product margins are holding firm. And I think that's a reflection of both a competitive environment, but not any rational environment for pricing and margin perspective. And then I've mentioned this before, but there's a trend of, I'll call it richer configurations on the product front, right, customers moving up the value chain. And we do feel like that trend is and will persist. And so really, that's the rationale overall for our outlook on gross margins being substantially similar to 2023, maybe a tick up.

Operator:

Our next question comes from Keith Housum of Northcoast Research. Keith, the line is yours.

Chris Leahy:

Yes, it's a great question. I would say currently nascent, the opportunity and the burgeoning demand right now is because of the complexity and the speed and trying to figure out and test use cases. So we are seeing most of the activity for us in our advisory and consulting services. I think I use the word burgeoning. The momentum has been significant. But if you think longer term, this is a full stack play. And that's why CDW is a scaled full stack full life cycle provider with expertise, not just technically, but deep into each industry vertical is positions as well to help our customers. And as you know, when we think about CDW strategy and the growth over the years, we have been moving our capabilities to ensure that we are moving closer to the front end of the value chain. AI is a great example of that strategy and action given the consulting momentum that we've been seeing. But at the end of the day, we're talking about the need for power and consumption and data center enhancements and up and down the stack. So in terms of timing across the next several years, it's hard to say exactly when the various components of the stack will hit. But what I would say is just like any kind of revolutionary technology change, it moves fast and this will move faster. So we're seeing AI as an accelerant in our business and one that we think will play out fairly quickly over the next 24 months.

Al Miralles:

I'm sorry, Keith, can you say that one more time?

Al Miralles:

Yes, sure. So largely, Keith, they would fall in the category of workforce optimization, really two components to that. We did have, as you know, some co-worker events during 2023. And that was really about aligning our fixed cost base and our co-worker count base with the level of the business and activity we were seeing. So that's one, call that more really one-time nature. The other element within that category would be real estate. As you would expect, and you're seeing more broadly, we are and continue to take a hard look at our real estate portfolio, where we are in the hybrid phase, if you will, of our workforce and making sure that we constantly re-rationalize our real estate portfolio. And so there are some charges that are coming through that front.

Al Miralles:

You're welcome.

Samik Chatterjee:

Hi. Thanks for taking my question. And maybe for the first one, if I could just follow up on the AI questions and so the question Amit asked. We understand sort of your comments about being more heavy towards consulting in sort of the early days of these AI sort of discussions with their customers. But when you think of a full stack solution or Envision One in sort of when the customers deploy it, does this even take you further down the road of netted down revenue mix increasing in the overall mix of your business? Or does it really bring back or sort of pull back the netted down revenue mix in terms of balancing out the hardware and the software sales? Just curious about how you see a full stack solution playing out. And I have a quick follow-up. Thank you.

Al Miralles:

Yes, I think that's right. And Samik, look, we will see exactly how this evolves at this point. Like you said, it is a bit more consultative and maybe services oriented, which is not netted down substantially. Chris hit it earlier. This is ultimately a full stack opportunity for us. And that would certainly include hardware. So we think that will be meaningful. As I would contemplate the netted down component that would likely show up and spend associated with cloud and SaaS. So is it conceivable that we would see that come through? Certainly, it just becomes kind of a matter of when and the pacing and track, if you will, for customers and how they ultimately deploy AI.

Al Miralles:

Sure, Samik. I'll start and Chris may want to add. As I think as I mentioned, we have not seen an environment that's irrational on the pricing or the margin front. I would say, ASPs have largely held firm. So, looking forward at this point, we wouldn't see any drastic changes. We're not seeing activities from partners or customers that would suggest that we're going to see any sharp movements up or down. So our outlook is based on the presumption that we'd be largely firm here.

Operator:

Our next question comes from Erik Woodring of Morgan Stanley. Erik, please go ahead.

Chris Leahy:

Yeah, Erik, it's a great, great question. One, we actually face here at CDW. At one point, you know, we do -- we loosen the first strings. Here's what I'd say, two things. One, there's definitely pent up demand. Our customers are ready to start putting plans in action. Two, they're looking to be more confident in the expectations for the rest of the year. So while there have been some more positive indicators currently around the economy, I mean, we still have elevated inflation and elevated interest rates, and they're just merely waiting to feel more confident in where the economy is going. I hate to make it that simple, but, but frankly, it is. But we're also equally confident of the pent up demand and the desire for our customers to get moving on those projects. I'm talking about the commercial space in particular, but get moving on those projects that they have delayed and deferred for some period of time.

Al Miralles:

Sure. Thanks, Erik. At this juncture, 80% to 90% is the rule of thumb that we would give you. As you recall, we start the years with a prudent view of what that would look like. And we'll see how the years play out. If you look back at the last two years, we were north of 100% on a non-GAAP net income basis. That reflected, I'd say, strong cash profits, strong and diligent management of our working capital, but also the counter cyclical components, right, as growth softened a bit, if you will. So I would say the other element that I would add for 2024, Erik, is the, we don't know exactly how the year will play out and what the pacing of business would look like. And so we try to give a little bit of space for use of working capital. Our inventory is at very low levels. And you can look at that both on a DIO and just inventory balance dollar basis. And so, look, we just want to take a prudent view out of the gates here that we may be more active users of working capital. And certainly we'll update you as the year progresses. And I would just finally just say that it is and will continue to be high priority for us of continue to drive cash flow, convert profits, and ultimately have the optionality in our capital decisions to deploy it.

Operator:

With that, I'll hand back to CEO Chris Leahy to end. Chris, please go ahead.

Operator:

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.

Operator:

Hello, everybody, and welcome to CDW Third Quarter 2023 Earnings Call. My name is Sam, and I'll be coordinating your call. [Operator Instructions] I'll now hand you over to your host Steve O'Brien with CDW, Investor Relations to begin. So, Steve, over to you.

Chris Leahy:

Thank you, Steve. Good morning, everyone. I'll begin today's call with a brief overview of our performance, strategic progress and view for the balance of the year. Al will provide additional details 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. The team continued to execute extremely well under persistently challenged conditions. Commercial markets remained cautious and conditions in international markets worsened, public markets held firm. For the quarter, the team delivered net sales of $5.6 billion, 8% lower than last year, record non-GAAP operating income of $556 million, up 1% year-over-year. And record non-GAAP net income per share of $2.72, up 4% year-over-year. Record profitability that underscores the power of our strategy when underpinned by our resilient business model and financial rigor. Profitability driven by relentless execution and profitability that is a clear demonstration of the value we deliver to our customers. Customers maintain their laser focus on mission-critical priorities and optimizing costs and once again, our deep and broad portfolio enabled the team to pivot to solutions that address our customers' priorities. Solutions that provide operating efficiency and expense elasticity like burstable performance in modern, hybrid and multi-cloud environments or solutions that are usage-based like SaaS and private cloud. Solutions, we are well-positioned to deliver. In today's environment, where customers are closely scrutinizing their IT spend. Our value as a trusted adviser is greater than ever before, an adviser who helps customers cut through complexity and evaluate options. An adviser, who designs, deploys, integrates and many times manages the solution. Capabilities made possible by the investments we have made in our three-part strategy for growth. Investments that enable us to serve customers across the full stack and full life cycle. Investments that have made us a vital technology partner. As we have executed our strategy, the amount that customers spend with us has consistently grown faster than net sales, a dynamic that reflects both the success of our strategic investments and increasing customer preferences for cloud and SaaS-based solutions. Recall that these offerings drive significant customer spend that are netted down in our sales and thus dampen our top line growth while enhancing our gross margin. Let's take a deeper look at quarterly results. There were three main drivers of performance, our balanced portfolio of customer end markets, our breadth of solutions and services portfolio and ongoing execution of our three-part strategy. First, our balanced portfolio of end markets. Each of our five build sales channels, corporate, small business, healthcare, government and education is a meaningful business on its own with 2022 annual sales ranging from $1.9 billion to over $10 billion. Within each channel, teams are further segmented to focus on customer end markets, including geography, verticals and customer size. Teams are similarly segmented in our UK and Canadian operations, which together delivered US$2.9 billion in 2022 sales. These unique customer end markets often act counter-cyclically, given the different macroeconomic and external factors that impact each, you see the benefit of our balanced portfolio again this quarter with public performance partially mitigating declines in commercial. Commercial market conditions continue to weigh on customer confidence and drive cautious purchasing behavior. Instead of the modest improvement in hardware we expected, we continue to experience pressure, particularly in client devices. Corporate net sales decreased 12%. Momentum continued around projects focused on increasing productivity, as well as projects focused on enhanced customer and go over experiences. With a shorter-term ROI lens, customers favored solutions enabled by cloud, which contributed to double-digit increases in corporate customer spend on cloud. AI and security were also major customer focus areas with CIOs increasingly being asked two questions, what are you doing with AI and how are you projecting our data? While AI remains in early stages of commercialization and development, and not yet translating into meaningful customer spend, our full portfolio of security offerings contributed to double-digit increase in security spend. Ongoing network modernization also led to excellent net comp performance, once again up double digits. Corporate top line performance continued to reflect meaningful year-over-year client device declines with ongoing postponement of upgrades and utilization of existing products. Small business net sales declined 22%. Market conditions were consistent with the second quarter, and customers continue to see clarity around the economy and more conducive conditions for hiring and new business formation. Focus remains on cost management and the prioritization of product – projects that need to get done. Projects that were more want rather than needs remain hot. Consistent with the second quarter, solutions increased up low single digits, while transactions declined by double-digits. Focus on shorter-term ROI for mission-critical priorities drove double-digit spend in cloud and software. Client devices continue to drive small business top line performance as refresh remained on the back burner and declines were on par with the second quarter. Public sales increased 1% year-over-year. Healthcare and education each posted a 2% increase, while performance was flat in government compared to last year's exceptional near 40% growth. Government performed relatively in line with historical seasonality, with Federal's mid-single-digit growth, offset by a mid-single-digit decline in state and local. The federal team continued its success helping agencies implement more efficient solutions to manage and protect data. This delivered excellent server performance up strong double-digits. The team also continued its work with agencies to optimize existing cloud investments and deliver new cloud solutions, which require rigorous proof of concept. The state and local team delivered solid sequential growth well above the historical averages, up 4%, but net sales declined mid-single digits compared to last year's double-digit growth. Solid Solutions growth was more than offset by a decline in transactions. Cloud-enabled solution adoption with strong, delivering double-digit increases in customer spend. Healthcare net sales increased 2% augmenting talent needs, modernizing data centers and driving cost savings and efficiency projects remain focused areas for customers. With complex industry challenges and tight operating budgets, healthcare systems continue to turn to cloud solutions. Armed with our full portfolio, which includes proprietary cloud-based health care solutions, the team drove a significant increase in cloud spend. Our broad portfolio of solutions also contributed to a double-digit increase in security spend growth as they help customers address heightened cybersecurity needs. Needs driven by the disproportionate percentage of all ransomware attacks that target healthcare organization. For education, net sales increased low single-digits, the first positive growth quarter for education in over eight quarters. K-12 low single digits increase more than offset a low single-digit decline in higher ed. Higher ed high single-digits increase in Solutions was offset by a double-digit decline in transactions, a decline largely driven by ongoing declines in client devices. Institutions continue to invest to improve security, campus connectivity and student experiences. The teams continue to focus on delivering these impactful solutions led to double-digit growth across netcomm, services and software. It also delivered low-teens growth in cloud spend. For K-12, the team continued their success helping schools and their efforts to achieve digital equity and improve learning outcomes, which delivered excellent growth in services and netcomm. Solutions grew meaningfully, while transactions declined low-teens, reflecting ongoing moderation of client device spend, security remained a key focus area with double-digit growth in customer spend. Other, our combined UK and Canada business came in below our expectations, down mid-teens. While the teams continue to execute well, the deterioration in market conditions in the UK and Canada were deeper than we anticipated, both the UK and Canada decreased by double-digits in local currency. Our diverse end markets are both a key strategic advantage and enable consistent performance amid an uncertain and uneven macro environment. The second strategic advantage and driver of our performance was our broad and deep portfolio, which enables us to pivot to address our customers' evolving needs. Similar to the second quarter, solutions sales increased mid-single digits, while transactions remained under pressure, down high teens. Hardware declined by double digits. Similar to the second quarter, performance continued to reflect depressed client device demand, particularly in the commercial space. Overall, client performance was roughly in line with the second quarter's double-digit decline. Net comp increased double digits with stable demand. Backlog continues to feather out and is now approximating historic levels. Cloud spend increased nearly 20% with increases across every end market, roughly half of our total third quarter cloud spend came from commercial customers and half from public. Security spend increased by double digits with a significant portion being delivered via software and the cloud. Cloud and security success contributed to a mid-teens increase in software, increases across virtualization and network management and security were partially offset by declines in categories tied to full stack projects and employment levels. Solid managed and professional services growth was more than offset by the impact of continued drag from lower services attached to transactional and solutions hardware and overall services net sales declined. As you can see, performance varies significantly across the portfolio. That is the power of our deep and broad portfolio. It enables us to meet our customers where they are and it is power driven by the investments we have made in our growth strategy. And that leads to the third driver of our performance this quarter, relentless execution of our growth strategy. A strategy guided by three pillars; first, capture share and acquire new customers; second, enhance capabilities in high-growth solutions area; and third, expand services capabilities. Over the past five years, we have broadened and deepened our capabilities. Our comprehensive life cycle management capabilities now deliver design, deployment, integration and management, capabilities that have deepened our relevance to customers and fortified our role as a trusted adviser to our customers. Capabilities that enable us to best serve customers across physical, digital or cloud based environment in the US and internationally and capabilities that drive favorable outcomes for our customers. In today's uncertain macro environment, with customers increasingly reluctant to make big upfront capital investment, our ability to deliver the cost savings outcome of our ICARE framework is a major competitive advantage. Armed with our consultative approach to problem solving, the teams both identify and implement consumption-based solutions with lower upfront costs, solutions that enable customers to move ahead with mission-critical projects, solutions that deliver value to our customers and deepen customer relationships. Many of these solutions are enabled by our Cloud Readiness Assessment, enablement and migration services, which are second to none in the industry. A great example of this in action is a solution we provided to an Illinois school district that had a legacy converged storage environment reaching end of life. The customer had three priorities; first, student teacher and administrator experience. Second, agility to meet end of school year deadline; and third, deliver costs that they manage within the constraints of their fixed budget. After a comprehensive evaluation of the wide range of on-premise and hybrid cloud solutions we can provide, the team determined that a consumption-based approach would provide the best outcome for the customer ultimately developing a private cloud hyperconverged solution. A solution that supports deployment and management of modern applications and provides the ability to seamlessly scale for future growth, one that delivered needed flexibility and cost predictability and deepens our relationship as a trusted adviser, another great win-win. Investments in our customer-centric growth strategy are foundational to our ability to consistently and profitably outgrow the US IT market, and that brings us to our expectations for the rest of the year. You will recall last quarter, we shared our expectations for the US IT market to post a decline of high single digits in 2023. This assumes three things. First, greater clarity in the market would lead to a modest improvement in the commercial IT hardware market in the back half of the year. Second, a moderate deterioration in the UK and Canada; and third, a return to normal seasonality in the public space. We did see a return to normal seasonality in public and while commercial spend has been stable there was a greater shift to solutions that net down in lieu of IT hardware spend. We also saw a deeper-than-expected international market deterioration. Current conditions and order today customer interactions lead us to expect these trends to continue. Our estimate of US IT market growth in 2023 remains at a high single-digit decline, and we continue to expect to profitably outperform the US IT market by 200 to 300 basis points when adjusted for this year's meaningful shift in customer spend to our complex solutions that net down. We are cognizant of the significant wild cards to our customers in the market space in this environment, a list that has grown more complex and now includes intensifying geopolitical instability and potential for federal government shutdown. We will continue to keep a watchful eye on these and other potential factors as we always do, and we will provide an update on business conditions on our next call. In the meantime, we will 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?

Operator:

Thank you. [Operator Instructions] Our first question today comes from Samik Chatterjee from JPMorgan. Samik, your line is now open. Please go ahead.

Chris Leahy:

Okay. Good morning, Mr. Samik. Let me get to the first question first on the commercial side. Look, I'll just say again that the environment this year, all year, frankly, has been cautious. It's been uneven -- has been challenging. All that said, I would say one thing that has held true is investments in technology continue to be a priority for all of our customers. What that's looked like in terms of their spending has been pretty consistent throughout the year as well. Commercial customers have remained focused on cost optimization throughout the year on operating efficiency, on experience, both employee and customer experience. And they have been more focused on consumption based and ratable solutions like cloud, much more hesitant to make significant upfront capital investments and very much focused on managing their costs throughout the year, given the fact that we continue to not have the clarity, I'd say, in the business environment that would give them the confidence to invest more heavily. Now remember, what we're seeing from where our customers are investing and how they're investing across cloud, security in some of these areas that I call mission-critical has been very strong. Clouds up double digits, securities up double digits, software is up significantly. And this is the customer reflecting the need for technology to drive their missions forward. In terms of the real impact to commercial, I would look at hardware and in particular clients. We saw some budgets loosening up a little bit in the second quarter, and we anticipated that, that would lead to a modest recovery, I'd say, in the back half of the year in hardware, in particular, in the client device. That's not proved to be true. Our customers in -- across corporate and small business are not seeing the clarity of the business climate and therefore not willing to increase their spend in that area. But net-net, what I would say about commercial is still investing behind technology in a different bucket, a bucket that is more cloud-based right now, more ratable, more prudent and measured around the immediate spend, but still very much seeing technology as critical to their mission, as I said. As we think about next year, look, we'll give you our views as we get through the year. One thing I'd say again about client devices is we're not seeing the pickup or signs of a pickup that we were hoping to see in the last half of the year. So when that happens, we'll see. But once there's clarity in the market, we might get to see that, but we have not seen those signs just yet. And that's where I'd leave it. I think we've got to get through the last couple of months. Here's what I just close with. The good news, which is the investment behind our strategy as physicians CDW to be able to offer our customers the broad portfolio, and we are seeing when they need help with their technology no matter where it sits across the full stack or the life cycle. Our sales and technical teams are there. And the good news is I'm really pleased with what I'll say is the engagement, the activity, the discussion and the depth with which we're ingraining our relationships with those customers. So feeling very good about when we kind of come out of the curve, we'll accelerate out with our customers. You've seen that in the past, and I wouldn't expect it to be any different at this time.

Erik Woodring:

Awesome. Thank you very much for taking my questions. I have two as well. Chris, maybe can we just start out. Can you just give us a bit more detail on linearity in the quarter? And specifically how the trends progressed from July through September and into October and how that has influenced your updated expectations for the full year? And then I have a follow-up. Thank you.

Erik Woodring:

Okay. Super. Thank you very much for that, Chris. And then, Al, I just wanted to dig into your gross margin comments a bit. We've heard for several quarters now about a mix shift to these more complex solutions that are obviously higher margin, when we eventually see a mix shift towards more transactional sales, as you've kind of cautioned us as we look forward. Do you expect that this will drive a mix away from these complex solutions? Or can kind of both of these trends coexist together because I think it does have an important influence on what -- how we think about gross margins in the future. So if you could just kind of help us understand if this is a zero-sum game or if you can see strong transactional alongside strength in complex solutions and what that would do for gross margins, that would be helpful. Thank you

Operator:

Our next question comes from David Vogt of UBS. David, your line is now open. Please go ahead.

