Q3 2022 CDW Corp Earnings Call
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 Bristol 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 three main drivers of our results our balanced portfolio of customer end markets breadth of our product solutions and services portfolio and the relentless execution of our three part strategy.
First the breadth and diversity of our customer end markets. As you know we have five U S sales channels corporate small business healthcare government and education. Each channel has a meaningful business on its own with annual sales ranging from $2 billion to over $10 billion over the last 12 months.
Within each channel teams are further segmented to focus on customer end markets, including geographies and verticals.
We also have our UK and Canadian operations, which together delivered sales of $2 9 billion U S dollars.
Our portfolio approach enables us to toggle to the best pockets of opportunity and to be there for our customers along every step of their journeys.
Our collective team did an exceptional job this quarter.
Our corporate team delivered another stellar quarter with a 25% net sales increase results were balanced and broad based customers continue to focus on digital transformation through infrastructure modernization and process automation the team's ability to deliver these outcomes translated to excellent solutions growth led by <unk>.
Calm enterprise storage and cloud.
Both professional and managed services posted double digit increases as the team help customers achieve their it priorities by augmenting their technology capabilities with dedicated technologists the.
The hybrid work environment continues to thrive with continued customer focus on collaboration across cross Workspaces and continued need to modernize their employee experience.
Small business delivered growth for the seventh straight quarter.
A 5% increase.
On top of last year's 39% growth.
The team continued to help small business customers navigate the impact of technology across all aspects of their business.
Todays cautious environment and accomplished critical projects that enhance and sustain mission and business outcomes. This drove double digit performance across software security and cloud or.
Our full stack full lifecycle support for customers, which enabled us to nimbly shift towards solutions that maximize prior investments led to double digit performance and services.
Public posted a strong 13% increase this quarter.
The healthcare team delivered another excellent quarter of robust growth up 28%. Once again results were driven by the team's ability to help healthcare organizations harness technology to drive productivity in an environment of rising costs, our healthcare customers are increasingly relying on CDW for talent orchestration.
<unk>.
And to guide their implementations are cloud resources.
Health care organizations face complex business dynamics, but they are committed to mission critical projects and datacenter and collaboration modernization continues to move forward.
Government posted 38% growth.
Within government state and local posted a substantial double digit increase.
Our collaboration with customers to identify and capture various funding opportunities is bearing fruit with data center and software projects beginning to advance under multi year phrasing.
The team delivered excellent security results as they help to state and local municipalities enhance their defenses against emerging and evolving cyber threats.
Remote collaboration continues at a top priority driving excellent performance across transactional product categories.
As expected federal activity resumed in earnest seasonal spending patterns normalized with the September fiscal year end spending uptick the team helps customers address their top priorities, including upgrades to collaboration and data management infrastructure. This drove strong growth in nearly all categories compare.
To last year.
For education higher as growth was more than offset by the expected decline in K 12, and overall sales decreased seven 5% the higher Ed team continued to deliver student's success programs to institutions. These programs promote enrollment through comprehensive endpoint solutions and.
Improved campus connectivity and safety and drive client devices sales and netcom growth.
Security remains very.
Security demands were high driven by solutions.
That addressed ransomware and Hatton threats for CDW delivered security enhancements.
12 performance remains strong on an absolute basis, but was obscured by the team's exceptional client device driven success in 2021 today. The team is helping school systems determined how to sustain prior investments and maintain the learning opportunities provided by digital equity initiatives.
At the same time the team continues to help customers implement industry, leading innovative connective learning spaces as well as enhanced campus safety.
And this drove strong security and audio visual performance during the quarter.
Other our combined U K and Canada results increased 18% on a reported basis.
Both regions delivered excellent local market growth.
The UK performance was broad based and balanced as our team showed resolve and resiliency in a complex environment.
Canada's performance was also broad based and balanced with customer priorities similar to the U S. Amid a continued shift into solutions and services.
All in the teams delivered another excellent quarter of end market performance. Our diverse end markets are both a key strategic advantage and a driver of our differentiated performance.
The second driver of our portfolio of our performance was our broadened portfolio as.
As technology has become a more vital part of their strategies customers require comprehensive integrated and interconnected solutions and services.
Our ability to address these priorities across the entire continuum delivered double digit growth across our solutions portfolio.
