Q3 2023 CDW Corp Earnings Call
Hello, everybody and welcome to U C. D. W. Third quarter 2023 unused school my name is some I'll be coordinating your call today.
If you would like to ask a question during the presentation. You may do so by pressing star followed by one when you kind of think you bet I'll now hand, you over to your host Steve O'brien with CDW Investor Relations to begin so Steve over to you.
Thank you Sam Good morning, everyone. Joining me today to review our third quarter 2023 results are Chris Leahy, Our chair and Chief Executive Officer, and Albarello, Our Chief Financial Officer, Our third quarter earnings release was distributed this morning and is available on our website investor CDW Dot com.
Along with supplemental slides that you can use to follow along with 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 1095, those statements are subject to a number of risks and uncertainties that could cause actual results to differ materially.
Additional information concerning these risks and uncertainties is contained in the earnings release and form 8-K, we furnished the FCC today and in the Companys other filings with the SEC 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 FTC rule, you will find reconciliation charts in the.
Slides for today's webcast and in our earnings earnings release and form 8-K. Please note all references to growth rates or dollar amounts 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 call is the property of CDW and may not be recorded or rebroadcast without specific.
Specific written permission from the company with that let me turn the call over to Chris.
Thank you, Steve and good morning, everyone. I will begin today's call with a brief overview of our performance strategic progress and view for the balance of the year I will provide additional details on our results our capital allocation priorities and our outlook, we'll move quickly through our prepared remarks to ensure we have plenty of time for questions.
Sam: Hello everybody, and welcome to CDW third quarter 2023 UN School. My name is Sam and I'll be coordinating your call today. If you would like to ask a question during the presentation you may do so by pressing star followed by one on your telephone keypad.
The team continued to execute extremely well under persistently challenged conditions.
Commercial markets remained cautious and conditions and in international markets worsen.
Steve O'brien: I will now hand you over to our host, Steve O'Brien with CDW Investor Relations to begin, so Steve over to you. Thank you Sam, good morning everyone. Joining me today to review our third quarter 2023 results are Chris Leahy, our chair and chief executive officer and Al Morales, our chief financial officer.
This market has held firm for the quarter. The team delivered net sales of $5 6 billion, 8% lower than last year record non-GAAP operating income of $556 million up 1% year over year and record non-GAAP net income per share of $2 72.
Steve O'brien: Our third quarter earnings release was distributed this morning and is available on our website investor.cdw.com along with supplemental slides that you can use to follow along with the call. I'd like to remind you that certain comments made in this presentation are considered forward looking statements under the private securities and litigation reform act of 1995. Those statements are subject to a number of risks and uncertainties that could cause actual results to differ materially.
Up 4% year over year record profitability that underscores the power of our strategy when underpinned by a resilient business model and financial rigor profitability driven by relentless execution and profitability that is a clear demonstration of the value we deliver our customers.
Customers maintain their laser focus on mission critical priorities and optimizing costs and once again, our deep and broad portfolio enable the team to pivot to solutions that address our customers' priority <unk>.
Steve O'brien: Additional information concerning these risks and uncertainties is contained in the earnings release and form HK refurnished to the SEC today and in the company's other filings with the SEC. CDW assumes no obligation to update the information presented during this webcast. Our presentation also includes certain non-gap financial measures including non-gap operating income, non-gap operating income margin, non-gap net income and non-gap earnings per share. All non-gap measures have been reconciled to the most directly comparable gap measures in accordance with SEC rules.
Solutions that provide operating efficiency and expense elasticity like first of all performance in modern hybrid and multi cloud environments.
Solutions that our usage base like SaaS and private cloud.
<unk> solutions, we are well positioned to deliver.
In today's environment, where customers are closely scrutinizing their IP spend our value as a trusted advisor is greater than ever before and advisor with helps customers cut through complexity and evaluate options.
An advisor who designed deploys integrates and many times manages the solution.
Steve O'brien: You will find reconciliation charts and the slides for today's webcast and in our earnings release and form HK. Please note all references to growth rates or dollar amounts, changes in our remarks today are versus the comparable period in 2022 unless otherwise indicated.
Capabilities made possible by the investments we have made in our three part strategy for growth.
Vestments that enable us to serve customers across the full stack and full lifecycle.
Investments that have made us a vital technology partner.
As we have executed our strategy the amount of customer spend with us has consistently grown faster than net sales dynamic that reflects both the success of our strategic investments and increasing customer preferences for cloud and SaaS based solutions.
Steve O'brien: Replay of this webcast will be posted to our website later today.
Steve O'brien: I also want to remind you that this conference call is the property of CDW and may not be recorded or re-broadcast without specific written permission from the company.
Recall that these offerings drive significant customer spend but are not that are netted down and our sales not dampen our topline growth while enhancing our gross margin.
Chris Leahy: With that, let me turn the call over to Chris. Thank you Steve and good morning everyone. I'll begin today's call with a brief overview of our performance, strategic progress, and view for the balance of the year. Al will provide additional details on our results, our capital allocation priorities and our outlook. We'll move quickly through our prepared remarks to ensure we have plenty of time for questions. The team continues to execute extremely well under persistently challenged conditions. Commercial markets remained cautious and conditions in international markets worsened. Public markets held firm.
Let's take a deeper look at quarterly results.
There were three main drivers of performance, our balanced portfolio of customer end markets, our breadth of solutions and services portfolio and ongoing execution of our three part strategy first our balanced portfolio of end markets. Each of our five sales channels corporate small business healthcare government and education is a meaningful business on its own.
With 2020 to annual sales ranging from $1 $9 billion to over $10 billion.
Chris Leahy: For the quarter of the team delivered net sales of $5.6 billion, $8% lower than last year, record non-gap operating income of $556 million, up 1% year over year, and record non-gap net income per share of $2.72 of 4% year over year, record profitability that underscores the power of our strategy when underpinned by our resilient business model and financial profitability driven by relentless execution and profitability that is a clear demonstration of the value we deliver our customers. The customers maintain their laser focus on mission-critical priorities and optimizing costs, and once again our deep and broad portfolio enable the team to pivot to solutions that address our customers' priorities.
Within each channel teams are further segmented to focus on customer end markets, including geography verticals and customer size teams are similarly, segmented in our UK and Canadian operations, which together delivered $2 $9 billion in 2022 sales.
These unique customer end markets, often act counter cyclically, given the different macroeconomic and external factors that impact each you see the benefit of our balanced portfolio again this quarter with public performance, partially mitigating declines in commercial.
Commercial market conditions continued to weigh on customer confidence and drive cautious purchasing behavior.
Instead of the modest improvement in hardware, we expected we continue to experience pressure, particularly client devices.
Corporate net sales decreased 12%.
Chris Leahy: Solutions that provide operating efficiency and expense elasticity like first of all performance in modern hybrid and multi-cloud environments, or solutions that are used to space like fast and private cloud. Solutions we are well positioned to deliver. In today's environment where customers are closely scrutinizing their IT spend, our value as a trusted advisor is greater than ever before, an advisor who helps customers cut through complexity and evaluate options, an advisor who designs, deploys, integrates, and many times manages the solutions.
Momentum continued around projects focused on increasing productivity as well as projects focused on enhanced customer however experiences with a shorter term ROI lens customers favored solutions enabled by cloud, which contributed to double digit increases in corporate customer spend on cloud.
AI and security were also major customer focus areas with CIO is increasingly being asked two questions. What are you doing with AI and how are you protecting our data.
Well AI remains in early stages of commercialization and development and not yet translating into meaningful customer spent our full portfolio of security offerings contributed to double digit increase in security spend.
Chris Leahy: Capabilities made possible by the investments we have made in our three-part strategy for growth, investments that enable us to serve customers across the full stack and full lifecycle, investments that have made us a vital technology partner. As we have executed our strategy, the amount that customers spend with us has consistently grown faster than that sales, a dynamic that reflects both the success of our strategic investments and increasing customer preferences for cloud and SaaS-based solutions. Recall that these offerings drive significant customers spend but are netted down in our sales and thus dampen our top-line growth while enhancing our growth margins.
Ongoing network modernization also led to excellent net comp performance once again up double digits.
Corporate topline performance continued to reflect meaningful year over year client device declines with ongoing postponement of upgrades and utilization of existing products products.
Small business net sales declined 22% market conditions were consistent with the second quarter and customers continue to see clarity around the economy and more conducive conditions for hiring and new business formation.
Chris Leahy: Let's take a deeper look at quarterly results. There were three main drivers of performance, our balanced portfolio of customer end markets, our breadth of solutions and services portfolio, and ongoing execution of our three-part strategy, first our balanced portfolio of end markets. Each of our five sales channels, corporate small business, healthcare, government, and education, is a meaningful business on its own, with 2022 annual sales ranging from $1.9 billion to over $10 billion.
Focus remained on cost management, and the prioritization of products projects that need to get done projects that were more once rather than needs remain cost.
Consistent with the second quarter solutions increased up low single digits, while transactions declined by double digits.
On shorter term ROI for mission critical priorities drove double digit spend in cloud and software.
Client devices continue to drive small business topline performance as refresh remained on the back burner and declines were on par with the second quarter.
Chris Leahy: Within each channel teams are further segmented to focus on customer end markets, including geography, verticals, and customer size. Teams are similarly segmented in our UK and Canadian operations, which together delivered $2.9 billion in 2022 sales. These unique customer end markets often act counter-cyclically, given the different macroeconomic and external factors that impact each. You see the benefit of our balanced portfolio, again, this quarter, with public performance partially mitigating declines and commercial. Commercial market conditions continue to weigh on customer confidence and drive cautious purchasing behavior.
Public sales increased 1% year over year health care and education, each posted a 2% increase while performance was flat and government compared to last year's exceptional near 40% growth.
Government performed relatively in line with historical seasonality with federal's mid single digit growth offset by a mid single digit decline in state and local.
The federal team continued its success, helping agencies implement more efficient solutions to manage and protect data. This delivered excellent server performance up strong double digits. The team also continued its work with agencies to optimize existing cloud investments and deliver new cloud solutions, which require a rigorous proof of concepts.
Chris Leahy: Instead of the modest improvement in far where we expected, we continue to experience pressure, particularly in client devices. Corporate sales decreased 12%. Momentum continued around projects focused on increasing productivity, as well as projects focused on enhanced customer and coworker experiences. With a shorter-term ROI lens, customer-savored solutions enabled by cloud, which contributed to double-digit increases in corporate customer spend on cloud. AI and security were also major customer focus areas, with CIOs increasingly being asked to questions.
