Q1 2023 CDW Corp Earnings Call

Speaker 1: I.

Speaker 2: Please go ahead. Thank you, Alex. Good morning, everyone. Joining me today to review our first quarter 2023 results are Chris Leihy, our Chair and Chief Executive Officer, and Al Morales, our Chief Financial Officer. Our first quarter and earnings release was distributed this morning as available on our website, investor.cdw.com, along with the supplemental slides that you can use to fall along during the call. I'd like to remind you that certain comments made in this presentation are considered forward-looking statements under the private securities litigation reform act of 1995.

Speaker 2: CDW assumes no obligation to update the information presented during this webcast. Our presentation also includes certain non-GAAP financial measures, including non-GAAP operating income, non-GAAP operating income margin, non-GAAP net income, and non-GAAP earnings per share. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You'll find reconciliation charts in the slides for today's webcast and in our earnings release in form 8K. Please note all references to growth rates or dollar amounts.

Speaker 2: Changes in our remarks today are versus the comparable period in 2022 unless otherwise indicated. Replay of this webcast will be posted to our website later today. I also want to remind you that this conference calls the property of CDW and may not be recorded or rebroadcast without specific written permission from the company.

Speaker 2: With that, let me turn the call over to Chris.

Speaker 3: 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.

Speaker 3: Market conditions were turbulent with a marked down shift in demand as that quarter progressed, translating into lower business volume. For the first quarter net sales were $5.1 billion, $16% lower than last year. Non-GAP operating income was $434 million down 6%.

Speaker 3: 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.

Speaker 3: So let's take a look at what happened in the puts and takes of the quarter. First, what happened?

Speaker 3: In short, demand was weaker than anticipated in our commercial business.

Speaker 3: When we exited 2022, our forecasts 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 consequence of events intensified already heightened economic concerns and recession fears.

Speaker 3: This led to a fairly rapid shift in customer behavior most notably in our large commercial customers.

Speaker 3: projects that drove cost reduction, productivity, and financial returns were prioritized.

Speaker 3: Project justification and budget scrutiny ruled the day and although deals were not canceled, sales cycles elongated, written sales slowed and deal sizes compressed.

Speaker 3: While all of this translated into lower sales, the value of the solutions we provided customers continued to grow. You see the impact of this in our gross margin momentum.

Speaker 3: margins were consistent with last quarter with meaningful year over year expansion in each of our customer end market.

Speaker 3: But unlike the fourth quarter, a strong margins did not fully offset the magnitude of our net sales decline.

Speaker 3: Let's take a look at the puts and takes of the quarter by customer and market. Recall we have five sales channels. Corporate small business, healthcare, government, and education, each a meaningful business on its own with 2022 annual sales ranging from $1.9 billion to over $10 billion.

Speaker 3: Within each channel, the teams are further segmented to focus on customer end markets, including geography and verticals.

Speaker 3: Teams are similarly segmented in our UK and Canadian operations, which together delivered $2.9 billion US dollars in 2022 sales. These unique customer and markets often act in a counter-cyclical way given the different macroeconomic and external factors that impact each, as was the case this quarter. The shift in large commercial customer behavior had an outside impact on corporate results with sales down 17% year-over-year. The clients were particularly steep in client devices, servers, and storage.

Speaker 3: Three meaningful hardware categories that require capital outlays, outlays under pressure and out of favor.

Speaker 3: The corporate team's success helping customers achieve ongoing network and application modernization led to excellent net performance up double digits.

Speaker 3: Momentum continued around projects focusing on increasing productivity and enhancing customer and coworker experiences, which drove strong growth in cloud and software spend.

Speaker 3: with customers increasingly using technology to address complex industry challenges. Patient care and patient experience continue to be mission critical, driving ongoing investment in collaboration solutions. However, similar to our commercial markets greater focus on shorter term ROI and type budgets resulted in elongated client devices replacement cycles and overall sales were flat. Government activities levels were strong. The credibility and track record of the combined and now fully integrated teams of legacy CCCW and Sirius opened doors and led to more seats at the table.

Speaker 3: Since the first quarter is a seasonally light quarter for both federal and state and local spending, our progress is a bit harder to see. Federal's low teens growth was offset by a mid-single-digit decline in state and local, and sales were flat to last year.

Speaker 3: Federal growth was balanced across solutions and transactions categories. The team's ability to help civilian agencies achieve their priorities around data management drove strong server and storage performance and contributed to high single-digit growth in solution.

Speaker 3: Services increased high teens and clouds spend remained strong.

Speaker 3: Underscoring the value of our diverse end-market federal posted year-over-year transactions growth, which was driven by client, video, and audio and collaboration.