Al Miralles:

Yeah, sure. Good morning David, it's Al. I'll start. Overall, I'll just break it down a bit by segment. So look, as Chris suggested in Q2 what we were seeing from customers might have suggested that with a bit more clarity in the economic environment that things would pick up. And again, we noted that we would have anticipated that would be more IT hardware and PC. That has not played out, and we have seen this really sentiment-driven environment has driven buying behavior. So on the commercial side, corporate and small business, we would say stable but not showing a pickup. With respect to our public business, first, they've executed exceptionally well, but I would say pretty much in line with expected seasonality. And then maybe lastly, I would just note in the international markets, we anticipated that you would see some moderation on the demand side in Q3 and our expectations for Q4 I would say that's worse than expected. And we would call it as maybe a few quarters behind what we've seen in the demand market in the US. So there are a couple of the puts and takes in terms of the demand environment, what we saw in Q3 as well as Q4. And then, David, just to your point on backlog, as Chris suggested in her prepared remarks, our backlog is nearing normalization. Maybe the lagging piece would be more networking, but we're getting close to what we'd call normalization. So no significant impact as we sit here now.

Operator:

Our next question comes from Amit Daryanani from Evercore ISI. Amit, your line is now open. Please go ahead.

Chris Leahy:

Yeah. Amit, look, I guess I'd say it this way, we've been here so many times before. The team knows how to manage through both the uncertainty. And if we do have a shutdown, have to manage through that, we're past the year-end, which is good. I would say that, projects that are in-flight already will stay in flight. There might be some projects that are in flight that might be on hold. I'd say that's really we're looking at 2024. But the good news is we have a team that has executed in and out of these -- these environments, I guess, sadly, in some regards, but in these environments many, many times, and I have great confidence they'll do a terrific job this time as well.

Al Miralles:

Sure, Amit. Thanks for the question. So a couple of things I would note. I think if I kind of parse the pickup we've had in our operating margins, a few things. Number one is we benefited from -- obviously, really strong gross profit margins up 200 basis points year-over-year. And that is a function of a few things, but I'd say most notably a mix of business. And so a lot of that gross profit margin pickup is dropping down into our operating margins. The other piece, Amit, would be really just our efforts to align our expenses with what we're seeing in the business and demand vectors and that is our efforts Q1, Q2 along those lines certainly helped. We have kind of a targeted range, and I've talked about this before of high 54s into the 55 of expenses relative to GP, and that's kind of our sweet spot in this environment. That's where we're operating. Now, I'll just say that is notwithstanding, we continue to invest behind our strategy, but at the same time, we have significant efforts to drive productivity, efficiency, kind of, managing our expenses commensurate with where we stand in. So they are the major components that are driving our operating margins. So Amit, I would just maybe just say that in terms of durability, you can expect we're going to continue on the efficiency front while we invest the impacts or influence of gross margin. Certainly, the netted down growth is going to continue to help that in that regard. But as we mix more into transactional products and PC start to come back, you could have some dilution effect there. So we certainly have moved quickly on the operating margin. Some of that ultimately could see giving back, but you're going to see different geography in our income statement as it plays out.

Matt Sheerin:

Yes, thanks and good morning. I'm hoping, Chris, that you can elaborate on the comments about the weakness in the international markets. You're not the first one calling out that specifically in Europe. So is that something that you saw throughout the quarter? And Al, you did mention that you expect that softness to continue over the next couple of quarters. So anything more you can add would be great.

Matt Sheerin:

Okay, great. Thank you. And just regarding PCs, there's been buzz recently about AI enabled PCs down the line and potentially being another catalyst for upgrade cycle, are you curing that at all from customers and suppliers? And is that something that folks will get excited about at some point?

Operator:

And our next question comes from George Wang from Barclays. George, your line is now open. Please go ahead.

Chris Leahy:

Yeah, I think the question was on share gains. Hi, George, good morning. Look, here's what I'd say. We hold ourselves accountable over the long term to outperforming the market by 200 to 300 basis points. And we feel very confident that we're continuing to do that. When I think about other periods when we had weaker hardware environment 2016 comes to mind. And in that environment, we had hardware declines, but we noted that our netted down solutions, which in those -- back in 2016 would have been software and software assurance and things like that. We're growing at a faster base, fast forward to now. And when we look at the customer spend, what customers are investing through CDW, we're seeing a delta of more than 5%. So it's a fairly big delta, and we feel very confident that we continue to take share across our markets, and we'll do so in 2023 and over the long run.

Chris Leahy:

Yeah. I would say on the M&A side, I think about that as a vehicle for investing behind our strategy. And you've seen us invest both organically and through acquisitions very successfully. And again, kudos to the team for on companies that we've joined with on both sides for both moving quickly and creating more value for our customers as a result of those investments. And those have been primarily, as you know, along capabilities there are advanced solutions related, cloud, security, digital things that you are now seeing really strength in the market and strength in our business. So we'll continue to look at M&A opportunistically. And if it's the right fit, we certainly would consider moving forward is always on the docket. We're never out of the market. But I'll have Al chat a little bit about cash position.

Operator:

And our next question comes from Ruplu Bhattacharya from Bank of America. Ruplu, your line is now open.

Al Miralles:

Sure, Ruplu. So a few things. Number one, we've said before and we continue to say we would expect, as we look forward, that netted down revenues would outpace our overall net sales, if you will. So I'd say, give you that one data point. I will note that the mix into netted down this year has been more extreme and a couple of metrics that I'll just note; number one, netted down for the quarter of $400 million was 7% of our net sales, but 32.6% of our GP and you can go back sequentially and look at what that looked like. But it's notable both sequentially and I'd say, versus prior year. If you try to put those dollars on a more even basis with net sales that grows up, you'd get a sense for the impact. And I think, and Chris alluded to this, it would suggest that our decline in net sales is pretty considerably less than if you looked at it on this customer spend basis. So there are a couple of things you could look at from a math perspective that would show the pretty notable growth and outsized impact even down has had this year.

Chris Leahy:

Yeah, Ruplu good morning, and I would say you've got it right, our track record of outperformance we were seeing refreshing hardware is strong. And part of that is our ability to gain share. And part of that is the fact that those are recognized on the top line net basis. And so we tend to outperform our premium as a result of those two things. In terms of looking forward, I just repeat a little of what I said, Ruplu, which is we do feel that clients, the downswing is kind of we're at the back end of that cycle, if you will, as opposed to the start of that cycle. That said, as Al mentioned, it's really a sentiment-driven market right now driving demand. And until our larger commercial customers had a level of confidence in the business climate, we think that client device and even data center refresh will be kind of the last point where they start to invest more dollars. Now, you're right, we're -- we've got a refresh cycle. We've got 40-year-old Tove devices, et cetera. We've got Win 11 coming. So there are a lot of things in the market that will certainly be a tailwind for client devices. AI, as we mentioned, embedded in client devices, those are all going to be positive. And I would also add that our teams are definitely having conversations with customers about refresh in terms of planning, we're just not seeing that convert. And again, we'll be ready when they're ready to convert, but it's just not to converting yet.

Adam Tindle:

All right. Save the best for last. Al, I wanted to maybe start by reflecting on 2023, the silver lining this year, I think it's been cost management. You've been protecting earnings all year despite very volatile revenue. And I think you mentioned that OpEx to GP is your metric, which makes sense, but it's now optimal. So the question would be, as we look forward, correct me if I'm wrong, but it sounds like the outlook for 2024, based on what you're seeing is a little bit more muted. I see you're not really investing in headcount, it's up modestly sequentially. Inventory days are very low, so you're not carrying up for revenue growth. You've got mix shifting on -- as a headwind for GP dollars. So the question would be how to think about protecting earnings in a more muted environment moving forward? Would it be fair for us to anticipate more negative operating leverage moving forward? Why or why not? Thanks.

Adam Tindle:

Got it. Maybe a quick follow-up on gross margin. I understand that net revenue is benefiting or mix. But we can exclude that, give it a 100% gross margin and strip it out and look at just traditional hardware gross margin. And at current levels, I'd love for you to maybe unpack some of the items that might be more cyclical versus structural and help us to gauge the outcomes, because that analysis can get some pretty scary outcomes of returning back to historical levels. I think you can get over $1 of EPS coming out from reverting that back to the mean. So if you could unpack the ex-net revenue gross margin and what's cyclical versus structural, that would be helpful. Thank you.

Operator:

And with no further questions, I'd like to hand the call back to the CDW team for closing remarks.

Operator:

This concludes today's call. Thank you, everyone for joining. You may now disconnect.

Operator:

Good morning. Thank you for attending today's CDW Second Quarter 2023 Earnings Call. My name is Megan and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to Steve O'Brien with CDW. Steve, please go ahead.

Christine Leahy:

Thank you, Steve. Good morning, everyone. I'll begin today's call as usual with a brief overview of our performance, strategic progress and our views on the second half of the year. Al will provide additional detail on our results, our capital allocation priorities and our outlook. We will move quickly through our prepared remarks to ensure we have plenty of time for questions. Our team executed extremely well in a market facing persistent challenges. As expected, commercial top line remained under pressure and public returned to more normal seasonality. For the quarter, the team delivered net sales of $5.6 billion, down 9% in U.S. dollars, down 8% in constant currency. Non-GAAP operating income of $530 million was up 3% and non-GAAP earnings per share of $2.56 was up 3%. These results demonstrate the power of our resilient business model when coupled with our broad and deep portfolio of technology solutions. In an ongoing period of economic uncertainty, our ability to drive outcomes and address customer priorities across the entire IT continuum enabled the team to pivot to where our customers need us most. An ability that reflects the impact of strategic investments we have made to enhance our high relevance and high growth solutions and services. While transactional business remained under pressure, increases in solutions contributed to meaningful margin expansion. Margin expansion that together with ongoing expense discipline, delivered strong profitability. Let's take a look at this quarter's key performance drivers. First, our balanced portfolio of end markets. Each of our five sales channels, corporate, small business, healthcare, government and education is a meaningful business on its own, with 2022 annual sales ranging from $1.9 billion to over $10 billion. Within each channel, teams are further segmented to focus on customer end markets, including geography, verticals and customer size. Teams are similarly segmented in our UK and Canadian operations, which together delivered US$2.9 billion in 2022 sales. These unique customer end markets often act counter cyclically given the different macroeconomic and external factors that impact each. Our second quarter results provide an excellent example of this. Economic uncertainty continued to weigh on the commercial market and both our corporate and small business results reflected ongoing cautious customer behavior, caution that once again drove elongated sales cycles, smaller deal sizes and greater focus on mission critical projects. Caution that also drove customer focus on short-term ROI with both corporate and small business posting double digit increases in cloud spend. For corporate overall sales declined 16%. Mission critical projects continue to move forward and slowly ticked up throughout the quarter. Large commercial customer spending sequentially improved. Continued postponement of upgrades and utilization of existing product resulted in a double digit decline in client devices. Well, we remain cautious on the outlook for client devices. Corporate delivered its first sequential volume increase in the past four quarters providing some indication of demand stability. Notably, client device ASP's held buoyed by mix into higher value, higher functionality units. Momentum around projects focused on increased productivity and enhanced customer and coworker experiences and that drove excellent growth in cloud spend. Implementation of network modernization projects delivered double digit Netcom growth. Small business declined 21%, reflecting the impact of ongoing caution by economically sensitive customers. Client devices continued to decline, with upgrades on hold pending greater clarity around the economy and employment. Focus on mission critical priorities around security and efficiency drove double digit customer spend increases in both cloud and software. Public performance partially mitigated commercial market pressure and was seasonally higher than the first quarter. Sales increased 2% year-over-year with strong performance in government, another quarter of stable performance in healthcare and an upturn in education. Government increased 12% and continued to benefit from strategic efforts to target complex services enabled hybrid infrastructure and cloud opportunities. Federal delivered double digit growth in the quarter, largely driven by the team's ability to help agencies implement more efficient solutions to manage and protect data. This delivered excellent net common storage performance. Legacy Sirius relationships contributed to significant growth in services. The state and local team also delivered double digit growth. Excellent services performance reflected the team's success, helping state and local municipalities address talent gaps through enhanced training as well as professional services engagement. Cloud adoption drove strong software and security performance. Healthcare performance was relatively flat. Talent needs and data center projects remained focus areas as customers increasingly leveraged technology to address complex industry challenges. Customer hesitancy around cloud continued to dissipate and adoption increased meaningfully in the quarter. Client devices remained under pressure given ongoing customer focus on mission critical projects that deliver short-term return on investment.

Albert Miralles:

Thank you, Chris, and good morning, everyone. I'll start my prepared remarks with detail on the second quarter, move to capital allocation priorities and then finish up with our 2023 outlook. Turning to our second quarter P&L on Slide 7, consolidated net sales were $5.6 billion, down 8.5% on a reported and average daily sales basis. Second quarter net sales were up 10.2% versus the first quarter on a reported and average daily sales basis, ahead of our outlook which had anticipated a mid-single digit seasonal increase. Broadly speaking, our expectation held that the first quarter's uncertain macro environment would persist with our commercial performance coming in as we expected while public moderately exceeded our expectations. Public results were driven by the strength and solutions performance across channels and the impact of some early shipping of anticipated client device refresh volume in K12, leading to return to year-over-year growth and the strongest sequential growth for this segment since Q2 2020. On the supply side, the dollar value of our backlog declined relative to the first quarter, which contributed to our stronger solutions performance. Backlogs and product lead times associated with transactional products ended the quarter essentially in line with more normal historical levels, while remaining supply chain challenges and netcom solutions continued to ease in the quarter. We continue to anticipate the remaining pockets of backlog to weather out over time. As always, we judiciously managed our working capital to support our customers while ensuring strong economic returns. Our year-to-date free cash flow performance, which we will discuss shortly, reflects this discipline. Our team delivered strong profitability in the quarter. Gross profit was $1.2 billion, a year-over-year increase of 1.1%. Record second quarter gross margin of 21% was up 200 basis points year-over-year and increase in transactional product volume had a mild impact on margins compared to the first quarter, but overall margins remain strong driving a year-over-year gross profit increase despite lower net sales. As a reminder, the record gross margin performance in recent quarters has principally been driven by two factors; first, product margins benefiting from both mix into complex solutions and a lower mix of transactional products. When we mix back into transactional products, we would expect for this benefit to moderate. Second, a greater mix into netted down revenues, the category again outpaced overall net sales, growing 10% in Q2 2023 compared to Q2 2022, primarily driven by double digit software-as-a-service growth. Netted down sales represented 31% of our gross profit compared to 28% in the prior year second quarter. This continues to be an important trend within our business. Turning to expenses on Slide 8, non-GAAP SG&A totaled $652 million for the quarter. Relative to the prior quarter, prior year quarter non-GAAP SG&A was flat as increased payroll expense associated with modestly higher co-worker count was offset by the prudent managed management of discretionary expenses during the quarter. Coworker account at the end of the second quarter was approximately 14,900, down from the first quarter, principally due to our efforts to align our cost structure with the level of business demand, while continuing to prioritize the areas where we can provide the most value to our customers. Strategic investments in our solutions and services capabilities remain key to our three-part strategy for growth and important catalyst for the achievement of our profitability and margin goals. GAAP operating income was $412 million. Non-GAAP operating income was $530 million, up $14 million or 2.6% versus the prior year. The difference between our GAAP and non-GAAP operating income for the quarter was larger than usual, primarily the result of the workplace optimization charge in the quarter which is detailed on slides 8 and 11:00. Non-GAAP operating income margin reached a record second quarter record of 9.4%, up 100 basis points from the prior year and up 90 basis points compared to the first quarter. We remain laser focused on delivering leverage on our gross profit growth despite challenging market conditions. Moving to Slide 9, interest expense was $58 million, approximately flat to the prior year and relatively in line with our expectations. Our GAAP effective tax rate shown on Slide 10 was 25.7%. This resulted in first quarter tax expense of $91 million. To get to our non-GAAP effective tax rate, we adjust taxes consistent with non-gap net income add backs as shown on the slide 11. For the quarter, our non-GAAP effective tax rate was 25.9% within our expected range of 25.5% to 26.5%. As you can see on Slide 12, with second quarter weighted average diluted shares of 136 million GAAP net income per diluted share was $1.92. Our non-GAAP net income was $349 million in the quarter, up 2.8% on a year-over-year basis. Non-GAAP net income per diluted share was $2.56, up 3.2%. Moving ahead to Slide 13, at period end, cash and cash equivalents were $204 million and net debt was $5.6 billion. During the quarter, net debt was relatively flat, consistent with our plan to maintain our net leverage ratio within the range of 2 to 3 times. Liquidity remained strong with cash plus revolver availability of approximately $1.2 billion. Moving to slide 14, the three-month average cash conversion cycle was 14 days, down four days from the first quarter, five days from the prior year's second quarter and below our targeted range of high teens to low 20s. Our cash conversion reflects our continued diligent management of working capital, particularly with respect to inventory. As we've mentioned in the past, timing and market dynamics can influence working capital favorably or unfavorably in any given quarter. We continue to believe our target range remains the best guidepost for modeling future working capital. Our effective working Capital Management also drove excellent year-to-date free cash flow of $684 million as shown on Slide 15. For the quarter, we utilized cash consistent with our 2023 capital allocation objectives, including returning approximately $79 million to shareholders through dividends and $196 million in share repurchases. That brings me to our capital allocations on Slide 16. Our execution remained consistent with the updated objectives we communicated at the start of the year. First, as always, increase the dividend in line with non-GAAP net income. Last November we increased the dividend 18% to $2.36 annually. Going forward we will continue to target a 25% payout ratio. Second, ensure we have the right capital structure in place for the targeted net leverage ratio. We ended the second quarter at 2.6 times, flat to the end of the first quarter within our new range of 2 to 3 times. We continue to convert cash profits into cash flow and have rigorous process in place to proactively manage liquidity while maintaining our flexibility. Finally, our third and fourth capital allocation priorities of M&A and share repurchases remain important drivers of shareholder value. For 2023, we continue to target returning 50% to 75% of free cash flow to investors through dividends and share repurchases. Moving to the outlook for 2023 on Slide 17. We continue to see caution and prudence in the market and in the sentiment of our customers. Given this, there is no change to our previously shared expectation that the IT market will contract at the upper end of high single digits. Our baseline view incorporates a modest recovery in the second half of 2023. We have not seen indications that would suggest a major turnaround on our commercial channels otherwise. With this scenario as our baseline, we maintain our expectation and outgrow the market by 200 to 300 basis points and continue to anticipate that netted down revenues will grow faster than other products and solution categories. Keep in mind in times of hardware softness, our over performance tends to be on the lower end of this range and vice versa. We also continue to expect a neutral currency impact for the full year, modest tailwinds in the second half after seeing modest headwinds in the first half. This assumes an exchange rate of $1.24 to the British pound and CAD0.77 for the Canadian dollar. Moving down the P&L, we expect our full year non-GAAP operating income margin to continue to be in the range of 9%. This reflects our expectation of continued strong gross profit margin with modest softening following three straight quarterly gross margin records. Operating margin is also supported by our actions to better align expenses. Finally, we expect our full year non-GAAP earnings to be in the range of flat year-over-year in constant currency. This reflects an increase from our prior expectation reflective of our better than expected second quarter results. Please remember that we hold ourselves accountable for delivering our financial outlook and a full year constant currency basis. Additional modeling thoughts for annual depreciation, amortization, interest expense and the non- GAAP effective tax rates can be found on Slide 18. Moving to modeling thoughts of the third quarter, for average daily sales, we expect mid-single digits sequential growth from Q2 to Q3. This equates to a mid-single digit percent year-over-year reported net sales decline for the fourth quarter in terms of average daily sales. As noted, we anticipate gross profit and [indiscernible] margins to be below second quarter levels, driven by both mix and rate elements. And we expect third quarter non-GAAP earnings per diluted share to be flat to slightly down year-over-year. In 2023, we expect full year free cash flow to be approximately 5% of net sales, above our rule of thumb range of 4% to 4.5% and reflecting our strong cash generation in the first half of the year. While we continue to operate in a cautious and uncertain market, we remain confident in our ability to deliver profitability, margins and cash flow to our stakeholders. That concludes the financial summary. As always, we've provided updated views on the macro environment and our business on our future earnings calls. And with that, I'll ask the operator to open up for questions. We would ask each of you to limit your questions to one with a brief follow up. Thank you.