U S hardware increased 13%. This steady performance was on top of 2021 quarter double digit hardware growth.
Network modernization and upgrades drove double digit increases in enterprise storage and Netcom video and audio and servers increased healthy single digit rates.
Commercial PC performance was strong on a relative basis and even more so when we exclude the year over year impact of growth from the K 12 market.
Relative to the supply environment conditions improved across several transactional areas. Despite these improvements during the quarter, our overall backlog remains elevated.
We expect the backlog to continue to feather out over the coming quarters.
U S software increased double digits strength was broad based as we continued to help customers manage data enhanced productivity and secure their it environment with strong double digit increases in storage management application suites and database management.
Cloud was an important driver of performance across the business.
Complexity surrounding cloud has not changed and navigating between multiple options remains a major area of customer focus once again cloud was a meaningful contributor to profitability with both customer spend and gross profit up by double digits.
Infrastructure as a service productivity security application delivery and connectivity, where key cloud workloads during the period.
Security remains top of mind for our customers as cyber threats continue continue to emerge evolve and increase our teams continue to guide customers through a cohesive strategy of security assessments data protection and threat mitigation to improve their security frameworks and respond to increasing threats.
This drove strong double digit growth in customer spend.
U S services performance continued to advance this quarter customers are leaning into CDW as extensions of their own teams and leveraging cdw's services as part of their strategies.
This produced broad based and balanced growth driven by professional services managed services and warranties.
Services net sales were roughly twice last year's levels and represented 8% of total sales up from 5% in 2021.
Services are fundamental to our go to market approach and are a key enabler of our value proposition to support this we have been making organic and inorganic investments in services over the past several years and those investments quickly gained traction in the market.
And that leads to the third driver of our performance this quarter relentless execution of our three part growth strategy.
Our targeted investments are guided by our three part strategy, which is one to capture share and acquire new customers two to enhance capabilities in high growth solutions areas and three to expand services capabilities.
This strategy delivers on our commitments to our customers and drives both our topline and Bottomline performance.
Over the past three years, we have enhanced our relevance to customers by broadening and deepening our capabilities, including an automation cloud native and Dev ops and cyber security.
Capabilities necessary to ensure we remain the trusted adviser to our customers as they accelerate their digital transformations.
Capabilities that enable us to best serve customers across physical digital and cloud based environment in the U S and internationally.
A great example of how our services investments deepen relationships and strengthen the value we deliver to customers as a solution. We are delivering to our medium sized hospital system with three primary hospitals and approximately 70 regional clinics and urgent care facilities. The system was challenged to find retain and train assists.
Anable level of technical staff, having previously worked with them, providing both hardware solutions and professional services to re architect their disaster recovery solution, we had a deep understanding of our customers' environment.
When coupled with the breadth and depth of our services offering this enabled us to construct a new design build run end to end services solution that Leverages CDW managed services and talent orchestration capabilities.
Our solution made possible by the services investments, we have made and the technical mastery, we have accelerated over recent years mastery over the broad spectrum of technologies, the customer needed for support including Windows, and Linux servers virtualization storage backup and recovery databases switching.
Outing network access and cloud based productivity and identity management tools, our full portfolio of services enabled us to become an extension of the customer's team.
We recently went live under a five year contract with monthly recurring revenue in the hundreds of thousands and a total contract value over $10 million a.
A great example of how our investments and services deliver value to our customers and caused them to lean further into CDW.
Investments in our customer centric growth strategy are foundational to our ability to consistently and profitably outgrow the U S market.
And that brings us to our expectations for the rest of the year.
Our team's terrific execution and relentless focus on our customers delivered significant outperformance to our baseline 2022 outlook when combined with our current expectations for fourth quarter performance. We now expect to outperform the U S market at the high end of the 325 to 425 basis points range.
Our estimate of U S. It market growth in 2022 remains 4%.
Taken together this equates to year over year constant currency growth at the high end of the seven in the quarter to eight quarter percent range. The high end of the range is applied to the combined CDW 2021 revenues of $22 8 billion calculated as those serious was acquired on January one 2021, instead of its actual acquisition date of December .
One on a reported basis this equates to a constant currency increase of $18, 5% over 2020 results.