Speaker 3: State and locals, low single-digit growth and solutions reflected the team's success helping customers address talent gaps through enhanced training, as well as professional services engagement.

Speaker 3: Double-digit cloud spend was driven by both software and security upgrades.

Speaker 3: Consistent with the fourth quarter, customers made do with their current client devices, and client device declines continued.

Speaker 3: For education, solid higher ed growth was more than offset by the year over year declines in K-12, and overall sales declined 27%.

Speaker 3: K-12 posted another quarter of excellent solutions performance. Solutions mid-teens increase was driven by networking and data center efforts with substantial double-digit increases in storage, servers, and netcom. Our ability to wrap services around applications and physical security drove excellent services performance. The K-12 team's solutions performance was more than offset by a meaningful year over year decline in client devices and overall sales declined. Similar to last year, customers placed a lower priority on client devices as schools reached student to device ratios near or at parity.

Speaker 3: and continue to digest end-point investments made over the past several years. Instead, schools were focused on networking and data center needs, as well as planning for the next horizon of multi-year funding opportunities. Opportunities which, given the expertise that we have in this area, will generate even more ways to serve this important customer channel.

Speaker 3: Our UK and Canadian operations, which we report as other, continue to execute very well in the quarter, delivering consistent profit performance as customers prioritize strategic investments and solutions.

Speaker 3: UK decreased by mid-single digits in local currency, while Canada decreased by high-single digits in local currency. Similar to the U.S. strong-grossed margins reflected higher value-mex. Now let's take a look at how the end-market performance translated into portfolio performance. The economic uncertainty that led to the downshift in our commercial business impacted performance across all three of our portfolio categories, hardware, software, and services. As a full-stack, full-life cycle provider, the deferral of major hardware projects results in lower attach of services and other solutions.

Speaker 3: All the components of the deliverables are delayed pending implementation of the project. Delays and pushbacks and hardware may dampen warranty and security opportunities, and focus on in-year ROI often drives compressed deal sizes as many customers elected to favor short-term deals versus multi-year agreements. First-quarter portfolio results were adversely impacted by all these cascading factors.?? alguna rioter

Speaker 3: US hardware decreased by 21%, a further step down from the fourth quarter.

Speaker 3: Large commercial customer client device declines had the greatest category impact as corporations work through the impact of slower hiring and layoffs.

Speaker 3: The strong performance was largely driven by improvements in supply, but also reflected better demand than we expected. U.S. services decreased 2%. Growth was impacted by weakness in services tied to hardware, particularly in warranties. Momentum in managed services growth was solid. And professional services continued to grow, though was impacted by the delayed timing of full-stack IT integrations.

Speaker 3: Strong performance was largely driven by improvements in supply but also reflected better demand than we expected. U.S. services decreased 2%. Growth was impacted by weakness in services tied to hardware, particularly in warranties. Momentum and managed services growth was solid. Professional services continued to grow, though was impacted by the delayed timing of full-stack IT integrations. U.S. software growth remained strong.

Speaker 3: Double-digit increases in network management software and storage SAM were partially offset by declines in software categories tied to full-stack projects and employment levels.

Speaker 3: Security remained a key focus area for customers, but results were impacted by the shift in large commercial customers buying behavior and US security sales declined slightly year over year.

Speaker 3: Significant growth in identity management, privileged access management, intrusion detection, and risk in governments was offset by declines in firewall, our largest category, which is also tied to either refresh of physical assets or expansion of customers' footprints. Overall, security demand remained very strong in small business.

Speaker 3: Once again, cloud with a meaningful contributor to performance with double-digit increases in customer spend and gross profit led by security, platform, and productivity.

Speaker 3: Within this period of economic uncertainty and heightened customer caution, our trust and engagement customers and partners was never stronger. Trust and engagement that when coupled with our capabilities and deep expertise served us well today, and trust and engagement that will serve us well when the temporal shift and demand recovers.

Speaker 3: Although volumes are down, our ability to help our customers drive outcomes across the five components of our ICare framework, especially cost management right now, continues to drive our customer value.

Speaker 3: Our ability to drive outcomes and dress customer priorities across the entire IT continuum enables us to pivot where our customers need us most.

Speaker 3: any ability that reflects the impact of strategic investments we have made to enhance our high relevance and high growth solutions and services.

Speaker 3: Investments that are exceeding our expectations in both capabilities and performance. Investments like our acquisition of Sirius have maximized our differentiation in the market, provided more and better seats at the table, increased customer stickiness, and contributed to our evolution as a one-stop trusted partner.