The state and local team delivered solid sequential growth well above historical averages up 4%, but net sales declined mid single digits compared to last year's double digit growth.
Solid solutions growth was more than offset by a decline in transactions.
<unk> enabled solution adoption was strong delivering double digit increases in customer spend.
Health care net sales increased 2% augmenting talent needs modernizing dangerous datacenters and driving cost savings and efficiency projects remained focused areas for customers with.
Chris Leahy: What are you doing with AI and how are you protecting our data? While AI remains at early stages of commercialization and development, and not yet translating into meaningful customer spend, our full portfolio of security offerings contributed to double-digit increase in security spend, on-going network modernization also led to excellent net common performance, once again up double digits. Corporate top line performance continued to reflect meaningful year-over-year client device declines with ongoing postponement of upgrades and utilization of existing products.
With complex industry challenges and tight operating budget healthcare systems continue to turn to cloud solutions.
Armed with our full portfolio, which includes proprietary cloud based health care solutions. The team drove a significant increase in cloud spend.
Our broad portfolio of solutions also contributed to a double digit increase in security spend growth as they help customers address heightened cyber security needs needs driven by the disproportionate percentage of all ransomware attacks that target healthcare organizations.
Chris Leahy: Small business net sales declined 22 percent. Market conditions were consistent with the second quarter and customers continued to seek clarity around the economy and more conducive conditions for hiring and new business formations. Focus remained on cost management and the prioritization of products projects that need to get done. Projects that were more once rather than needs remained paused. Consistent with the second quarter solutions increased, uploads single digits while transactions declined by double digits.
For education net sales increased low single digits. The first positive growth quarter for education and over eight quarters, K 12, low single digit increase more than offset a low single digit decline in higher Ed.
Higher as high single digit increase in solutions was offset by a double digit decline transactions declined largely driven by ongoing declines in client devices.
Institutions continue to invest to improve security campus connectivity and student experiences. The team's continued focus on delivering these impactful solutions led to double digit growth across netcom services and software. It also delivered low teens growth in cloud spend.
Chris Leahy: Focus on shorter term ROI for machine critical priorities drove double digits fed in cloud and software. Client devices continued to drive small business top line performance as refresh remained on the back burner and declines run hard with second quarter. Public sales increased 1 percent year-over-year. Healthcare and education each posted a 2 percent increase while performance was flat in government compared to last year's exceptional near 40 percent growth. Government performed relatively in line with historical seasonality with federal's mid-it single-digit growth offset by a mid-single digit decline in state and local.
For K 12, the team continued their success, helping schools in their efforts to achieve digital equity and improved learning outcomes, which delivered excellent growth in services and net cash solutions grew meaningfully while transactions declined low teens, reflecting ongoing moderation of client device.
Security remains a key focus area with double digit growth in customer spend.
Other our combined UK and Canada business came in below our expectations down mid teens, while the teams continue to execute well the deterioration in market conditions in the UK and Canada were deeper than we anticipated, but the U K and Canada decreased by double digits in local currency.
Chris Leahy: The federal team continued its success helping agencies implement more efficient solutions to manage and protect data. This delivered excellent server performance up strong double digit. The team also continued its work with agencies to optimize existing cloud investments and deliver new cloud solutions which require rigorous group of concepts. The state and local team delivered solid sequential growth well above the historical average is up 4 percent but net sales declined mid-single digits compared to last year's double digit growth.
Our diverse end markets are both a key strategic advantage and enable consistent performance amid an uncertain an uneven macro environment.
The second strategic advantage and driver of our performance with our broad and deep portfolio, which enables us to pivot to address our customers' evolving needs Sim.
Chris Leahy: Solid solutions growth was more than offset by the client and transactions. Cloud-enabled solution adoption with strong delivering double digit increases in customer spend. Healthcare net sales increased 2 percent. Augmenting talent needs, modernizing data centers and driving cost savings and efficiency projects remained focused areas for customers. With complex industry challenges and type operating budget, healthcare systems continue to turn to cloud solutions. Armed with our full portfolio, which includes proprietary cloud-based healthcare solutions, the team drove a significant increase in cloud spend.
Similar to the second quarter solutions sales increased mid single digits, while transactions remained under pressure down high teens.
Hardware declined by double digits similar to the second quarter performance continued to reflect depressed client device demand, particularly in the commercial space.
Overall client performance was roughly in line with the second quarter's double digit decline netcom increased double digits with stable demand.
Backlog continues to feather out and it's now approximating historic levels.
Cloud spend increased nearly 20% with increases across every end market roughly half of our total third quarter cloud spend came from commercial customers and half from public.
Chris Leahy: Our broad portfolio solutions also contributed to a double digit increase in security spend growth as they health customers address heightened cybersecurity needs. Needs driven by the disproportionate percentage of all ransomware attacks that target healthcare organizations. For education net sales increased low single digits. The first positive growth order for education in over a quarter. K-12 low single digits increased more than offset a low single digit decline in higher ed. Higher ed's high single digits increased in solutions was offset by a double digit decline in transactions.
Security spend increased by double digits with a significant portion being delivered via software and the cloud cloud.
Cloud and security success contributed to a mid teens increase in software increases across virtualization and network management and security were partially offset by declines in categories tied to full stack projects and employment levels.
Solid managed and professional services growth was more than offset by the impact of continued drag from lower services attached to transactional and solutions hardware and overall services net sales declined.
Chris Leahy: A decline largely driven by ongoing decline in client devices. Institutions continue to invest to improve security, campus connectivity, and students. Experiences. The teams continue to focus on delivering these impactful solutions led to double digit growth across netcoms, services, and software. It also delivered low teams growth in cloud spend. For K-12, the team continue their success, helping schools, and their efforts to achieve digital equity and improve learning outcomes, which delivered excellent growth in services in netcom. Solutions through meaningfully, while transactions declined low teams, reflecting ongoing moderation of client device spend, security remained a key focus area with double digit growth in customer spend.
As you can see performance varied significantly across the portfolio.
That is the power of our deep and broad portfolio. It enables us to meet our customers where they are and it is a power. It has power driven by the investments we have made in our growth strategy.
And that leads to the third driver of our performance this quarter relentless execution of our growth strategy a.
Our strategy guided by three pillars first captured share and acquire new customers second enhanced capabilities in high growth solutions area and third expand services capabilities.
Chris Leahy: Other are combined UK and Canada business came in below our expectations, down mid-teens. While the teams continue to execute well, the deterioration in market conditions in the UK and Canada weren't deeper than we anticipated, both the UK and Canada that decreased by double digit in local currency.
For the past five years, we have broadened and deepened our capabilities our comprehensive lifecycle lifecycle management capabilities now deliver design deployment integration and management.
Capabilities that have deepened our relevance to customers and fortified our role as trusted adviser to our customers capabilities.
Chris Leahy: Our diverse end markets are both a key strategic advantage and enable consistent performance in an uncertain and uneven macro environment. The second strategic advantage in driver of our performance was our broad and deep portfolio, which enables us to pivot to address our customers' evolving needs. Similar to the second quarter, solution sales increased mid single digits, while transactions remained under pressure, down high teams. Hardware declined by double digits. Similar to the second quarter, performance continued to reflect a press client device demand, particularly in the commercial space.
Capabilities that enable us to best serve customers across physical digital or cloud based environment in the U S and internationally and capabilities to drive favorable outcomes for our customers.
In today's uncertain macro environment with customers increasingly reluctant to make big upfront capital investments our ability to deliver the cost savings outcome of our eye care framework is a major competitive advantage.
Armed with our consultative approach to problem solving the teams both identify and implement consumption based solutions with lower upfront cost solutions that enable customers to move ahead with mission critical projects.
Chris Leahy: Overall, client performance was roughly in line with the second quarter's double digits decline. Netcom increased double digits with stable demands. Backlaw continued to feather out and in now approximating historic levels. Cloud spend increased nearly 20 percent with increases across every end market. Roughly half of our total third quarter cloud spend came from commercial customers and half from public. Security spend increased by double digits with a significant portion being delivered via software and the cloud.
Solutions that deliver value to our customers and deepen customer relationships.
Many of these solutions are enabled by our cloud ready assessments enablement and migration services, which are second to none in the industry.
A great example of this in action is the solution, we provided to an Illinois school districts that had a legacy converged storage environment, reaching end of life.
Customer had three priorities first students teacher and administrator experience.
Second agility to meet.
Chris Leahy: Cloud and security success contributed to a mid-teens increase in software. Increases across virtualization and network management and security were partially offset by declines and categories tied to full stack projects and employment levels. Solid managed and professional services growth was more than offset by the impact of continued drive from lower services attached to transactional and solutions hardware and overall services net sales declined.
Agility to meet ended school year deadline, and third deliver cost did they manage within the constraints of their fixed budget.
After a comprehensive evaluation of the wide range of on premise and hybrid cloud solutions. We can provide the team determined that a consumption based approach would provide the best outcome for the customer ultimately developing a private cloud hyper converged solution or <unk>.
Solution that support deployment and management of modern applications and provides the ability to seamlessly scale for future growth.
Chris Leahy: As you can see, performance varied significantly across the portfolio. That is the power of our deep and broad portfolio. It enables us to meet our customers where they are and it is a power driven by the investments we have made in our growth strategy. And that leads to the third driver of our performance this quarter, relentless execution of our growth strategy. A strategy guided by three pillars. First, capture share and acquire new customers.
On the delivered needed flexibility and cost predictability and deepened our relationship as a trusted adviser another great win win.
Investments in our customer centric growth strategy are foundational to our ability to consistently and profitably outgrow the U S market and that brings us to our expectations for the rest of the year.
You will recall last quarter quarter, we shared our expectations for the U S market posted a decline of high single digits. In 2023. This assumes three things first greater clarity in the market would lead to a modest improvement in the commercial hardware market in the back half of the year second a moderate.
Chris Leahy: Second, enhance capabilities in high growth solutions areas and third, expand services capabilities. Over the past five years, we have broadened and deepened our capabilities. Our comprehensive life cycle management capabilities now deliver design, deployment, integration and management. Interimation, Capabilities that have deepened our relevance to customers and fortified our role as trusted advisor to our customers. Capabilities that enable us to best serve customers across physical, digital or cloud-based environments in the US and internationally and capability that drive favorable outcomes for our customers.
The deterioration in the UK, and Canada, and third a return to normal seasonality in the public space.
We did see a return to normal seasonality in public and while commercial spend has been stable. There was a greater shift to solutions that net down in lieu of hardware status.
We also saw a deeper than expected international market deterioration.
Current conditions in order to stay customer interactions lead us to expect these trends to continue.