Our outlook continues to reflect our baseline expectations that our mix will remain weighted more heavily to netted down items. We expect this to drive profit growth faster than sales growth, while we continue to thoughtfully invest in our future.
We are cognizant of the current environment, but to date customer urgency to innovate for the future and the internal and external stakeholder demand has not diminished.
Of course, we remain mindful of wildcards, including economic geopolitical and the variable nature of the supply chain and we will keep a watchful eye on these and other potential factors.
As we always do we will provide an updated view on business conditions and our annual outlook 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, our flexible business model and proven formula for success, we will continue to serve us well.
The accelerated pace of change makes our role as a trusted strategic partner to our customers more important now than ever.
Now, let me turn it over to al who will provide more detail on our financials and outlook al.
Thank you, Chris and good morning, everyone I'll start my prepared remarks with additional detail on the third quarter move to capital allocation priorities and then finish up with our 22022 outlook turning to our third quarter P&L on slide eight consolidated net sales were $6 2 billion.
17, 3% on a reported and an average daily sales basis on a constant currency average daily sales basis consolidated net sales grew 18, 7%.
Sequentially sales increased one 1% versus the second quarter.
Third quarter sales were in line with our expectations, reflecting broad based and balanced growth across our portfolio.
On the supply side, some conditions improved during the quarter, resulting in an overall reduction in our backlog.
Supply and lead times of client devices is indeed improved pockets of pressure remain especially in solution categories and our backlog remains very elevated.
As we've previously shared we would expect our backlog to feather out over time as supply conditions conditions can begin to ease and this will not likely be symmetrical cross product offerings, we continue to manage inventory strategically to support our customers.
Still uncertain supply environment and the team did a great job leveraging cdw's competitive advantages to ensure strong strong returns on working capital.
We once again, an excellent profitability in the quarter gross profit was $1 $2 billion a year over year increase of 34, 8%.
Gross profit margin was a record 19, 8% up 250 basis points versus last year.
<unk> expansion in gross profit margin was driven by several factors first as we expected for the second half of the year, a greater mix of netted down revenues the category or your category grew nearly twice as fast as overall net sales primarily driven by software as a service.
Product margins were strong driven by both mix and demand for certain hardware products and third net sales contribution from high margin services, which increased 70% year over year as a result of our recent acquisitions.
Turning to SG&A on slide nine non-GAAP SG&A totaled $684 million for the quarter the year over year increase in non-GAAP SG&A was primarily due to higher payroll consistent with higher gross profit attainment and higher coworker count co.
Coworker count at the end of the third quarter was nearly 15000 up approximately 400 from the prior quarter, reflecting investments in co workers that support high growth solutions and services as well as our own digital transformation.
Investments in our coworkers and our strategy are integral to our ability to outgrow the market.
<unk> and sustainably we.
We are focused on disciplined and balanced investment that will pay dividends.
This is evidenced by our record sales and profitability in the period.
GAAP operating income was $466 million of.
Up 27% compared to the prior year non-GAAP operating income was 548 $49 million.
Up 26, 2%.
non-GAAP operating income margin was a record eight 8% up 60 basis points from the prior year and 40 basis points compared to the second quarter.
Overall im very pleased with this outcome it was above our expectations and driven by a confluence of factors within gross margin, including a favorable mix and rate of product margins, which we'd expect to moderate in Q4.
Moving to slide 10 interest expense was $63 million higher interest expense compared to the prior year was primarily driven by the senior notes issued last year to fund the acquisition of serious as well as the effect of higher interest rates on our floating rate debt.
This level of interest expense was in line with our expectation for the quarter, we have not changed our expectation of approximately $240 million for the full year.
Our GAAP effective tax rate shown on slide 11 was 25, 4%.
This resulted in the third quarter tax expense of $101 million.
To get to our non-GAAP effective tax rate, we adjust taxes consistent with non-GAAP net income add backs as shown on slide 12.
For the quarter, our non-GAAP effective tax rate was 25, 9% up 60 basis points versus last year's rate as a result of an increase in nondeductible expenses and state taxes.
As you can see on slide 13, with third quarter weighted average diluted shares outstanding of 137 million GAAP net income per diluted share with $2 17.
Our non-GAAP net income was $357 million in the quarter up 20% on a year over year basis.
non-GAAP net income per diluted share was $2 60 up 22%.