Asiya Merchant:

Great. Thank you very much for taking the questions and congratulations on the results. If you could just talk a little bit about seasonality, I know you guys have guided for the third quarter and as you look into the fourth quarter, there's a lot of debate on whether the pull in, incline devices for the second quarter is going to result in below seasonal growth for the second half, that's on the client devices side, and just generally a lot of caution on other hardware spend, whether it's on the compute or storage side just given a cautious spending environment and shift towards AI. So if you could provide me what you're seeing in the channels and then your end customers that would be great. And then I just have a follow up on free cash flow as well. It's -- you're looking like it's pretty strong for this year. How should we think about potential acquisition and a boost to the growth rates that you guys have outlined for this year? Thank you.

Albert Miralles:

And Asiya, maybe I would just put this is out, maybe just add the just kind of to give you the technical component with our Q2 delivery and kind of allocation across the channels, Q3 would essentially look seasonal, that is obviously it's the seasonal peak for public, and we'd expect that would play out. And what we experienced from the commercial channels for Q3 would look much like Q2. So when we think about that pickup of activity, modest recovery, probably a little bit more weighted towards Q4 in those segments that have been softer in the last few quarters.

Asiya Merchant:

Yes, just on the free cash flow. Yes, it's obviously trending higher than what you guys had previously anticipated or guided to. How should we think about the use of cash here?

Asiya Merchant:

Great, thank you.

Adam Tindle:

Okay, thanks. Good morning. I just wanted to start, it looks like kind of the old CDW that we've come to know and expect in terms of over-delivering relative to expectation is back this quarter. So at a high level, Chris, prior to this quarter, we had two quarters that were very different from plan in Q4 and Q1. I just would be curious for investors that are wondering what changed in Q2 from either a guidance process or what enabled the over-deliverance that we can kind of get confidence that the old CDW is back moving forward?

Adam Tindle:

Got it. And maybe just a follow-up for Al on guidance, just a little bit more in-the-weeds question here. Your Q3 guidance, I think you said mid-single digits sequentially per day, which if I look back historically, that's kind of seasonal, like you said. As I think about Q3, that's typically a big public sector, particularly government quarter, but you also had a very strong public sector result during Q2. So I guess the question would be what gives you confidence that there wasn't pull-in during Q2 in public sector and why guide mid-single digits in Q3 or that seasonal based on that strong Q2 result. Thanks.

Adam Tindle:

That’s helpful. Thanks and congrats on the results.

Operator:

Thank you. Our next question comes from the line of Matt Sheerin with Stifel. Your line is now open.

Christine Leahy:

Yes. Matt, it's a great question. We've been all asking ourselves this for a long time, when our PC is going to start to come back and that, as we all know, is really tied to the market and projects that are related to growth initiatives within organizations and employment. And look, I think that the farm has not yet been cleared and I don't think our customers yet are on the kind of solid footing of they're ready to open the coffer, so to speak. They're still being incredibly judicious in their spending. They're scrutinizing relentlessly, frankly. And so what we're hearing is more focused around mission critical, and I'll call that more solutions oriented endeavors right now. So it's hard to gauge on the PC refresh and when we'll start to see it come back. That said, look, we all know that the PCs are the productivity tool, right? They're what connect people to the applications. I think we all agree on that. We also know that we've got devices that are sitting old in the system. We talked about K-12 as an example, two to three years old, breakage five times higher than it was pre-pandemic, frankly. And Win 11 is right around the corner. Now you heard us talk about ASPs and customers buying devices that are kind of higher functionality, higher productivity, those would be Win 11 devices. So we do see customers starting to explore the benefits of Win 11, and that's going to set in at some point, and that's going to be a nice tailwind. Whether it will be Q3, Q4, 2024, it feels a little longer term than this year.

Christine Leahy:

Yes. So on the networking side, we certainly saw a healthy flush this quarter, and I would say that we had double-digit growth across all of our customer segments, and that was largely due to backlog flush and continuation of network modernization projects. In terms of the movement to cloud and AI, look, I would just say that this is a topic of conversation. I've used the word frenzy before, but it's a topic of conversation and as I said in my prepared remarks, there's a lot of complexity. There are a lot of questions out there. What will it drive? And what I would just say, Matt is, look, the benefit of our broad portfolio and the investments we've made across high growth type solutions areas as well as the services capabilities in particular, position us well to support customers wherever they are on the IT spectrum and whatever they're buying. So in any case, I do really see the customer decisions benefiting CDW because we'll benefit them with the portfolio and our capabilities.

Operator:

Thank you. Our next question comes from the line of Amit Daryanani with Evercore ISI. Your line is now open.

Christine Leahy:

Yes. Amit, thanks for the question. Here's what I'd say. I'd say too early too call. We're taking it quarter-by-quarter right now. On the commercial side, there's still caution, there's still prudence. There's no doubt that's still sitting in the market, notwithstanding, as I said, slight uptick as we get to the end of the quarter. So a couple of weeks, a month of a quarter does not -- was going to say trend make, but it really doesn't create solid ground yet. So we have to give it a little more time. I see some good indicators, but they're just not enough to make the call. So moderate feels better to us than major turnaround. On the public side, look, the way that both education and government work is we track very early in the year. So in the first quarter, we're tracking the projects that are coming in. So we have very good visibility to seasonality and generally what's going to happen during the strong seasonality. K-12 has been strong, and it's delivering. Having some of that come in, in June in our second quarter versus third quarter, we're not worried because we actually are seeing a real uptick in refresh needs. We talked a couple of years ago about the breakage rates and how that was going to drive refresh, well it is. And on the public side, it's looking very, very normal to us. So we don't want to get ahead of our skis on either commercial or public. We're just kind of calling it as we see it as we rounded out the quarter. So that's what I'd say. I don't know Al, if you want to add anything?

Amit Daryanani:

Perfect, thank you. And then I guess, Al, maybe if I could ask you this question. Gross margins are up fairly nicely, I think, 140 basis points in the first half of this year versus last year. And you touched on a couple of things that are helping you there, but maybe you can talk about how much of an uplift do you think is cyclical in nature of the fact that the PCs are down a lot versus things that might be a bit more structural in nature. I'd love to just understand how do you think about gross margin run rate as you go forward from here? Thank you.

Operator:

Thank you. Our next question comes from the line of Erik Woodring with Morgan Stanley. Your line is now open.

Christine Leahy:

Yes. Let me start, Erik, with you know that we're a price plus model, right? So you're familiar with that model. If the prices, the OEM prices go up, we're usually passing that on to the customer, but let me set that that aside for a second. Let me -- I would characterize it as follows. I would say that pricing is holding fairly firm in an intensely competitive market. And I'd say that and give credit to the team that is reflecting to the customer the value that the CDW is delivering. But I will acknowledge that we're in a very intensely competitive environment. And when you think about the levels of scrutiny and all the things we've talked about in terms of purchasing processes right now, there's a lot of getting it out. That said, ASPs are holding pretty firm for CDW and what happens in the second half, I would expect the market to remain competitive. But I would expect also that the value that we, for example, wrap around client devices when they come back more robustly, that really resonates with customers, and I would expect us to hold ASPs pretty darn firm.

Christine Leahy:

Yes. No problem, Erik. Here's what I would say, small businesses are acting like small business. They're the most highly sensitive to the economy and in particular, hiring, right? And so right now, without -- again, the fog hasn't cleared. Without more clarity around the economy and potential for growth and hiring, they're kind of in a bit of a hold position except for those mission-critical projects that are productivity related, that are security related, that are frankly, even a little lower cost because we're talking about cloud versus large hardware purchases. Interest rates have really impacted that group of customers in terms of access to capital, and we're seeing that. I do think we've stabilized there kind of at the bottom, as I said. The difference when we look at the larger commercial customers, first quarter to now, we talked about first quarter that large commercial customer being what was the real drag, if you will, on the overall results. Those are the customers we've started to actually see the uptick in. So think about the last month of the quarter, starting to see movement back to mission-critical projects, the things that were on delay. That's where we're actually seeing some stability and sequential increase in client devices. So the difference is the small businesses, they're going to be a little longer to get -- kind of get back on the major buying page. Those larger entities are starting to inch back in and that's what's giving us -- that's one input to the confidence we have in the back end of the year. Does that help?

Christine Leahy:

Yes, thanks Erik.

Samik Chatterjee:

Hi, thanks for taking my questions. I guess, Chris, maybe to some extent, following up here on Erik's question about what you're hearing from customers. With supply generally improving, is the visibility that customers are providing you or even the heads-up in terms of like heads up around projects that they're planning, is that starting to come in and sort of get compressed a bit more? What are you seeing on that front? And I have a follow-up. Thank you.

Samik Chatterjee:

Okay, got it. And if I can just ask more specifically to NetComm, that has continued to be an area of growth, but you did mention that you have continued to work down backlog. I think one of the questions we get often is, how sustainable can growth be once the backlog gets drawn down and normalized, any thoughts around that? I mean, are you expecting a similar pickup in NetComm sort of in the pipeline once spending recovers to a more normalized level? Or is backlog going to be a headwind in relation to growth?

Albert Miralles:

And Samik, this is Al. Just to maybe add one thing. What we experienced with the backlog with NetComm in the quarter was what we would call pretty orderly. We have been saying we expected that backlog would work its way down, and it did. So while it contributed to the performance for NetComm, certainly underneath there, there's still continued written demand, as Chris suggested.

Operator:

Thank you. Our next question comes from the line of Shannon Cross with Credit Suisse. Your line is now open.

Christine Leahy:

Yes. Sure, good morning Shannon. Yes, I guess when we think about AI, we think very simply two parts, two sides. First is the catalyst for CDW to accelerate and expand our own internal use cases, obviously. And then it's an opportunity to evolve our -- help our customers evolve using our services capabilities and transaction capabilities. It might sound very simplistic, but I'll tell you the way that we think about it is putting tools in the hands of coworkers and customers and taking the work out of the hands of coworkers and customers. I mean, it really does fall into those two buckets. And CDW's full stack approach allows us to help customers across the entire value chain from what I'll call the base to the tip. So think advisory services, right? And think applications, think modeling and tools, think computing and data structure that's required to run on all of that. And we are having conversations, I would say, on the advisory level, it's essentially its assessment, AI maturity, how do you use AI instances? How do you use data models? Do I want to use a private or [indiscernible], it's basically some of the basics. Application level, it's around the embedded AI tools that are there or coming and ensuring customers understand the benefits that they can accrue and then helping them consume and use those benefits and then modeling in tools and obviously, infrastructure required and the tools to create the use cases. You asked about particular industries. Look, I'd say contact center is a huge use case and it was a fast pickup in a number of industries, including financial services, retail, et cetera. We've seen a lot of activity there. Then you think about things like marketing transformation. You think about things like knowledge assistance and customer assistance. Those are the types of use cases that we're talking actively with customers about right now and that's really across industry. So think customer assistance, think retail, think food, think knowledge assistance, think financial services, et cetera. But those are the buckets that we're really starting to have conversations about in addition to what I would say more proprietary conversations with customers about specific ways that they can monetize, specific to their industry or to their organization. So that's what we're seeing right now. There's a lot of discussion, a lot of -- go ahead. Go ahead, Shannon.

Christine Leahy:

Yes. Here's what I'd say about that. I would continue to think that our customers are at the front end of this discussion. We certainly have some, as I said, in a number with contact centers where we've already implemented solutions, and they're reaping the benefits. I think in the middle of the year right now, given the environment we're in, customers are not prepared to increase budgets as a result of AI for 2024 yet because we're in the midst of planning what their -- helping them plan what their 2024 looks like. Do I think over the last, over the next six to 18 months, customers are really going to understand the tremendous benefit? I call it evolutionary -- evolutional. It's transformative. It really is one of those technologies that is going to massively change how companies operate and the benefits they accrue. But I think we're going to have to wait and see a little bit longer to understand what that opportunity looks like and when it's going to come to fruition. But it will be there, in our view. It will absolutely be there.

Operator:

Thank you. Our last question will go to the line of Keith Housum with North Coast Research. Your line is now open.

Christine Leahy:

Yes, sure. So both of the acquisitions were relatively small, didn't have a material impact on the financials, but I would be -- I would say, strategically write-down the fairway in our sweet spot. So the first one that I think that you're thinking of is Locus, which is a consulting company, and they're in what we call our talent orchestration space. So they help us to basically provide professional and managed services engineers so they expand our technical talent base period to end. And it's a way to have I'll call it, kind of a flexible burstable model across our technology resources. Locus actually doubled the size of that business in one fell swoop, and we're really delighted where actually we've seen very significant success, almost right out of the bat with Locus because we've been able to fill talent needs and talent orchestration needs with customers even more quickly around all of the important areas like networking cloud and security. Enquizit is the other one, the acquisition we made recently, also very exciting. They're AWS Premier Cloud, a service provider in the government and education and not for profit space. And they complement our existing digital velocity team. Think of what Enquizit does as professional services around application modernization and cloud migration. And they also have a proprietary tool that combines professional services with IP, which helps automate the migration process. So it's very unique to Enquizit and so far, that's gained a lot of traction in our federal space. So, two great acquisitions that we were delighted to bring into the family and already paying dividends.

Operator:

Thank you. That will conclude the question-and-answer session. So I will now pass the conference back over to CDW for closing remarks.

Operator:

That concludes the CDW Second Quarter 2023 Earnings Call. Thank you for your participation. I hope you have a wonderful rest of your day.

Operator:

Hello, and welcome to the CDW First Quarter 2023 Earnings Call. My name is Alex. and I will be your coordinator your call today. [Operator Instructions]. I’ll now hand over to your host, Steve O'Brien with Investor Relations. Please go ahead.

Chris Leahy:

Thank you, Steve. Good morning, everyone. We have a lot to cover today. I'll begin with an overview of our results and our outlook, and Al will provide a deeper view into the financials as well as an overview of our capital allocation priorities, and then we'll move right to your questions. Market conditions were turbulent with a marked down shift in demand as the quarter progressed, translating into lower business volume. For the first quarter, net sales were $5.1 billion, 16% lower than last year. Non-GAAP operating income was $434 million, down 6% and non-GAAP net income per share was $2.03, down 8%. While clearly not satisfied with these results, our excellent cash flow and record gross margin reinforce the durability of our underlying profitability and integrity of our strategy. So, let's take a look at what happened in the puts and takes of the quarter. First, what happened? In short, demand was weaker than anticipated in our commercial business. When we exited 2022, our forecast called for a moderate softening of IT demand in 2023 and a mid-single-digit year-over-year decline in first quarter sales. As the quarter progressed, IT demand weakened more than expected as a confluence of events intensified already heightened economic concerns and recession fears. This led to a fairly rapid shift in customer behavior, most notably in our large commercial customers. Projects that drove cost reduction, productivity, and financial returns were prioritized. Project justification and budget scrutiny ruled the day. And although deals were not canceled, sales cycles elongated, written sales slowed, and deal sizes compressed. While all of this translated into lower sales, the value of the solutions we provided customers continue to grow. You see the impact of this on our gross margin momentum. Margins were consistent with last quarter with meaningful year-over-year expansion in each of our customer end markets. But unlike the fourth quarter, our strong margins did not fully offset the magnitude of our net sales decline. Let's take a look at the puts and takes of the quarter by customer end market. Recall, we have five sales channels

Operator:

[Operator Instructions]. Our first question for today comes from Amit Daryanani from Evercore. Your line is now open. Please go ahead.

Chris Leahy:

Yes. Good morning, Amit. Well, let me just take you through and unpack it a little bit. look, the key driver, the overwhelming driver of the performance miss to our expectation was the sharp uptick in concern and caution that we saw with our commercial customers as economic uncertainty intensified through the quarter and the meaningful downshift in customer demand, particularly amongst our large commercial customers as a result. And that translated into an outsized impact on results given the relative size of our commercial business. If I dig a little deeper, look, when our customers got cautious and exhibited a lot of concern, they went into decisions around deferring and pausing and reducing costs generally, which is a playbook for larger customers. And that brought greater scrutiny to projects that brought a focus on shorter-term ROI that brought a focus on overarching cost reductions, all of which created longer sales cycles and shorter duration contracts. I would say we didn't see cancellations, what we saw were delays in smaller deals and the knock-on effects of that. So as a full stack, full life cycle provider, there's a cascading impact across hardware, software, and services. right? So, if you've got large delays in deals, then you have less attach of services and other solutions at that point in time. And when you think about commercial representing more than 50% of our business, the impact just created a major headwind for our top line sales. Now I would say as you go through the rest of the portfolio, the balanced portfolio of customer end markets did help. But particularly given the extreme softness in the client device market, generally, it didn't help as much as we would have liked. So, when you think about government high Ed and health care, they all performed well but did have some growth challenges, again, due to client international executed well, K-12 executed well in solutions, but they certainly had continuing year-over-year pressures and didn't quite perform in the client area as well as we thought they might. And so, as a result, the top line was impacted. The other thing I would just unpack for you a little bit is if you go through the portfolio itself, NetComm was strong across the board. Software was strong across the board. Cloud growth remains strong. Services in the areas where we focus strategically, professional, and managed services were strong and solid. We had a little -- we had some impact on services relative to warranties that were softer. But up and down and across the portfolio, we felt very good about execution is really, in our view, is a macro impact. And look -- and you look in terms of profit, contrary to Q4, record first quarter margins weren't enough to offset the magnitude of the shortfall but we did have record first quarter margins and excellent free cash flow. So, I would say that the team is performing well in a really challenging environment. And our cash flow and margins are really demonstrating that the strategy is working as our investments are contributing to enhanced profitability. The other thing I'd say on it, and you've seen this over the years is in periods of uncertainty, we further strengthen the trust and engagement with our customers. We've been through turbulent times before, and these are the times when our customers turn to us and our partners turn to us to address their challenges. And they know we're there for them, regardless of the conditions in the market, and they know that when the temporal shift in demand lifts, we'll be there for them.

Chris Leahy:

Yes. Amit, I would say, in these times, you can imagine what we're doing, controlling what we can control, staying in front of our customers, playing aggressive offense, and really doubling down on the relationship. And that always bodes us well. We like to say accelerating out of the curve is what we do, and that's what we would expect. In terms of the timing, look, hard for any of us, I think, to predict the timing of client devices significantly turning around, for example. But we do feel absolutely confident that as demand shifts that we will be very well positioned to capture more than our fair share of the uplift.

Chris Leahy:

Thank you, Amit.

Samik Chatterjee:

Hi, thanks for taking my question. Thanks for all the color today in your prepared remarks. I was just wondering, just starting off with the 2Q guide here for a mid-single-digit sales growth expectation -- now I understand that's not as robust as what you used to see pre-pandemic. But in terms of what's driving the confidence of sort of guiding to a growth into 2Q? And should we expect sort of that growth to continue to and 4Q? Is that sort of how you're thinking about customer activity starting to sort of return and spending start to improve? And just sort of what's baked into the second half, particularly in terms of your client device expectations? And then I have a quick follow-up. Thank you.

Samik Chatterjee:

Okay. Got it. And my follow-up, just maybe if we can -- if I can ask you to double click on the NetComm product momentum or the momentum in -- within your portfolio seems to be an outlier related to what you're seeing otherwise in the other parts of the portfolio. Any color on what's driving your customers to still continue to spend on NetComm. Obviously, it's not been -- it's been supply challenge, but not really demand challenge even for the last couple of years. So, what's driving that momentum there still?