Chris Leahy: In today's uncertain macro environment, customers increasingly reluctant to make big upfront capital investments, our ability to deliver the cost savings outcome of our IT or framework is a major competitive advantage. Armed with our consultative approach to problem solving, the teams both identify and implement consumption-based solutions with lower upfront costs. Solutions that enable customers to move ahead with mission-critical projects. Solutions that deliver value to our customers and deepened customer relationships. Many of these solutions are enabled by our cloud-ready investments in able-mint migration services, which are second to none in the industry.
Our estimate of U S. It market growth in 2020 remains at a high single digit decline and we continue to expect to profitably outperform in the U S. It market by 200 to 300 basis points. When adjusted for this year is meaningful shifts in customer spend toward complex solutions that net down.
We are cognizant of the significant wildcards are customers in the market space in this environment. A list that has grown more complex and now includes intestine intensifying geopolitical instability and potential for federal government shut down we will continue to keep a watchful eye on these and other potential factors as we always do and we will provide an update on that.
Chris Leahy: A great example of this inaction is a solution we provide into an Illinois school district that had a legacy converged storage environment reaching end-of-life. The customer had three priorities. First, student teacher at Administrator Experience. Second, agility to meet, excuse me, agility to meet end-of-school year deadline. And third, deliver cost as they manage within the constraints of their fixed budget. After a comprehensive evaluation of the wide range of on-premises hybrid cloud solutions we can provide, the team determined that a consumption-based approach would provide the best outcome for the customer ultimately developing a private cloud-hyper-preneurged solution.
As conditions on our next call in the meantime, we will continue to do what we do best leverage our competitive advantages and out execute the competition now let me turn it over to al who will provide more detail on our financials and outlook.
Thank you, Chris and good morning, everyone I'll start my prepared remarks with detail on our third quarter performance move to capital allocation priorities and then finish up with our 2023 outlook. This quarter, our continued execution and financial discipline discipline delivered three notable records record gross margin record operating margin.
Chris Leahy: A solution that supports deployment and management of modern occupations and provides the ability to seamlessly scale for future growth. One that delivers needed flexibility and cost predictability. And deepened our relationship at a trusted advisor, another great win-win.
And record earnings per share on a diluted basis. We achieved these records on consolidated net sales of $5 6 billion.
Which were nine 4% 2022 on a reported basis and down 8% on an average daily sales basis.
Third quarter net sales performance reflected both the impact of uneven market conditions, and our continued success, providing cloud and SaaS based solutions that drive meaningful customer spend.
Chris Leahy: Investments in our customer center growth strategy are foundational to our ability to consistently and properly outgrow the U.S. IT market, and that brings us to our expectations for the rest of the year. You will recall last quarter. We shared our expectations for the U.S. IT market to post a decline of high single digits in 2023. This assumes three things. First, greater clarity in the market would lead to a modest improvement in a commercial IT hardware market in the back half of the year.
On a sequential basis third quarter net sales increased one 6% on an average daily sales basis slightly lower than our outlook, reflecting a higher than anticipated mix into cloud and SaaS based solutions that are netted down.
And our top line results as well as economic conditions.
Adversely impacted our international business.
Chris Leahy: Second, a moderate deterioration in the U.K, and Canada, and third, a return to normal feasibility in the public space. We did see a return to normal feasibility in public, and while commercial spend has been stable, there was a greater shift to solutions that net down in lieu of IT hardware spend. We also saw a deeper than expected international market deterioration. Current conditions in order to stay customer interactions lead us to expect these trends to continue.
Gross profit was $1 2 billion.
Essentially flat versus prior year as a record gross margin, which increased 200 basis points year over year offset the impact of lower net sales. Our gross margin of 21, 8% was driven by two factors.
The impact of higher mix in the complex solutions, which have higher product margins.
Second a higher mix into netted down revenues, which while dampening net sales growth also enhanced gross profit margin.
Chris Leahy: Our estimate of U.S. IT market growth in 2022 remains at a high single digit decline, and we continue to expect to profitably outperform the U.S. IT market by 200 to 300 basis points, when adjusted for this year's meaningful shift in customer spend toward complex solutions that net down. We are cognizant of the significant wild cards or customers in the market space in this environment, a list that has grown more complex, and now included in testing, intensifying geopolitical instability and potential for federal government shutdown.
Each cloud SaaS based revenue streams once again outpaced net sales growth.
For the cats. This quarter. This category represented a record 32, 6% of our gross profit compared to 31% in the prior year third quarter.
While we expect this mix shift to continue to be an important durable trend within our business. Eventually we anticipate a greater mix back and transactional products, which will balance out both the top line growth and corresponding gross margin impacts we've experienced in 2023.
Chris Leahy: We will continue to keep a watchful eye on these and other potential factors, as we always do, and we will provide an update on business conditions on our next call. In the meantime, we will continue to do what we do best. Leverage or competitive advantages and out execute the competition.
For the third quarter, non-GAAP, SG&A totaled $671 million down one 9% year over year.
Coworker count in the third quarter was approximately 15000 up slightly from the second quarter. We continue to prioritize investments in our three part strategy that are important catalysts for the achievement of our growth profitability and margin goals.
Al Morales: Now, let me turn it over to Owl, who will provide more detail on our financials in Outlook. Thank you, Chris, and good morning, everyone.
Al Morales: I'll start my prepared remarks with detail on the third quarter of performance, move to capital allocation priorities, and then finish up with our 2023 outlook. This quarter are continued execution of financial discipline to deliver three notable records, record gross margin, record operating margin, and record earnings per share on a deluded basis. We achieved these records on consolidating net sales of $5.6 billion, which were 9.4% 2022 on a reported basis and down 8% on an average daily sales basis.
As our customers optimize and rationalize their own investments are.
Planned approach to discretionary expenses helped drive non-GAAP operating income of $556 million up $7 million or one 3% versus prior year.
non-GAAP operating income margin reached a record nine 9% up 110 basis points from the prior year.
Moving down the P&L, our interest expense tax rate remained in line with our expectations.
Al Morales: Third quarter net sales performance reflected both the impact of uneven market conditions and our continued success providing cloud and SaaS-based solutions that drive meaningful customer spend. On a sequential basis, third quarter net sales increased 1.6% on an average daily sales basis, slightly lower than our outlook, reflecting a higher than anticipated mix in a cloud and SaaS-based solutions that are netted down in our top line results, as well as economic conditions that adversely impacted our international business.
As you can see on slide eight our non-GAAP net income was $369 million in the quarter.
Up three 5% on a year over year basis with third quarter weighted average diluted shares of $136 million non-GAAP net income per diluted share was also an all time record at $2 72.
Up four 4% year over year.
Moving to slide nine at period end net debt was $5 3 billion.
Our two four times net leverage during the quarter net debt declined reflect our continued strong cash flow performance and modest debt repayment during the quarter consistent with our targeted net leverage range of two to three times.
Al Morales: Gross profit was $1.2 billion, essentially flat versus prior year, as our record gross margin, which increased 200 basis points year over year, I'll set the impact of lower net sales. Our gross margin of 21.8% was driven by two factors. First, the impact of higher mix in the complex solutions, which have higher product margins. Second, a higher mix in denetted down revenues, which while dampening net sales growth, also enhanced gross profit margin.
Liquidity remains strong with cash plus revolver availability of approximately $1 4 billion.
Moving to slide 10, the three month average cash conversion cycle was 15 days down three days from the prior year and below our targeted range of high teens to low twenties.
Al Morales: These cloud and SaaS-based revenues once again outpaced net sales growth. For this quarter, this category represented a record 32.6% of our gross profit compared to 31% in the prior year's third quarter. While we expect this mixed shift to continue to be an important, durable trend within our business, eventually we anticipate a greater mix back in transactional products, which will balance out both the top line growth and core-spotting gross margin impacts we've experienced in 2023.
Our cash conversion reflects our continued diligent management of working capital, particularly with respect to our inventory levels and we expect to remain at the lower end of this targeted range. This year.
As we've mentioned in the past timing and market dynamics can influence working capital in any given quarter.
And we continue to believe our target cash conversion range remains the best guide post for modeling working capital longer term.
Strong profits and effective working capital management drove our strong year to date adjusted free cash flow of $1 1 billion as shown on slide 11, well above our rule of thumb as a percentage of sales.
Al Morales: For the third quarter, non-gas S-GNA total $671 million, down 1.9% year over year, co-worker Canada deemed the third quarter was approximately 15,000, up slightly from the second quarter. We continue to prioritize investments in our three-part strategy that are important catalysts for the achievement of our growth, profitability and margin goals. As our customers optimize and rationalize their own IT investments or discipline approach to discretionary expenses, help drive non-gas operating income of $556 million, up $7 million or 1.3% versus prior year.
For the quarter, we utilized cash consistent with our 2023 capital allocation priorities, including returning approximately $79 million to shareholders through dividends and $54 million in share repurchases.
This brings us to our capital allocation priorities on slide 12.
Our execution remained consistent with the objectives, we communicated at the start of the year first as always increased the dividend in line with non-GAAP net income. This morning, we announced a 5% increase of our dividend to $2 48 annually.
Al Morales: Non-gas operating income margin reached a record 9.9% up 110 basis points from the prior year. Moving down the P&L, our interest expense tax rate remained in line with our expectations. As you can see on slide 8, our non-gas net income was $369 million dollars in the- quarter, up 3.5% on the year of a year basis. With third quarter weighted average diluted shares of 136 million, non-gap net income per diluted share was also an all-time record at $2.72, up 4.4% year of a year.
This is our 10th consecutive year, increasing the dividend we've grown the dividend at a compound annual rate of approximately 31% from the initial level.
Going forward, we will continue to target a 25% payout ratio.
Second ensure we have the right capital structure in place with a targeted net leverage ratio. We ended the quarter at two four times down from two six times at the end of last year and within our targeted range of two to three times.
We continue to convert profits in the cash flow and have a rigorous process in place to proactively manage liquidity, while maintaining our flexibility.
Al Morales: Moving to slide 9, a period in net debt was $5.3 billion or 2.4 times net leverage. During the quarter net debt declined, reflect our continued strong cash flow performance and modest debt repayment during the quarter, consistent with our targeted net leverage range of 2-3 times. The liquidity remains strong with cash plus revolver availability of approximately $1.4 billion. Moving to slide 10, the three-month average cash conversion cycle was 15 days, down 3 days from the prior year and below our targeted range of high teens to low 20s.
