Q2 2023 CDW Corp Earnings Call

Good morning. Thank you for attending today's C. D. W. Second quarter, 20th twenty-three earnings call. My name is Megan and I'll be your moderator for today's call.

All right will be needed during the presentation portion of the call with an opportunity for questions and answers at the end.

I would not like to pass the conference over to Steve O'brien with C. D. W. Steve. Please go ahead.

Thank you Megan good morning, everyone. Joining me today to review our second quarter of 2023 results are Chris Lee or chair and Chief Executive Officer, and Albarello, Our Chief Financial Officer or second quarter earnings release was distributed this morning and is available on our web site investor Dot CDW dot com along with supplemental slides.

That you can use to follow along during the call I would 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, those statements are subject to a number of risks and uncertainties that could cause actual results to differ materially additional information.

Turning these risks and uncertainties is contained in the earnings release and form 8-K, we furnished the SEC today and and the company's other filings with the SEC.

CDW assumes no obligation to update the information presented during this webcast. Our presentation also include 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 gap mess.

<unk> in accordance with FCC rules, you'll find reconciliation charts and the slides for today's webcast and in our earnings release and form 8-K. Please note all references to growth rates are dollar Mo changes in our remarks today are versus the comparable period in 2022, unless otherwise indicated replay of this webcast will.

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 with that let me turn the call over to Chris. Thank.

Good morning, everyone.

I'll begin today's call as usual with a brief overview of our performance strategic progress in our views on the second half of the year and we will provide additional detail on our results are capital allocation priorities and our outlook will move quickly who are prepared remarks to ensure we have plenty of time for questions.

Our team executed extremely well in a market facing persistent challenges.

As expected commercial top line remained under pressure in public return to Morris needs normal seasonality for.

For the quarter the team delivered net sales of $5.6 billion down 9% in U S dollars down 8% in constant currency.

non-GAAP operating income of 530 million was up 3% and non-GAAP earnings per share of $2.56 was up 3%.

These results demonstrate the power of are resilient business model, when coupled with our garage and D portfolio of technology technology solutions.

And an ongoing period of economic uncertainty, our ability to drive outcomes and address customer priorities across the entire continuum enabled the team to where our customers need us most.

An ability that reflects the impact of strategic investments, we have made to enhance our high relevance in high growth solutions and services.

While transactional business remained under pressure increases and solutions contributed to meaningful margin expansion.

Margin expansion that together with ongoing expense discipline delivered strong profitability.

Let's take a look at this quarter's key performance drivers first are balanced portfolio of and market <unk>.

Each of our five sales channels corporate small business health care government and education is a meaningful business on its own with 2022 annual sales ranging from 1.9 billion to over $10 billion <unk>.

Within each channel teams are further segmented to focus on customer and market, including geography verticals and customer size.

Teams are similarly segmented in our UK in the Canadian operations, which together delivered 2.9 billion U S dollars and 2022 sale.

These unique customer and market often act counter cyclical given.

Given the different macroeconomic and external factors that impact each our second quarter results provided an excellent example of this.

Economic uncertainty continued to lay on the commercial market and both our corporate and small business results reflected ongoing cautious customer behavior.

Caution that once again drove elongated sales cycle smaller deals sizes and greater focus on mission critical projects.

Caution that also drove customer focus on short term all wrong with both corporate and small business posting double digit increases in cloud spend.

For corporate overall sales declined 16% mission critical projects continue to move forward and slowly picked up throughout the quarter <unk>.

Large commercial customer spending sequentially improved.

Continued postponement of upgrades and utilization of existing product resulted in a double digit decline in client devices.

Well, we remain cautious on the outlook for client devices.

Delivered its first sequential volume increase in the past four quarters, providing some indication of demand stability.

Notably client device Asp's held buoyed by mixed into higher value higher functionality units.

Momentum momentum around projects focused on increase productivity and enhance customer and co-worker experiences.

And that drove excellent growth and cloud spend implementation of network modernization projects delivered double digit and that kind of growth.

Small business declined 21%, reflecting the impact of ongoing caution by economically sensitive customers.

Client devices continued to decline with upgrades on hold pending greater clarity around the economy and employment.

Focus on mission critical priorities around security and efficiency drove double digit customer spend increases in both cloud and software.

Public performance, partially mitigated commercial market pressure and with seasonally higher than the first quarter.

Sales increased 2% year over year with strong performance in government another quarter of stable performance in healthcare and an upturn in education.

Government increased 12% and continued to benefit from strategic efforts to target complex services enabled hybrid infrastructure and cloud opportunities fed.

Federal delivered double digit growth in the quarter, largely driven by the team's ability to help agencies implement more efficient solutions to manage and protect data.

This delivered excellent and that common storage performance legacy serious relationships contributed to significant growth in services.

The state and local team also delivered double digit growth excellent services performance reflected the team's success, helping state and local municipalities address talent gas through enhanced training as well as professional services engagement.

Cloud adoption drove strong software and security performance.

Healthcare performance was relatively flat talent needs and data center projects remained focus across.

Mmm remained focus areas as customers increasingly leverage technology to address complex industry challenges <unk>.

Customer hesitancy around cloud continued to dissipate at adoption increased meaningfully in the border clay.

Client devices remained under pressure given ongoing customer focus on mission critical projects that deliver short term return on investment.

And education, a double digit increase in higher Ed was offset by significantly improved but still lower year over year performance in K 12, and overall sales decreased 1%.

Higher education institutions ongoing emphasis on student enrollment drove investments and enhanced security as well as campus connectivity and dorm room experiences.