Samik Chatterjee:

Thank you. Thanks for taking my question.

Shannon Cross:

Thank you, very much and good morning. I'm wondering what your customers are saying about artificial intelligence. And I think you have a pretty unique position, I guess, in terms of your, our diverse customer base and ability to talk to them. And I'm just wondering where are they at in their AI journey? Where are they thinking that they're going to be investing as they look to AI? Anything you can give us would be helpful. Thank you.

Shannon Cross:

Great. Thank you. And then just -- you're at the high end of cash flow for the year. We're about two years, while not quite, but years past the Sirius acquisition. So, what are your current thoughts on acquisitions, what do you see in the landscape like? Are prices coming down or valuations coming down at this point? Or are people still thinking over or a couple of years back and valuations are high?

Operator:

Our next question comes from Erik Woodring of Morgan Stanley. Erik your line is now open. Please go ahead.

Chris Leahy:

Yes, sure. Good morning, Erik. Well, let me start with the client device -- let me just start with hardware and client devices because that really was the core of the impact. And again, primarily are the largest impact came from our larger commercial customers. So, number one, on the client side, we continue to see, the market generally has got kind of an extreme -- is an extreme softness right now and that continues. Okay. So that had an impact. And we saw in the client space moderating either -- even further down as we progress throughout the quarter. And you continue to see staff reductions across every industry. And those things are impacting client device purchases. And I think I mentioned in my prepared remarks that the large commercial customers client device category was the biggest down shift in the corporate space. So, client device is number one. Server storage, hardware, things that are customers are looking at, and finding ways to save money. That's another source of the down shift. And what happens when you've got hardware either being refreshed not refreshed delayed or paused if you have a knock-on effect. It's like a cascading effect. So, if projects are delayed, the services that go with the project obviously aren't implemented some of them until the integration of the product. You also have things like warranty that are going to be a bigger impact to warranty when you're not buying hardware. So, if I come back to the categories, I'd say it all starts with large customers reducing their costs immediately, which means let's reduce hardware, let's extend the useful life of assets. When we're purchasing software, for example, we can purchase a one-year deal instead of a three-year deal. They're pausing on making decisions on things because they don't want to get locked in. But it does start with the areas of hardware. And then where we saw softness in places that I would say are very strategic for us, that really was, again, an effect of the delay or deferral of larger projects. I would say, overall, look, our services business is very strong in the areas that are strategic. If you take out warranties, professional services, managed services, strong, yet impacted security, strong in the areas that we've been investing heavily in weaker in firewalls, which are related primarily to the, when you're buying physical assets or extending your geographic footprint. And then cloud. I mean cloud is continuing to be extremely robust across every one of our customer segments. So, I'm trying to dig into the weeds a little bit here for you, and I hope I'm getting to the heart of your question. but it's starting with the climate. I mean that's really what happened, starting with the climate and climate of cost containment.

Al Miralles:

Yes, Eric, let me take that. This is Al. So just a couple of things. You're definitely right with respect to netted down revenues and the impact from that. The other component is obviously you have a mix component. If you think about the broader IT market relative to our mix, there is a translation, if you will. I think most notably, in normalized years that does not create significant distortion in a year like this where the mix has shifted significantly. That is client coming down considerably and more solutions and netted down revenues being up. It does create more exaggerated results. So, what I would tell you is if you think about our full year guide with respect to the IT market, it is high single digits decline, if we think about that on a gross spend basis, Obviously, that would be more muted than that decline. Does that help you?

Adam Tindle:

Okay. Thanks, good morning. Al, I hate to be the one to question guidance again, but it's a question that we're getting a lot here this morning. Q2 is obviously very clear, so I appreciate all the details, but more on the shape of the back half of this year embedded in your guidance? And if I look last year, you guided Q3 to low single-digit sequential growth. And if I applied that here, it would imply a really big hockey stick in Q4. Conversely, if Q3 was above that level, it's implying a bigger Fed quarter, but we've got debt ceiling concerns causing a potential Fed slowdown in that quarter. So, a little bit of a double-edged sword. And just wondering if there's any way we could be thinking about waiting in the back half because there's a fear that this might not be the last cut.

Adam Tindle:

Okay. Got it. And maybe just as a follow-up, Chris, I'll ask a higher level one. You often talked about the CDW story and culture as a differentiator, in particular, for the company. leads to your ability to outperform the IT market consistently and profitably. Here most recently, you have made a tough decision to reduce coworker count. So, I'm just wondering how you thought about that decision to implement layoffs essentially in efforts that you made to try and preserve culture. And Al, if you wanted to maybe talk more quantitatively about how you're able to maintain expectations to outperform the market by 200-basis to 300-basis points while reducing workforce with your sales productivity expectations look like post that would be helpful. Thank you.

Al Miralles:

Adam, I'll just add a couple of comments to your questions on productivity and hitting on our goals, if you will. So, to Chris' point, look, this was not a reaction. We had been pacing our hiring and our coworker count and our discretionary spend in the quarter is building up. Obviously, we saw a sharp turn in Q1, and we expect some of that to persist. We had structural efforts, activities in place to drive productivity and savings, and we basically just amplified those efforts. So, let me just parse it for you when we think about kind of allocation of our coworkers, first from a revenue-producing GP and going through something like this, we're looking at where are the areas and the practice areas that the demand vectors are stronger and we should allocate more resources and where areas where maybe that demand could be softer for a more prolonged period. And so that was part of the calculus in going through that. And then when we think about kind of more of the support layer and the infrastructure, again, we got structural initiatives, but we also expect that we're going to drive productivity, coworker savings from that. And so, there are all the things that went into this decision and these actions. And we believe while difficult, obviously, to go through, ultimately, we'll add the greatest value for our customers. and obviously, improve efficiency.

Operator:

Our next question comes from Matt Sheerin from Stifel. Matt your line is now open. Please go ahead.

Chris Leahy:

Matt, it's Chris. I'd say both actually. We're seeing large customers who are optimizing for sure, particularly in this environment of cost optimization and reduction opportunity for CDW with our professional services and our FINOP services and things that we can offer to our customers to help them do exactly that and then potentially convert that into managed services going forward. But equally, we are seeing organizations that are kind of optimizing their cloud environment, not just workloads on the cloud, but the cloud environment and continuing to make decisions about where workloads are best optimized, whether it's on-prem whether it's -- now we're moving towards private on-prem, but where that should sit in multi-cloud public arena as well, so moving workloads potentially from one public cloud to another public cloud, again, for optimizing either for performance, functionality, costs, et cetera. All of this requires health from CDW to design the movements to actually do the migrations. And as I said, ultimately, we're seeing more and more opportunity to convert some of this into managed services, cloud managed services, which, of course, is a is a positive thing for us and for our customers.

Chris Leahy:

No, no, you're not. It's a great question. We asked the question earlier. What's different? What's different is we do see when folks are sweating assets, they are extending warranties typically, they're extending them for short periods. So, at a time when you would typically see a hardware renewal with a three-year contract, for example, warranties are coming in at shorter time periods. We also have some folks who are making the decision not to extend warranties. So, we're just seeing softening across the board there. And what we don't have is the offset of hardware purchases elsewhere, software purchases elsewhere, we're seeing new warranties come into play. So, it's a bit of a while you'd expect warranties to have an uptick because people are -- our customers are extending the useful life of their assets. The size of those warranties, the deals are smaller so it's muting the impact of the top line.

Chris Leahy:

And I would just add to what Al said, I think it's an important point. The delays, the pauses, the deferrals that we're seeing is really just that. We haven't seen the cancellation. So, all of this really reflects itself in pipeline in the future. And so that's a positive sign.

Operator:

Our next question comes from Keith Housum from Northcoast Research. Keith your line is now open. Please go ahead.

Chris Leahy:

Good morning, Keith, it's Chris. I think I understood your question was around kind of when assets have to be replaced? Was that the question? I just want to make sure I was getting the question right.

Chris Leahy:

Yes. Okay. I got the question. It's a good question. I'd say, look, when it comes to PCs, the PC themselves can go foru years, five years. I'd say four, five, 5.5 years. that's not ideal because the feature functionality gets to be very old by that point in time. But if customers are really sweating the assets because they're in a financial situation needs to do so, it can go that long. All that said, if you look back over the last four years to five years, you're going to see a number of PC refresh requirements that are coming up. And I'd add that you have things like win 11, which is going to add more pressure to those device refreshes. So, we've said this before, we do expect a refresh cycles to be starting sooner rather than later, whether it's federal government when we know when they're buying cycle is, whether it's Chromebooks. I mean, we're seeing a number of large RFPs related to Chromebooks for our education students already. So, our expectation is refreshes are going to be under pressure to begin later in the year into 2024. And when they do, we'll reap the benefit of that.

Operator:

Our next question comes from Ruplu Bhattacharya from Bank of America. Ruplu your line is now open. Please go ahead.

Chris Leahy:

Okay. Good morning, Ruplu. In terms of federal and health care, the countercyclicality that you pointed to, we're a bit in the reverse of that, actually. We had some softness in the public space going back a bit. And what we're seeing now is public, federal, in particular, we're seeing strong activity, I'd say, getting back to our normal seasonality and stronger activity as we run into the back half of the year. In fact, their performance this quarter was quite balanced across transactions and solutions. So, we're not seeing any issues there that we're concerned about and expect normal seasonality in the back half of the year. Health care is another one. It's been a pretty good balance across transactions and solutions, a little tougher in the client space but health care is really doing well. Given the increases in costs and wage inflation and everything they're experiencing, they're needing more help on technology and people help as well. So, we're actually seeing our value proposition with our health care customers accelerate in many ways, and you add our Sirius team into the mix here. And as I said before, it opens doors and gets more seats at the table. Health care is also equally feeling very robust. So, we don't have concerns of either of those end markets going into the end of the year.

Ruplu Bhattacharya:

Okay. Thanks for the details. Can I just ask, Chris, why is high single digits year-on-year, the correct number for U.S. IT market growth? I mean, why not down double digits or down even mid-single digits. I mean, just if you could give a little bit more color on what you're assuming for data center products like server, storage, networking growth versus PC growth? And how much of the backlog that you have factors into your particular revenue growth of down mid-single digits year-over-year in 2023? Thank you.

Chris Leahy:

Yes, Ruplu. I would add -- look, let me just start with how we shape our view of the IT market, and it's substantially grounded in 11,000 customer-facing coworkers who are in market every day. And so there -- they've got the pulse of what's going on in the market and what customers are doing, saying and feeling. And while we have a number of market factors that we look at and analyze that the customer pulse is the most relevant one that we consider. So, I'd just say that's 1 thing that we are looking at. And then we're factoring in as we think about the year, the caution and concern that we've already mentioned that, that will continue at least in the short run, and we've reflected that in our Q2 outlook. And then expecting some moderation in the back end, some moderating recovery in the back end. So, all of that combined is a reflection of, as I said, what we're seeing in the market, the current activity in terms of written demand, in terms of back order, in terms of all of the things that we triangulate. And frankly, that's just -- that's where we end up. because of what we're seeing because of seasonality. We've already kind of gone through Q2. It's going to feel about the same as Q1, right? We'll get a little bump in seasonality, but that will be muted as Al mentioned earlier. And when you think about the back half of the year, what we have benefiting us there is seasonality from our government business, for example, and education running into the third quarter. And we also have lower overlaps, compares are easier in the last quarter. So, all of those things combined, you put them together, and that's just -- that's where we end up.

Chris Leahy:

Thank you.

Chris Leahy:

All right. Well, thank you very much. Let me close by reemphasizing my confidence in this team in our strategy and the durability of our resilient business model. Thank you to our CDW coworkers across the globe for your unwavering commitment to our customers. 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 in CDW. And Al and I look forward to seeing you next quarter.

Operator:

Hello, and welcome to CDW Fourth Quarter 2022 Earnings Call. My name is Drew, and I will be your operator today. [Operator Instructions]. I would now like to turn the call over to Steve O'Brien, Investor Relations. Please go ahead.

Chris Leahy:

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 2023. Then I'll 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 will move quickly through our prepared remarks to ensure we have plenty of time for questions. Our fourth quarter was an excellent example of the power of our business model when coupled with our broad and deep portfolio of technology solutions. In an extraordinary period of shifting customer priorities, we delivered record profitability. For the quarter, net sales were $5.4 billion, $100 million below 2021, and roughly flat on a constant currency basis. Non-GAAP operating income was $523 million, 23% above last year; and non-GAAP net income per share was $2.50, up 21% year-over-year, up 22% on a constant currency basis. These results were driven by the team's ability to pivot to meet customer priorities and capture high relevance, high growth opportunities. This led to excellent performance across services, cloud, security, and software. Performance that drove record profitability and exceptional outcome given market dynamics and an outcome that is a direct result of the investments we have made in solutions and services over the past several years. Simply put our ability to deliver outcomes across the full stack and full lifecycle of technology drove strong profit growth notwithstanding a meaningful decline in client devices. This quarter clearly demonstrates the power of our strategy when combined with the resiliency of our business model. So what happened to client devices this quarter? While we expected some level of contraction in client devices and accessories given the past two years of heavy investment, the magnitude of the decline in the fourth quarter was certainly steeper than anticipated. The primary driver was the K-12 market, which represented roughly half of the client device decline. We also saw a general moderation in client device demand across channels as economic uncertainty increased. As we always do, we stayed the course on our playbook and maintained our discipline with a focus on our customer and our value proposition. This discipline contributed to this quarter's excellent cash flows and strong economic returns. In Q4, the combination of lower transactional business and the team's success delivering on customer demand for solutions and services led to a meaningful shift in our sales mix. Let me put this in perspective for you. You've heard us speak over time about the impact of solutions mix and notably netted-down revenue streams on our financial results. As we have grown our netted-down revenue streams over time, total annual customer spend has consistently grown a few hundred basis points faster than net sales. In periods where we mix into more solutions business that nets down and mix out of client device business that fully shows up in net sales that growth rate spread will be wider. In Q4 an extreme mix shift took place. The result was meaningful customer spend growth significantly dampened net sales growth and very healthy gross margins that drove delivery of gross profit. Now let's turn briefly to the full-year results. 2022 was a year of financial performance underpinned by progress on our three-part strategy for growth. The first pillar of our strategy is to capture share and acquire new customers. One way we do this is through strategic acquisitions. The addition of Sirius is a great example of this. Sirius elevated and expanded our services capabilities providing an excellent cross-sell opportunity into our existing customer base. At the same time, Sirius customers represent excellent cross-sell opportunity given the broader CDW portfolio. The second pillar of our strategy is to enhance capabilities in high-growth solutions areas. Strategic coworker investments contributed to excellent solutions performance through 2022, with strong growth in cloud, security and network upgrades. The third pillar of our strategy is to expand services capabilities. As a key enabler of our value proposition, services are fundamental to our full stack, full lifecycle, full outcomes go-to-market approach. Services engagement solves critical customer problems and drive enduring customer relationships. In 2022, the team delivered more than 20% services growth across the business. No doubt, our acquisitions have accelerated our services breadth and depth and have been foundational to our success. 2022 was indeed a year of strategic performance across all three of our priorities. It was also a year of exceptional financial performance. The team delivered record results with constant currency net sales growth of 15% and each profit category down the P&L statement up 20% or more. Results enabled by ongoing investment in our three-part growth strategy, investments that have made us a vital technology partner, whether customers' priorities require transactional or highly complex solutions. You see the impact of these investments on our fourth quarter performance as the team pivoted to meet customer shifting priorities and advise, design and orchestrate full outcomes. Outcomes that deliver five key organizational benefits

Operator:

Thank you. We'll now start today's Q&A session. [Operator Instructions]. Our first question today comes from Matt Sheerin from Stifel. Your line is now open.

Chris Leahy:

Good morning, Matt. Yes. It's a good question. We have seen customers elongate the replacement cycle given the uncertain times. I mean you're seeing what we're seeing with hiring freezes and layoffs and things like that. So right now, there's just more pause than we had seen earlier in the year. Eventually, the benefit of enhanced productivity and security from the newer replacements will certainly drive a replacement cycle, but it's not happening right now with the level of uncertainty.

Chris Leahy:

A rebound?

Chris Leahy:

Yes. Our forecast contemplates the environment to feel pretty much like it feels now. That's what we've reflected in the forecast. I mean we do expect the PC market to remain larger than it was pre-pandemic. But right now, our forecast reflects the current environment and the current temperature.

Al Miralles:

Yes. Good morning, Matt. This is Al. We are not seeing -- I would say ASPs in the fourth quarter and ongoing continue to be really firm. And so that is not contemplated in our outlook.

Ruplu Bhattacharya:

Hi, thank you for taking my questions. Chris, from the prepared remarks, I mean it's clear that client devices are weak and likely will remain weak in the near-term. But if we think about it, if SMB is really a bellwether for the macro economy, are you concerned that demand for advanced solutions or data center devices like servers and storage that demand can also moderate? So what have you assumed for sustainability of that demand through 2023? And I think in the prepared remarks, you guided for kind of the seasonality in this year to be skewed more to the second half versus the first half. So what are you expecting to be stronger in the second half of 2023?

Ruplu Bhattacharya:

Or just the sustainability of demand for servers and storage and solutions throughout the year. I mean do you think that, that can be better in the second half? Or do you think it's a sense at this level throughout the year?

Al Miralles:

And good morning, Ruplu. On the -- on your question on seasonality, so first, just look, our outlook is based on the premise, we continue to see strength in software and services and lower growth in terms of hardware overall. With respect to the timing of that, first half, our typical seasonality would be first half 48, 49, we'd expect to maybe be slightly below that in the first half, and that's reflective of that continued slope towards more netted-down revenues and cloud, security, et cetera with the expectation that in the second half, you may see a pickup there, more on the client device. And so second half a bit stronger in terms of top-line impact, if you will.

Ruplu Bhattacharya:

Got it. Thanks for the details there. Can I ask a follow-up? Al, I may have missed this, but on the call, did you mention what was netted-down items as a percent of gross profit in the fiscal 4Q? And sounded like that, that percent was unusually high in the quarter, and you expect that to moderate but your guide for next year for operating margin, I mean you're guiding it to be higher at mid to high-8% versus your original guide for this year was below 8%. So I guess my question to you would be what are you assuming for netted-down items as a percent of gross profit in 2023? And in general, can you help us parse out that year-on-year operating margin improvement? What are some of the factors that are driving the increase? And what are some of the headwinds year-on-year?

Operator:

Our next question comes from Samik Chatterjee from J.P. Morgan. Please go ahead.

Al Miralles:

Let me just start, and then Chris can add on from an M&A perspective. So as you know, our capital priorities reopened both M&A and share repurchase. And the way that I would think about that, as I spoke to that range of our free cash flow of 50% to 75%, we would expect return to shareholders. So if you take the dividend, you can get a sense for what that range would look like. There is a range there because we view that as really optionality for us to tackle between what's going to drive the longest strategic value, including M&A as well as what's going to maximize shareholder return in the more near-term. And so look, both of those options and array of options are available to us. We're certainly back on the path of share repurchases, but M&A is also on horizon as well.

Samik Chatterjee:

Got it. Got it. And for my follow-up, I know you're all talking about sort of client devices being softer than expected. But I think you also mentioned on the flip side, solutions tracked much better than expected which, again, sort of is counter to the mixed impressions we get about enterprise spending. So maybe if you can sort of give us a bit more color on -- is that really solutions doing better than expected more of a supply dynamic where supply is easing up faster? Or are you seeing sort of upsized deals from your customers? Or is it really a strong run rate of orders that you continue to see on that front continued interest from customers? Just trying to sort of parse that out in terms of the backdrop of -- the macro backdrop that we have.