Speaker 3: A partner with the capabilities and expertise that can help customers achieve the outcomes they need from the technology and solutions they can trust.

Speaker 3: The strategic actions we've taken have not only strengthened our value proposition, they have also fortified our profitability, contributing to our operating profit margin expansion of more than 100 basis points since 2020.

Speaker 3: It's our strategy, when combined with our flexible business model, execution rigor and financial discipline that enables our ability to profitably outgrow the US IT market.

Speaker 3: And that leads us to our view for the balance of 2023.

Speaker 3: The initial 2023 US IT market forecast we shared with you on our February call was for flattish growth. Given our belief that first quarter business conditions will persist through at least the second quarter, we now look for the US IT market to contract at high single digit rates for the full year.

Speaker 3: We continue to target outperformance of the US IT market by 200 to 300 basis points.

Speaker 3: This outlook assumes that we will see a moderate pick up an activity in the back half of the year and anticipates that ongoing economic uncertainty will continue to impact customer behavior.

Speaker 3: Wildcards include deeper recessionary conditions, heightened credit tightness, and debt ceiling-driven liquidity events.

Speaker 3: As we always do, we will provide an updated perspective on business conditions and refine our review of the market as we move through the year.

Speaker 3: We are operating in choppy waters right now. We have this strategy, capabilities, and discipline to continue to profitably outgrow the market. And while we have a durable process to manage and align costs to opportunity, given our expectation for market demand, we have amplified our expense discipline to preserve profitability. A hallmark of CDW is to serve our customers whenever and wherever their needs may be.

Speaker 3: The outcomes technology delivers haven't diminished and our customers know that we will be there for them regardless of market conditions.

Speaker 3: CDW is an all-weather team, always adapting and evolving to lead in the market. We have faced turbulent markets in the past and have leveraged our proven business model, unmatched competitive advantages, and deep and trusted relationships to come out stronger. We will do so again. Let me turn it over to Al now who will provide more detail on the financials.

Speaker 3: and Outlook. Out. Thank you, Chris, and good morning, everyone. I'll start my prepared remarks with detail in the first quarter. We've moved to capital allocation priorities and finished up with our 2023 Outlook. Turning to our first quarter P&O on slide seven, consolidated net sales were $5.1 billion down 14.2% on a reported basis and 15.6% on an average daily sales basis.

Speaker 3: more than expected and despite greater resiliency and while flat year over year, solutions also came in lower than anticipated.

Speaker 2: Notwithstanding the lower than expected solutions performance, the decline in transactions drove a mix shift that benefited margins. And as we've shared before, the impact of mixing into a higher relative percentage of solutions.

Speaker 4: and specifically netted down revenue as a dampening effect on total net sales pretends to bolster gross margins all else equal.

Speaker 4: Since we are not the primary obligor on these transactions, several important high-value components of our solutions portfolio, including cloud, software as a service, much of security, and partner-delivered services and warranties are recorded on an edit-down basis. And gross profit is our revenue.

Speaker 4: In the first quarter, these neted down revenues and notably SASS transactions, OutCruir overall net sales represented 32% of our gross profit compared to 31% in the fourth quarter and prior year first quarter. This continues to be an important trend in our business.

Speaker 4: So sequential net sales were down 6.1% versus the fourth quarter on a reported basis and 7.6% on average daily sales basis.

Speaker 4: Our outlook anticipated better than normal first-quarter seasonality given the unusually soft demand in the fourth quarter. Our outlook assumed public would have better than historical sequential growth, which it did.

Speaker 4: It also assumed our commercial channels, corporate and small business, would remain firm and deliver close to historical sequential growth levels. They did not. The disconnect came from a downshift in large commercial customer spend, which had an adverse impact on our results.

Speaker 4: To dimensionize the shortfall in net sales relative to our expectations, roughly two-thirds of the amount was driven by large commercial customer activity across both transactional and solutions business.

Speaker 4: On the supply side, the dollar value of our backlog did not change meaningfully relative to the fourth quarter. And while the backlog and product lead times associated with transactional products are essentially back in line with normal levels, supply chain challenges have persisted in net-com solutions and the backlog here remains elevated.

Speaker 4: We continue to anticipate this remaining backlog will feather out over time as supply conditions ease. So this has been more drawn out than anticipated.

Speaker 4: As always, we continue to judiciously manage our working capital to support our customers while ensuring strong economic returns.

Speaker 4: Our free cash flow performance, which we will discuss shortly is emblematic of this discipline.

Speaker 4: Our team delivered excellent profitability in the quarter, who was profit was $1.1 billion, a year-over-year decrease of only 1% despite a double-digit decline sales.