The team's ability to deliver these solutions drove double digit growth across cloud netcom storage software insecurity client devices were flat as a volume decline was offset by mixed into higher value unit, which drove strong aspie performance.

For K 12, the team continued their success executing on infrastructure opportunities and delivered excellent growth and services net common storage.

This quarter. The team also delivered a sequential improvement and client devices.

As you know the summer season represents the height of K 12 buying with our June 30 quarter, and we occasionally see anticipated summer sales hit the end of the second quarter. We experienced this in the quarter with anticipated back half refresh driving a significant sequential improvement.

Refresh driven by aging devices and higher than historical breakage rates given more students take their devices off campus.

Other are combined UK in Canada business declined 7% similar to the U S. Each team continued to execute well and sustained profitability improvements under challenging conditions.

UK posted a low single digit decline in local currency, while Canada declined by low double digits.

We're seeing growing customer caution in both the UK and Canada similar to what we heard from U S commercial customers a quarter ago.

As you can see the diversity of and market growth. This quarter demonstrates the benefit of the first driver of our performance are balanced portfolio of customer and markets.

Category performance demonstrates the benefit of our second performance driver are broad and deep portfolio of products and solutions, which enables the team to pivot and support customers wherever needed.

Ongoing economic uncertainty in the commercial space continued to have an outsized impact on both transactions and solution. While the rate of decline moderated transactions were down double digits solutions performance improved with mid single digit growth versus flat performance in the first quarter.

Similar to the first quarter, all three of our portfolio categories hardware software and services were impacted by commercial pressure with deferral of major hardware projects, resulting in lower volumes and services and solutions.

Hardware decreased 11% year on year client device performance in the commercial space significantly impacted hardware performance and corporate continued to have the greatest category impact.

Netcom had an exceptional quarter posting meaningful increases across all customer and Marcus This strong performance was largely driven by improvements in supply and continued work on customers network modernization projects.

Services were relatively flat year on year growth varied widely with strength tied to channels specific customer priorities offset by services attached to transactional and solutions hardware profess.

Professional services were solid and while managed services activity with solid given extended sales cycles and radical revenue streams the impact on net sales was minimal.

Software customer spent increased by mid single digits, driven by mixed into software as a service double digit increases in network management software and database software were offset by continued declines in software categories tied to fullstack projects and employment levels and net sales decreased at a mid single digit rate.

Security remains a key focus area for customers with spend up single digits Top group categories included and point Security E Mail security identity management, and physical security security associated with growth and business expansion remained challenge.

Once again cloud with an important driver performance across the business contributing meaningfully gross profit.

Productivity infrastructure as a service and security, where the top three workloads and the quarter.

Each of our customer and markets posted a double digit increases in cloud customer spend and gross profit.

Profitable growth that was enabled by the strategic investments both organic and acquired that we've made in cloud capabilities over the past 10 years capabilities that enable us to deliver for our customers and our stakeholders.

And this leads to the final driver or performance in the quarter or three part strategy for growth, which is to first acquire new customers and capture share second enhance our solutions capabilities and third expand our services capabilities.

Each pillar is crucial to our ability to profitably advise design orchestrate and manage the integrated technology solutions, our customers want and need today and in the future.

Our investment and data analytics is a great example of this strategy and action like.

Like many of our strategic investments data analytics delivers value across all three pillars.

Our data analytics capabilities are underpinned by the intimate knowledge, we have about our customers knowledge earned through deep and long lasting relationships, which range on average over 12 years.

They are also underpinned by our broad and comprehensive product portfolio, which provides extensive historical information about buying patterns across industries and vertical.

This proprietary customer and product knowledge powers are data analytics. It helps create robust and data driven predictive models models that identify customer needs and create personalized and targeted outreach to drive tailored services products and solutions.

Solutions that help our customers accelerate their strategies and achieve their missions. We continue to invest in the breath and performance of these models utilizing machine learning and other advanced analytics techniques and have produce tangible lift in sales conversion and market relevancy.

Clearly our investments and data analytics are delivering proceeded W.

They are also delivering for our customers today, we have significant data analytics expertise across server database model construction and training expertise that delivers outcomes in our eyecare framework, particularly in the areas of innovation agility and experience X.

Experts that bolsters, our consultative professional services capabilities, including our AI consulting practice.

For CDW AI adoption feels very much like other transformative technologies of the past customers recognize the evolutionary benefits of AI, yet they face incredible complexity in choice complexity in choice that plays to our strengths and our value proposition as a trusted partner an advisor.

And just as we have in the past we have made and will continue to make the investments necessary to ensure we are ready ready to lead the market and ready to help our customers maximize the return on their AI investments.

Another excellent example of how we strategically invest for today and the future.

And that leads me to the expectations for the balance of the year, you'll recall on last quarter's conference call. We shared our expectations for the USA market to posted decline of high single digits in 2023.

It's assumed a moderate improvement in the commercial environment in the back half of the year and returned to normal seasonality and the public space.

To date, the demand environment has been consistent with our expectations and our view of the USA market remains unchanged.

Within this environment, we continued to target outperforming the USA market by 200 to 300 basis points on an organic constant currency basis.

Wildcards remain the macro environment further tightening of credit and the potential for federal government budget Struction and as we always do will provide an updated perspective on business conditions as we move through the year.

In the meantime, we will continue to do what we do best leverage our competitive advantages and execute the competition. We will also continue to judiciously invest to ensure we are there for our customers. So they can achieve their mission critical outcome today and in the future.