Finally, our third and fourth capital allocations of M&A and share repurchases remain important drivers of shareholder value for 2023, we now anticipate returning 60% to 75% of adjusted free cash flow to investors through dividends and share repurchases up from our prior range of 50% to 75%.
Al Morales: Our cash conversion reflects our continued diligent management of working capital, particularly with respect to our inventory levels, and we expect to remain at the lower end of this targeted range this year. As we've mentioned in the past, timing and market dynamics can influence working capital on any given quarter, and we continue to believe our target cash conversion range remains the best dipose for modeling working capital longer term. Strong profits and effective working capital management trover strong year-to-date adjusted free cash flow of $1.1 billion, as shown on slide 11, well above our rule of thumb as a percentage of sales. For the quarter, we utilize cash consistent with our 2023 capital allocation priorities, including returning approximately $79 million to shareholders through dividends and $54 million in share purchases.
Al Morales: This brings us to our capital allocation priorities on slide 12. Our execution remains consistent with the objectives we communicated at the start of the year. First, as always, increase the dividends in line with non-depth net income. This morning, we announced a 5% increase of our dividend to $2.48 annually. This is our 10th consecutive year increasing the dividend. We've grown the dividend at a compound annual rate of approximately 31% from the initial level.
Along with expensive efficiency, we as we manage through is uncertain economic environment.
Finally, we expect a full year non-GAAP earnings per share to be flat to slightly up year over year in constant currency.
This reflects an increase from a prior expectation of flat based on our strong third quarter profitability and relatively unchanged profitability expectations for the fourth quarter.
Al Morales: Going forward, we will continue to target the 25% payout ratio. Second, ensure we have the right capital structure in place for the targeted net leverage ratio. We enter the quarter at 2.4 times down from 2.6 times at the end of last year and within our targeted range of 2-3 times. We continue to convert profits into cash flow and have rigorous processes in place to proactively manage liquidity while maintaining our flexibility. Finally, our third and fourth capital allocations of M&A and Sherry Birch's SIS remain important drivers to shareholder value.
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 14.
Moving to modeling thoughts for the fourth quarter for average daily sales, we now expect a largely seasonal mid single digits sequential decline from Q3 two four.
This equates to a low to mid single digit net sales decline on a year over year basis for the fourth quarter in terms of average daily sales.
Al Morales: For 2023, we now anticipate returning 60-75% of adjusted for cash flow to investors through dividends and Sherry Birch's SIS up from our prior range of 50-75%. All in all, strong results get an ongoing economic uncertainty and uneven market conditions.
This is lower than we previously expected and reflective of both the current business conditions and top line mixed components previously referenced.
With this we also anticipate gross profit and non-GAAP operating margins to be strong similar to third quarter levels, driven by both mixed and rate elements.
Al Morales: We continue to run our playbook and remain laser focused on margins, cash flow, and predictable profitability, and that leads us to our outlaw on slide 13. The uncertain marking conditions we've operated under throughout the year are persisting and continually to customer caution and proves. Given this, we expect that the IT market will contract at the upper end of high single digits. With this scenario as our baseline, we expect to deliver a two to three hundred basis point growth premiums to the market, albeit not evident on a net sales basis as the outside share of netted down revenue met the impact of our premiums.
And we expect fourth quarter non-GAAP earnings per diluted share to grow low single digits year over year.
For full year 2023, we expect adjusted free cash flow be approximately 6% of net sales above our prior year expectation of 5% and well above a rule of thumb range of 4% to 4.5% reflecting are strong cash generation in the first nine months of the year.
Al Morales: Keep in mind that our premiums is most significant when hardware demand is strong, like in 2021 and 2022. We currently maintain a meaningful premiums to the IT market on a customer spend basis. Moving down the P&L, we expect our full-year non-GAF operating income margin to be in the low to mid-9% range, up from our prior expectation of approximately 9%. This reflects our expectations of continued growth, strong growth, profit margins, along with expense efficiency as we manage through this uncertain economic environment.
While we continue to operate in a cautious and uncertain market, we remain confident in our ability to deliver profitability margin and cash flow to our stakeholders, while continued to invest behind our strategy.
That concludes the financial summary, as always will provide updated views on the macro environment and our business on our future earnings calls.
And with that I'll ask the operator 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 if you would like to ask a question. Please press <unk> followed by one on your telephone keypad now.
Change a month <unk> for the blood too.
Packed Austral question, Please and show your line is a muted Lindsey.
Al Morales: Finally, we expect our full-year non-GAF earnings for share to be flat to slightly up year-over-year in constant currency. This reflects an increase from our prior expectation of flat based on our strong third quarter profitability and relatively unchanged profitability expectations for the fourth quarter. Please remember we hold ourselves accountable for delivering our financial outlook on a full-year constant currency basis.
My first question today comes from stomach custody from J P. Morgan semi Caroline is now open. Please go ahead.
Yep.
Thank you and thanks for taking my question I just have two quick ones that I lost both together if that's okay I think.
Broad set up <unk> has been that most of the resilience we've seen in total spending from customers has been helped by the public sector.
And beyond that when you look at the broader customers beyond public sector, there hasn't been as much momentum and in fact vivid momentum is spending his problem to do anything on the commercial side can you sort of dive into what you're seeing from a pipeline perspective going instead of just beyond the public sector and is there.
Al Morales: Additional modeling thoughts for annual depreciation and amortization, interest expense, and the non-GAF effective tax rate can be found on slide 14. Moving to modeling thoughts for the fourth quarter, for average daily sales, we now expect a largely seasonal mid-single-digit sequential decline from Q3 to Q4. This equates to a low to mid-single-digit net sales decline on a year-over-year basis for the fourth quarter in terms of average daily sales. This is lower than we previously expected and reflected on both the current business conditions and top-line mixed components previously referenced.
Sustainability of demand from the commercial accounts and for my second one I mean, obviously, we're getting close to the end of the <unk>, maybe any insight you have into how are you thinking about next year spending we haven't seen too cause they're gonna be you as a sort of significant declines in the wild and enterprise spending so any thoughts of <unk>.
Looking at your way you should be expecting higher spending from a lower level B S or are we looking for it on to your optic lines from customers. Thank you.
Al Morales: With this, we also anticipate growth profit and non-GAF operating margins to be strong, similar to the third quarter levels, driven by mixed and rate elements. And we expect fourth quarter non-GAF earnings for the alluded share to grow low single-digits year-over-year. For full-year 2023, we expect adjusted free cash flow to be approximately 6% of net sales above our prior-year expectation of 5% and well above our rule of thumb range of 4 to 4.5%, reflecting our strong cash generation in the first nine months of the year. While we continue operating across an uncertain market, we remain confident our ability to deliver profitability, margin and cash flow to our stakeholders while continuing to invest behind our strategy.
Okay. Yeah. Good morning at the stomach, let me get to the question. The first question first on the commercial side like I'll just.
Say again that the the environment. This year all year frankly has been cautious it's been uneven it's been challenging all that said I would say one thing that has held true is investments in technology continue to be a priority for all of our customers what that looked like in terms of their spending.
Has been pretty consistent throughout the year as well commercial customers has remained focused on cost optimization throughout the year on operating efficiency unexperienced, both employee and customer experience and they have been more focused on consumption based in radical solutions like cloud.
Al Morales: That concludes the financial summary. As always, we will provide updated views on the macro-environment and our business on our future earnings cost, and with that, I'll ask the operator, open it up for questions. We would ask each of you to want me your questions to one with a brief follow-up. Thank you.
Much more hesitant to make significant upfront capital investments and very much focused on managing their costs throughout the year given the fact that we continue to not have the clarity I'd say in the business in the business environment that would give them the confidence.
Operator: If you like to ask a question, please press star, followed by one on your telephone keypad now. If you change your mind, please press star for the by two. When preparing to ask your question, please ensure your one is unmuted, actually.
To invest more heavily.
Now remember what we're seeing from from where our customers are investing and how they're investing across cloud security in some of these areas that I called mission critical critical has been very strong clouds up double digit security's up double digit software is up significantly and this is the customer reflecting the knee.
Samik Chatterjee: Our first question today comes from Samik Chatterjee from Davey Morgan. Samik, your line is now open. Please go ahead.
Chris Leahy: Hi. Thank you and thanks for taking my question. I'll just have two quick ones and I'll ask both together if that's okay. Chris, I think broad sort of investor concern here has been that most of the resilience we've seen in total spending from customers has been held by the public sector and beyond that when you look at the broader customers beyond public sector, there hasn't been as much momentum and in fact momentum is spending is probably deteriorating on the commercial side.
Chris Leahy: Can you sort of dive into what you're seeing from a pipeline perspective going sort of just beyond public sector and is there sustainability of demand from the commercial accounts. And from my second one, I mean, obviously we're getting close to the end of the year and maybe any insights you have into how you're thinking about next year's spending, we haven't seen two consecutive viewers of sort of significant declines in a while in enterprise spending.
Need for technology to derive their missions forward.
In terms of the real impact of commercial I would look to hardware and in particular client you know, we we saw some budget loosening up a little bit in the second quarter, and we anticipated that that would lead to a modest.
Recovery I'd say in the back half of the year in hardware you in particular and the client device. That's not proved to be true our customers in across corporate and small business.
Are not seeing the clarity in the business climate, and therefore, not not willing to increase their sent in that area, but net net what I would say that commercial is still.
Still investing behind technology in a different bucket a bucket that is more cloud based right now more radical more prudent and measured around the immediate spend but still very much seeing technology is critical to there to there.
Chris Leahy: So any thoughts if we are at least looking at a year where you should be expecting higher spending from a lower level base or are we looking for another year of declines from customers? Thank you. Okay, yeah, good morning and sorry. Let me get to the question. The first question is first on the commercial side. Look, I'll just say again that the environment this year, all year frankly has been cautious, it's been uneven, it's been challenging.
Mission as I said, you know as we think about next year look we'll give you our views if we get through the year. You know one thing I'd say again about client devices is we are not you know we're not seeing the pick up.
Or or signs of a pick up that we were hoping to see in the last half of the year. You know so when that happens, we'll see but once there's clarity in the market, we might get to see that but we have not seen those signs just yet.
Chris Leahy: All that said, I would say one thing that is held true is investments in technology continue to be a priority for all of our customers. What that's looked like in terms of their spending has been pretty consistent throughout the year as well. Commercial customers have remained focused on cost optimizations throughout the year on operating efficiency on experience both employee and customer experience. And they have been more focused on consumption-based and retable solutions like cloud, much more hesitant to make significant upfront capital investments and very much focused on managing their cost throughout the year.