Speaker 4: Gross profit margin was a first quarter record of 21.3%, up 280 basis points versus the prior year period and down only 40 basis points versus the record fourth quarter.

Speaker 4: The year of year expansion and growth profit margin was driven by similar factors as in the fourth quarter.

Speaker 4: First, product margins benefitted both mix into complex, hybrid cloud solutions, and a lower mix of transactional products. When we mix back Indic transactional products, we would expect for this benefit to moderate awarded

Speaker 4: Second, as we expected for the first quarter, a greater mix in the netted down revenues.

Speaker 4: The category outpaced overall net sales growing low single digits in Q1 compared to Q1 in the prior year, primarily driven by double-digit software-as-a-service growth. And third, net sales contribution from high-margin services mix with significant contribution from a recent acquisition.

Speaker 4: Turning to SG&A on slide 8, non-GAAP SG&A totaled $655 million for the quarter. The year-over-year increase in non-GAAP SG&A was primarily due to higher fixed payroll as our coworker count increased during last year.

Speaker 4: This was partially upset by a decline in sales payroll expense reflecting the variable component of our compensation structure which is principally tied to gross profit attainment.

Speaker 4: through the year. To that end, we are focused on our efforts to innovate our operating model and drive productivity and savings.

Speaker 4: Given the demand environment, we have advanced initiatives to ensure our cost structures align to our opportunity set.

Speaker 4: This includes driving structural savings as well as pacing our overall co-worker count with the level of business demand and in the areas where it can provide the most value to our customers.

Speaker 4: Co-worker count at the end of the first quarter was approximately 15,300. Up slightly from the fourth quarter, principally due to the most recent acquisition, which added to our technical resources in professional and managed services.

Speaker 4: Strategic investments in our solutions and services capabilities remain key to our three-part strategy for growth, an important catalyst for the achievement of our profitability and margin goals.

Speaker 4: Gap operating income was $355 million down $32 million compared to the prior year. Non-Gap operating income was $434 million down $28 million versus prior year.

Speaker 4: The non-GAAP operating income margin was strong at 8.5%, up 70 basis points from the prior year, although down 110 basis points compared to the record fourth quarter.

Speaker 4: Similar to last quarter, this year of year improvement was driven by our strong gross margin.

Speaker 4: the prior year driven by higher interest rates but relatively in line with our expectation for the quarter.

Speaker 4: Our GAAP effective tax rate shown on slide 10 was 22.3%. This resulted in first quarter tax expense of $66 million. To get our non-GAAP effective tax rate, we adjust taxes consistent with non-GAAP net income add backs as shown on slide 11.

Speaker 4: average diluted shares of 137 million. Gap net income per diluted share was $1.68.

Speaker 4: Our non-GAAP net income was $279 million in the quarter, down 7.6% on a year-over-year basis. Our net income per diluted share was $2.03, down 7.9%.

Speaker 4: Moving ahead to slide 13, a period end, cash and cash equivalent for $279 million, and net debt was $5.5 billion.

During the quarter, we reduced our overall debt by almost $139 million, consistent with their plan to maintain our net leverage.

Liquidity remains strong with cash plus revolver availability of approximately $1.3 billion.

Moving to slide 14, the three-month average cash conversion cycle was 18 days, down three days from the fourth quarter, two days from the prior year first quarter, and within our targeted range of high teens to low 20s.

reflecting our continued diligent management of working capital. Our effective working capital management also drove excellent year-to-date pre-cash flow of $411 million as shown on slide 15.

For the quarter, we utilize cash consistent with our 2023 capital allocation objectives.

including returning $80 million to shareholders through dividends and $200 million in charity purchases.

In addition, there's $130 million in debt repayment. We also close the acquisition of locusts recruiting in February . That brings me to our capital allocations on slide 16.

Our execution remained consistent with our updated objectives we communicated last quarter.

First, as always, increase the dividend in line with non-GAAP net income. Last November , we increased the dividend 18% to $2.36 annually. This increase demonstrated our confidence in the earnings power and cash flow generation of the business.

Going forward, we will continue to target a 25% payout ratio, growing the dividend in line with earnings.

Second, ensure we have the right capital structure in place with a targeted net leverage ratio. We ended the first quarter 2.6 times, flat to the end of the fourth quarter, and within our new range of 2-3 times.

We continue to convert business performance into cash generation and have rigorous processes in place to maintain our flexibility and proactively manage liquidity. Finally, our third and fourth capital allocation priorities of M&A and share repurchase have remained important drivers of shareholder value.

For 2023, we'll continue to target returning 50 to 75 percent of free cash flow to investors through dividends and share repurchases.