I Hope you can tell from my comments at this quarter's performance reinforce our confidence that we have the right strategy in place a strategy that serves as well when confronted with macro or and market specific challenges a strategy designed to ensure we remain our customers partner of choice and most importantly, a strategy that enables us to continue to deliver.

Excellent cash flows and profitably outgrow the market.

With that let me turn it over to al who will share more details on our financial performance al.

Thank you, Chris and good morning, everyone I'll start my prepared remarks detail on the second quarter moved to capital allocation priorities and and finish up with our 2000 twenty-three outlook.

Turning to our second quarter P&L on slide seven consolidated net sales were $5.6 billion down 8.5% on a reported an average daily sales basis sex.

Second quarter net sales were up 10.2% versus the first quarter on a reported an average daily sales basis ahead of our outlook, which had anticipated in mid single digits seasonal increase broadly.

Broadly speaking our expectation held but the first quarter's uncertain macro environment would persist with our commercial performance coming in as we expected or public moderately exceeded our expectations public.

Public results were driven by the strength and solutions performance across channels and the impact of some early shifting of anticipate declined device refresh volume in K 12, leading to return a two year over year growth and the strongest sequential growth for this segment since Q2 2020.

On the supply side, the dollar value of our backlog declined relative to the first quarter, which contribute to our stronger solutions performance backup.

Backlogs and product lead times associated with transactional products ended the quarter essentially in line with more normal historical levels, while remaining supply chain challenges in netcom solutions continuing to he's in the quarter we.

We continue to anticipate the remaining pockets of backlog to tether out over time.

As always we judiciously managed are working capital to support our customers, while ensuring strong economic returns.

Are your date free cash flow performance, which we will discuss shortly reflects this discipline.

Our team delivered strong profitability in the quarter.

Most profit was $1.2 billion a year over year increase of 1.1%.

Record second quarter gross margin of 21 per cent was up to 200 basis points year over year, an increase in transactional product volume at a mild impact on margins compared to the first quarter, but overall margins remained strong driving a year over year gross profit increase despite lower net sales.

As a reminder of the record gross margin performance in recent quarters is principally been driven by two factors first product margins benefiting from both mixed into complex solutions and a lower mix of transactional products. When we mixed back into transactional products. We would expect for this benefit to moderate.

Second a greater mix into netted down revenues the category again outpaced overall net sales growing 10% and Q2 20 twenty-three compared to Q2 2022.

Primarily driven by double digit software as a service growth.

And then it down sales represented 31% of our gross profit compared to 28% and acquire your second quarter. This continues to be an important trend within our business.

Turning new expenses on slide eight non-GAAP SG&A totaled $652 million for the quarter relative to the prior quarter prior year quarter non-GAAP SGA was flat at increased payroll expense associated with modestly higher co-worker account was offset by the prudent manage management.

<unk> of discretionary expenses during the quarter.

Co-worker count at the end of the second quarter was approximately 14900 down from the first quarter principally due to her efforts to align our cost structure with the level of business demand, while continuing to prioritize of the areas, where we can provide the most value to our customers strategic investments in our solutions and services capabilities.

Remain key or a three part strategy for growth and important at catalyst for the achievement of our profitability and margin goals.

Gap operating income was 420 $412 million non-GAAP operating income was $530 million up $14 million or 2.6% versus the prior year.

The difference between our gap and non-GAAP operating income for the quarter was larger than usual, primarily the result of the workplace optimization charge in the quarter, which is detailed on slides eight and 11 non.

<unk> operating income margin reached a record second quarter record of 9.4% a.

100 basis points from the prior year and up 90 basis points compared to the first quarter.

We remained laser focus on delivering leverage on our gross profit growth despite challenging marketing market conditions.

Moving to slide nine interest expense was $58 million approximately flat to the prior year and relatively in line with our expectations.

Our gap effective tax rate shown on slide 10 was 25.7%. This resulted in first quarter tax expense of $91 million.

To get to our non-GAAP effective tax rate, we adjust taxes consistent with non-GAAP net income add back's has shown on slide slide 11.

For the quarter of non-GAAP effective tax rate was 25.9% within our expected range of $25, 5% to 26.5%.

As you can see on slide 12 was second quarter weighted average diluted shares of 136 million.

GAAP net income per diluted share with a $1.92.

Or non-GAAP net income was $349 million in the quarter up 2.8% on a year over year basis.

non-GAAP net income per diluted share was $2.56 up 3.2%.

Moving ahead to slide 13 at period, and cash and cash equivalents or $204 million and net that was five $6 billion. During the quarter net debt was relatively flat consistent with our plan to maintain our net leverage ratio within the range of two to three times.

Liquidity remains strong with cash plus revolver availability of approximately $1.2 billion.

Moving to slide 14, the three month average cash conversion cycle was 14 days down four days from the first quarter five days from the prior year second quarter and below are targeted range of high teens to low twenties.

Or cash conversion reflects our continued diligent <unk> soldier management of working capital, particularly with respect to inventory.

As we've mentioned in the past timing and market dynamics can influence working capital favorably or unfavorably in any given quarter.

We can we continue to believe our target range remains the best guide post for modeling future working capital.

Are effective working capital management also drove excellent year to date free cash flow of $684 million is shown on slide 15.

For the quarter were utilized cash consistent with our 2023 capital allocation objectives, including returning approximately $79 million to shareholders through dividends and $196 million in share repurchases.

That brings me to our capital allocations in slide 16.