And you know, that's that's where I believe it I think we've got to get through the last couple of months, Here's what I just close with the good news, which is the investment behind our strategy is positioned CDW to be able to offer our customers a broad portfolio and we are seeing when they need help.
With their technology, no matter, where it sits across the across the full stack or the lifecycle, our sales and technical teams are there and the good news is I'm really pleased with what I'll say to the engagement the activity the discussion and the depth with which were inbreeding our relationships with those <unk>.
Chris Leahy: Given the fact that we continue to not have the clarity I say in the business environment that would give them the confidence to invest more heavily. Now, remember what we're seeing from where our customers are investing and how they're investing across cloud, security, and some of these areas that I call mission critical has been very strong. Clouds up double to security, and this is the customer reflecting the need for technology to drive their mission for.
Customers, so feeling very good about when we intend to come out of the curb will accelerate out with our customers you've seen that in the past and I wouldn't expect it to be any different this time.
Thank you next question comes from <unk> from Morgan Stanley <unk>. Please go ahead.
Awesome. Thank you very much for taking my questions I have two as well [noise] Chris.
Chris maybe can we just start out can you just give us a bit more detail on linearity in the quarter and specifically how the trends progressed from July through September and am to October and and how that has influenced your updated expectations for the full year and then I have a follow up thank you.
Chris Leahy: In terms of the real impact commercial, I would love to have hardware and in particular clients. You know, we saw some budgets loosening up a little bit in the second quarter and we anticipated that that would lead to a modest recovery essay in the back half of the year of hardware in particular in the client's advice. That's not proof to be true. Our customers in across corporate and small business are not seeing the clarity in the business climate and therefore not willing to increase their spend in that area.
Chris Leahy: But net net, what I would say about commercial is still investing behind technology in a different bucket of bucket that is more cloud-based right now, more radical, more prudent and measured around the immediate spend, but still very much seeing technology as critical to their mission, as I said. You know, if we think about next year, look, we'll give you our views as we get through the year. You know, one thing I say again about client devices is we are not, you know, we're not seeing the pick-up or signs of a pick-up that we were hoping to see in the last half of the year.
Yeah sure Eric here I I did say it was pretty stable throughout the whole quarter, you'll remember in hue to we talked about an uptick as we went through the quarter and that gave us some level of confidence that you know there might be some more clarity of the business climate in Q3, we just kind of fell on the same level of activity.
Across the three months.
Okay Super Thank you very much for that Chris and then L. I you know I just.
[noise] wants to dig into your gross margin comments a bit you know we've heard for several quarters now about a mix shift to these more complex solutions that that are obviously higher margin. When we eventually see a mix shift towards more transactional sales as you've kind of caution dust as we look forward you know do you expect that this will drive.
<unk>, where are you from these complex solutions are can kind of both of these trends coexist together because I think it does have an important influence on how how we think about gross margins in the future. So if you could just kind of help us understand if this is a zero sum game or if you can see strong transactional alongside complex <unk> strength and complex solutions and what that would do for her.
Chris Leahy: You know, so when that happens, we'll see, but once there's clarity in the market, we might get to see that, but we haven't seen those signs just yet. And, you know, that's where I leave it, I think. We've got to get through the last couple of months. Here's what I just close with, the good news, which is the investment behind our strategy as physicians, the WTB able to offer our customers the broad portfolio and we are seeing when they need help with their technology, no matter where it sits across the, across the full stack or the life cycle.
Martin So it'd be helpful. Thank you.
Yeah, Thanks, and good morning <unk>.
I I think they definitely can coexist I think what we've seen an environment, Eric it's essentially I'll I'll take commercial customers kind of fixing on their span in choosing to wait that towards more of these noted down revenue streams. If you will and holding back on some of these other spend items in I T R, where I'm, particularly in client.
But our expectation and our expectation was that with less uncertainty and the <unk> economic environment, We would see an incremental pick up on the hardware side, and particularly clients and so the expectation would be that this durable trend of our noted down revenues would persist and likely self paced.
Chris Leahy: Our sales and technical teams are there and the good news is I'm really pleased with what I'll say is the engagement, the activity, the discussion, and the depth with which we're in grading our relationships with those customers. So feeling very good about when we kind of come out of the curve will accelerate out with our customers, you've seen that in the past and I wouldn't expect it to be any different this time. Thank you.
<unk>, but we also we see pick up in some other category. So do do believe that that <unk> would come it exists for not seeing in the current environment and the more cautious environment. That's <unk> hopefully the future will hold.
Eric Woodring: Our next question comes from Eric Woodring from Morgan Stanley. Eric, your line is now open. Please go ahead. Awesome. Thank you very much for taking my questions. I've to as well.
Chris Leahy: Chris, maybe can we just start out? Can you just give us a bit more detail on linearity in the quarter and specifically how the trends progressed, you know, from July through September and into October and how that has influenced your updated expectations. For the full year and then I will follow. Thank you. Yes, sure Eric. Here's I just say it was pretty stable throughout the whole quarter. You remember in Q2 we talked about an uptick as we went through the quarter and that gave us some level of confidence that, you know, there might be some more clarity in the business climate. In Q3 we just kind of saw the same level of activity across the three months. Okay, super. Thank you very much for that, Chris.
Our next question comes from David votes G. P. S. David <unk>. Please go ahead.
Great. Thanks, guys for taking my question, so mate too if I may so can you kind of maybe just touch on sort of the demand signals that you're seeing out there a little bit more robustly in terms of maybe what you're hearing from customers versus kind of the backlog signals that you're hearing how much of the weakness is macro related you think vs. Some continued normal <unk>.
<unk> I know you mentioned you know <unk> netcom sounds like it's back abnormal historical levels with public as well I just wanted to <unk> would love a little bit more color. There and then when you think about kind of <unk> 24, and maybe go back to Sam explained you know it certainly sounds like some of your related companies and your ecosystem, we're talking to them.
Eric Woodring: And then I just wanted to dig into your gross margin comments a bit. You know, we've heard for several quarters now about a mix shift to these more complex solutions that are obviously higher margin. When we eventually see a mix shift towards more transactional sales as you've kind of cautioned us as we look forward. Do you expect that this will drive a mix away from these complex solutions or can kind of both of these trends.
A little bit more robustly about demand, particularly in let's say P. C client just trying to get a sense for maybe what the disconnect is from a timing perspective, maybe a windows 11 refresh perspective, just any more color there would be incredibly helpful. Thank you.
Yeah sure. It's good morning, David <unk>, I'll I'll I'll start overall I'll.
I'll, just kind of break it down a bit.
<unk>, So look as Chris suggested in queue to what we were seeing from customers might've suggested that with a bit more clarity of the economic environment that things would pick up and again, we noted that we would have anticipated that would be more I T hardware and P. C that is not played out and we.
Eric Woodring: Colleagues just together because I think it does have an important influence on what how we think about gross margins in the future. So if you just kind of help us understand if this is a zero some game or if you can see strong transactional long side complex, strengthening complex solutions and what that would do for gross margins. That would be helpful. Thank you. Yeah, thanks and good morning, Eric. I think they definitely can code this.
Have seen that this kind of really sentiment driven.
Environment has driven buying behavior, so on the commercial side corporate and small business.
Eric Woodring: I think what we've seen in this environment. Eric is essentially, I'll take commercial customers kind of fixing on their spend and choosing to wait that towards more of these netted down revenue streams, if you will, and holding back on some of these other spend items and IT hardware and particularly in client. But our expectation and our expectation was that with less uncertainty in the economic environment, we would see an incremental pick up on the hardware side and particularly client.
We would say stable, but not showing a pickup with respect our public business first they've executed exceptionally well, but I would say kind of pretty much in line with expected seasonality and then maybe lastly, I would just note in the international market, we anticipated that you would see.
Some moderation on the demand side in Q3 and in our expectations for Q4, I would say that's worse than expected and we would call. It as maybe a few quarters behind what we've seen in the <unk> market in the U S. So there are a couple of the puts and takes in terms of the demand.
Eric Woodring: And so the expectation would be that the durable trend of our netted down revenues would persist and likely help pace net sales, but we also would see pick up in some other categories. So do you believe that that code would code exists for not seeing it in the current environment in the more cost environment. That's what hopefully the future holds.
<unk>, what we saw in Q3 as well as two four and then David just to your point on backlog has Chris suggested in her prepared remarks are backlog is nearing normalization you know maybe the the lagging piece would be more networking and but we're getting close to what we would call normalization so no significant and.
David Vogt: On that question, come from David Vogt of UBS. David, your line is not open. Please go ahead. Great, thanks guys for taking my question. So, maybe two if I may. So, can you kind of maybe just touch on sort of the demand signals that you're seeing out there, a little bit more robustly in terms of maybe what you're hearing from customers versus kind of the backlog signals that you're hearing. How much of the weakness is macro related, you think, forces?
Packed as we sit here now.
Think so and and on the.
On the on the on the P. C side. The question you asked about a potential quote unquote disciplined and I'd say a couple of things you know I mentioned earlier that we have not seen picking up an activity around client devices and as we know that's kind of the last place that our customers start to spend again once their feel.
David Vogt: So, continue normalization of backlog. I know you mentioned, you know, necktoms sounds like it's back at normal historical levels with public as well, but just want to love a little bit more color there. And then when you think about kind of calendar 24, maybe go back to Samik's point, you know, it totally sounds like some of your related companies in your ecosystem are talking a little bit more robustly about the man, particularly in let's say PC client.
<unk>, a better about the business complaint market, but what I would say is we are certainly closer to the end of a downside than we are to the beginning so that's quite clear the other the other point I would make is that a consumer tends to react earlier to market changes than the.
David Vogt: And just trying to get a sense for maybe what the disconnect is from a timing perspective, maybe a Windows 11 refresh perspective, just any more color there would be incredibly helpful. Thank you. Yeah, sure. Good morning, David. Is that all I'll start a world.
Commercial business. So when you see a bit of a lag in terms of what we are suggesting versus what you might see from Oem's et cetera part of that is who is doing the buying the second is the timing of the market in terms of the kind of flush of of inventory into the channel from the Rams and distributors.
Al Morales: I'll just kind of break it down a bit by segment. So, look as Chris suggested in Q2, what we were seeing from customers might have suggested that with a bit more clarity of the economic environment that things would pick up. And again, we noted that we would have anticipated that would be more IT hardware and PC. That has not played out and we have seen this kind of really sentiment driven environment has driven buying behavior.
And then us to the end market, so that will account for a quarter or two of differences.
Yeah.
Our next question comes from <unk> from <unk>.
And what is now open. Please go ahead.