Year to date results can be found on slides 14 through 19.
Moving ahead to slide 'twenty at period end cash and cash equivalents were $358 million and net debt was $5 8 billion during the quarter, we reduced borrowings under our senior unsecured term loan by $400 million <unk>.
Consistent with our plan to reduce leverage.
Quiddity remains strong with cash plus revolver availability of approximately $1 5 billion.
Moving to slide 21, the three month average cash conversion cycle was 18 days down seven days from last year's third quarter and at the low end of our targeted range of high teens to low twenties, reflecting the impact of serious and our continued diligent management of working capital.
Our effective working capital management, along with strong growth and the growth in the business also drove excellent year to date free cash flow of over $1 billion as shown on slide 22.
For the quarter, we utilized cash consistent with our 2022 capital allocation objectives, including returning $68 million to shareholders through dividends. In addition to the $400 million in debt repayment.
Which brings me to our capital allocation on slide 23.
Our objectives remain consistent with what we shared last quarter.
<unk> increased the dividend in line with non-GAAP net income, including todays 18% increase to the dividend from $2 to $2 36 per share.
Increased annual dividend represents approximately 25% of our trailing 12 month non-GAAP net income through September .
Q4, 2022 dividend demonstrates our confidence in the earnings power and cash flow generation of the business and marks the ninth consecutive year of increases since our initial public offering in 2013.
Our dividend has grown at a compound annual growth rate of 34% from its initial level.
Going forward, we will continue to target a 25% payout ratio growing the dividend in line with earnings.
Second we have the right capital structure in place with a targeted leverage ratio of two five to three times.
We ended the third quarter at two seven times down from three four at the end of 2021, demonstrating strong growth in the business and excellent cash generation.
While we're at the middle of our targeted net leverage range. We are balancing rating agency capital expectations, which could cut which would call for us to be towards the bottom of our range as such we will continue to prioritize delevering until we are more firmly in our targeted net leverage range and can satisfy the commitments we made when we <unk>.
The acquisition of serious we continue to expect to achieve this by the end of 2022.
And finally, while we continue to temporarily put a lower priority on our third and fourth capital allocation objectives of M&A and share repurchases. We are firmly on the path to getting back to these priorities.
Moving to the outlook for 2022 on slide 24.
While we are cognizant of potential market variables as we look forward, we remain confident in our ability to execute.
If it to growth opportunities and outperformed the broader market.
We continue to expect the fourth quarter will reflect a greater mix of netted down revenues.
Recall that the accounting treatment for netted down revenues has a dampening effect on our absolute net sales dollars, but is neutral to gross profit dollars and thus results in higher gross margins all else equal.
With this in mind, we continue to expect U S market growth of 4% and now expected to be at the upper end of our 325 to 425 basis point range of CDW market outperformance in constant currency on a combined basis.
Recall, we previously shared we would expect to be at the higher end of our premium range as supply improves.
Conversely, if we experience elevated levels of supply constraints, our mix more into netted down revenue streams, we would expect to be at the mid to lower end of our premium range on.
On a combined basis Cdw's net sales would have been $22 $8 billion in 2021, including two $1 7 billion from serious.
On a reported basis, our full year net sales outlook equates to approximately 18, 5% growth in constant currency.
The change in currency exchange rates from our initial original outlook is now expected to be a headwind of $110 million to net sales in the fourth quarter and $260 million for the full year.
This assumes an X.
And exchange rate of $1 13 to the British pound and <unk> 73 for the Canadian dollar in the fourth quarter.
Moving down the P&L, we continue to expect full year non-GAAP operating income margin to be in the low 8% range. This implies the fourth quarter will be the fourth consecutive quarter of 20% or higher operating profit growth.
We now expect full year non-GAAP earnings per diluted share growth to be roughly 16% in constant currency on a combined basis. This equates to approximately 23, 5% full year growth in constant currency on a reported basis.
I'd remind you that 2021 would have been $8 49 per share on a full year combined basis compared to a reported $7 97 per share which included only one month of serious.
The changing currency exchange rates from our original outlook is now expected to be a headwind to.
EPS of <unk> in the fourth quarter and eight for the full year.
Please remember we hold ourselves accountable for delivering our financial outlook on a full year constant currency basis.