Operator:

Our next question today comes from Amit Daryanani from Evercore. Your line is now open.

Chris Leahy:

Good morning, Amit. Well, look, I wish I could say that it felt stronger out there. I really do, but that's not what the temperature is that we're feeling. So we build our expectations by listening to our customers. We've got thousands of sellers and technical advisers out there. And it's just the pulse that's coming back to us and looking at industry and partner data, we're feeling that it's going to be flattish. And then the 200 basis points to 300 basis points of premium that we always commit to would be on top of that. In terms of mix, I guess what I would say is we don't calculate in our customer spend versus net sales as an example. But of course, in this kind of environment, as we've explained, when you've got hardware that's more muted and you've got, in our case, netted-down solutions more heavily in the mix, you can expect more meaningful customer spend than the net sales line reflects. But that said, we are right now feeling flattish. Of course, we'll update you as we move through the year, but that's kind of where we feel right now.

Al Miralles:

Good morning, Amit. We are not seeing any level of cancellation or postponements there. The demand on NetComm, and you can see from our reported results, really, really strong. We're not getting a lot of help from a supply perspective, honestly. Extended lead times is still there. Our backlog has not moved substantially really -- our backlog has moved more in client, as Chris suggested, supply is still -- there's still friction there on the NetComm side, but that's notwithstanding really strong written demand.

Erik Woodring:

Great. Thank you. Good morning, guys. Yes, Chris, maybe a high-level question for you. And that's now that you have a year of Sirius under your belt, and that being one of the larger acquisitions CDW has done in the last handful of years. How do you think about doing more transformational deals going forward rather than tuck-in deals? And then does kind of the lower leverage targets that you guys communicated today -- is that because you want greater flexibility to do larger deals? I just want to kind of get a sense of how you're thinking about transformational deals because it does seem like Sirius has been a pretty significant success for you and what your appetite would be for those types of deals going forward? And then I have a follow-up.

Al Miralles:

Sure. So Erik, obviously, we're within our stated range, and I noted that our new leverage range is 2x to 3x. So certainly, we have room in that regard. And I would say as we think about M&A, certainly, smaller bolt-on as we've certainly done plenty of. We can do that with free cash flow and with our existing net leverage capacity. As we think about things bigger, obviously, we're going to look at what's the best use of our capital, which could include taking on more debt and could include other avenues. I will just note that while our goal is to stay within that investment-grade capital structure. Certainly, from the rating agencies, we get some room there that if you do larger M&A and you go beyond that, you have a grace period, if you will, and you have time that you then get back into that range. So all of that would be contemplated in our calculus as we think about deals.

Chris Leahy:

Okay. Erik, yes, so differences between enterprise and SMB in terms of the process. I would say that the -- look, larger enterprises have a muscle for this and we're dealing with that muscle, and we know how to deal with the muscle. The smaller business, frankly, turn to us for cost evaluation as a trusted partner. And so in some ways, we actually play this avid role with them, which is how do you figure out, where you make adjustments in your technology roadmap to achieve the cost effectiveness. So in terms of the behavior itself, I'd say small and medium-sized businesses are being cautious. Enterprises have kind of kicked in their muscle and they're doing the analysis that they do. But all of that said, we do continue to feel strong demand across all of our segments. Even K-12 that we've talked about, that was a real dynamic in the quarter. We're still very successful with them with network modernization, all the things that have to support the client devices. It's the demand. Demand is okay right now.

Shannon Cross:

Thank you very much. I was wondering, can you talk a bit about working capital requirements as your model turns more and more to netted-down? I know this inventory levels came down quarter-over-quarter even with the shortfall in PCs and you've raised your target for free cash flow. So just how do you see your cash flow and balance sheet morphing over time? And then I have a follow-up. Thank you.

Shannon Cross:

Great. Thank you. And then can you talk a bit about demand you're seeing for Device-as-a-Service, Infrastructure-as-a-Service? It seems like in a challenged end market; maybe the ability to pay more ratably would be gaining some traction. But I'm just curious as what you're hearing maybe both from an enterprise standpoint as well as SMB. Thank you.

Operator:

Our next question comes from Jim Suva from Citigroup. Your line is now open.

Chris Leahy:

Jim thanks for the question. Well, can I say they're rolling out as they typically do? And sometimes, that includes red tape and not all the things that you expect with government. I mean seriously, there's -- when we think about the federal budget that was passed, we're used to dealing with that, and we know where we can go find the funds. And I think that's been pretty kind of standard operating procedure, if you will. The Infrastructure Act is a little more to figure out where funds that can benefit our customers' vis-à-vis technology that's taking a little bit more time is what I'd say. But it's nothing that is daunting us or nothing that concerns us, frankly.

Chris Leahy:

Yes. That's -- that's a great point. The ability to access that funding for more advanced solutions is absolutely there. There's more demand for that versus merely client devices, for example. That's a good point. Security, another one that you tends to thread through all of the funding mechanisms at this point. So yes, that's a good point. And the answer is yes.

Keith Housum:

Good morning. Appreciate the opportunity. Chris, just looking at the hiring that you guys did over the year, 1,100 people through the first three quarters and then obviously, you guys were flat in the fourth quarter. I guess two things. One, is that kind of a testament to your thoughts on the overall market, perhaps weakening here as you guys went through the fourth quarter? And then what kind of people were you hiring during the year in order to meet your needs?

Keith Housum:

Great. I appreciate it. And then looking at your guide a little bit more, trying to unpack it. As you think about like the macro environment, are you expecting roughly a flat GDP? And where are you -- what kind of assumptions are you making for interest rates as you guys think about your guide?

Operator:

Our next question is from Adam Tindle from Raymond James. Your line is now open.

Chris Leahy:

Thanks, Adam. Let me just -- let me start with our guide, when our guide is coming versus when some of the other observations about the outlook for the market came out a month or 1.5 months ago. And the pivot that we've talked about in Q4, we started to see more dramatically end of November and into December. So that might be having an impact on how -- on the discrepancies that you're hearing. In terms of the 200 basis points to 300 basis points and the validity of the 200 basis points to 300 basis points, I think that question was the one you were asking, we still view that as our target go get. As we mentioned, Adam, and this might be what you're getting underneath. But as we mentioned, as we think about 2023 and the dynamics that we've seen in the fourth quarter of 2022, continuing into 2023, namely for us, stronger growth in cloud and Software-as-a-Service and security and more muted hardware sales. That does mean that our customer spend will be more meaningfully greater than the number, I think you gave a 2.5% figure. It will be meaningfully greater than that number. So we would look at that outperformance as 200 basis points to 300 basis points plus, if I could put it that way.

Al Miralles:

Sure. Thanks, Adam. Look, the most notable thing I would just say is the Q4 was a very extreme period. And so as we look at Q1, you're right, seasonally, we would typically say there would be a contraction to Q1. And I guess what you should take from that is, while thematically, we'd still expect this mix into netted-down and lower transactional, maybe not as extreme as what we saw in Q4 and therefore, with some of that balancing out, we'd expect that we'd have modest growth on the top-line in the first quarter. And then again, a little more modest in terms of the gross margin. So just really kind of a bit of a dampening effect of the extremity that we saw in Q4.

Chris Leahy:

Thank you, Drew. And let me close by recognizing the incredible dedication and hard work of our 15,100 coworkers around the globe. Your ongoing commitment to serving our customers is what makes us successful. And 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 in CDW. Al and I look forward to talk to you next quarter.

Operator:

Hello, everyone, and welcome to the CDW Third Quarter 2022 Earnings Call. My name is Seb, and I will be the operator for the call today. There will be an opportunity for Q&A. [Operator Instructions]. I will now hand the floor over to Steve O'Brien to begin the call. Please go ahead.

Christine Leahy:

Thank you, Steve. Good morning, everyone. I'll begin today's call with a brief overview of our results and then provide an update on our strategic progress and a summary of our outlook. Al will provide additional details on the financials and outlook as well as our capital-allocation priorities. And then we'll move right to your questions. We had an outstanding third quarter. Once again, we delivered all-time record sales, profits and margins. Net sales were $6.2 billion, 17% higher than last year. Non-GAAP operating income was $449 million, up 26%, and non-GAAP net income per share was $2.60, up 22% year-over-year. This exceptional performance is a result of our relentless execution and disciplined investment in our customer-centric strategy, a strategy that underpins our ability to address customer priorities across a broad array of end markets with solutions across the full stack and full life cycle of IT. The vital need for interconnected and integrated solutions has created levels of complexity never seen before. We cut through the complexity and help customers maximize the impact of technology, technology that delivers mission-critical outcomes. In today's environment of persistent uncertainty, our customers are increasingly leaning on CDW as a trusted partner, and they look to us to provide unbiased expert advice across the entire spectrum of IT. A trusted partner who helps them tackle their most pressing priorities, pressing priorities like advancing their digital transformation, driving innovation and delivering exceptional stakeholder experiences, along with enhancing security and supporting collaboration in today's distributed environment of work, learn and live everywhere. Priorities that deliver operating efficiency and expense elasticity like burstable billing and modern hybrid and multi-cloud environments and infrastructure and new technology investments to optimize flexibility and agility. Our ability to enable solutions in support of all these diverse priorities drove broad-based and balanced performance. There were 3 main drivers of our results

Operator:

[Operator Instructions]. Our first question is from Shannon Cross at Credit Suisse.

Albert Miralles:

Yes. Shannon, this is Al. So happy to address that. So as I mentioned, the NGOI margin and dollar result was largely driven by strong gross margin. So if we just take the components of gross margin for the quarter, a few things, Shannon, that I would note first, obviously, the benefit and accretive effect from Sirius which we've seen all year. Number two, the effect of netted-down revenues, right, largely driven by focus on security, cloud, Software as a Service. We would view that component as pretty structural. Next, I would say, contributions from services. Again, we've made a lot of investments in that space. So we view that as largely structural. And then the last component of our gross margin, Shannon, would be on the product side. And we've talked about through the year that we've had really favorable, both mix and rate on the product side. And that would be the 1 variable that we would see potentially could moderate. And so obviously, in this supply environment, we've seen our customers favor a bit more speed over price. And that's led to a favorable mix and also strong rates. And so obviously, as we start to see supply ease a bit here, you could see that moderate, and that's what we're tending towards for Q4.

Christine Leahy:

Shannon, it's Chris. I'll give you some color maybe on the overall PC trends we're seeing. And as expected, overall, the PC environment has moderated a bit versus the robust client device growth in 2021. But that said, our end markets are not synchronized. So looking at the client-device growth across channels, for example, we helped customers with pent-up demand in our government segment in both federal and state and local. Obviously, K-12 was down as expected, but our other segments, Commercial Healthcare, higher-ed channels, what they saw was upgrade experience, not right now a broad refresh but upgrading of experience, meaning higher-value PCs along with the collaboration tools and automation that helps with that experience. What I would say is, I can't tell you exactly which channels are going to start picking up their client devices soon, but we are continuing to see the criticality of client devices [Technical Difficulty]. And so at the end of the day, we'll continue to profitably outperform the PC market for several reasons. Number one, as we've said before, there's a very compelling commercial PC opportunity. When you think about the value PCs deliver -- so employee productivity, for example, and use cases and also PC product cycle. We're already seeing some customers who are moving to Windows 11, a number of customers moving to Windows 11, particularly for things like security updates. And then the natural refresh. We've talked a lot about the aging of devices from 2018, '19, '20, and we'll see those refreshes start to kick in. The other thing is think about the services that CDW wraps around PCs, which are very attractive to our customers. There are massive market opportunity available to us, addressable market opportunities when we think about cross-selling to our Sirius customers and also international. And then the thing I finally say is that CDW has got the absolute best PC muscle in infrastructure, which has allowed us to outperform the market significantly in the past. And remember, when our partners are looking to move the needle in any arena, they look to CDW to help them do that. So very confident PCs are critical to the future, moderated a bit, but still fundamentally part of the solution customers are looking for. What I would say is right now, in terms of prioritizing, our customers are largely leaning into their infrastructure, the things that they had not invested in over the last couple of years, so infrastructure, cloud, security, things like that and priority and PCs are a little lower on the priority list.

Amit Daryanani:

I guess the first one, you obviously have a very sizable upside to gross profit dollars despite the revenue that we think in line with consensus. Maybe to talk about how much of that is a structural shift towards more netted-down revenues versus perhaps mix of a bit more favorable. And really the talk about the netted-down revenue map, I'm curious, at some point, does it start making sense, Chris, to talk about your ability to grow gross profit dollars at premium to IT spend versus talking about revenues going at premium to IT spends?

Amit Daryanani:

Got it. And then if I just follow up, there's really notable deviation, I think, in the growth we're seeing out of the SMB bucket versus corporate. I know you talked about kind of what's driving this trend with net count that commentary and so on. But maybe just tell on why are we seeing such a big divergence? And then is 1 a more leading indicator or not? Or is that not the way to think about it? Just any help on the deviation would be helpful.

Operator:

Our next question comes from Erik Woodring at Morgan Stanley.

Christine Leahy:

Yes. Sure, Erik. Here's what I'd say between the 2 calls. And it's the words I just used before, where there's certainly, I'd say, incrementally more pressure on budgets generally for our customers. Look, there's persistent uncertainty out there. And when that happens, there's just pressure. That said, customers are being prudent and what we are seeing consistently is notwithstanding that added scrutiny. Technology is being prioritized because it's reframed from a cost center to an asset of innovation, an enabler of cost efficiency and agility and risk mitigation and resilience and experience. So technology touches everything that drives competitive advantage for our customers. Further, we are continuing to see a scarcity of talent in the market, coupled with the heightened complexity that technology brings and security risks continue to essentially explode. So you have all of that happening in a more pressured budget environment. The good news for CDW is in those environments, our customers lean even more into CDW. And so the strategy that we've been executing with discipline over the last few years, has created -- has really strengthened our value prop. I would say our value proposition and the broad-based portfolio, particularly of solutions and services has never been stronger. It's never been more relevant. It's never been more resonant with our customers and they can look to us to help them make the best decisions in an unbiased outcome-based way. So I guess the point is more pressure right now, persistent uncertainty, but that actually drives the need for CDW even more.

Albert Miralles:

Yes, sure. Thanks, Erik. So look, I would say Q4, I think, is going to be a decent reflection of what we've seen year-to-date, which has been really strong margins, both gross margins and NGOI. Q3 was exceptional. And I think I've called out some of the areas that really drove that, particularly on the product margin side. So I would say it's stay the course pretty much on par with what we've seen for the year, notwithstanding that, again, as we start to see this feathering out of supply, it's conceivable you could see a bit of a moderation on the product margin side. So that's basically been what you've seen year-to-date is low 19s on gross margin and low 8s on NGOI margin may be slightly better.

Keith Housum:

Question for you guys on price increases that we've seen over the past year. Have you guys seen a moderation of those price increases from the vendors and your ability to pass those on? And how has your customers buying decisions changed as most recently as a result of those based on the current environment?

Keith Housum:

Great. And what kind of -- and how should that contribute to actually your top-line growth you say this quarter?

Operator:

Our next question is from Ruplu Bhattacharya from Bank of America Merrill Lynch.

Christine Leahy:

Ruplu, we can't hear you.

Christine Leahy:

Not quite.

Christine Leahy:

Yes. Perfect. Thank you.

Christine Leahy:

Yes, Ruplu, I would tell you that it is more mix than demand generated. Really, as we had expected, we have mixed more heavily into netted-down items, even a little bit more than we expected, and that really is the main driver of the pressure on the top line. And that's -- from a deceleration perspective, like I said before, there's pressure. PCs have moderated, as we said. But really, otherwise, we're seeing what I would consider pretty robust demand and performance as a result.

Albert Miralles:

Sure, Ruplu. I'll take that. This is Al. Back to my comments on just the components really starting with gross margin and the fact that we would deem the more netted-down categories. Remember, cloud, security, Software as a Service as structural. And my comments there are more kind of over time, but also certainly thematically important in this environment. If you think about what we're talking about there, right? You got a lot of customers that are focused on how do I drive productivity, how do we get to the cloud, how do I reduce my costs. So thematically, structurally, we think there's durability there. Same thing with services, right? Now we've bolstered and we've made significant investments on services. But also in times like this, this is where our customers look to us, they need assistance more so than ever. So those components really, really important. And then just look to the beyond the gross margin down to NGOI margin, it's important for us that we, just like our customers, remain very diligent and thoughtful about our spend, and we are on the pulse of our customers and what's happening and making sure that both the timing, the size and the criticality of our investments are always top of mind, and that's how we try to manage -- kind of manage the margin profile over time. So hopefully, that's helpful.

Samik Chatterjee:

I guess for the first one, we've seen a few other enterprise suppliers report already. And I think in relation to sort of pulled back or a bit of a sort of pressure on customer budgets that's not as surprising to hear at this point. But they've also indicated a bit more pressure when it comes to the international markets, particularly EMEA. I was just wondering, Chris, I mean, is there a difference you're seeing in terms of engagement with customers in the U.S. versus in the international markets? Is there a bit more of a pushback or a pullback in terms of thinking about budgets for next year in the international markets? Maybe your insights on that front will help. And I have a follow-up.

Samik Chatterjee:

Okay. Got it. And a follow-up, if I could get an update on the growth rate you're seeing or the growth trajectory you're seeing at Sirius and I know you mentioned sort of challenges around hiring talent at your customers, but what sort of constraints you might be having at the same time on Sirius and your ability to sort of scale that business? What are you trying to think about sort of how accretive it is to your out-performance to underlying industry growth, particularly as we start thinking about next year?

Operator:

Our next question comes from Mark Cash at Raymond James.

Christine Leahy:

No, I think it could be a short answer. No, we aren't seeing that slowdown actually. We're seeing cloud continue to accelerate. And I don't need to take through all the reasons for you why that's happening. But look, with regard to our customers, we've got customers who are -- some are just starting the journey to the cloud. Some are on the journey. Some are trying to optimize the cloud. Some are moving optimized cloud and on-prem. And there's just a lot of opportunity to support customers in this journey. But we certainly are not seeing it start to slow down.

Albert Miralles:

Yes. Sure, Mark. We continue to not see any evidence of double ordering or canceling. So I would say that just the clarity and the commitment of our customers to the products they originally want and what we're delivering has been pretty solid, pretty seamless. So no concerns there.

James Suva:

Great. I had a question about higher labor rates, both on your cost of goods sold buying as well as your kind of OpEx line. Do the clients and customers kind of see it or notice it? Or is it just kind of all built-in? And are those creating a little bit more challenging thing for your customers? And then as we approach the end of this calendar year, can you remind us about like annual merit increases or anything like that on the OpEx line regarding higher wages and just cost of living adjustments and things like that?

Operator:

We have no further questions on the call. So I will hand back to Chris Leahy to conclude.

Operator:

This concludes today's conference call. Thank you all for dialing in. You may now disconnect your lines.

Operator:

Hello, and welcome to the CDW Second Quarter 2022 Earnings Call. My name is Lauren, and I will be coordinating your call today. [Operator Instructions] I would now hand over to host, Steve O'Brien, Vice President, Investor Relations to begin. Steve, please go ahead.