Execution remain consistent with the updated objected communicated at the start of the year.

First has always increase the dividend in line with non-GAAP net income.

Last November we increase the dividend, 18% to $2.36 annually going forward will continue to target at 25% payout ratio.

Second ensure we have the right capital structure in place with a targeted net leverage ratio. We ended the second quarter at 2.6 times flat to the end of the first quarter within our new range of two to three times.

We continue to convert cash profits in a cash flow and have rigorous process in place to proactively manage liquidity, while maintaining our flexibility.

Finally, our third and fourth capital allocation priorities of M&A and share repurchase would remain important drivers of shareholder value for 2000 twenty-three would continue to target returning 50% to 75% of free cash flow to investors through dividends and share repurchases.

Moving to the outlook for 2000 twenty-three on slide 17.

We continue to seek caution and prudence in the market and then the sentiment of our customers. Given this there is no change to our previously shared expectation that the market will contract at the upper end of high single digits.

Our baseline review baseline view incorporates a modest recovery in the second half of 2023.

We have not seen indications that would suggest a major turnaround are commercial channels otherwise.

With this scenario as our baseline we maintain our expectation outgrow the market by two to 300 basis points and continue to anticipate that netted down revenues will grow faster than other products and solution categories.

Keep in mind in times of hardware softest softness or overperformance tends to be on the lower end of this range and vice versa.

We also to continue to expect a neutral currency impact for the full year modest tailwinds in the second half after seeing modest headwinds in the first half.

This assumes an exchange rate of $1.24 to the British Brown and 70 70.

77 cents for the Canadian dollar.

Moving down the piano, we expect a full year non-GAAP operating income margin to continue being the range of 9%.

This reflects our expectation of continued strong gross profit margin with modest softening following three straight quarterly gross margin records.

Operating margin is also supported by your actions to better align expenses.

Finally, we expect our full year non-GAAP earnings to be in the range of flat year over year in constant currency. This.

This reflects an increase from our prior expectation reflective of are better than expected second quarter results.

Please remember that we hold ourselves accountable for delivering our financial outlook and a full year of constant currency basis.

Additional modeling thoughts for annual depreciation and amortization interest expense and the non-GAAP effective tax rates can be found on slide 18.

Moving the modeling thoughts of the third quarter for average daily sales, we expect mid single digits sequential growth from Q2 to Q3.

This equates to a mid single digit percent year over year reported net sales decline for the fourth quarter in terms of average daily sales.

As noted we anticipate gross profit in in July margins to be below second quarter levels, driven by both mix and rate elements.

And we expect third quarter non-GAAP earnings per diluted share to be flat to slightly down year over year.

In 2023, we expect full year free cash flow to be approximately 5% of net sales above our rule of thumb range of 4% to 4.5% and reflecting are strong cash generation in the first half of the year.

While we continue to operate in a cautious and uncertain market remained confident in our ability to deliver profitability margins and cash flow to our stakeholders.

That concludes the financial summary, as always will provided updated reviews views on the macro environment and our business on our future earnings calls.

And with that I'll ask the operator open up for questions. You would ask each of you to limit your questions to one with a brief follow up thank you.

Thank you.

He would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to remove to that question. Please press star followed by two again to ask a question press Star one as a reminder, if you're using a speaker phone. Please remember to pick up your handset before asking your question, we will talk to you briefly.

Ask questions are registered.

Our first question comes from the line of C. A merchant with Citigroup. Your line there's no open.

Great. Thank you very much for taking our questions and congratulations on the result, if you could just talk a little bit about seasonality.

There's a guy did for the third quarter and as you look into the fourth quarter, there's a lot of debate on whether.

The pull in incline devices for the second quarter is going to result in pillows seasonal growth for the second half that <unk> client devices side, and just generally a lot of caution on other hardware spend whether it's on the computer storage side.

Just giving a cautious spending environment and shipped towards AI. So if you could provide me you know what you are seeing the channels in India and customers that would be great and then I just have a follow up on free cash flow as well.

You don't seem like it's pretty strong for this here you know how should we think about potential acquisition and a boost to the groceries that you guys have outlined for this year. Thank you.

Oh, well good morning, as they are good to have you on the line.

So let me just say with regard to expectations for the last half of the year and this concept of pull forward look the quarter played out very very much as we anticipated.

With commercial still feeling some pressures due to market sentiment in market caution and public returning to seasonality with somewhat over delivery by our government and education groups.

Look if I take a step back and I think about cute.

Q2 versus the first the second half let me just say this I'm encouraged by the kick up that we saw at the end of the second quarter with regard to commercial customers in both activity and sentiment I'm encouraged by public returning to that seasonality that feels much more normalized.

Compared to pre Covid for example, I'm encouraged by the fact that our international team notwithstanding sales decline maintained their profitability.

Progress that there Megan.

Courage, frankly that small business feels like it is not getting any worse, it's kind of hovering around the bottom, it's not getting any better but it's not getting worse. So there are a lot of things that encourage me I'm.

I'm impressed with the execution of this team frankly.

Always they always pull through and tough environments and they did it again all that said we are still cautious we're cautious and.

We got a one month into the quarter, where we felt an uptick sewer cautious about the back and and what I would say is we still believe that we are starting to and will continue to see a mild to moderate recovery in the back and and we're holding firm to that.

I mentioned, K 12, and we had a little bit more and in the second quarter. Then we might have anticipated that just straggling quarters. That's just that phenomenon, but we're not seeing anything that is causing us to believe that the second half half is going to be any different than than were suggesting in our outlook and.