Additional modeling thoughts for annual depreciation amortization interest expense and the non-GAAP effective tax rate can be found on slide 25.
Moving the modeling thoughts for the fourth quarter related to average daily sales, we expect a zero to low single digit sequential decline from Q3 to Q4. This equates to $9 75 to 10, 75% year over year reported net sales growth rate for the fourth quarter.
We anticipate continued strong gross profit margin and <unk> margin in the fourth quarter at or above year to date average levels for both reflecting some moderation from what we experienced in Q3.
And we expect fourth quarter non-GAAP earnings per diluted share to grow in the range of $18, a quarter and 19.25% year over year on a reported basis.
Finally, we now expect full year free cash flow to be approximately 5% of net sales.
Feeding the top end of our long term free cash flow rule of thumb of three and three quarters to 4.25% of net sales as you know timing has a meaningful impact on free cash flow and it may ebb and flow by quarter and across years. If you recall 2021 free cash flow was two 3% of net sales.
In aggregate, we expect our 2021 and 2022 free cash flow to balance out and be within our free cash flow rule of thumb over the two years.
That concludes the financial summary, as always we will provide updated review views on Mac on the macro environment and our business on future earnings calls and with that I'll ask the operator to open it up for questions. We would ask each of you to limit your questions to one with a brief follow up thank you.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad will pressure start to to withdraw your question.
First question is from Shannon Cross of Credit Suisse. Please go ahead.
Thank you very much I guess I was wondering if you could talk a bit more about the EBIT.
And.
Very strong this quarter, obviously in gross margin was strong and I'm wondering how we should think about the progression as netted down revenue becomes a larger percentage of.
The total I realized obviously some of it was probably from lower client contribution but.
It seems as if the.
The model toward maybe a bit higher than EBIT.
It gets guidance over time.
Might be in place. Thank you.
Yes. Good morning, Shannon This is al so hot.
Happy to happy to address that so as I mentioned, the <unk> margin and <unk>.
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 to the benefit an accretive effect from serious.
We've seen all year number two the effect of netted down revenues in rate largely driven by focus on security cloud software as a service we would view that component is pretty structural.
Next I would say contributions from services again, we've made a lot of countries a lot of investments in that space. So we view that as largely structural and then last 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.
With mix and rate on the product side and that would be the one variable that we would see potentially could moderate and so obviously in there.
This supply environment, we've seen our customers.
We are 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.
Okay. Thank you and then if you can just talk a bit more about client I know you provided some some comments during the remarks, but if you could talk maybe.
What what Youre hearing from your customers in terms of what they're thinking about about PC purchases. We look forward is there any indication that some of the chromebooks that perhaps were placed in 2020 will need to be refreshed or are there any education dollars that are available for that just any more color you can get that would be great. Thank you.
Shannon Hi, 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 you know our end markets are not synchronized so looking at the client device growth across <unk>.
<unk> 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.
They saw was upgrade experience not right now our 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.
Are you going to start picking up their client devices soon but we are continuing to see the criticality of client devices.
And so at the end of the day, we'll continue to profitably outperformed 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 already see.
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, 1920, and we will see those refreshes start to kick in.
The other thing to think about the services that CDW wraps around Pcs, which are very attractive to our customers.
There are massive.
<unk> opportunities available to us addressable market opportunities when we think about cross selling to our serious customers and also international and then the thing I. Finally say is that CDW has got the absolute best PC muscle and it 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.
Confident Pcs are critical to the future moderated a bit but still fundamentally part of the of.
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 called security things like that and priority and Pcs are.
A little lower on the priority list.
Great. Thank you very much.
Okay.
Our next question comes from Amit <unk> from Evercore ISI. Please go ahead.
Thanks, a lot for taking my question.
I guess the first one you obviously, a very sizable up slightly gross profit dollars. Despite the revenue the keeping in line with consensus.
Maybe just talk about how much of that is a structural shifts towards more netted down revenues.
Perhaps mix a little bit more favorable.
When people talk about the netted down revenue Bob.
I'm curious at some point does it suddenly become scarce we talk about your.
The ability to grow gross profit dollars at a premium to IP spend where he was talking about revenues going out of green guidance Spence.
Yes, good morning, Amit this is al.
Similar to my response to Shannon there.