Christine Leahy:

Thank you, Steve, and good morning, everyone. I'll begin today's call with a brief overview of our results, strategic progress and outlook, and then Al will run through the financials and our capital allocation priorities. And then we will move right to your questions. We had an exceptional second quarter. The teams continued to execute well in a challenging supply environment and delivered all time record sales, margins and profits. For the second quarter, net sales were $6.1 billion, 19% higher than last year and our first $6 billion quarter. Non-GAAP operating income was $516 million, up 23% and non-GAAP net income per share was $2.49 also up 23% year-over-year. These exceptional results reflect our ability to address customers' priorities across a broad array of end markets with solutions across the full spectrum of IT. Digital transformation, agility and security remain top priorities with ongoing focus on hybrid work and return to office driving collaboration, networking and endpoint solutions. Customers also continue to seek ways to manage costs while meeting or exceeding coworker and customer service level requirements. Our ability to meet all of these needs led to a broad-based and balanced performance and was a result of three key drivers. Number one, our balanced portfolio of customer end markets; number two, the breadth of our product and solutions portfolio; and number three, our ongoing execution against our customer-centric strategy. Let's take a look at how each contributed to our growth this quarter. First, the breadth and diversity of our customer end markets. As you know, we have five U.S. sales channels

Operator:

Thank you. [Operator Instructions] Our first question comes from Samik Chatterjee from JPMorgan. Samik, please go ahead.

Christine Leahy:

Good morning, Samik. Thanks for the question. And I would say just the short answer is yes. We are seeing our customers rely more heavily on us in the labor shortage world we're in. We've said often that technology has become just absolutely essential, more integral to our customers' success and more vital to their businesses, whether it is delivering experience, whether it is profitability, whether it's teaching kids, whether it's providing health care. It is just essential to what organizations do, and CDW is their trusted adviser. And we are continuing to see our customers lean into us more for some of the things that we referenced in our prepared remarks, for example, advisory services on the front-end professional services as they're going through their disciplined planning, et cetera. But equally, relieving their staffs of important management, like data center security and things like that. So it's been a very positive move for us and is driving some of our growth.

Christine Leahy:

Yes, I'll start with that. Al can add, if you'd like. I would tell you that – look, we don't expect supply constraints to meaningfully change beyond what we've experienced in the first half of the year as we look to the back half of the year. I mean it's still, I'd call it, what's the best word, choppy. We're seeing pockets of pressure and pockets of improvement. As I mentioned in my remarks, I'd tell you, we kind of a tick down, which is barely negligible. So not expecting any necessarily meaningful change in the back half of the year. But for us, that means we just continue to navigate and press our competitive advantages and navigate as we have been through these past several years. And that's what I say about the supply chain.

Operator:

Thank you. Our next question comes from Jim Suva from Citigroup. Jim, please go ahead.

Christine Leahy:

Yes, Jim, good to hear from you. Let me start with the customers. And what I would say, and this is more of a general answer to the current environment and uncertainties out there. Interest rates going up, labor shortages, inflation, everything that we hear about in the headlines. What I would say is customers are being disciplined around their investments, and that is good for CDW in so far as they look to a trusted adviser with the depth of experience we have to be able to work with them towards the best solutions. So the environment, frankly, is playing into our competitive advantages. And we're not seeing that type of macro environment impact. Our sales opportunities, our profit opportunities, on the contrary, is actually being something that pulls us in more closely with our customers. So I'll just answer that part of it, and I'll turn it to Al for interest expense vis-a-vis CDW?

James Suva:

Thank you so much for the details and clarifications. It's greatly appreciated.

Operator:

Thank you. Our next question comes from Erik Woodring from Morgan Stanley. Erik, please go ahead.

Christine Leahy:

Yes, sure, Erik. Again, the answer is yes, some of these short answers. The answer is yes. We certainly perceive and – look, we have historically been well positioned and outperformed the market and our peers in challenging macro environments. And we would expect that to be similar going forward. In fact, I would say that we are better positioned now than ever to be opportunistic in down markets given the full spectrum of our technology solutions. For our customers now needing a trusted adviser that can – that brings the comprehensive suite of solutions in the complete end-to-end services is required has become more integral and more essential to how they do business. And so the answer is yes, we would intend to press our competitive advantages and we see great opportunity. And that's been part of what we've been really focused on building over the past couple of years through executing our strategy and ensuring that our portfolio is fulsome and has the services that are relevant to delivering on the solutions our customers need.

Albert Miralles:

Sure, Erik. So first, I didn't mention Sirius, right, because we would think of Sirius more kind of macro level. But I would just note that the contribution from Sirius and really the power of putting the teams together, we are seeing exactly what we would have expected in terms of accretive effect on gross margin. On the netted down revenues, I mentioned grew 30% year-over-year, 28% of gross profit. That was a solid contribution there, absolute dollar amount consistent with Q1. But what was the different for this quarter is we had even stronger contributions from professional services, right, which is coming online and accelerating. And then firm margins on product. And so multiple variables there. In terms – as we look forward and we think about durability, look, there's always going to be puts and takes, and that's why our outlook focuses on in July margin because it's just a little bit more balanced, a little bit more stable. But certainly, this quarter, you saw all those contributions on the gross margin front come to four.

Operator:

Thank you. Our next question comes from Matthew Sheerin from Stifel. Matthew, please go ahead.

Christine Leahy:

Hi. Matt, let me start on this, and then we can dive into the backlog a little more specifically. The way I would characterize it is we do continue to expect resilient commercial demand. As we've said a number of times, end client devices, endpoint devices are low-cost productivity enhancing investment. And given the changing dynamics of delivering goods, digital curbside, et cetera, they've just become part and parcel of the solutions for every commercial business. In terms of the total client device sales and backlog, we had healthy – I think it was low single-digit client device growth this year, which compared to anything out there, I think, has been really solid. In terms of the backlog, we have had some backlog open up a little bit over the last six months or so, I think. But Al, did you want to add more about the backlog specifically?

Matthew Sheerin:

Okay. Thanks very much for that. And then just turning to your outlook on the solutions side and specifically, investments from customers in infrastructure. We're picking up from our VAR survey that customers are taking longer to close larger deals, being a little bit more scrutinous on deals requiring more sign-offs. Are you seeing that at all in terms of hesitation or a little bit more scrutiny from customers on deals?

Matthew Sheerin:

Okay. Thank you.

Ruplu Bhattacharya:

Hi, good morning. Thanks for taking my questions. Chris, in the past, you've talked about the SMB or small medium business segment as a bellwether for the macro environment, as they react fast to the macro changes. This quarter looks like revenue growth slowed to 4% year-on-year albeit on tough compares. And you've kept the full year guidance changed and you had a strong fiscal 2Q. So first, can you give us your thoughts on what the SMB segment is indicating to you? And then second, on the – in the prepared remarks, you talked several times about continuing to invest in the business. It looks like CapEx as a percent of sales declined slightly to 0.6%. So just give us your thoughts on what areas of investment you would like to make in this environment? And how would you just judge the success of those investments?

Ruplu Bhattacharya:

Okay, thanks for the clarification and the details there. For my follow-up, if I can just ask, it was great to see the federal business grew year-on-year. Do you think that strength continues? And within Government, how should we think about the relative growth from federal versus state and local in the second half of this year? Thanks, again.

Ruplu Bhattacharya:

Thanks for all the details and congrats on the strong execution.

Operator:

Thank you. Our next question comes from Keith Housum from Northcoast Research. Keith, please go ahead.

Christine Leahy:

Hi, Keith. Our hiring plans for the rest of the year?

Christine Leahy:

Yes, we're still investing in people. Obviously, we've got our eyes on the headlines. We're being prudent in how we run our business, but we're continuing to invest in those areas that support the important capabilities that our customer needs from us. And we're investing in areas to drive efficiency. So we have not slowed down our investment in people at this point, and we feel very confident with that.

Christine Leahy:

I had a hard time hearing the beginning. Can you just repeat the question, please?

Christine Leahy:

Yes. What I would say is I think technology spending is going to be even more resilient in the face of all kinds of challenges going forward because it's so essential to businesses, whether it is challenges around chips, challenges around the macro environment, et cetera, businesses can't win in the marketplace without utilizing technology to drive efficiency, effectiveness, experience, all the things we talk about. So we aren't concerned about some of that talk track. We feel very confident that our customers and we see the momentum. Our customers are continuing to invest in technology across the spectrum from endpoint solutions to hybrid infrastructure. And we feel very confident that we'll be able to press our competitive advantages and have access to the technology needed for our customers given our size and scale.

Operator:

Thank you. Our final question comes from Lauren Lucas from Evercore. Lauren, please go ahead.

Albert Miralles:

Yes. Thanks, Lauren. This is Al. I think look, previous to today, we talked about we expected a higher level of netted down revenues in the second half, and that still holds true. If we look at Q2 and the contributors to our gross margin, otherwise, I talked about professional services, obviously, at a macro level the accretive effect of Sirius and product margins were firm. But the theme kind of as we look at the second half as well as really ongoing with netted down revenues, which makes up just for clarity, SaaS software assurance, warranty and commissions, those themes continue. And we continue to expect that they will outpace our net sales overall.

Operator:

Thank you. That is the end of the Q&A session today. So I will now hand you back over to Chris Leahy for closing remarks.

Operator:

This concludes today's call. Thank you for joining. You may now disconnect your lines.

Operator:

Welcome to the CDW First Quarter 2022 Earnings Call. At this time all participants are in a listen-only mode. After the speakers presentation there will be a question and answer session. Please be advised that today’s conference is being recorded. I would now like to hand over the conference to your speaker today Steven O’Brien who is VP, Investor Relations. Thank you and please go ahead.

Christine Leahy:

Thank you, Steve. Good morning, everyone. I will begin today’s call with a brief overview of our results, strategic progress and outlook and Al will run through the financials and our capital allocation priorities. And then we’ll move right to your questions. We had an outstanding start to the year. The team’s continued to execute well in a challenging supply environment and delivered exceptional top line growth and profitability. For the first quarter net sales were $5.9 billion, 23% higher than last year. Non-GAAP operating income was $462 million up 26% and non-GAAP net income per share was $2.20 up 26% on a reported basis. These exceptional results reflect our ability to address customer priorities with solutions across the full spectrum of IT and the inclusion of Sirius. Customers continue to evolve as we move ahead into the new normal. Digital transformation, agility and security remained top concerns with return to office driving collaboration, networking and endpoint solutions. Customers want to manage costs while meeting or exceeding coworker and customer service level requirements. At the same time, customers across our diverse and markets are seeking ways to supplement technology resources in today’s war for talent environment. Our ability to meet all these needs led to a broad based and balanced performance. There were three drivers of our performance during the quarter. The first driver with our broad and diverse portfolio of customer end markets, as you know we have five U.S. sales channels; corporate small business, health care, government and education. Each of these channels is a meaningful business on its own, with 2021 annual sales ranging from $1.8 billion to over $6 billion. Within each channel teams are further segmented to focus on customer end markets, including geography and verticals. We also have our UK and Canadian operations, which together deliver $2.6 billion U.S. in 2021 sales. This scale and balance across customer and markets positions us to perform when external factors impact certain sectors or geographies. This quarter our commercial markets, corporate and small business, along with our healthcare and international markets all delivered strong double digit growth. As expected education and government growth was depressed as they left strong prior year stimulus and large deal driven results. Our corporate team delivered a 46% increase. Growth was strong and balanced across transactions and solutions. The team did an excellent job addressing customer demand for return to Work solutions, digital transformation and the need for agility and security. Unit growth coupled with ASP increases resulted in another quarter of strong double digit growth in client devices and cloud spend was excellent. Small business posted a 21% increase performance was broad based across both transactions and solutions. Return to office strategy and modernizing workspaces drove strong collaboration, networking and security growth for hybrid work environments. Remote enablement drove another strong quarter of client device growth up double digits both in unit and ASPs. Security performance was up mid teens and cloud spend was robust. Public posted a 6% increase on top of last year’s exceptional 20% plus growth. Healthcare increased 27%. Ongoing focus on driving productivity to offset higher costs from staffing shortages and other acute care needs lead to double digit solutions growth. Cloud adoption was strong driven by the speed and efficiency cloud solutions can deliver. Government posted a mid single digit increase. State and local delivered a high single digit increase driven by client devices and security. As we shared last quarter, we continue to help our customers as they work through the various funding opportunities and multiyear phasing and expect projects to continue to be implemented as we move through 2022. Federal performance played out as expected and was balanced across both the department of defense and civilian while lapping tough compares. As we shared last quarter, we continue to experience the lumpy nature of government contracts and contracting changes. There is no change to our expectation that growth will return later in the year. Higher ed strong double digit performance was offset by the expected decline in K-12 and overall education sales decreased 4% off the first quarter of 2021 remarkable 101% growth. The higher ed team continues to help customers implement student success programs using technology to give an institution an edge with comprehensive endpoint solutions, improve security, campus connectivity and enhanced dorm room experiences. The team delivered excellent client device growth and school systems tapped our capabilities to address the war for technology talent which drove increased usage of CDW services to fill the gap in staffing needs. While K-12 delivered strong non-seasonal results they posted a year-over-year decline on top of last year’s exceptional 100% growth. Emergency connectivity funding which was expected to end during the first half of 2022 was extended and a third wave was announced adding complexity to an already challenging process. Many school systems are leveraging the extended funding window to digest better options and plans for their IT spend. Other our combined UK and Canada results increased 13% on a reported basis. UK grew double digits in local currency and Canada increased high single digits in local currency. Each market saw balanced strength across both commercial and public customers. Customer priorities remain similar to those in the U.S. The second driver of first quarter performance with our broad and deep product and solutions portfolio. Our ability to address customer priorities across the entire IT continuum drove excellent performance across both our solutions and transactions portfolios. We continue to leverage our competitive advantages including our distribution centers, extensive logistic capabilities, deep vendor partner relationships, and strong balance sheet and liquidity position to navigate an ongoing supply challenge. U.S. hardware increased high teens. Growth was broad based and included double digit increases in net cash on servers and server management, client devices, and video/audio. This exceptional performance was on top of 2020 one’s first quarter double digit high hardware growth. Demand continued to outpace supply in several key areas, notably in the networking space, and remaining orders built during the quarter. Customers once again placed orders to get in line for second half 2022 projects, especially in Netcom. U.S. software posted a 40% increase driven by success helping customers upgrade their edge and secure their IT environments with double digit increases network management software and security software. Cloud was a meaningful contributor to this quarter strong performance with significant double digit increases in customer spend and gross profit led by productivity, platform, security and collaboration workloads. U.S. services sales doubled. Growth was broad based and balanced, driven by professional services, managed services and warranties. As you can see excellent, broad and balanced performance across the business. And that leads to the third driver of our performance this quarter; our customer and coworker centric strategy. Over the past three years, we have executed against our strategy to enhance our high relevant and high growth solutions and services with both organic and inorganic investments. Eight acquisitions have deepened and advanced our services capabilities including automation, cloud native and DevOps, cyber security, and our services scale and reach. We welcomed nearly 3,000 new coworkers from these eight acquisitions with more than half and technical rules. Since year end 2018 our technical team has doubled in size, and at the end of this first quarter was more than 5,000 strong. Today, technical coworkers comprise more than half of all customer facing coworkers. Together with their other CDW colleagues, they form an amazing high performing team; a high performing team that is a key competitive advantage for CDW, a team that is the most engaged enabled and energize team in the industry. All our investments whether homegrown or inorganic, are intended to maximize our key point of differentiation in the marketplace. We are a one stop trusted partner with capabilities across the entire continuum of IT. Capabilities that help customers achieve the outcomes they need from technology so they can do great things. Let me share a couple of recent customer examples that demonstrate how our investments help customers achieve outcomes. A soft drink manufacturer wanted to upgrade their on-premise voice system. The customer had two desired outcomes for the solution. Number one flexibility to expand as their business grew. And number two an excellent user experience. Since IT staff was focused on other priorities, the solution needed to be managed off-premise. Leveraging CDW is world class unified communications as a service capability and ServiceNow capabilities the team designed a flexible and cost competitive, integrated full stack managed collaboration anywhere solution. The solution included CDW professional services for upfront design, planning, configuration and deployment and CDW managed services to provide ongoing MCA support and integration with our ServiceNow ticketing platform. A great outcome for the customer and for the team who bested large telecom providers to win the deal. They also deepen their relationship with the customer and delivered more than 3 million in licensing and services revenues. The second example of how our investments enable customers to achieve the outcomes they need is the recent adoption of Focal Point Academy by a major technology company. Focal Point Academy is a bespoke training program that delivers workforce development programs that solve today’s greatest cyber security problems; finding training and retaining skilled cyber professionals. Focal Point Academy operationally focused portfolio which covers high demand topics like threat hunting and application security, coupled with its ability to train and develop both senior and junior technical professionals was exactly what the customer needed to achieve its desired outcome of mitigating risk. Prior to our acquisition of focal point, we would not have been able to deliver this important global solution and further deepen our relationship with the customer. Investments in our customer and coworker centric growth strategy are integral to our ability to consistently and profitably outgrow the U.S. IT market. And that leads to our expectations for the rest of the year. During the balance of 2022, we will continue to execute against our strategy to deepen our services and solutions capabilities. We are making excellent integration progress with Sirius and that will remain a key focus area for the balance of 2022 as will investments in our coworkers and our own digital transformation. We will continue to balance investments with our growth and profitability expectations which are now higher than previously shared at year end. Given our excellent momentum coming into the second quarter and first quarter performance, we now expect to outperform the U.S. IT market by 325 to 425 basis points, 125 basis points higher than our view at year end 2021. Our view of U.S. IT market growth has also increased and we now look for 2022 growth of 4% which is 50 basis points above our prior view. Taken together this equates to constant certain constant currency growth of seven and a quarter to eight and a quarter percent above 2021 combined CDW revenues of $22.8 billion. Recall 2021 combined CDW is calculated as those Sirius had been acquired on January 1, 2021 instead of its actual acquisition date of December 1 since our outlook represents a 17.5% to 18.5% increase over 2021 results. This outlook reflects our baseline expectations that given 2021 second half strong hardware performance, we will mix into more cloud and security in the back half of this year. It also reflects our expectation that supply constraints remain relatively consistent with the first half of the year. As always, we remain mindful of our wildcards, the potential for further disruption to the supply chain, changes in COVID, or macro economic performance and we will keep a watchful eye on these and other potential issues. As we always do, we will provide an update on our view on our next call. In the meantime, we will continue to do what we do best which is leverage our competitive advantages and out execute the competition. We will also continue to invest to ensure we remain our customers trusted partner who delivers the outcomes they need whether for innovation, cost management, agility, risk mitigation or user experience. If the past two years have shown us anything it is that our role as a trusted strategic partner to our customers is more important now than ever. Let me turn it over to Al now who will provide more detail on our financials and outlook. Al?

Operator:

Thank you. [Operator Instructions] The first question we will take is from Matthew Sheerin from Stifel. Matt your line is now open. Please go ahead with your question.

Christine Leahy:

Yes. Good morning Matt. It’s Chris. Yes what we are seeing is customers across our commercial segments, kind of as we mentioned last time getting on with it meaning living within the current environment and making decisions about their back to work strategy, which means they’re bolstering their capabilities in offices. They are bolstering their capability in home environments, because they’re really focused on their co-workers ability to be productive, and deliver seamlessly moving from remote to in office. And as we expected, we continue to see very strong endpoint solution performance this quarter. And we’re also seeing what usually, typically follows that and what was delayed a bit over the last couple of years which is an investment in the hybrid infrastructure to support all the needs of the coworkers and the expectations both at the workload and application level and everything required to create a stronger and more robust infrastructure for those devices. So we will continue to see those two dynamics play out through the course of the year would be our views. It’s different in different segments, but in the current commercial segment, for sure, we’ll continue to see that.