In the first quarter, returned roughly 68%. As a reminder, the board authorized a $750 million increase to the company's share repurchase program last quarter, on top of the remaining dollars from the prior authorization.

Moving to the outlook for 2023 on slide 17.

The current overall IT market sentiment reflects the caution and prudence of customers. We expect this to continue in the near term with a modest recovery of demand conditions in the second half of the year. This informs our expectation that the IT market will contract at the upper end of high single-digit.

With this scenario as our baseline, we look for netted down revenues to continue to grow faster than our other product and solution categories.

and we maintain our long-held expectation to outgrow the market by 200 to 300 basis points.

keeping in mind that in times of hardware softness, overperformance tends to be on the lower end of this range and vice versa.

We continue to expect a neutral currency impact for the full year, with modest headwinds in the first half and modest tailwinds in the second half.

This assumes an exchange rate of $1.25 to the British pound and $0.77 for the Canadian dollar. Moving down the P&L, we expect our four-year non-gap operating income margin to be within the range of 9%.

This reflects the expectation of lower net sales and gross profit, balanced with higher gross margins and a reduction in the level of our fixed expenses. Finally, we expect our full-year non-GAAP earnings to decline low single digits year-over-year in constant currency.

Please remember we hold ourselves accountable for delivering our financial outlook on a full-year, constant currency basis. Additional modeling thoughts for annual depreciation and amortization, interest expense, and the non-GAAP effective tax rate can be found on slide 18.

Moving to modeling thoughts for the second quarter. Related to average daily sales, we expect mid-single digit sequential growth from Q1 to Q2.

That equates to a low double digit percent year-over-year reported net sales decline for the second quarter.

We anticipate continued strong margin performance in the second quarter for the gross profit margin consistent with levels in Q1 and NGUI margin higher as expense efforts improve operating leverage. And we expect second quarter non-gap earnings per diluted share to decline mid-single digits year over year.

In 2023, we expect full year free cash flow to be at the high end of our new rule of thumb range of 4 to 4.5 percent of net sales as we continue to emphasize a return on working capital.

While we are clearly operating in a cautious and uncertain environment, given our resilient business model, the rigor of our financial controls, we remain confident in our ability to deliver the profitability, margin, and cash flow our stakeholders have come to expect.

That concludes the financial summary. As always, we will provide updated views on the macro environment and our business on our future earnings calls. With that, I will 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, you can press star followed by one on your telephone keypad. If you would like to withdraw your question, you may press star followed by two.

Good morning and thanks for taking my question. Yeah, I guess maybe to start with, Chris, one of the concerns I think folks have had is, how much the issues that you saw in the March quarter are macro versus micro, really CDW specific. And I think all the reasons you already mentioned sound like it's a much more broader trend rather than CDW specific. Well, I'd love to hear, do you think there's anything company specific that may have impacted or magnified these issues?

And then any change in transit seeing for the month of April so far versus what you saw in March. Yeah, and good morning, Atlee. Well, let me just take you through and unpack it a little bit. Look, the key driver, the overwhelming driver of the performance missed 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 outsize impact on results given the relative size of our commercial business. You know if I dig a little deeper look when our customers got cautious and exhibited a lot of concern.

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 and 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 attached 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. You know, now I would say as you go through the rest of the portfolio, the back end of

well, K-12 executed well in solutions, but they certainly had, you know, continuing year-over-year pressures and didn't quite perform in the client areas as well as we thought they might. And so as a result, you know, the top line was impacted. The other thing I would just unpack for you a little bit is if you go through the...

You know, we had a little, we had some impact on services relative to warranties that were softer, but up and down, you know, and across the portfolio, we felt very good about execution. It's really, in our view, with a macro impact. And looking, you look in terms of profit, you know, contrary to Q4, record first quarter Marcheting.

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's 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 that, 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.

Ashu, can you just follow up on that last part of what you were talking about? I think historically, what I'm seeing as you come out of these pauses or recessions or whatever happens in the next six months, you tend to see an inflection of share gains going higher for CDW. So I'm wondering, I guess maybe you could touch on, what do you think the duration of this pause could look like? And do you think you're well positioned to see an acceleration in share gain?

as you come out of it, given the engagement you have with your customers? Yeah, Ahmed, 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...

and shifts that we will be very well positioned to capture more than our fair share of the uplift.

Thank you.

Perfect. Thank you. Thank you, Emmett.

Thank you. Our next question comes from Samik Chatterjee from JP Morgan. Your line is now open, please go ahead.