Really if you ticked down the list again, the kind of the priority order of what contributed to gross margin serious for sure netted down revenue contributions from services and then on the on the product side and I would say that.
That's both the netted down and the contributions from services would be deemed a bit more structural certainly from a product margin perspective, there is a structural component, but youre going to vary depending on.
Mix in any given period and so that's what we've been seeing to your question on guiding on gross profit that's certainly something on it that we talk about just remember the beauty of our deep and broad portfolio means at any given time youre going to have puts and takes in terms of where thing.
Show up and what our customers need and so what we we discuss really there is there going to be periods, where there is stronger hardware contribution and refreshes and those types of things and Thats where.
Certainly focusing on the net sales is important as well that as time goes by and particularly as we see some of the supply conditions changed certainly we'll talk more about kind of the contribution of gross profit and how we think about that from an outlook perspective.
Got it.
Can I just follow up really.
Notable deviation I think in the group, we see out of the SMB bucket versus corporate.
You're talking to kind of what's driving this trend with net my commentary and so on but maybe just talk about why are we seeing such a big diversion and then.
She's want a more leading indicator or not or is that that's not the way to think about it just any help that deviation would be helpful. Thank you.
Hey, Amit, it's Chris on <unk>.
Mall business, it's been interesting I would just I would just start with the execution from the team. It's a cautious environment for sure but the team is really helping customers navigate what's become ubiquitous impacts of technology across literally every aspect of their business.
And in the small business arena like all of our customers right now Theres a focus on mission critical priorities and that tends to be software cloud and security led and so CDW with that.
The capabilities, we've built within that segment Youll recall, we separated it out about four or five years ago, we bring the full stack full lifecycle support for customers and we've been able to over the past several quarters really nimbly shift.
Towards the solutions that maximize their prior investments.
And add services to the mix there. So look we continue to see momentum behind the strategic execution in small business and we're really confident in our ability to leverage our broad solutions portfolio and pivot where the customers need us in that right now is infrastructure solution in modernizing and optimizing and securing their their networks.
What I would say also is this notion that technology has become more critical to.
Business strategy is the same in small businesses its really no different there so thematic Lee.
Customers are very much prioritizing their technology investments and while theres pressure on budgets for sure and customers are being prudent technology is getting a priority.
So the pulse of our customers is pretty strong right now and we're just staying very close to them and what's top of mind.
Really helpful. Thank you very much.
Yeah.
Our next question comes from Erik Woodring at Morgan Stanley . Please go ahead.
Hey, good morning, guys. Congrats on the quarter. Thank you for taking my question. So maybe I'll have one for each of you. So so Chris maybe if I just start with you maybe can you help us understand.
What has been the biggest change to either kind of your end market outlook or your customer discussions since we all were on your <unk> call and mind, you 90 days ago anything that is notable that you'd call out in terms of changes either positive or negative and then I have a follow up thanks.
Yes, sure Eric Here's what I'd say between the two calls and it's the words I just used before where there is certainly I would say incrementally more pressure on budgets generally for our customers look the persistent uncertainty out there and when that happens. There's just pressure that said customers are being prudent and what we are.
Being consistently is notwithstanding that added scrutiny.
<unk> technology is being prioritized because it's reframe from a cost center to an asset of innovation and enabler of cost efficiency and agility.
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.
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 has never been more resonant with our customers and they can look to us to help them make the best decision.
<unk>.
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.
Perfect. That's really helpful. Thank you and then maybe a follow up for you historically you do see a sequential expansion of gross margins in the December quarter.
You made some comments about margin rates moderating from <unk>. So maybe if you could just help us understand again some of the moving pieces as we think about <unk> margins, whether that's on the growth gross <unk> operating side. Just just so we could think about what that might mean for seasonality versus what normal seasonality has historically looked.
And thats it from me thanks.
Yeah sure. Thanks, Eric 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 <unk>.
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 a 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 19th on gross margin and.
Low eights on enjoy margin maybe slightly better.
Super Thanks, so much guys and congrats again.
Our next question comes from Keith.
Coast Research. Please go ahead.
Good morning, guys question.
For you guys on price increases that we've seen over the past year I mean for you guys.
Seeing a moderation of those price increases from the vendors and your ability to kind of forgotten and how has your customers' buying decisions changed against most recently as a result of those based on the current environment.