We're getting this from our customers with 10000, plus sales folks and sales professionals and technologist in market, we're getting a real time pulse and it feels like a pretty solid outlook to us.

And.

<unk>, maybe I would just visit maybe just add the just kind of give you a technical component with dark Q2 delivery and kind of allocation across the channel two three would essentially look seasonal that is obviously.

Seasonal peak for public and we'd expect that would play out and what we experience from the commercial channels for Q3 would look much like two two so when we think about that's pick up of activity modest recovery, probably a little bit more weighted towards Q4 in those <unk>.

Means that have been softer and the last few quarters.

And you had a follow up beside me, thanks, and just on prepaid asthma, yeah, Yeah, <unk>, yeah, all the heat trending higher than what you guys I previously anticipated or guided too how should we think about the use of cashier.

Yeah, Great. Great question. So we've asked look we've had a good run a four plus quarters on the free cash flow generation side, and look driven by strong cash profits, but here, but also by pretty diligent management of working capital in an environment that's been challenging.

I'd say talk on evergreen base that you'd expect that we will continue to be judicious about working capital, but certainly there's a counter cyclical component to this and so as the environment has been a bit softer we'd been tighter in that regard as we look to the second half and we look to pick up and particularly in there.

Transactional side, it's reasonable to believe that there'd be a bit of a more full on our working capital.

In the second half and notably.

You'll see from our cash conversion that much of that favorability has come on the inventory side. So we're trying to make a little space for an expectation of pulling a bit more on working capital in the second half.

That being said for the full year, we gave you a refresh rule of thumb.

Four to four and a half and we expect that will come out for the full year at five and and and.

<unk> to your latter point on M&A and otherwise look we're going to utilize our capital where where you see best both supporting our strategic objectives, but also where the best relative values.

Alright, thank you.

Thank you.

Our next question comes from the line of Adam Tyndall with Raymond James Your line is though open.

Okay. Thanks, Good morning, I, just wanted to start it looks like kind of the old CDW that we've come to know and expect in terms of over delivering relative the expectation is back this corner.

<unk> at a high level, Chris prior to this quarter, we had two quarters that were very different from plan in Q4, two one I just would be curious for investors wondering what changed in queue to from a either a guidance process or what enabled the over deliverance that we can.

Kind of get confidence at this the old C. D. W is back moving forward.

Well good morning, Adam appreciate that you know look I'd say a couple of things the macro environment really had a significant impact on Q1 and Q2 well Q1 in in the front end of Q2, and when you think about the challenges to our larger commercial customers in particular, which have an oversized impact on the whole of the business.

I would say that number one was the first driver. The second is we weren't we were anticipating a return to seasonality for the education space and the government space, but as you know those are really.

The summertime and the third and fourth quarter with Al mentioned, so as we sat in Q1, we had a tough economic environment impacting our large commercial customers and our public sector just couldn't quite make it up what you're seeing now is the benefit of the counter cyclicality in the difference and diversity of our end markets really come.

<unk> into full play so it was that I would call it timing to some extent in the macro environment I would also say Adam that we are seeing this this somewhat of a stability I'll use the question a little bit of stability I mentioned client devices are still down, but first first quarter of sequential increase in.

Commercial K 12, still down but delivered very nicely in the quarter and we're starting to see on the commercial side in particular, a little bit of uptick in sentiment, that's giving us. Some some optimism and then you add the execution of this team is you know very well this team executes like nobody else.

And given the change then change in the market that we're seeing happening and back to seasonality. We're just going after it and leveraging our competitive advantages and customers have been holding off on spending for a long time, so as they start to loosen the reigns a little bit we have been there and will be there for them.

Got it and maybe just a follow up for our guidance just a little bit more in the weeds questions here.

Two three guidance I think you said mid single digits sequentially per day, which if I look back historically, that's kind of seasonal like you said as I think about Q3, that's typically a big public sector, particularly government quarter, but you also had a very strong public sector result, during two too. So I guess my question would be what gives you a call.

<unk> that there wasn't Poland during Q2 in public sector and why guide mid single digits in queue to me or that seasonal based on that strong queue to resolve thanks.

Yeah sure. Thanks, Adam for the question, you're you're right. Two two is really strong and particularly in in public segment all of the data that we see in the pipeline that we evaluate ongoing which suggests there's continued strength, there and I'd say, notably.

And the government side and as well higher Ed that really had strong performance on the quarter. We mentioned Adam that's K 12 had some yeah I'll call it kind of summer seasonal pick up in activity, which some of which we might typically see kind of straddle over to Q3, So there's probably.

A little bit of that that showed up in Q2.

Modest enough that we feel comfortable holding to the expectation of seasonal uptick in public overall.

That's helpful. Thanks, and congrats on the results.

Okay.

Thank you.

Our next question comes from the line is Matt Sharon with Stifel. Your line is that Wilson.

Yes, yes, thank you and in terms of Christian or your commentary about the seating or at least a modest recovery in the commercial markets in queue for based on what you're hearing from customers is do you see any sort of P. C. Refreshers that more on the infrastructure solutions side projects getting pushed out.

We will get done.

Yeah that is a great question, we've been all asking ourselves us for a long time with our P. C is gonna start to come back in and that as we all know is really tied to the market and.

Projects that are related to growth.

Initiatives within organizations in employment and you know look I think that the <unk> has not yet been cleared and I don't think our customers yet [laughter] around the kind of solid footing of they're ready to open the cough or so to speak their still being incredibly judicious and they're spending their scrutinizing.