Yep. Good morning, everyone I'll have to as well <unk> both of your Christmas being some degree of chaos at the federal level from a budget perspective sounds like September quarter, when relatively find for you folks, but you know there's this fortify the extension that I believe expires in a couple of weeks, how do you think about federal spending in the disk.
Al Morales: So on the commercial side corporate and small business, you know, we would say stable, but not showing a pick up with respect to our public business. This first they've executed exceptionally well, but I would say kind of pretty much in line with expected seasonality. And then maybe lastly, I would just note in the international markets, we anticipated that you would see some moderation on the demand side in Q3 and in our expectations for Q4.
<unk> and just the wisdom this extended shutdown potentially.
Yeah. It looked I guess I'd say it this way we've been we've been here. So many times before the team knows how to manage their both the uncertainty and if we do you know have a shutdown have to manage through that you know we're past the year end, which is good.
Al Morales: I would say that's, you know, worse than expected. And we would call it as maybe a few quarters behind what we've seen in the demand market in the US. So there are a couple of the puts and takes in terms of the demand environment what we saw in Q3, as well as Q4. And then David, just to your point on backlog, as Chris suggested in our prepare remarks, our backlog is nearing normalization, you know, maybe the lagging piece would be more networking. But we're getting close to what we call normalization. So no significant impact as we sit here now. Thanks, Al.
I would say that projects that are in flight already will stay in place there might be some projects that origin flight that might be on hold I'd say, that's really we're looking at 2024, but the good news is we have a team that is executed in and out of these these environments I guess sadly in some regards to in N out of these environments. Many many times and I have great.
Confidence they'll do a terrific job this time as well.
Fair enough isn't.
If I could just maybe follow up if I think about the operating margin performance with the company and calendar twenty-three you know based on the midpoint of you guys with a somebody is going to be up like I don't know 80 90 basis points you over here on the operating margin site and there's obviously a bunch of <unk> I'm a bit of cyclical like client device is gonna be welcoming for the secular how do you think about.
Chris Leahy: And on the on the on the PC side, the question you asked about a potential, you know, quote, unquote, dyskinetic say a couple of things. You know, I mentioned earlier that we have not seen picking up an activity around client devices. And as we know, that's kind of the last place that our customers start to spend again once they're feeling better about the business market. But what I would say is we are certainly closer to the end of a downside than we are to the beginning.
Neil What's the Bureau ability of these operating margins as you go forward and if you reflect on the field with them come to 23, how much would you say is cyclical that perhaps is not sustained into the out years. Thank you.
Sure and thanks for the question. So a couple of things that would note I think if I had to kind of parse the.
Chris Leahy: So that's quite clear. The other, the other point I would make is that consumer tends to react earlier to market changes than the commercial business. So when you see a bit of a lag in terms of what we are suggesting, which is what you might see from OEMs, et cetera, a part of that is who is doing the buying. The second is the timing of the market in terms of the kind of flush of inventory into the channel from the OEMs and distributors and then us to the end market. So that will account for a quarter or two of differences.
Pick up we've had in our operating margins a few things number one is we've benefited from obviously really strong Ah gross profit margins up 200 basis points year over year and that is a.
A function of a few things, but I'd say, most notably mix of business and so a lot of that gross profit margin pick up is dropping down into our operating margins. The other piece it would be really just our efforts to align our expenses.
With what we're seeing in the business and demand vectors and that is you know our efforts Q1, two two along those lines certainly help we have kind of a targeted range and I've talked about this before of high.
Amit Daryanani: On that question comes from Amit Daryanani, from Evka, Asiya. I'm actually a lot of sound openness. Please go ahead.
Chris Leahy: Good morning, everyone. I have two as well. You know, both of your questions being some degree of chaos at the federal level from a budget perspective sounds except in the quarter when relatively fine for you folks, but you know, there's a spotify the extension that I believe expires in a couple of weeks. How do you think about federal spending in the December quarter? And just a whiff from this extended shutdown potentially?
Hi, 50 fours into the 55 of expenses relative to G. P and that's kind of our sweet spot in this environment, that's where we're operating now I'll just say that is notwithstanding we continue to invest behind our strategy, but at the same time, we have significant efforts to drive productivity efficient.
See kind of managing our expenses commensurate with with where are we standing so they're kind of a major components.
Chris Leahy: Yeah, Amit, look, I guess I'd say it this way. We've been here so many times before. The team knows how to manage through both the uncertainty. And if we do, you know, have a shutdown, have to manage through that, you know, we're past the year end, which is good. I would say that projects that are in flight already will stay in flight. There might be some projects that aren't in flight that might be on hold.
Better driving or operating margins. So I would just maybe just say that in terms of durability. You can expect we're gonna continue on that efficiency front, while we invest.
The impact or influence of gross margin certainly the netted downgrowth is gonna continue to help that in that regard, but it has we mixed more in depth transactional products and P. C start to come back you could have some dilution effect. There. So we certainly have moved quickly on the operating margin some of that ultimately <unk>, giving back.
Chris Leahy: I say that's really we're looking at 2024, but the good news is we have a team that is executed in and out of these these environments. I guess sadly in some regards, but in and out of these environments, many, many times. I have great confidence. They'll do a terrific job this time as well. Fair enough. If I could just maybe follow up, you know, if I think about the operating margin performance of the company in calendar 23, you know, based on the midpoint of your guys in the summer, it's going to be up like, I don't know, 80, 90 basis points every year on the operating margin side.
<unk>, which you're gonna see different geography in our income statement as it plays out.
On next question comes from <unk> Sharon of Stifel. Macho line is now open. Please go ahead.
Oh, yes, thanks, and good morning, I'm, hoping of course that you can elaborate on the comments about the weakness in the international markets and you're not the first one calling out specifically in in Europe. So is that something that you saw a throughout the quarter and al you did mention that you expect that softness to continue.
Chris Leahy: And there's obviously a bunch of levers over here. Some of it is cyclical, like client device is not doing well. Some of it is secular. But how do you think about, you know, what's the durability of these operating margins as you go forward? And if you reflect on the tailwind and calendar 23, how much would you say is cyclical that perhaps does not sustain into the out years? Thank you. Sure. Thanks for the question.
Over the next couple of quarters. So anything more you can that would be great.
Yeah, good morning that yeah on.
On the international front, we did start to see Ah down kick in queue to which we mentioned on our last call and I would just say you know it it continued with a steepness, we hadn't anticipated in the third quarter and that is across the visit very very similar to what we've seen in the U S. Throughout.
Chris Leahy: So a couple things that would note, I think if I had kind of parsed the pickup we've had in our operating margins, a few things. Number one is we've benefited from obviously really strong growth profit margins up 200 basis points year of year. And that is a function of a few things, but I say most notably mix of business. And so a lot of that gross profit margin pickup is dropping down into our operating margins.
The year and our expectation is is al mentioned as we're probably a couple of quarters behind on the international front, that's supposed to the UK in Canada in terms of performance.
Chris Leahy: The other piece on it would be really just our efforts to align our expenses with what we're seeing in the business and demand vectors. And that is, you know, our efforts to one to two along those lines certainly helps. We have kind of a targeted range and I've talked about this before of, you know, high 54s into the 55s of expenses relative to GP. And that's kind of our sweet spot in this environment that's where we're operating.
And demand and kind of certainty in the market there.
So that's what we're seeing.
Oh, Okay, great. Thank you and just regarding P. C's Ah there's been buzz recently about a I enabled P. C's down the line and potentially being another catalyst for upgrade cycle is are you hearing that at all from customers and supply.
<unk> and that's that's something that folks will get excited about at some point.
Chris Leahy: And I'll just say that is notwithstanding we continue to invest behind our strategy, but at the same time we have significant efforts to drive productivity, efficiency kind of managing our expenses, commences with with where we stand. And so they're kind of the major components that are driving our operating margins. And so I would just maybe just say that in terms of durability, you can expect we're going to continue on that efficiency front while we invest the impacts or influence of gross margins.
Yeah. It is a great question you know AI is on everybody's mind and I I think the short answer to your question is yes, we do expect customers to get excited at a at a I enabled client devices. If we just take a step back and I mentioned in my prepared remarks that you know we're kind of at the front end of.
Commercialization and development, but obviously, it's going very quickly and the way we think about it as we're building what I would call her and and Fullstack capabilities AI is gonna be integrated into all technology products across the full stack, it's gonna need the infrastructure optimized to support AIG, it's going.
Chris Leahy: Certainly the netted down growth is going to continue to help that in that regard, but as we mix more into transactional products and PCs start to come back, you could have some dilution effect there. So we certainly have moved quickly on the operating margin. Some of that ultimately could see giving back, but you're going to see different geography and income statement as it lives out.
Need services to be able to move from arrival to adoption.
And so we are very much aligned with all of our partners in tact building practices with our partners around AI enabled technology.
And so yes, we think customers will be excited and again cdw's well positioned to help them make decisions across the full stack and in particular client devices. It's just there's more choice and complexity in the market and you know thinking years back Mad where customers had to think about the technology choice the brand choice.
Matt Sheerin: On next question comes from Matt Sheerin of Stephen. Matt Sheerin is now open, please go ahead. Yes, thanks, and good morning. I'm hoping, Chris, that you can elaborate on the comments about the weakness in international markets. You're not the first one calling out that specifically in Europe. Is that something that you saw throughout the quarter? And Al, you did mention that you expect that softness to continue over the next couple quarters.
Then we had consumption then we have capex versus Opex models now we've got intelligence across all of the you know the full stack, it's getting more complicated.
That said, there's a very high expectation within all of our customers that their C. T. As in C. I OS and their line of business leaders are thinking about how artificial intelligence could help drive their efficiency and their experiences for their customers. So what we see it as an accelerant I think from a timing perspective.
Matt Sheerin: So anything more you can add would be great. Yeah, good morning, Matt. On the international front, we did start to see a downkick in Q2, which we mentioned on our last call. And I would just say, you know, it continued with a steepness we hadn't anticipated in the third quarter. And that is across the business, very similar to what we've seen in the US throughout the year. And our expectation, as Al mentioned, is we're probably a couple quarters behind on the international front. That's both the UK and Canada in terms of performance and demand and kind of certainty in the market there. So that's what we're seeing. Okay, great.
It will move fairly quickly, but we are still at the very front is authenticated.
And our next question comes from told why George One from Barclays. Georgia line is not what can you. Please go ahead.
Oh, Hey, guys. So thanks for taking my questions I have to pick one supposedly can you just maybe talk while shagging and especially.
<unk> kind of thing.