Christine Leahy:

Yes, Matt so I think about it, the extension in the new, the little bit of an added round of funding for ECF just is timing. So it gave the schools a little bit of a breather to reflect on their planning and not be rushed to buy. So that’s just an extension. So we’ll see that play out over the next 18 months. At the same time schools are working very hard on ensuring that they don’t lose ground in what they’re trying to do which is teach students and learn. And so when you think about the dynamics of the classroom and the infrastructure needs to support the classroom including audio, visual, interactive monitors, and kind of the new generation of the classroom, we’re starting to already help our customers with that. So look, we look at this as a kind of steady ed long term growth opportunity for CDW at every time there’s been an inflection point in K through 12, in the classroom learning space, CDW has been at the absolute tip of the spear and helping customers get there. And we’ve seen growth as a result.

Operator:

Thank you very much. Our next question comes from Erik Woodring from Morgan Stanley. Erik, your line is now open, please proceed with your question.

Christine Leahy:

Yes, I guess, what word would I use? I think I’d say kind of unchanged. Meaning we’re not seeing a lot of change in the challenges that we’re all facing. When we think about the supply chain environment, I’d say two things. Number one, it’s an opportunity. But it’s also frustrating. It’s an opportunity for CDW because we know what’s happening, we have more visibility with our partners, I think, than anybody. When you think about our competitive advantages, our ability to take on inventory to support our customers with our balance sheet, having the distribution logistics capabilities, that’s put us in a great position to manage the supply chain issues, I think, again, better than anybody in the market. But it’s frustrating for customers. And we’re helping customers get through that, because we can help them choose alternatives, which they’re a little more open minded now to which we have a pretty good path to get to. But the short answer is supply chain is what it is. And it’s not getting better. It’s not getting worse, some pockets are getting better, some pockets are getting more difficult. But net-net, we’re going to be living with this through 2022 if not into 2023. And again, it’s a matter of who manages it the best and I think we’re doing a really good job of that.

Christine Leahy:

Yes, no, Erik, it’s a fair question. Look, its CDW’s typical approach, which is we’ll call it when we’re ready to call it and when we think we have a good visibility. And it’s just too early to call that in the back half of the year right now. But that said outstanding start to the year as you know, and we see absolutely excellent momentum going into Q2 and expect what a robust 20% profit growth in the second half of 2022. So we look at this and see a really aggressive but achievable goal in front of us. So we’re feeling very optimistic about the year and what we’ll call the back half of the year when we get a little closer in the back half of the year.

Christine Leahy:

Thanks very much. I appreciate it.

Unidentified Analyst:

Hi, yes, this is Joe on for Samik Chatterjee. So my first question is a follow up on the full year guide. Question prior can we dissect that a little bit particularly as it relates to the rate outlook for the underlying it market and CDW has outperformance to it? What are you seeing as the main drivers or contributors to the rate outlook for both? And then I guess how much of that rate outlook is being driven by recent acquisitions like Sirius tracking better than expected, as opposed to kind of the traditional CDW business? And then I have a follow up.

Unidentified Analyst:

Got it. And then just quickly for my follow up, can you help me understand what you guys are seeing from a pricing perspective versus 90 days goes, and whether that’s translating into a tailwind or headwind for CDW?

Al Miralles:

Two things I would just add in and I am more, one thing we see in the supply environment is more creativity and agility, both ourselves and with our partners in terms of where do we pivot to different products, where do we pivot to different solutions and finding customers are accommodating that working with us to try to get to their solutions sooner than later. So that certainly had a bit of an impact from a mix and rate perspective. So just I would note that.

Operator:

Thank you very much. Our next question comes from Ruplu Bhattacharya from Bank of America. Ruplu your line is now open. Please go ahead.

Christine Leahy:

Yes, good morning Ruplu and thanks for the comment. Let me start with the second part first with raising our, with feeding our confidence is what we’re seeing with our customers. It’s the demand. It’s the momentum. It’s the criticality of IT in every walk of every industry to drive competitive advantage, experience, etc. So we just see technology as absolutely central. And really it’s an investment in innovation. It’s no longer viewed as a cost to the business as much as an asset of innovation. And we’re seeing that and feel very confident that that will continue, possibly at the expense of some other investments that organizations make. But technology is top of the list. As far as the macro environment, what might happen here’s what I would tell you. First of all, we have our broad and deep portfolio is the best it’s ever been at any point in time. Secondly, our flexible business model has allowed us, in any challenging time has allowed us to outperform the market and deliver results. And if you look actually at the Great Recession, we did outperform the market. And if you think about the last three years, significant delivery of great performance versus the market. So and in those cases, we also emerge stronger. So you’ve got our portfolio which is better than it’s ever been. You’ve got our flexible business model which has a track record of working and having us deliver performance in downtime. And when you think about our value propositions the third thing, I would say the value proposition for our customers and our partners becomes even more important to them. They become even more reliant on our stability, on our scale on all the things that we deliver. And at the end of the day, that allows us to be opportunistic and helping them and gaining share in the market. So I point you to our track record and our model and our portfolio and our value proposition which has over 35 years, reflected the fact that CDW is a different company performs in tough times and in good times. And typically in tough times, we come out even stronger than when we enter them.

Christine Leahy:

Yes. No problem on the government side, the federal side we’ve been saying now for a couple of quarters that we expect growth to see growth in the second half of the year and that expectation has not changed. So the projects, we’ve talked about the green shoots we’ve talked about, we expect to be taking hold in the second half of this year as expected. As far as state and local that’s playing out as we thought it would as well, if you remember, the funding was coming in a multiyear fashion. The federal funding and that was extending customer’s buying patterns a bit. And we’ve been really helping them on the planning phase of spending that those that funding federal funding and we’re starting to see that come to fruition. And you see that in the results this quarter which is those projects starting to flow out now which is a very positive thing and reflective of what we expected to happen.

Operator:

Our next question comes from Adam Tindle from Raymond James. Adam your line is now open. Please go ahead with your question.

Al Miralles:

Sure, Adam and good morning. This is Al. So on gross margins for the quarter I would comment on two things certainly you had the impact from Sirius for the quarter and I would say that benefit was as expected. We had a couple of the things that benefited our gross margin for the quarter. Number one stronger netted down revenues actually grew two times the level of our sales, product margin mix and rate were strong. And so they were important components on the gross margin front. So down to your NGOI margin question. So yes, NGOI margin 20 basis points better than prior year and basis points better than prior quarter certainly had the benefit of Sirius. Just the one call out I would give you in terms of the accrued and benefits there for Sirius is that, given the seasonality of their business, Q1 is typically lower on the scale of the full year. And therefore some of the fixed cost leverage we get from Sirius is more on the latter half of the year. So that has a bit of a dilute effect for the quarter. But still we were able to turn in really strong 7.8 for the quarter.

Christine Leahy:

Yes, morning, Adam. I’d say look in terms of backlog building it was in line with what we saw in Q4. So that would give you kind of characterizes the size. In terms of what we’re seeing is a feathering out. So I think I said we were seeing pockets of improvement yet new pockets of pressure. So we’ve seen notebooks free up a little bit. Chrome books free up a little bit over the course of time, but solutions, products really more constrained now than they were before in particular Netcom. And I’m sure you’re hearing that a lot. So look, we’re in it. We still expect it feathering out. We’re not seeing anything in our results, frankly, or in our conversations with partners that suggest anything than the way we’ve already described it to you.

Operator:

Thank you very much. Our next question comes from Amit Daryanani from Evercore ISI. Amit your line is now open. Please ask your question.

Christine Leahy:

Yes, good morning Amit. In terms of the tech now, I want to make sure I could having trouble hearing you a little bit. But you were asking about PAM expansion due to servicing enterprise size customers and in particular technology talent supply shortages. Did I get that right?

Christine Leahy:

Yes, okay. I got. Fair question. Yes. Well, when you look at the couple of things you look at Sirius’s customer segment. And it’s heavily enterprise oriented. So yes, we are focusing on the enterprise. If you look at CDW’s customers well, we have typically said our sweet spot is customers up to 5000 end users, we have a very large number of enterprise customers that we service and that service extremely well in the past five years, given the increase in complexity. So yes, we are in the enterprise space. We’re continuing to grow in the enterprise space. We have not done the calculation regarding the TAM. But we certainly expect to be able to continue to be successful in that space now more than ever. It used to be you think about enterprise and one of the reasons they might not have turned to CDW was because they would have and could afford the technology talent within their organization to handle everything that they needed. But now given the speed and complexity, even the larger organizations can’t keep up with the changing nature of technology and our ability to supplement and address that problem is really become a very interesting value proposition for those organizations. And boy, did we see it play out in the during the pandemic.

Al Miralles:

Sure Amit. First, let’s just start with our expectation or outlook of low 8% on NGOI margin. So that is what we guide on in that regard. But just back to your comment, your question on gross margin. Look, if we look at our strategy and the execution, I think that that has played out over time, in terms of expansion of our gross margin. I think this quarter is a great example of that really bring the power, all of that; strong net it down revenues, product margin was a factor, Sirius coming online. So a lot of those variables are playing out. We would anticipate that that would continue and particularly talked about the second half, we expect higher level of netted down revenues which certainly is the theme. So if you get back to that NGOI margin, we believe that execution of the strategy and follow through on that will deliver the outcomes we’re expecting.

Jim Suva:

Thank you. And congratulations, Chris earlier in the call, you had mentioned that the supply situation largely hasn’t changed from say 90 days ago when the investors last spoke to you on such a call. I wanted to ask though, if you dissect the end markets though, or I’m sorry, not end markets, but end products, whether it be PCs or servers or computer devices. Have you seen some shifts there? Because there’s been indications of things like Chrome books seeing actually a big deterioration, while maybe others seen higher demand? So I’m wondering if you take it to the device level? Have you seen some material puts and takes and shifts?

Jim Suva:

Okay, that makes a lot of sense. And then as my follow up probably more appropriate for Al. Al when we think about cash flow and uses am I correct to kind of 2022 should be kind of a debt pay down here? Or is there sufficient cash flow, because component costs are going higher and high growth, that inventory will need to be cash flow consumed to support the inventory, or you guys looking at actually strategically adding in more software services, security skill sets to your portfolio. Thank you.

Jim Suva:

Thank you so much for the details Chris and Al.

Keith Housum:

Good morning, guys. Al hopefully, we’ll have more color on the 23% growth, I understand was a good, very good quarter for demand. But can you provide a bit more breakdown between the three different elements, which I think I’m hearing is this Sirius growth in the volume and growth in price increases. Can you provide a context about the contributions of each?

Christine Leahy:

Hi Keith, and its Chris just to add on to what Al said I think he really coined it with hitting on all cylinders. So the business is hitting on all cylinders, the customer end markets, the portfolio and the integration. I know you have to question about integration. I guess, what I would say is number one, serious, the integration is going outstanding. I could not be more pleased with the pace and with the results. And also with the execution in the marketplace. As we said last quarter, we’re really, really focused on integrating the businesses and bringing them together and going to market as one CDW and not really parsing out dollars and assigning creditors, as we’d like to say. So I would just tell you that it’s going great. Our focus, this first quarter has been all about our customers and our partners and our coworkers in particular, and creating the roadmaps and the support and the tools they need to be successful. And at the end of the day I think we said a couple quarters ago, we expect one plus one equal more than two, and there’s absolutely nothing that is making us doubt that. We’re very excited about what we’re bringing to the market, and in particular excited about how our customers are responding to the value add in the combined entity.

Christine Leahy:

Yes. Keith a great question. And we’re facing the same tight labor market that everybody does. The good news is we’ve been an employer of choice for a very long time. And we’ve focused on investing in our coworkers since our founding, and so the unique environment, the unique culture is a real draw for coworkers, the ability to grow one’s career, the interesting work we do, that all is important, as important as compensation to coworkers staying with CDW. We’ve seen some tick up a little bit of a hiccup in attrition in certain pockets of the CDW, but nothing that I would say is kind of worth noting. We’re working harder to bring in the talent. It takes a little longer to get new talent in. But we’re, of course very focused on keeping our talent and that potential for attrition. In terms of the costs and adjustments to our compensation. Look, again, we think about total rewards to coworkers and that includes the work. the people, the benefits, everything combined, and not just the compensation, per se. So we haven’t had to make major adjustments. And then don’t forget that the largest section of our organization is variable comp. And so it’s all about driving growth and the more growth they drive the more they make, and as you can see from our results, we should have a pretty happy team.

Operator:

Thank you very much. We have no further questions. [Operator Instructions] Yes. And there’s no further question. So I’d like to hand back to Chris, the CEO for closing remarks.

Operator:

Thank you. You may now disconnect your lines.

Operator:

Hello and welcome to today's CDW Fourth Quarter 2021 Earnings Call. My name is Bailey, and I'll be the moderator for today's for. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. [Operator Instructions]. I would now like to pass the conference over to Kevin White, Director of Investor Relations. Kevin, please go ahead.

Christine Leahy:

Thank you, Kevin. Good morning, everyone. Thank you for joining us today. I'll begin our call with an overview of our full year and fourth quarter performance and share some thoughts on our strategic progress and expectations for 2022. Then I'll hand the call 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 to ensure we have plenty of time for questions. 2021 was a year of both strong financial performance and strategic progress. The teams delivered $21 billion in net sales with excellent profitability. Margins improved and our 13% increase in sales translated to a 17% increase in both non-GAAP operating income and non-GAAP net income. Share repurchases amplified this growth and non GAAP net income per share increased 21% to $7.97. These exceptional results demonstrate the power of our resilient business model, a model that has enabled us to deliver industry-leading performance year after year, including through the past two years of a global health crisis, unprecedented supply interruptions and evolving customer priorities. You see the power of our model and the performance across our balanced portfolio of customer end markets over the past two years. As you know, we have five U.S. sales channels:– corporate; small business; health care; government, which includes federal and state and local customers; and education with K-12 and higher ed. We also have our UK and Canadian operations each serving public and commercial customers. All of these operations represent meaningful businesses in their own right. Often different factors impact customer end markets, sometimes macro and sometimes industry specific. This was the case over the past two years as customers across our diverse end markets experienced the impact of the pandemic very differently. In 2020, public customer spend, fueled by education and government, offset commercial and international declines and net sales increased 2%. In 2021, our 13% sales increase was powered by strong commercial and international customer spend, which more than offset flat public sales. The past two years also highlighted the power of our business model in our product and solutions performance, with more than 100,000 products and solutions from over 1,000 leading and emerging brands. We are well positioned to meet our customers' needs, whether transactional or highly complex. In 2020, customers prioritized remote enablement and continuity. Transactions increased driven by the ability to deliver endpoint solutions to meet unprecedented work from home and learn from home needs. At the same time, solutions declined as customers focus their spend on addressing critical endpoint projects. In 2021, while work from home and learn from home enablement remained key priorities, customers reprioritized investments to enable the future and add resiliency to their operations to strengthen and secure infrastructure, platforms and endpoints. Both transactions and solutions increased. Our ability to help customers address their priorities during two years of unprecedented supply challenge is another example of the power of our business model. We leveraged our competitive advantages, our distribution centers, our extensive logistics capabilities, deep vendor partner relationships and strong balance sheet and liquidity position to navigate the environment. And our sellers and technical coworkers helped customers find alternative solutions from our deep portfolio whenever possible. In 2020, we were able to deliver more than 11 million client devices despite meaningful supply shortages in endpoint devices. In 2021, while facing extended lead times for transactions and solutions, we delivered solid growth in both categories. As you can see, our resilient business model had a significant impact on our ability to profitably grow during an unprecedented period. Looking at performance over the past two years, net sales are up 15% since 2019 and our annual net sales compound growth rate was 7.5%. Profitability improved at a faster rate with compound annual growth rates for gross profit and non-GAAP operating income of 8% and 10%, respectively. Of course, our business model is not the only component of our formula to profitably outgrow the U.S. market. Our success would not be possible without the dedication of our talented team of 14,000 coworkers, including the more than 2,600 new Sirius coworkers who joined us in December. During the past two years, time and again, CDW coworkers demonstrated why they are so vital to our ability to successfully deliver industry-leading performance year after year. Let's take a closer look at what the teams delivered for the fourth quarter. For the quarter, net sales were $5.5 billion, including $197 million of results from Sirius, which closed on December 1. On an average daily sales and constant currency basis, net sales increased 9.6%. Non-GAAP net income was $285 million in the quarter, up 8.2%, and non-GAAP net income per share was $2.08, up 14% from last year. The teams leveraged the combination of our broad and deep portfolio, extensive technical knowledge and unique logistical and distribution capabilities to advise, design and orchestrate full outcomes to address customers' priorities across all of our customer end markets. Outcomes that deliver five key organizational benefits – innovation, lower cost, agility, risk mitigation and enhanced experiences for customers and coworkers. Let's take a look. Corporate delivered a 33% increase with excellent performance across both transactions and solutions. Digital transformation, agility and security remained top priorities. Endpoint solutions remained a key focus area and the team delivered another quarter of strong double-digit growth in client devices. Small business delivered another exceptional quarter, up 31%, with strong growth across both transactions and solutions. The team continued to help customers with remote enablement. Security performance was up mid-teens as the team helped customers address risk mitigation needs, delivering penetration testing and incident response as well as backup and recovery solutions. On the public side of the business, excellent performance in both healthcare and higher ed was not enough to offset expected declines in government and K-12, and total public net sales declined to 13%. Healthcare's 20% increase continued to reflect return to projects that had been put on hold. Security remained a top priority. Cloud adoption was strong, in part driven by efficiency needs as customers dealt with COVID-19 and acute care. The expected decline in federal reflected the lumpy nature of government contracts as the teams faced two meaningful overlaps in the fourth quarter of 2020, the wind down of our devices and service solution for the U.S. Census Bureau and a large client device program. Results also reflected the impact of slowness in contracting practices we shared last quarter. We are beginning to see greenshoots and there's no change to our expectation that trends will reverse later in 2022. State and local posted a high-single digit decline. The team delivered a high-single digit increase in solutions, driven by helping customers upgrade security. This could not overcome the team's 2020 strong fourth quarter performance when they helped customers take advantage of the year-end use-it-or-lose-it CARE funds. As we shared last quarter, we continue to help our customers work through the planning required to evaluate multiple funding opportunities and multi-year phasing and expect funded projects to begin implementation as we move through 2022. Higher ed strong double-digit performance was offset by the expected decline in K-12, and overall education sales increased 9% on top of 2020 fourth quarter remarkable 142% growth. Higher ed growth reflected our ability to meet growing demand for student success programs. These programs use technology to give institutions an edge, including comprehensive endpoint solutions, improved security, campus connectivity as well as enhancing the dorm room experience. The K-12 team delivered excellent net sales performance against very tough unseasonal fourth quarter 2022 compares. Consistent with expectations we've previously shared, net sales declined. Although down year over year, fourth quarter client device sales were more than double a typical pre-COVID fourth quarter. Both the UK and Canada delivered high teens local market growth. Combined in our other results, average daily sales for these two markets increased 20% in US dollars. Customer priorities in both markets were similar to those in the US. Our success addressing customer priorities is evident in our fourth quarter portfolio performance where we delivered balanced growth across transactions and solutions both increasing mid-single digits. On the transaction side, client devices increased mid-single digits. While client device supply improved in some areas and we were able to help more customers adopt alternative providers, overall supply remained constrained and we exited the year with an elevated backlog. Tight supply continued to impact prices which our teams were generally able to pass along. Video and audio delivered another impressive quarter. Solutions growth was driven by strong software and servers performance. Writings remain strong as customers turn to CDW for expertise across the full technology solution stack and entire lifecycle. Lead times extended in several key solutions areas, notably netcom, enterprise storage and servers. Remaining solutions orders increased at year-end. Once again, the team delivered strong double-digit growth in cloud, driven by robust growth in security, infrastructure as a service, and productivity. Security cloud growth was driven by the success of our comprehensive strategy of security assessments, data protection and threat mitigation with many solutions delivered via cloud and software. Overall security spend in the quarter increased mid-teens. Our ability to meet customer needs in the quarter across the IT continuum translated into a mid-single digit US hardware sales, 20% increase in software and more than 50% increase in services. Services growth reflected the ongoing success of our strategy and was balanced across professional and managed services. Recent acquisitions are paying off, contributing meaningfully to this quarter's growth. So, as you can see, our fourth quarter delivered a strong finish to an excellent year of financial performance. 2021 was also a year of excellent strategic progress against our three-part strategy for growth, which is to first acquire new customers and capture share; second, enhance our solutions capabilities; and third, extend our services capabilities. In 2021, we made excellent progress against all three of these pillars. Acquisitions made during the year, Focal Point, Amplified IT and Sirius, as well as integration progress for our 2020 acquisitions at IGNW and Aptris furthered our strategy to bolster our services capabilities. Deep services capabilities are critical to our ability to deliver full organizational outcomes across the full stack and the entire lifecycle. This is an important source of differentiation in the marketplace. Let me share a quick example of how this is showing up in our performance. Our acquisition of Amplified IT in August deepened our already strong offering in the education space, particularly in the Google ecosystem, which is the largest education platform in the US. Amplified IT's expertise as a systems integrator enables us to facilitate end-to-end solutions for education customers. This leads to greater customer engagement and stickiness and provides insights into opportunities to further help our customers across the full IT lifecycle. During the fourth quarter, the CDW Amplified for Education team worked closely with Google and Internet2 team to make it easier for institutions to adopt Google Workspace for education plus. In addition to ease of procurement, with the Amplified IT team on board, we were able to deliver additional value to customers through much needed deep technical expertise and services, expertise and services that deliver organizational outcomes, enhance collaboration, streamlined instruction, and a secure learning environment. This joint campaign generated more than 30 net new awards in the fourth quarter with more than $11 million in total contract value over the next several years. This is a great example of how we leverage our powerful business model to quickly deliver customer benefits from newly acquired capabilities. It is also a great example of how our acquisitions enhance our ability to deliver full outcomes across the full stack and the entire IT lifecycle. Internal investments made in 2021 also enhanced our ability to deliver on this strategy. These included digital investments in proprietary portals to drive customer and seller productivity. We also added 1000 new coworkers in addition to the nearly 3,000 coworkers who joined us via acquisition. Just over half of all new coworkers in 2021 are in technical roles. Whether acquired or homegrown, investments in our three-part growth strategy are integral to our ability to consistently and profitably outgrow the US IT market. That brings me to our thoughts about 2022. In 2022, we will continue to execute against our three-part strategy with a focus on the recent integrations. A top priority in this area is the disciplined integration of Sirius. Work is moving apace led by a dedicated seasoned executive. The team's mission is, just as it's been with all of our acquisitions, to ensure our customers are able to quickly reap the benefits of our combination. And we are making excellent and swift progress in that area. For example, I'm pleased to share that our new Sirius coworkers had a CDW email address on day one, a seemingly small accomplishment, but with really big impact. Turning to 2022 financial performance, our outlook is built off a combined 2021 CDW and Sirius net sales figure of $23 billion, which includes $2.2 billion of full-year Sirius results. Top line performance for Sirius was relatively flat compared to 2020 as they overcame a number of large projects and the impact of supply interruptions. Managed services, an area of focus for Sirius, delivered double-digit growth. In 2022, as Sirius is integrated into the fabric of CDW, we expect its operations to grow in line with total CDW. Given current market dynamics, our 2022 baseline outlook calls for US IT market growth of 3.5%, plus 200 basis points to 300 basis points in constant currency of CDW outperformance. This outlook reflects our view on three key drivers. First, we expect a moderation in US GDP growth. Second, we expect the impact of supply on our results in 2022 to remain fairly consistent with its impact at year-end 2021. And third, we expect customer priorities in 2022 will increasingly require integrated solutions that leverage our services, cloud and hybrid expertise. Wildcards remain ongoing supply and macro impacts, particularly in small business. Of course, as we always do, we will update you on our thoughts as we move through the year. I'm extremely proud of the excellent financial performance and strategic progress we've made during the past two years. In 2022, we will continue to do what we do best leverage our competitive advantages to help our customers address their IT priorities and achieve their strategic objectives and out-execute the competition. If the pandemic has shown us anything, it is that technology is essential to all sectors of our economy and will play an increasingly important role in the years ahead. That means our role as a trusted strategic partner to our customers is more important now than ever. And I remain confident that we have the right strategy in place. And with that, let me turn it over to Al, who will share more detail on our financial performance. Al?