Hi, Keith its Chris.
I would say on the price increases is first of all they're ubiquitous across the industry. We haven't seen them abate really we have been able to pass them along.
And right now given the continued supply constraints and the.
And the prioritization of technology.
We're not expecting to see those abate anytime soon because customers are customers.
Customers are okay, taking those on.
Might start to see that sometime in 2023, but for right now they're holding strong.
Great.
So that will contribute to your top line growth this quarter.
Jessica Yes, it's Keith I'll take that so.
It varies by channel.
And obviously varies by product certainly there are pockets, where we've had very solid unit growth and then in some cases, where net sales is more bolstered by.
Asps, so thats going to vary by channel and by product.
But back to Chris's points, I would say for the quarter and what we see now asps continue to be to be firm, but we're certainly cognizant as supply changes.
Some customer behaviors change.
You could maybe see a bit of that easing of that and that's why we're just being a little bit prudent on the product margin side.
Great. Thank you.
Our next question is from <unk> <unk> from Bank of America Merrill Lynch. Please go ahead.
Thank you for taking my questions I have one question on revenue growth and one on margins.
We can't hear you.
Hi can you hear me.
Not quite high can you hi can you hear me.
Yes, perfect. Thank you.
Okay, great sorry about that I had one question on revenue growth and one on margin expansion. So maybe I'll ask the first one on revenue growth to you Chris.
At a high level when we look at the commentary in the prepared remarks. It seems to indicate that there is ongoing strong end market demand and yet you are seeing some deceleration in year on year growth.
First half versus second half so the second half is growing mid teens year on year based on your full year guidance versus the low 20% year on year growth in the first half that's still strong growth, but it is a diesel. So so my question is are you seeing any end market demand deceleration.
And any end markets or is it all just a matter of.
Netted down items and the change in mix.
Yeah, I would tell you that.
It is more mix than demand generated really as we had expected. We have met we have mixed more heavily into netted down items, so 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 is 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.
Okay. Okay. Thanks for that.
Maybe I'll ask the margin question to al So the full year guidance for low 8%.
<unk> margin and Thats really good margin performance compared to your peers, but my question would be can you.
Talk to us about factors that can drive margin expansion beyond that and if the U S.
Go into a more protracted recession can you still expand margins. So so what do you need to have.
Either from a revenue growth standpoint, or a mixed and plain.
Do you think that even in a slower demand environment or in a recessionary environment or their factor are there levers that you could have to expand margins beyond this.
Sure <unk> 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. You remember cloud security software as a service as structural and my comments there are more kind of over time, but also certainly semantically important.
This environment and if you think about what we're talking about there right you've got a lot of customers that are focused on how do I drive productivity, how do we get to the cloud how do we reduce my cost so thematic like 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 are really really important and then just look to the beyond the gross margin down to the <unk> 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 the manage the margin.
File over time, so hopefully that's helpful.
Okay. Thanks for all the details appreciate it.
Our next question is from summit catastrophe from J P. Morgan Chase. Please go ahead.
Hi, good morning, Thanks for taking my questions I guess, the close one we've seen a few others.
Pray suppliers.
<unk> already and I think in relation to sort of pulled.
Pulled back or beautiful sort of pressure on customer budgets.
That's not a surprising to hear at this point, but.
They're also going to get a little bit more pressure when it comes to the international markets, particularly EMEA.
I was just wondering Chris I mean is that a difference youre seeing in terms of engagement with customers in the U S versus in the international markets is that a bit more.
Back or pull back in terms of thinking about budgets for next year in the international markets, maybe your insights on that front and I have a follow up thank you.
Yes, sure what I would say on that one is I focus in on the U K, it's a pretty complex environment. There right now for all the reasons we know.
And I'd say a couple of things first of all our position in the market is very similar to CDW U S. We've got the most broad based portfolio of solutions and services capabilities, we have customers focusing on the same types of things digital transformation security cloud.
Collaboration et cetera, and also the criticality of technology is obviously central to companies and organizations over in the UK.
That said it is a tougher environment and so I would just say that I attribute our ability to perform as well as we have been and in particular this quarter, which was exceptional performance.
To the execution of the team and their ability to stay close to their customers know what their customers need access supply and provide the professional services at the front end for advice and counseling to ensure the highest return on technology investment and that trusted adviser role you can never.