Thanks for taking my questions and thanks for all the colors today in your prepared remarks. I was just wondering, just starting off with the 2Q guide here for a 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 3Q 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 baked into the second half particularly.

customer buying behavior would be similar and particularly in commercial that is softer with an offset that we'd expect that regular seasonality, particularly from our public business would be in play. So the lift there largely from that seasonality from public.

with a bit of a muting from our typical seasonality given the softer conditions otherwise.

Now, with respect to your question on the second half. So the second half, similar, we would expect we'd have our normal seasonality, including our government business and public having higher seasonality in two, three. And while obviously we've got extreme conditions, we've seen the last couple quarters. We would anticipate at this point.

a pickup in activity. Now that pickup in activity, we'll say kind of balance between clients and solutions, and it's a little bit of a TBD exactly when you'd see client pickup, but there's reason to believe that we'd see some of that activity in the back half of the year.

Okay, okay. And for my follow up, just maybe if I can ask you to double click on the netcom product momentum or the port momentum in netcom 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 netcom obviously is not being...

It has been a supply challenge but not really demand challenge even for the last couple of years. So what is driving that momentum there still?

It's Chris, and I'd say a couple of things driving the Netcom momentum. One is networking momentum. One is supply chain. Obviously, we've got some release in the backlog, which has been good, but we are seeing demand. And when you think about our customers'

modernizing their infrastructure and the cloud performance that you're seeing. We do have customers who are moving to the cloud using networking to handle larger and heavier workloads. We do see customers like our K-12 I mentioned earlier, you know, they're hard at work on classroom upgrades and modernization.

When you also think about the trend towards back to the office and in the commercial space notwithstanding the fact that these large corporate customers are in cost reduction mode, they are focusing on digital transformation and experiences of their own co-workers and their employees and networking is a very important part of that.

Obviously, as you know, the data center and networking drive the connectivity out to the employees and to the customers.

So it's not surprising given the amount of client investment that's been made over the past few years, usually ingesting client devices actually requires upgrading networking. And that's what we're saying.

Thank you. Thanks for being my question. Yeah, thank you. Thank you. Our next question comes from Shannon Cross of Credit Suisse. Shannon, your line is now open. Please go ahead. Thank you very much. Good morning. I'm wondering what your customers are saying about artificial intelligence. I think you.

Thank you. Yeah, Shannon, you know, it's a great question. You're right. There's nobody who's not talking about it. And everybody is talking about it a lot. The good news for CDW is right now it's moving fast. And it's complex. And there are a lot of work to be done around how the kind of new form of AI can support customers.

So what our customers are saying is, frankly, they're saying our CEO says we really need to be all over this. And I say that because there's pressure on the system, which is always good for CDW because the conversations that we're having around AI and generative AI are right now. We're at the front of the design with our customers. And here's how we think about it. Obviously, we think about it internally for CDW, but as importantly for our customers,

use cases could be going forward. Those are things, as you know, like workflows to build innovative products or improving efficiencies in their existing cases, in their existing workflows, things that we've all been talking about. What do they need from CDW and how can we help them? A, it's identifying those use cases and building them out.

and supporting them up and down the stack. Think professional services, right? Think applications and building B2B applications. Think computing and data infrastructure. Need a whole new kind of infrastructure to support what AI is driving. And think models and tooling. So our digital velocity team.

That practice actually already orchestrates AI initiatives with many customers today, and they're having deeper conversations. I would just say look, we're at the forefront of this. There is a lot to be worked out, but it is definitely one of those trends that is, you know, the hype is real in this case. There is going to be a fast and growing market.

that AI is going to drive and it fits really nicely within our full stack solution. So we're having lots of conversations with customers. And we're doing the same inherently. Look, we're looking in all the ways that we can use the new AI to basically drive efficiency within our organization.

Great, thank you. And then I'm just, you're at the high end of cash flow for the year, we're about two years, well not quite, but a year and a half past the serious 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, you know, thinking we were, or a couple years back and valuations are high?

You know, it's really interesting because I would say valuations have not ticked down significantly, although the pipeline and the outreach has increased. So that tells you something, what the landscape might look like three to four months from now.

You know, it's really interesting because I would say valuations have not kicked down significantly, although the pipeline and the outreach has increased. So that tells you something that what the landscape might look like three to four months from now. All right, thank you.

interesting because I would say valuations have not ticked down significantly although the pipeline and the outreach has increased. So that tells you something what the landscape might look like three to four months from now. All right thank you. You're welcome.

Thank you. Our next question comes from Eric Woodring of Morgan Stanley . Eric, your line is now open. Please go ahead. Thank you so much. Good morning, guys. Chris, maybe I'll ask you a question. I appreciate all the color you provided by end market and product and clearly there's a lot of moving pieces.