Relentlessly frankly, and so what we're hearing is more focus around mission critical and I'll call that more solutions oriented.

Endeavors right now so it's hard to gauge on on the P. C refresh and when will start to see it come back that said look.

We all we all know that the P. C's are the productivity tool right there what connect people to the applications I think we all agree on that we also know that we'd get devices that are sitting all in the system. We talked about K through 12 as an example, two to three years old breakage five times higher than it was pre pandemic frankly and when <unk>.

<unk> is right around the corner now you heard us talk about Isps and customers buying <unk>.

Devices that are kind of higher functionality higher productivity those would those will be 111 devices. So we do see customer starting to explore the benefits going 11, and that's gonna set in at some point and that's gonna be a nice tailwind whether it will be Q3, Mmm Q4 2024 it feel.

A little longer term than this year.

Okay. Thank you and then on the infrastructure in advance solution side I guess, there was some concern that we're seeing backlog across many companies come down because.

Component availability product availability is much better now and then also as customers maybe refresh servers. They they move to a cloud model I guess that would benefit you, but are you seeing any signs of any of those things playing out.

Yeah. So on the networking side, we certainly saw a healthy flush this quarter and I would say that we had double digit growth across all of our customer segments and that was largely due to a backlog reef.

Flush and a continuation of network modernization projects.

In terms of the movement to cloud in AI look I would just say that this is a topic of conversation I've used the word frenzy before but it's a topic of conversation and as I said in my prepared remarks, there's a lot of complexity. There are a lot of questions out there what will it drive and what I would just say that is look.

Benefit of our broad portfolio and the investments we've made across a high growth high solutions areas as well as the services capabilities in particular.

Position as well to support customers wherever they are on the spectrum and whatever they're buying so in any case, you know I do really see the customer decisions benefiting CDW, because will benefit them with the portfolio and our capabilities.

Okay. Thank you very much.

Thank you.

Our next question comes from in the line of <unk> with Evercore ISI.

Your line that's I Wilson.

Yep, Thanks, and not congrats on your nightstand here.

Chris I want to kind of go back to this question around the June quarter upside that you're focusing.

<unk>, you're definitely reason to pull your guide I guess, so I would love to maybe just go back to this and understand you know what are you seeing the backstop that refrain from perhaps taking up they'll pull your guide it leads to reflect the upside. He was on June so was it a bit of a <unk> is it becomes available I'm just looking at the Sun given the big beat in June .

You can wait for the Guy.

Yeah, you know it thanks.

Thanks for the question, Here's what I would say I would say too early to call. You know, we're taking a quarter by quarter right now on the commercial side, they're still caution there's still proves there's no doubt that still sitting in the market notwithstanding as I said slight tick as we got to the end of the quarter. So a couple of <unk>.

Weeks or months of a quarter does not.

Does not I was going to say trend make but it really doesn't create solid ground yet so we have to give it a little more time.

We see some good indicators, but they are just not enough to make the call. So moderate feels better to us than major turnaround on the public side look the way that both education and government work as we track very early in the year. So in the first quarter were tracking the projects that are coming in so we have very good visibility to seasonality.

And generally what's going to happen during the strength strong seasonality K 12 has been strong and it's delivering.

Having some of that come in in June and our second quarter <unk> versus third quarter, we're not worried because we actually are seeing a real uptick in refresh needs. We talk to you know a coupla years ago about the breakage rates and how that was going to drive refresh well it is and on the public side.

It's looking very very normal to us. So we don't Wanna get ahead of our skis on either commercial or public. We're just kind of calling it as we see it as we rounded out the quarter. So that's that's what I would say I don't have a family you want to add anything yeah, I I would just echo Christmas versus comments, there and just say.

On it that look we had called for in the last quarter, a modest recovery based on the information we had at the time to to did come in a bit stronger. We're now effectively saying two three look seasonal and Q4 ultimately look above seasonal on that expectation of a pickup and so there.

Still plenty of puts and takes that could call that into question, but we're comfortable overall with what we're seeing in the kind of all of the data that we we.

Evaluate that that pick up is.

Appropriate, but certainly wouldn't expect at this point that it's going to be much more of a term than that.

Perfect. Thank you and then you know I guess I'll, maybe if I could ask you a question you gross margins are.

<unk> hundred 40 basis points in the first half of the seal was lost your and you touched on a couple of things that I help you there, but you know maybe you can talk about how much of a uplifting things is cyclical the nature of the fact that you know P. C's are gone a lot worse things that might be a bit more structural damage I'd love to just understand how do you think about gross margin one right as we go forward from here.

Thank you.

Yeah sure on it so you're right slipped 2022, and 2022 with gross margins of just shy of 20 per cent, which were new record levels and work up from there if I had to parse it kind of year over year on it I think it's both a combination of I'll call it kind of thematic.

Ponant submitted down revenue in that continued growth fair right, So, particularly focused in cloud SAS security. If you will so we do think they're adorable themes there, but they are also been factors driven by both mix and right. So in the mix side, obviously the tougher.

<unk> has shifted more customer spending the solutions, which comment and services, which come at higher margin.

So with good reason to believe that that could would balance out over time, and when that does and particularly with client on it you could see some moderation Ah.

There and then on the right side look I've talked to a couple of quarters now about product margins being firm.

And they've held up and even in this quarter continue to hold up in some of that is I'd say more adorable theme from all indications of customer's going a bit upmarket in terms of kind of product, but also it's just been a really firm environment I think substantially driven by supply chain. So there are some of the puts and takes a.