<unk> estimate the impact that has on our results in a market that is really in its very dynamic I would say so we expect them to continue to perform well despite the external factors.
Okay, Okay got it.
Follow up if I could.
On the growth rate you're seeing.
Because you're producing at Cvs and I know you mentioned some challenges around hiring talent to customers, but what sort of.
Constraints that you might be having at the same time on Sirius them that you had a basically sort of a scheme that business, whether you're trying to think about sort of how accretive. It is to your outperformance to underlying industry growth, particularly as we start thinking about next year. Thank you.
Yeah.
Yes sure on the talent side I would say look everybody is feeling tightness in the labor markets, but our position is the best place to work has been.
Been pretty solid for a very long time, and we have not seen.
Linked to fill or quality diminish at all we've been very pleased with our ability to bring in talent.
Part of that I believe is because it's a great place to work, but equally the the development of our technical talent in particular is top of the list. So if you then look this year the number of certifications.
Dramatically, particularly around cloud services for example, and security services. So CDW is a place to be if you're a technologist and that bodes well in the market.
And as a result, obviously, we've been able to.
It reflects its reflected in the performance as a result, we've been able to help our customers with talent orchestration, where they have talent scarcity and we've been able to staff professional services engagements at a very fast pace. So we're look it's tough it's a tough market, but we arent inhibited by it right.
Now which is great.
Okay. Thank you thanks for taking my questions.
Our next question comes from Mark cash at Raymond James. Please go ahead.
Alright. Thanks for the question this is mark on for Adam.
It sounds like cloud and SaaS are doing very well for you and upbeat about <unk> right now.
Zooming out I think there's concerns around the hyperscale are slowing down are you starting to see any of that impacted the pipeline or maybe it's a broad customer base and strong digital transformation and security demand helped give you're insulated from that somewhat.
No.
It could be a short answer no. We arent seeing that slowdown actually were seeing cloud continued to accelerate and I don't need to tick through all the reasons for you why 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 Theres, just a lot of opportunity to support customers in this journey, but we certainly are not seeing it start to slowdown.
Okay perfect.
Follow up I appreciate it.
On the backlog you guys provided.
I was wondering if you can update on what youre seeing around potential risk of double ordering any cancellations and a slowdown for that backlog.
Yes, sure sure Mark.
We continue to not see.
Any evidence of.
Double ordering or canceling so I would say that.
And just the clarity and the commitment of our customers to.
The products. They originally one and what we're delivering has been.
Pretty solid pretty seamless so no concerns there.
Okay.
Our next question comes from Jim Suva Citigroup, Tim. Please go ahead.
Great and thank you so much for all the details thus far I had a question about higher labor rates.
Both on your cost of goods sold buying as well as your kind of Opex line.
Clients and customers kind of theater 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 wage.
<unk> and just cost of living adjustments and things like that thank you so much.
Hi, Jim Yeah. Good question about labor, because it's a pretty dynamic and fluid market.
With regard to our own folks remember that we are a highly variable compensation.
Organization with a significant amount of compensation geared to performance.
So that that is a positive thing and it doesn't really excuse me put as much pressure on kind of raising costs at the baseline level because there is opportunity on the upside with performance with regard to fees for professional services. For example, we do bring those up like the rest of the.
The industry in line with inflation and that lags a little bit right. When you bring it up because you have contracts in place, but so far customers again, when it's a critical point is a critical critical projects customers do not balk at the expertise they need it's just you've got your go to trusted advisors.
You are willing to pay for that because you know look there's pressure and theres a lot at stake and getting the technology right.
Terms of our raises going into next year performance raises where we're in the middle of evaluating that and.
We'll know what we're doing when we get to next year.
Great. Thank you so much and congratulations.
Thanks, Jim.
Yeah.
We have no further questions on the coal side I'll go hand back to Chris Leahy to conclude.
Okay, well. Thank you Seth let me, let me close by recognizing the incredible dedication and hard work of our nearly 15000 coworkers around the globe their ongoing commitment to serving our customers is what makes US successful. 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 with you next quarter.
Yeah.
This concludes today's conference call. Thank you all for dialing in you may now disconnect your lines.
Yes.
Yes.
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Okay.