Operator:

Thank you. [Operator Instructions]. Our first question comes from Amit Daryanani from Evercore. Amit, please go ahead.

Al Miralles:

So just a couple of things to note. So, I think we've given you some component parts to get a sense for EPS. So number one, obviously, our reported EPS for 2021 was $7.97. That includes one month of contribution for Sirius. We've also provided you what would be a combined CDW and Sirius result for 2021 as if they were together for the full year. That's $8.49. So, the way you should think about it is if you walk forward from that $8.49 to our outlook there of 9.25% growth, you get a sense for the combined entities and what they contribute. The other data point I would just give you is that we noted that, from a top line perspective, we'd expect that Sirius would grow at the same rate as we provided in that top line outlook. To your question on synergies. So, here's what I would say. Look, we're very focused on the integration of the combined entities. And we expect through that, we're going to find value in terms of synergies on the revenue front. We're certainly looking hard at procurement efficiencies, systems consolidations, facilities consolidation, all of those components, and we expect we're going to get value. But, Amit, I would just mention that it's critically important as we talk about our strategy that we continue to invest in our strategy. And I would say as it pertains to synergies, reinvest. And so, while we expect we're going to see value, we expect that a lot of those values we get from the synergy be reinvested in 2022.

Al Miralles:

Look, I would say, comments on the supply environment, Q4 looked very similar to the prior quarters in terms of the supply environment. Our backlog increased consistent with those previous quarters, call it a couple hundred million of backlog increase. Look, there are some puts and takes in terms of what supply chain would look like in Q4 and I would say probably a bit more challenged on the solution side of the business. And I think that's natural as these efforts evolve over time. As we look forward into 2022, we don't really see any meaningful end in sight. I would say, as we think about kind of our interactions and what we hear and observe from a partner and product perspective, maybe there's silver lining there that some of the transparency has improved. So, there's a better line of sight of lead times and where things stand, but I'm not sure that we would translate that into any indication of things are going to get better in the near term. And so, really, we're hunkered down on consistent similar outlook with respect to this supply chain environment and we'll continue to execute as we have during this time.

Adam Tindle:

Al, I just wanted to start on 2022 guidance. And the revenue buildup implies around 6% growth for the full year, but looks like you're going to be starting at about half that level based on the Q1 guidance. And as we think about compares getting tougher as the year progresses, there's questions around how long the device ecosystem tailwinds are going to last as the year progresses. Maybe you can double click on those fears and why you have built in acceleration in year-over-year growth as the year progresses to start with? Thanks.

Adam Tindle:

Maybe just as a follow-up, you onboarded over 2,500 employees from Sirius and I just had a question on integration, Chris. You talked about the CDW culture, how it permeates customer-facing coworkers, compensation metrics are generally aligned with key metrics like gross profit dollar growth and returns on capital. As you think about the Sirius employees that you're taking on, maybe you can touch on their comp metrics and any potential planned changes to that. And, Al, if you could touch on the systems integration piece of this, that would be helpful. Thank you.

Al Miralles:

I'll just add a couple of things. So number one, just from a compensation perspective, Chris hit the key points there in terms of alignment. Just keep in mind, because their business has a higher proportion of services solutions, that variable fixed component of the business looks a little different. They have a higher cost to serve with their technical staff. And so, that will shift. I don't think that's a diametrical shift immediately. We'll see that over time as we integrate. On your question on systems consolidation, look, it's a little early days. I think we've laid down the foundation of kind of the initial evaluation of systems. And I think we're pleased to see that there's really strong infrastructure from a Sirius perspective. And so, we're really lining up for an approach of best in breed from a systems perspective, and we think there's going to be opportunities to take on some of the technology tools they have, as well as vice versa. So, we'll share more as we have that, but we're making good progress on that front.

Matthew Sheerin:

Chris, I was hoping you could expand a little bit on your outlook for the year in terms of end market. What should we be thinking about on the commercial side of the business, which has been accelerating, versus the public sector, which you've talked about, tough comps in education and government?

Matthew Sheerin:

Just regarding your commentary just about the product and component constraints, we're hearing from other resellers that some customers are moving or accelerating the move toward off-prem, cloud-based computing storage, et cetera, because of those constraints. Are you seeing that at all from your customers?

Operator:

The next question comes from Ruplu Bhattacharya from Bank of America.

Al Miralles:

Let me start with that. And Chris may have something to add there. So, we are assuming no change in the supply environment relative to what we experienced in 2021. So, just recall, if look back the last three quarters, we've quoted that our backlog has increased several hundred million dollars through 2021. That's notwithstanding that written demand continue to be extremely strong. So, if you look at our actual printed results, there are times we look at it and say, you can't really see the effect of the significant backlog. So, I think our expectation would be that supply chain will continue to work as it has. And I think you may have some pluses and minuses through that in terms of solutions versus transactions and byproducts. But lo and behold, I think that supply assumptions are very consistent with what we've seen in 2021.

Christine Leahy:

On PC demand, look, I think we will see Q1 is going to be a tough quarter because of the overlaps, for sure. And as we move through the year, we expect to continue to see corporate, commercial, small business, international, continued strength there, provided that the recovery that we're seeing continues and provided the macroenvironment continues. When you think about the puts and takes across 2022, supply can be a plus or minus. I mentioned the emergency connectivity funds for K-12. That'll be a plus. Macro can be a plus or a minus. But generally speaking, here's what I'd say about PCs and it's consistent with our commentary of the past. We really do see client devices as a tool for employees, as a tool for people generally and expectations of using them for productivity have increased. And the demand for client devices for remote and then as people frankly come back to the office and are working in the office and remotely and anywhere, also add demand to the market. The other thing we've talked about is technology cycles and technology innovation and upgrades happening more quickly than we've typically seen in the past. And when you think about remote and virtual, think about breakage. And so, you've got a couple of pressure points putting cycle times – compressing cycle times. The last thing I would say is new use cases. We continue to see endpoint devices and new use cases in the digital transformation. So, I guess, think about PCs this year as still solid performance, moderating growth especially compared to last year. And by the time we get to the end of the year, when you look at where we are, and you think about the refresh opportunities from 2017 and 2018, those are going to be opening up and then we've got Win 10 end of life coming. So, people are buying PCs, we are in a very good position to make sure that we get our fair share of inventory to supply them. And while we see moderating growth, we just see it as a positive contribution to our overall performance.

Al Miralles:

Let me address it. So, first, just on a year-over-year basis, the growth is not muted. It's in the teens in terms of growth. I think just on the – comment on the sequential is the one obviously coming off of a very strong Q4, but the comps for education, much more significant in Q1 relative to Q4 there, and so that mutes the impact. You get a bit of a kind of contra going the other way with, again, Sirius, but there's some of the puts and takes. If you just focus on that year-over-year, that was very strong.

Operator:

The next question comes from Erik Woodring from Morgan Stanley.

Al Miralles:

First, again, just [Technical Difficulty], supply chain would look similar to 2021. I think we've mentioned before, there is a component of backlog in supply chain, and includes pull forward of business. And I think as our partners became more and more clued into and kind of have gotten clarity of lead times and so forth, they've encouraged us and encouraged customers to get in line. And I think through 2021, that has happened. And we would expect that will continue to happen. In terms of how that plays out and what that might look like, I think that now – I think we could look at our backlog and say we've got a pretty balanced portfolio there of pull forward business as well as current business. And so, for those very reasons, we don't believe that the backlog will ultimately result or play out as a full flush or a big bang, if you will. It's going to feather in over time. So, I think it's going to be probably a bit episodic in terms of continue to progress from individual partners and products in terms of how that plays out and how fast it moves. But again, as we sit here now, we would say we would not expect that to be anything that happens near term. And our hope is that, later 2022, we start to see that feather out.

Christine Leahy:

As we look at Q4 and the strength across the segments, the nice thing is it was balanced across transactions and solutions. And I do think – I'm not going to go back into supply chain, but I do think supply chain ended up impacting growth on some categories across each. But that said, look, I think in every element, whether it was client devices or infrastructure or cloud, I feel confident that the team has really been outperforming the market in a very balanced way. When you think about the acquisitions we've made and our ability to integrate them very quickly into the organization as practice groups and as part of the larger CDW, areas like security in Focal Point and what we bring to market there and the speed that we're growing there or our Digital Velocity practice and our ServiceNow automation practice and how that is flowing into 54% growth in our services category. So, I feel very good that we are outperforming taking share, and in particular, in those high growth areas where we are investing.

Jim Suva:

I only have one question. It's probably directed towards Chris. In your prepared comments, you talked about, in 2020, a big strength year in K-12. And then, in 2021, more of a pivot to enterprise. So, Chris, I'm just kind of asking, as you look into, say, 2022, the end markets, what strength – or maybe is it cloud? Is it services or type of products that you see maybe being stronger in, say, 2022 versus 2021?

Operator:

The next question comes from Shannon Cross from Cross Research.

Christine Leahy:

Here's what I am hearing. Nobody likes price increases, but virtually all commercial customers, technology is the number one investment. People and technology. So, if there's a budget to spend, they're not cutting back on budgets at all. In fact, they might be expanding them. But having to be very disciplined about cost containment. So, again, our expertise across the full spectrum allows us, with our customers, to have conversations that can drive cost reduction, cost management in a way that makes us even more valuable. But we're not finding commercial customers or other customers, for that matter, who are reducing technology investments at all. So, that's the good news. And again, technology is essential to being competitive, to winning, to educating, to doing all the things that companies are trying to do and organizations are trying to do. So, we're not seeing any material impact at this point. And, obviously, we're passing prices along. Al, I don't know if you'd add anything.

Shannon Cross:

You've guided to low 8% for operating margin, which, obviously, is higher than you've done in the past. Is that absolutely all from the acquisition? Or are there any mix issues or benefits actually we should take into account as we think about the core business? And then, again, I know you talked a little bit about synergies, but I'm just kind of curious if you could bucket what's really driving the margin improvement?

Operator:

[Operator Instructions]. The next question comes from Samik Chatterjee from J.P. Morgan.

Al Miralles:

Yes, really pointing back to what we've provided on the investor meeting for Sirius, we noted that their gross margins are higher than ours. And so, we would certainly expect that that accretive effect is going to come through. And again, in addition to our progress, otherwise. Now, look, we don't provide outlook. So I'm not going to quote for you specifically what our gross margins would be. But I think if you apply the math on where we're coming out, from an NGOI margin outlook perspective, you get a good sense of the progress we expect we're going to make.

Christine Leahy:

Let me start with that one. I think as a starting place, a reminder that with Sirius, we are actively and swiftly bringing them together. So, when you think of some of the other acquisitions we've recently done, they've really been practice areas that can tuck into our technology groups in a holistic way. Sirius, we are going to bring the organization into CDW and literally integrate it. So, as we think about growth in the future, when we say we expect Sirius to drive, at least 200 basis points to 300 basis points above market, what we mean is we expect the teams to perform as CDW has always performed with the benefit of our competitive advantages and outperforming the market. So, we think about it on a combined basis as opposed to a standalone Sirius contribution.

Operator:

Our final question comes from Keith Housum from Northcoast Research.

Al Miralles:

Look, I don't know if I have one single answer in terms of the impact. I will say that and reiterate the written demand continues to be super strong. So, as we think about the growth of prices, which have been meaningful in different pockets across our product set, it has not stopped demand. And I think that is, like Chris said, a testament to the power of technology and the importance of technology and the fact that our vast customer base is looking to go forward and continuing to invest in their own efforts in digital transformation. And so, really, if you look from a top line perspective, in terms of revenue, we don't think it's had a meaningful impact. [indiscernible] demand is definitely still there. And our belief is that will largely continue.

Christine Leahy:

Well, let me just add. We will, obviously, as we always do, update as we go through the course of the year, but right now, what we're seeing is a moderation in estimates for GDP. Inflationary trends, uncertain where those will be. And the wildcards in the macro environment, labor shortages, et cetera, I think you're hearing people at the beginning of the year taking a clear eyed view of what to expect in 2020. Look, ASPs could drive it up, but we'll know more as we start to move through the year on all of these things.

Christine Leahy:

Thank you, Bailey. I want to recognize the incredible dedication of our coworkers around the globe and their extraordinary commitment to serving our customers, our partners and all CDW stakeholders. And thank you to our customers for the absolute privilege and opportunity to serve you. To our investors and analysts participating in this call, we appreciate you and your continued interest and support of CDW and we look forward to talking to you again next quarter. Thank you. Have a great day.

Operator:

Hello, everyone, and welcome to the CDW Third Quarter 2021 Earnings Call. My name is Bethany, and I'll be coordinating this call for you day. If you would like to register a question at Q&A, you can do so by pressing [Operator Instructions] on your telephone keypad. If you change your mind, you can press [Operator Instructions. I will now hand the call over to your host, Kevin White, Director of Investor Relations. Kevin, over to you.

Chris Leahy:

Thank you, Kevin, and good morning, everyone. I'll begin today with an overview of third quarter results and drivers of performance. Al will take you then through a more detailed look at our financials, as well as our capital allocation strategy and outlook. We'll move quickly through our prepared remarks as we always try to do to ensure we have plenty of time for questions. But before I get started, I do want to pause for a moment to honor the life and legacy of our former CEO, Tom Richards, who passed away last week after a valiant fight with cancer. I suspect most of you on this call have likely met Tom in-person. I'm certain that everyone on this call has been impacted by Tom. He was a fierce competitor and equally a kind human being. Tom had a lot of what we like to call it CDW Tomism. Simple ways of getting to the essence of something in a way that it stuck. One of my personal favorites is when Tom used to say, At CDW, we take what we do seriously, but we don't take ourselves too seriously. That's the essence of who we are. That is our CDW culture. Captured those simply and amplified those strongly, by Tom Richards. Tom also had an unexpected way of signing off on our earnings calls, usually with a right comment about an upcoming holiday, like Halloween or Mother's Day, or even Valentine's Day. As a result, we always ended these calls on a high note and with a chuckle. Tom knew his audience well. In honor of Tom, I'd like to kick off this earnings call with the tagline he penned on every communication to a co-worker. Tom always signed off with "you make a difference. " Literally injecting into each co-worker Tom's personal belief in them, and their important impact. On behalf of all of our coworkers around the globe, our customers and our partners, our communities and our investors, I would like to say thank you to Tom. You made a difference. Let me turn now to Q3 performance. Once again, CDW posted strong top-line growth and profitability. Overall, demand was strong and the teams did a great job addressing customer needs. For the quarter we delivered record net sales of $5.311 billion, 0.4% higher than last year, and up 10.7% in constant-currency, non-GAAP operating income of $435 million up 12.6% and non-GAAP net income per share of $2.13, 13.4% higher than last year on a reported basis and up 15.8% in constant-currency. Our ability to deliver this strong top line and profitability was the result of 3 key drivers; our balanced portfolio of customer end markets, the breadth of our products and solutions portfolio, and our ongoing execution against our three-part strategy, which is focused on taking share and investing in solutions and capabilities our customers need and want. Let me walk through each one of these and share some detail about how they contributed to our performance. First, our balanced portfolio of customer and markets. As you know, we have five U.S. sales channels