Did you guys talk all kind of weak or international UK town, just know curious it's official <unk> industry weakness all maybe it's <unk>, maybe you can double click on that all the shagging both in the U S and also in overseas markets.
Chris Leahy: Thank you. And just regarding PCs, there's been buzz recently about AI-enabled PCs down the line and potentially being another catalyst for upgrade cycle. Are you curing that at all from customers and suppliers? And is that something that folks will get excited about at some point? Yeah, Matt, it's a great question. You know, AI is on everybody's mind. And I think the short answer to your question is yes, we do expect customers to get excited about AI-enabled client devices.
Yeah, I think the question was I'm sure getting high I, George Good morning, and.
Look here, here's what I would say, we hold our <unk> accountable over the long term to outperform.
Outperforming the market by two to 300 basis points and we feel very confident that we're continuing to do that you know when I think about other periods when we had weaker.
Chris Leahy: And if we just take a step back, and I mentioned in my prepared remarks that, you know, we're kind of at the front end of commercialization and development, but obviously it's going very quickly. And the way we think about it is we're building what I would call our end-end full stack capabilities. AI is going to be integrated into all technology products across the full stack. It's going to need the infrastructure optimized to support AI.
Week or hardware environment 2016 comes to mind and in that environment, We had hardware declines, but we noted that our net net is down solutions, which a nose you know back when she doesn't exceed would've been software and software assurance and things like that were growing at a faster base dashboard to now.
And when we look at the customer spend what customers are investing sort of CDW. We're seeing we're seeing a delta of you know more than 5%. So it's a fairly big Delta and we feel very confident that we continue to take sure across our markets and it will do so in 2023 and over the long run.
Chris Leahy: It's going to need services to be able to move from arrival to adoption. And so we are very much aligned with all of our partners in tech building practices with our partners around AI-enabled technology. And so, yes, we think customers will be excited. And again, see, we use well-positioned to help them make decisions across the full stack and in particular client devices. It's just there's more choice in complexity in the market.
Okay, Great just a quick one if I can just as a follow up but just the thing comes helpful. And he took him what kind of both of them deals. You know given you know just you know <unk> you know kind of imagine accretion than the kind of <unk> guidance, just curious any thoughts and color you can sure just on them. So they continue this survey you know real well.
Chris Leahy: And, you know, thinking years back, Matt, where customers had to think about the technology choice, the brand choice, then we add consumption, then we add CapEx versus OPEX models. Now we've got intelligence across all of the, you know, the full stack. It's getting more complicated. That says there's a very high expectation within all of our customers that there's CTOs and CIOs. And their line of business leaders are thinking about how artificial intelligence can help drive their efficiency and their experiences for their customers. So, what we see as an accelerant, I think from a timing perspective, it will move fairly quickly. But we are still at the very front stage.
<unk> D O C any significant segments you all the cough.
Chris Leahy: Thank you.
Yeah, I would say on the M&A side, I think about that as a vehicle for investing behind our strategy and you've seen us invest both organically into your acquisition very successfully and again to the to the team for on companies that we joined with on both sides for both moving quickly and you know creating.
More value for our customers as a result of those investments Elizabeth primarily as you know along capabilities that are advanced solutions related cloud security digital.
George Wang: And our next question comes from George Wang from Barclays.
Things that you are now seeing really strengthen your market and strengthen our business. So we will continue to look at M&A Opportunistically and if it's the right. The right fit we certainly would would consider moving forward is always on the docket were never out of the market.
George Wang: George O'Lean is now open, please go ahead. Oh hey guys, thanks for taking my question. I have two quick ones. Firstly, can you just maybe talk about Sheerin, you know, especially by Geo. You guys talk about kind of weaver international UK, Canada, just, you know, curious, it's a finishing off for industry weakness, or maybe some shareships, maybe you can kind of double click on that on the Shagging, both in the US and also in overseas markets. Yeah, I think the question was on share date.
But I'll I'll have I'll have a chat a little bit about cash positions.
Yeah, Georgia I would just just add obviously m&a's always front and center for Us and and so you think about our capital priorities were gonna balanced strategically where are the opportunities that are gonna add value to us as well as the <unk>, where is where our evaluations and where can we kind of best deploy our our money. So you know.
Chris Leahy: Hi George, good morning. And look, here's what I'd say. We hold ourselves accountable over the long term to outperforming the market by two to 300 basis points. And we feel very confident that we're continuing to do that. You know, when I think about other periods when we had weaker hardware environments, 2016 comes to mind. And in that environment, you know, we had hardware declines, but we noted that our net netted down solutions, which in those, you know, back in 2000, Steve would have been software and software insurance and things like that.
<unk> on that you can see the kind of we do have a cash position in place and it is a volatile on variable environment. So we certainly value optionality with respect to our capital in this environment George to your your comment about you know where can we expect we're gonna look across and will continue to look across that.
Ecosystem of opportunities our last acquisition was inquisitive that was in the cloud space, mostly focused in federal So you can imagine some of those revenue streams would have a higher concentration of netted down but I wouldn't per se.
Chris Leahy: We're growing in a faster base, fast forward to now. And when we look at the customer spend what customers are investing sort of CDW, we're seeing, we're seeing a delta of, you know, more than 5%. So it's a fairly big delta. And we feel very confident that we need to take share across our markets and we'll do so in 2023 and over the long run.
That's part of our strategy, it's going to be more about the capabilities so more to come on that front.
And our next question comes from a very <unk> <unk> from Bank of America.
Your lifestyle.
Hi, Thank you for taking my questions I have two of them one traveling from Chris.
<unk> is there a way to quantify the impact of <unk> items on your on your sales growth in 2023.
Al Morales: Okay, great. Just a quick one. If I can't just follow up, but just just in comes up for any tucking kind of both on deals, you know, given, you know, just, you know, netted down, you know, kind of a modern accretion and the kind of, you know, bad at FDF guidance, just to curious any thoughts and color. You can share just on so they continue to survey, you know, row up kind of, you know, tucking deals, the any significant segments you want to call out.
And is there anything unique about this year or as we look into 2024 2025 should we expect a similar level of your on your impact or even higher because I mean, it looks like it makes sense for you guys to make shift more into these items. So just your thoughts on that.
Al Morales: Yeah, I would say on the M&A side, I think about that as a vehicle for investing behind our strategy and you've seen us invest both organically and through acquisition very successfully and again to the team for on companies that we've joined with on both sides for both moving quickly and, you know, creating more value for our customers as a result of those investments. And those have been primarily as you know along capabilities that are advanced solutions related cloud security digital things that you are now seeing really strengthen the market and strengthen our business.
Sure <unk>. So a few things number one we've said before and will continue to say, we would expect as we look forward that netted down revenues would outpace our overall net sales. If you will so I'd say give you that one data point I will note that the <unk>.
Internet is down this year has been more extreme in a couple of metrics that I'll. Just note number one netted down for the quarter of $400 million. It was 7% of our net sales, but 32.6% of our G. P. And you can go back sequentially and look at what that looked like but.
Al Morales: So we'll continue to look at M&A opportunistically. And if it's the right, you know, the right fit, we certainly would would consider moving forward is always on the docket we're never out of the market. But I'll have out a little bit about cash positions. Yeah, George, I would just just that obviously M&A is always front and center for us and if we think about our capital priorities, we're going to balance strategically where the opportunities that are going to add value to us as well as the tactical where is where our valuations and where can we kind of best deploy our minds.
It's notable both sequentially and I'd say versus prior year, if you kind of try.
Try to put those dollars are more even basis with net sales that grocer you'd get a sense for the impact and I think and Chris alluded to this it would suggest that our decline in net sales is pretty considerably less than if you're located on this customer.
Spend basis. So there there are a couple of things you can look at it from a map perspective that would show the pretty notable growth an outsize impact heading down has had this year.
Al Morales: So, you know, stay tuned on that. You can see the kind of we do have a cash position in place and it is a volatile and variable environment. So we certainly value optionality with respect to our capital in this environment. George, to your your comment about, you know, where can we expect we're going to look across and we'll continue to look across the ecosystem of opportunities. Our last acquisition was in quid that was in the cloud space, mostly focused in federal.
Okay. Thanks for the details there Chris let me ask you. This on the prepared remarks, you talked about device refreshes remaining on the back burner as.
As you look out over the next couple of quarters in 2024.
Given fundamentals like you know the age of P. C's in the market I mean, do you expect to see any device refreshes either in the client site or in the data center side and and I think you've said that typically when that happens cdw's outperformance to the USA spend as at the higher end of the two to 300 basis points range.
Al Morales: So you can imagine some of those revenue streams would have a higher concentration than that it down, but I wouldn't per se six. That's part of our strategy. It's going to be more about the capabilities. So more to come on that.
So I guess, what I'm getting at is even though the macros weaker today should we expect that when the macro improves and do you get this added benefit of device refreshes that you know you're outperformance can actually be at the higher end of of the normal range. So so so can you give us your thoughts on that please.
Ruplu Bhattacharya: And our next question comes from Ruplu Bhattacharya from Bank of America, Ruplu, your lunch now, I think. Thank you for taking my questions. I have two of them, one for Al one for Chris. Al is there a way to quantify the impact of netted down items on year on year sales growth in 2023. And is there anything unique about this year, or as we look into 2024, 2025, should we expect a similar level of year on year impact, or even higher, because I mean, it looks like it makes sense for you guys to make shift more into these items.
Yeah remember those mid morning, and yeah, I would say you've got it right or track record of outperformance. We were seeing refreshing hardware is strong and in your part of that is is our ability to gain share and part of that is the.
The fact that those are recognized on the top line net basis, and so we tend to outperform our premium.
As a result of those two things in terms of looking for you know I just repeat a little of what I said Roucou, which is we do we do feel that clients. The downswing and is kind of where at the we're at the.
Ruplu Bhattacharya: So just your thoughts on that? Sure, Ruplu. So a few things. Number one, we've said before, we're continuing to say we would expect, as we look forward, that netted down revenues would outpace our overall net sales, if you will, so I'd say give you that one data point. I will note that the mix in netted down this year has been more extreme in a couple of metrics that I'll just note. Number one, netted down to the quarter of $400 million with 7% of our net sales, but 32.6% of our GP, and you can go back sequentially and look at what that's look like, but it's notable, both sequentially and I'd say versus prior year.
Back end of that cycle, if you will as opposed to the start of that cycle that said as al mentioned, it's really a sentiment driven market right now driving demand and until our larger commercial customers have a level of confidence in the business climate.
That Ah client device and even data center refresh will be kind of the last the last point, where they start to invest more dollars yeah, you're right. The whereas we've got a refresh cycle was that four year old totally devices et cetera got when 11 coming through there are a lot of things in the market.