Look we feel good overall, we're holding two are in July margin of 9% for the full year, but it's reasonable to expect that you could soften a bit here on gross margin.

Thank you.

Our next question comes from the lineup Eric would ring with Morgan Stanley .

There's no open.

Awesome. Thank you good morning, guys. Congrats on the corner cause I was wondering if you could just maybe elaborate on some of the pricing dynamics you are seeing in the market today, meaning or discounts accelerating and if so where conversely are you pulling back on any discounting you know how our customers responding to any pricing changes.

How do you expect that to China into the second half just just broadly any incremental color you could charm pricing would be helpful. Thank you.

Yeah, Let me start Eric with you you know that were price plus model right. So.

You're familiar with that model is the prices. The OEM prices go up we're usually pass that onto the customer, but let me set that aside for a second let me I would characterize it as follows I would say that pricing is holding fairly firm and an intensely competitive market and I I say that and give credit to the team.

That is.

Reflecting to the customer the value that the CW is delivering.

But I will acknowledge that we're in a very intensely competitive environment and when you think about the levels of scrutiny and all the things we've talked about in terms of purchasing.

Processes right now there's a lot of gritting. It out that said asp's are holding pretty firm procedure W and.

What happens in the second half I would expect the market to remain competitive.

But I would expect also that the value that we for example, wrap around client devices when they come back more robustly that really resonates with customers.

And I would expect us to hold Asp's pretty darn firm.

Awesome those those Super helpful. And then I'd love to follow up again with you.

Just on some of the nuances.

Comparing and contrasting it but what you're hearing from you know the existing med law or the the corporate clients versus a smaller S. M B <unk>.

Differences or similarities that you're hearing from them, maybe slightly nuance, but anything that you could call out would be super helpful. Thank you.

Yeah, No problem, Eric Here's what I would say small businesses are acting like small business, they're the most highly sensitive to the economy and in particular hiring right and and so right now without again fog hasn't cleared without more clarity around.

The economy and potential for growth and hiring.

They're they're kind of in a bit of a hold position except for those mission.

Mission critical projects that are productivity related that our security related that are frankly, even a little lower cost because we're talking about cloud versus large hardware purchases.

You know interest rates have really impacted that group of our customers in terms of access to capital and we're seeing that I do think we stabilize their kind of at the bottom as I said the difference when we look at the larger commercial customers first quarter to know we talked about first quarter.

That large commercial customer being what was the real drag if you will on the overall results.

Those are the customers we've started to actually see the uptick in so think about the last month of the quarter starting to see movement back to mission critical projects that things that were on delay, that's where we're actually seeing some stability in sequential.

Sequential increase in client devices. So you know the differences are small businesses, they're going to be a little longer to get kind of get back on the major buying page those larger entities are starting to inch back in and that's what's giving US you know that's one input to the confidence we have in the back end of the year.

Does that help.

That's yeah. That's super helpful. Thank you so much and congrats again, thanks to us.

I think there.

Thank you.

Our next question comes from the line of <unk> with J P. Morgan Your line, there's no open.

Oh, hi, Thanks for taking my questions I guess, maybe to some extent following up on Eric's question about what are you hearing from customers with supply generally improving is the visibility that customers are providing you even the heads up and dumps of like the <unk> heads up it on projects.

The planning is that's starting to come in and get compressed a bit more than what you're seeing on that front and I'm a follow up thank you.

Yeah that.

That would be some of it.

We think about activity right, we think about quoting we think about the activity, we track and our CRM system, We think about obviously invoicing and writings, but we all have those activities with the customer is what drives are kind of pipeline analysis to inform what is.

Coming in what we think is coming down the pike. So back to those kind of mission critical we are starting to see some.

Some of those loosen up which means writings around those are.

Are taking up slightly.

Across the whole the whole stack related to solutions for example.

So the answer is yes, it's about the activity that we triangulate with the customers and the conversations we're having <unk>.

Okay.

If I can discuss more specifically <unk> that has continued to be rude, but you did mentioned that you are <unk> to walk dawn backlog I think one of the questions. We get often is how sustainable comeback glued to be one just backlog good strong bone a normal lives any thoughts around that I mean.

Are you expecting a similar pick up in mccomb sort of in the pipeline. One some spending recover just one one moment of them an order backlog going to be a headwind in relation to growth.

Yeah. It's a fair question, Here's how I think about network modernization. There is a lot that is driving a continuous need for network modernization take any of the segments, our customer and markets higher and it's all about willing students, which means it's all about experience, which means their network has to be.

Be improved when you think about kind of leveling into a hybrid work or back to work.

That has major network requirements, if basically if you tickle law frankly, as you're thinking about consulting and advising customers around AI use cases that has network upgrade if you will modernization requirements.

<unk> requirements as we think about Ah refresh coming down the Pike. That's gonna have upgrade requirements are classrooms definitely are focused on modernization. So while the backlog was was quite helpful to results for this quarter.

Oh, I don't expect that we're going to see [noise] network modernization dramatically slowed down in the near term given the needs.

And some X as in Val just maybe add one thing <unk> we.

<unk>, we experience with the backlog with Netcom and a quarter was what we would call pretty orderly we have been saying, we expected that backlog would work its way down and it did so while I contributed to the performance for Netcom certainly underneath there. There's still continued written to ban as per suggestion.

Alright, great. Thank you.

Thank you.

Our next question comes from the line of Shannon Cross with Credit Suisse. Your line, there's no open.