I guess if we step back and think about your product exposure and think about what you reported relative to how you guided in February , can you just understand which products are kind of most responsible for the guide down or for maybe for the missing one queue and then for the guide down for the rest of 2023? Just trying to understand what is incrementally weaker.

the impact and again primarily or 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 that had an impact and we.

saw in the client space moderating either even further down as we progressed throughout the quarter. And you know 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

large commercial customers client device category was the biggest downshift in the corporate space. So client device is number one. Server storage, hardware, things that our customers are looking at and finding ways to save money. That's another source of the downshift.

And what happens when you've got hardware either being refreshed, not refreshed, delayed or paused, is you have a knock-on effect. It's like a cascading effect. So if...

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, businesses, very strong and...

primarily to the, you know, 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 happens. It's starting with the climate and a climate of cost.

that it would be helpful to maybe understand, but said differently, you know, if USIT market growth in CDW's eyes is down, high single digit year over year, how would you think about your overall customer spending to trend in 2023? I think that would be helpful just again because there is an impact of this netted on revenue.

and the impact from that. The other component is obviously you have a mixed component. If you think about the broader IT market relative to our mix, there is a translation, if you will. I think, you know, most notably in normalized years, that does not create significant distortion in a year like this where the mix has shifted significantly. That is, by forecasting, having the mixing coming online disappear. So avoid contrasting lines, aiming forantenna grappen against each other to see a most sensitive thing, dashed phenomenon or loud noise.

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 that is high single digits decline, if we think about that on a gross spend basis, obviously that would be more muted than that decline.

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 that 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?

Yep, that makes sense. Thank you very much, Jeff. Thanks, Eric. Thank you. Our next question comes from Adam Tindall of Raymond James. Adam, your line is now open. Please go ahead.

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 night might not be the last cut. Yeah, sure Adam. Happy to address that. So on the back half, first of all, let's let me just say the our expectation that Q2 would look a lot like Q1 obviously informs then the seasonality for the rest of the year, right? Because we would apply our typical seasonality. Q3 definitely reflects

I'll call it reasonably normal public seasonality. And so you have that in play. Look, the comps frankly for Q3 are much tougher than Q4. Q4 was really the first time that we felt the effect of softening and particularly in client.

So, I think two or three probably looks a little bit more normalized from a seasonality perspective and then Q4, I will call it more of the pickup there, particularly given the lower comps that we saw there with education and with clients.

Okay, got it. And maybe just as a follow-up, Chris, I'll ask a higher level one. You often talk 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 and 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 two to three hundred basis points while reducing workforce, what your sales productivity expectations look like, post that would be helpful. Thank you.

Yeah, Adam, and it's a great question, you know as well, and as you can imagine we approached a decision like that with great care and respect. And I'll tell you, look, we have been, we are operating discipline, cost discipline is something that is evergreen. We are always focused on finding...

economic uncertainty. And so you know, we went into high gear in terms of our prudence. And what we've done is really pull every lever we can pull to align our current cost structure with the demand that we're seeing. And when I say every lever, I mean, all the things you would imagine discretionary spend,

hiring, promotion, staffing, geographic locations, etc. And one of the decisions we had to make was to adjust our staffing to current demand environment. Now look, these are really hard decisions. I'm proud of the team and how they put it together and how we communicated it. And, you know,

everybody was very respectful. Now all that said, the teams are looking forward because that's what the organization needs to do. We're pivoting to the future and focus really heavily on our customers. But you're right, it was a tough decision, but the right decision for the business and for the customers ultimately.

Adam, I'll just add a couple comments to your questions on productivity and hitting on our goals, if you will. 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 quarters building up. Every week.

It's all 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 co-workers first from a revenue producing GP and going through something like this we're looking at where 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 and going through that.

And then when we think about kind of more of the support layer in the infrastructure again, we got structural initiatives, but we also expect that we're going to drive productivity, co-worker savings from that. And so there are all the things that went into this decision in these actions, and we believe we've wild different, difficult obviously to go through.

ultimately will add the greatest value for customers and obviously improve efficiency. Understood. Thank you very much.

Thank you. Our next question comes from Matt Sheren from Stevehall. Matt, your line is now open, please go ahead.

Yes, thank you and good morning. I have a question on your cloud-related revenue, which continues to be strong. There are some concerns that large customers are now digesting their cloud investments and looking to optimize those investments. Are you seeing any signs of that or do you expect continued strength?

as customers elect to move workloads off-prem instead of refreshing their own data centers?

Matt, hi, 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 FinOps services and things that we can offer to our customers.