Ruplu Bhattacharya: If you kind of try to put those dollars on more even basis with net sales that grew up, you'd get a sense for the impact. And I think in Chris alluded to this, it would suggest that our decline in net sales is pretty considerably less than if you looked at it on this customer stand basis. So there are a couple of things you could look at from a map perspective that would show the pretty notable growth and outside impact netted down this year.
It will certainly be a tailwind buffer client devices AI as we mentioned embedded in Ah client devices. Those are all going to be positive and I would also add that our our teams are definitely having conversations with customers about refresh in terms of planning, we're just not seeing that.
Al Morales: Okay, thanks for the details there.
Convert and again will be ready when they're ready to convert but it's just not to Virginia.
Chris Leahy: Chris, let me ask you this on the prepared remarks you talked about device refreshes remaining on the back burner, as you look out over the next couple of quarters and 2024. Given fundamentals like, you know, the age of PCs in the market, I mean, do you expect to see any device refreshes either in the client side or in the data center side. And I think you said that typically when that happens CDW's outperformance to the US IT spend is at the higher end of the 2 to 300 basis claims range.
And our last question today comes from Adam Tyndall from Raymond James Adam Yolanda. Please.
Please go ahead.
Alright, I'd say the best for last L. I wanted to maybe start by reflecting reflecting on 2000 twenty-three the silver lining this year I think it would cost management.
<unk> been protecting earnings all your despite very volatile revenue and I think you mentioned that opex to G. P. As your metric, which makes sense, but is now optimal. So the question would be as we look forward correct me, if I'm wrong, but it it sounds like the outlook for 2024 based on what you're seeing is a little bit more muted I see you're not really investing in head count <unk>.
Chris Leahy: So I guess what I'm getting at is even though the macro is weaker today should be expect that when the macro improves and you get this added benefit or device refreshes that, you know, your outperformance can actually be at the higher end of the normal range. So, so, so can you give us your thoughts on that, please. Yeah, we're close this morning and yeah, I would say you've got it right our track record of outperformance when we're seeing refreshes hardware is strong.
<unk> inventory days are very low so you're not hearing up for revenue growth you've got mix shifting on as a headwind for G. P. Dollars. So the question would be how to think about protecting earnings in a more muted environment moving forward would would it be fair for us to anticipate more negative operating leverage moving forward.
Chris Leahy: And in your part of that is is our ability to gain share and part of that is the fact that those are recognized on the top line net basis. And so we tend to outperform our premium as a result of those two things in terms of looking forward, you know, I just repeat a little of what I said, which is we do, we do feel that clients is the down swing and is kind of we're at the back end of that cycle, if you will, as opposed to the start of that cycle.
Why or why not things.
Sure. Thanks have a great question, a couple of things I would call out first like I gave you. The the range. How we think about expenses just understand kind of underneath the engine. There. There are puts and takes in terms of the where are we driving productivity where are we driving efficiency.
Not only to kind of keep within that range, but also to make sure that we can appropriately fun investment opportunities I think what you can expect is those efficiency efforts will continue but we will continue to invest in you noted that our head count was slightly up but.
Chris Leahy: That said, as Al mentioned, it's really a sentiment driven market right now driving demand and until our larger commercial customers have a level of confidence in the business climate, you know, when things that client device and, you know, even data sensor refresh will be kind of the last. The last point where they start to invest more dollars now you're right, the we're at we've got a refresh cycle and got four year old covid devices that said we've got 11 coming so there are a lot of things in the market that will certainly be a tailwind for client devices.
It was up if you look at the gross effects of those <unk> that account. It would look at you know more more significant if you will from a row spaces. So look I think it's a it's a balancing act I think.
Adam as we start to see the demand cycle start deterrence, how many areas. We've talked about we would certainly accelerate and continue to ramp up on the investment side, but I would call the efficiency efforts somewhat evergreen and so therefore, when you add that up we're still gonna try to remain within a range I would not be able to tell you <unk>.
Chris Leahy: AIs we mentioned embedded in clients devices, those are all going to be positive and I would also add that our teams are definitely having conversations with customers about refresh in terms of planning we're just not seeing that convert. And again, we'll be ready when they're ready to convert, but it's just not too early.
Minimally every quarter, if we'd show operating leverage there could be some quarters are we saying there was a great opportunity and therefore, we we have less operating leverage or delever, but it's gonna be a big ordered a quarter would kind of that strategic balance that I mentioned on top of that.
Chris Leahy: Yes.
Got it maybe a quick follow up on gross margin and understand its net revenue was benefiting or mix, but we can exclude that you know give it 100 per cent gross margin and strip it out and look at just traditional hardware quote unquote gross margin and at the current level that I'd Love for you then maybe unpack some of the items that might be more cyclical.
Adam Tindle: And our last question today comes from Adam Tindle, from Raymond James, Adam Yoland is now open. Please go ahead. All right, I saved the best for last.
Adam Tindle: I wanted to maybe start by reflecting on 2023, the silver lining this year. I think it's been cost management. You've been protecting earnings all year despite very volatile revenue. And I think you mentioned that topics to GP is your metric, which makes sense, but is now optimal. So the question would be as we look forward, correct me if I'm wrong, but it sounds like the outlook for 2024 based on what you're seeing.
<unk> vs structural and help us to gauge the outcomes because that analysis can get some pretty scary outcomes of returning back to historical levels. I think you can get over a buck a V. P S coming out from somewhere burning that back to the main so if you could unpack the X net revenue gross margin and what cyclical versus instructional that'd be helpful. Thank.
Adam Tindle: It's a little bit arm muted. I see you're not really investing in head counts of modestly sequentially inventory days are very low. So you're not curing up for revenue growth. You've got mix shifting on as a headwind for GP dollars.
<unk>.
Yeah, absolutely Adam So I've talked about in the past, obviously mix matters and we've had a pretty extreme mixed movement, particularly this year on on these noted down revenues in Lou of hardware P C's et cetera.
Al Morales: So the question would be how to think about protecting earnings in a more muted environment moving forward, would it be fair for us to anticipate more negative operating leverage moving forward? Why or why not? Thanks. Sure. Thanks Adam for a question. A couple things I would call out. First, like I gave you the range, how we think about expenses. Just understand kind of underneath the engine there, there are puts and take in terms of the where we driving productivity, where we driving efficiency.
Certainly we would expect that to balance out over time, and so that is a variable that would dilute gross margins. The other piece Adam would be that in general product margins upheld very firm and if you look back over the last two years, they've actually moved up quite a bit so there's been resiliency there.
I'd also note that so in that there is this component of more kind of upmarket premium spend on kind of higher level of higher value product that is persisting and we're seeing that continue to hold off and there may be an element. There that you know what you bought in the way of premium product now you're kind of in it and you're gonna continue.
Al Morales: Not only to kind of keep within that range, but also to make sure that we can appropriately fund investment opportunities. I think what you can expect is those efficiency efforts will continue, but we will continue to invest. And you noted that our head count was slightly up, but it was up. If you look at the gross effect of those that head count, it would look at more significant, if you will, from a gross basis.
To kind of invest in that same way and then the last component Adam I would note and we know this that over time, you could see commoditization, we've not seen that but it's conceivable that some of that could come back over time. So we are at pretty significant levels in terms of gross margin when you add those components up.
Al Morales: So look, I think it's a balancing act. I think Adam, as we start to see the demand cycle start to turn in some of the areas we've talked about. We would certainly accelerate and continue to ramp up on the investment side, but I would call the efficiency efforts somewhat evergreen. And so, therefore, when you add that up, we're still going to try to remain within a range. I would not be able to tell you definitively every quarter if we'd show operating leverage.
Certainly components that I'd reference that are adorable and then some area some components that could be somewhat transitory and we can see fade a bit over time.
No further questions I would like to have a call back to the C. D. W. T replace your remarks.
Al Morales: There could be some quarters where we say there were a great opportunity. And therefore, we have less operating leverage or the lever. But it's going to be a bit quarter to quarter with kind of that strategic balance that I mentioned on top of that. Got it.
Oh, Thank you very much and let me close by recognizing the incredible dedication and hard work of art nearly 15000 coworkers around the globe their ongoing commitment to serving our customers is what makes us successful.
Thank you to our customers for the privilege and opportunity to help you achieve your goals and thank you to those listening for your time and continued interest in city that you al and I look forward to talking to your next order.
Al Morales: Maybe a quick follow up on gross margin. Understand it's, you know, net revenue is benefiting or mix. But we can exclude that, you know, give it 100% gross margin and strip it out and look at just traditional hardware, quote unquote gross margin. And at current level that I'd love for you to maybe unpack some of the items that might be more cyclical versus structural and help us gauge the outcomes, because that analysis can get some pretty scary outcomes of returning back to historical levels.
This concludes today's cool. Thank you everyone for joining you may now disconnect.
Al Morales: I think you can get over a buck of EPS coming out from from reverting that back to the mean that you could unpack the ex net revenue gross margin and what's cyclical versus structural, that'd be helpful. Thank you. Yeah, absolutely, Adam. So we've talked about it in the past, obviously, mixed matters and we've had a pretty extreme mixed movement. Particularly this year on these net-ground revenues in lieu of hardware, PCs, etc.
[music].
Al Morales: Certainly we would expect that to balance out over time. And so that is a variable that would dilute gross margins. The other piece Adam would be that in general product margins have held very firm and he looked back over the left two years they've actually moved up quite a bit. So there's been resiliency there. I would also note that so within that there is this component of more kind of a market premium spend on kind of higher level higher value product.
Al Morales: That is persisting and we're seeing that continue to hold up and there may be an element there that, you know, what you bought away premium products now you're kind of in it and you're going to continue to kind of invest in that same way. And then the last component, Adam, I would note and we know this, that over time you could seek a lot ofization, we've not seen that, but it's conceivable that some of that could come back over time.
Al Morales: So we are at pretty significant levels in terms of gross margin when you add those components up. Certainly components that are referenced that are durable in some areas, some components that could be somewhat transitory, you can see a bit of time.
Chris Leahy: And with no further questions, I'd like to hand the call back to the CDW team for closing remarks. Thank you very much and let me close by recognizing the incredible dedication and hard work of our nearly 15,000 co-workers around the globe. Their ongoing commitment to serving our customers is what makes us successful. Thank you to our customers for the privilege and opportunity to help you achieve your goals. And thank you to those listening for your time and continued interest in CDW, Al and I look forward to talking to you next quarter. This concludes today's call. Thank you everyone for joining.
Operator: You may now disconnect.