Thank you very much okay can you talk a bit about what the discussing here, having with customers on AI and what I'm curious about is.

You know within your various customer segment. You know is there any of that are sort of a head I don't know I kind of doubt state and local would be but you know how you know where where people are in their AI discussion, where maybe they're thinking about first employing some of these you know generative AI solution.

You know and and how you how you see it developing because you have such a unique position in that you speak with with so many various customer groups. Thank you.

Yeah sure. Good morning, Shannon, Yeah, I guess, when when we think about AI would think of it very simply.

Two <unk> two sides first as a catalyst for CDW.

To accelerate and expand our own internal use cases, obviously and then it's an opportunity to evolve our our help our customers evolve using our services capabilities and transaction capabilities, you know it might sound very simplistic, but I'll tell you the way that we think about it.

Is.

Putting tools in the hands of co workers and customers and taking the work out of the hands of co workers and customers I mean, it really does fall into those two two bucket and Cdw's Fullstack approach allows us to help customers across.

Across the entire value trained from what I'll call the base to the tip. So thank advisory services right and think applications. Thank modeling and tools. Thank computing and data structure, that's required to run on all of that and we are having conversations I would say on the advisory level. It's essentially is assessment AI maturity.

How do you use AI instances, how do you use data models do I want to use you know prior.

Private or Llm's basically some of the basics.

Application level, it's it's around the embedded AI tools that are there or come in and ensuring customers understand the benefits that they can accrue and then helping them consume and uses those benefits and then modeling and tools and obviously infrastructure required.

And the tools to create that use cases, you asked about a particular industries look I'd say contact center.

Is is is a huge use case and it was a fast pickup and a number of industries, including financial services retail et cetera, we've seen a lot of activity. There then you think about things like marketing transformation.

Do you think about things like knowledge assistance in customer assistance. Those are the types of abuse cases that were talking actively with customers about right now and that's really across industry. You know so think customer assistance, thank retail think food.

Thank knowledge assistance, thank financial services et cetera, but those are the buckets that were really starting to have conversations about in addition to what I would say more proprietary conversations with customers about specific ways that they can monetize specific to their industry or to the organization.

So that's what we're seeing right now there's a lot of discussion a lot of guts dead.

Gotcha.

Are you hearing her customers that that like next year's budget might expand because they're finding benefit so much benefit from AI and it's so early and and the investment cycle that you know they they see their iced tea expenditures, maybe you know growing above trend another trend right now is down but.

Theory.

Yeah, Here's here's here's what I would say about that I would continue to think that our customers are at the front end of this discussion. We certainly have some as I said, a number with contact centers, where we've already implemented solutions and they're reaping the benefits I think in the middle of the year right now given the environment we're in.

In.

Customers are are not prepared to increase budgets as a result of AI for 2000 2004, yet.

Because we're in we're in the midst of planning what they are helping them plan what they are <unk> 2024, it looks like.

Do I think over the loss of over the next.

Six to 18 months.

Customers are really going to understand the tremendous benefit I call that evolutionary ordinary evolution. All it's transformative. It really is one of those technologies that is gonna massively changed.

How come from companies operate and the benefits they accrue.

But I think we're gonna have to wait and see a little bit longer to understand what that opportunity looks like and when it's going to come to fruition, but it will be there and in our view it will absolutely be there.

Great. Thank you so much.

Thank you.

Our last question will go to the line of Keith Olsen with North Coast Research. Your line is I will open.

Good morning guards cause a little bit broader question in terms of there'll be emanates grabbed you guys may two acquisitions this year with.

Brokers recruiting inquisitor or perhaps can you just touch real quick on what both of those acquisitions add to you guys and how it <unk> W better going forward.

Oh, Yeah sure. So both of the acquisitions were relatively you know relatively small didn't have a material impact on the financials, but I would be I would say strategically right down the fairway and are the sweet spot. So the first one that I think that you were thinking of his locus, which is a consulting company and they are and what we call.

Our talent orchestration spayed, so they help us to basically provide professionally managed services engineers. So they expand our technical talent base theory at the end and it's a way to have a call it kind of a flexible versatile model across.

Across our technology resources.

Locust actually doubled the size of that business in one fell swoop and we're really delighted we're actually we've seen.

Very significant success almost right out of the bat with low cost because we've been able to fill talent needs and talent orchestration needs with customers.

Even more quickly around all of the important areas like networking cloud and security.

Inquisitive the other one that the acquisition. We made recently also very exciting there it AWS premier clouds, a service provider in the government and education and not for profit space and they compliment our existing digital velocity team think of what include it does as professional service.

Around application modernization and cloud migration and they also have a proprietary tool that combines professional services with IP, which helps automate the migration process. So it's very unique to include it and so far that screened a lot of traction in our federal space. So two great.

Acquisitions that we were delighted to bring into the family and already paying dividends.

Great. Thank you.

Thank you that will conclude the question and answer session. So I'll know past the conference back over to C. D. W for closing remarks.

Thank you and I want to recognize before we close the an incredible dedication of our co workers around the globe and their extraordinary commitment to serving our customers our partners and all CDW stakeholders you show the power of execution excellent everyday and in every way and thank you.

To our customers for the privilege and opportunity to serve you and to our investors and analysts participant participating in this call. We appreciate you and your continued interest in in support of CDW, Alan I look forward to talking with you again next year signing off from Navy Pier.

That concludes the C. D. W. Second quarter 20 twenty-three earnings call. Thank you for your participation I Hope you have a wonderful rest of your day.