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, you know, whether it's

Now we're moving towards private on-prem, but where that should sit. And 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, cost, et cetera. All of this requires help from CW to design the movements, to actually do the migrations, and as I said, ultimately we're seeing more and more opportunity to actually

increase in maintenance contracts and renewals as customers look to so-called sweat their assets longer. What's different this time or am I missing something?

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. What's different is we do see when folks are sweating assets. It's a great question. We

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. And that maybe just let me add just a couple comments. Number one is just recall that warranty business shows up as netted down revenues for us. The recognition is upfront. And so therefore, if we have a typical four year warranty that turns into a one year, obviously the recognition.

and the result for us obviously becomes muted. The other element I would just add here and look maybe somewhat obvious is just the, some of this focus on shorter ROI and the financial impacts therein are creating more conversations.

that will come back around with customers. That is the, there's a sweating assets, but an expectation that that business will come back around both in terms of refreshing some of the infrastructure and some of the clients, but as well as in some cases, renewals of software assurance, software and warranties that we're seeing in a little bit shorter duration here.

Thank you very much. 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.

Keith, your line is now open. Please go ahead. Thank you guys. I know we're running late, so I'll just get the one in here. You know, I know client devices have been very important for you guys, and as you look out going forward, I think it was earlier last quarter you guys were talking about perhaps a return of client devices. I'm assuming that that file process has changed a little bit, and as you think about client devices in particular.

Is there a period for which you can no longer sweat these assets? Is it a few quarters? If it goes out to a few years? Any color around that would be helpful. Thank you. Good morning, Keith. It's Chris. Good morning.

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. Yeah, I think the PC's have been under – particularly have been under pressure and the thought process was that in the second half of the year you might see some recovery.

I'm assuming one, that's not the same assumption anymore. And then two, PCs or client devices, when they are sweated, is there a period of time that you can no longer sweat them for and you really have to make the investment regardless? Yeah, okay, I got the question. It's a good question. I say, look, when it comes to PCs, the PC themselves can go four or five years. You know, I'd say four, five, five and a half years.

Now, 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 you need to do so, it can go that long. All that said, if you look back over the last four to five years, you're going to see a number of PC refresh requirements that are coming up. And I add that you have things like win 11, which is going to add more pressure to those device refreshes. So, you know, we said this before, we do expect...

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 education students already so you know our expectation is refreshes are going to be under pressure to begin later in the year into 2024 and you know and when they do will reap the benefit of that

Great, thank you. Thank you. Our next question comes from Rupalu Bhattacharya from Bank of America. Your line is now open, please go ahead.

Hi, thanks for taking my questions. Chris, in the past, in a downturn, corporate and small business typically declined first, followed later by government and other public sector channels. Revenues from government and healthcare looks like in one queue were slightly up year on year. Are you seeing any weakness in those sectors, and are you concerned at all about those end marks?

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. Healthcare is another one. It's been a pretty good balance across transactions and solutions a little tougher in the client space.

But healthcare is really doing well. Given the increases in costs and wage inflation and everything they're experiencing, they're needing more help and technology and people help as well. So we're actually seeing our value proposition with our healthcare customers accelerate in many ways. And you add our serious team into the mix here.

always is funding and we would say from a funding perspective, both government and education we're at a reasonable level there so we think that there certainly is the impetus and catalyst there for continued spending. Okay, thanks for the details there. Can I just ask Chris, why is...

high single digits here and here, the correct number for US IT market growth. I mean, why not down double digits or down even mid single digits? I mean, 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 in into your particular revenue growth of down.

I'm meeting with the digital year in 2023. Thank you. Let me just maybe rupload start on the backlog. So backlog not a meaningful contributor in our expectations. I think I mentioned my prepare remarks that NetCom continues to be a sticking point. We would expect that to feather out. It's taken longer, but we would not consider that to be a meaningful contribution. Thank you.

for the remainder of the year. So yeah, it gets through blue. I would add, look, let me just start with how we shape our view of the IT market. And, you know, it's substantially grounded in 11,000 customer-facing co-workers who are in market every day. And so they've got the pulse of what's going on in the market and what customers are doing, saying and feeling.

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 a Q2. It's going to feel about the same as Q1, right? We'll get a little bump in seasonality, but that'll be muted as 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. We'll see you in seasonality.

And we also have lower overlap. You know, 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. Okay. All right. Thank you for all the details. Appreciate it. Thank you. Thank you. At this time, we have no further questions. So I'll hand back to the CDW team for any further remarks. Thank you.

I look forward to seeing you next quarter. Thank you for joining today's call. You may now disconnect your lines.

Thank you for joining today's school. You may now disconnect your lines.