Q1 2024 CDW Corp Earnings Call

Karla: Welcome to the CDW first quarter 2024 earnings call. My name is Karla, and I'll be coordinating your call today. During the presentation, you can register to ask a question by pressing star followed by one on your telephone keypad. If you change your mind, press star followed by two. I will now hand you over to your host, Steve O'Brien, with investor relations to begin. Steve, please go ahead.

Welcome to D. C. D. W. First quarter 2024 earnings call. My name is Kyle and I'll be coordinating your call today. During the presentation. You can register to ask a question by pressing star followed by one on your telephone keypad. If you change your mind. Please press star followed bite you.

I'll now hand, you over to your host, Steve O'brien, which Investor relations to begin Steve. Please go ahead.

Steve O'brien: Thank you, Carla. Good morning, everyone.

Steve O'brien: Thank you Carla and good morning, everyone. Joining me today to review our first quarter 2024 results are Chris Leahy, Our chair and Chief Executive Officer, and Al <unk>, Our Chief Financial Officer, Our first quarter earnings release was distributed this morning and is available on our website investor CDW Dot.

Steve O'brien: Joining me today to review our first quarter 2024 results is Chris Leahy, our Chair and Chief Executive Officer, and Al Morales, our Chief Financial Officer. Our first 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 during the call. I'd like to remind you that certain comments made in this presentation are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995.

Steve O'brien: Com along with supplemental slides that you can use to follow along during the call I'd like to remind you that certain comments made in the presentation are considered forward looking statements under the private Securities Litigation Reform Act of $19 95, those statements are subject to a number of risks and uncertainties that could cause actual results to differ.

Steve O'brien: 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 8K, which we furnished to the SEC today 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-GAAP financial measures, including non-GAAP operating income, non-GAAP operating income margin, non-GAAP net income, and non-GAAP earnings per share.

Steve O'brien: We're materially additional information concerning these risks and uncertainties is contained in the earnings release and form 8-K, which we furnished to the SEC today and the company's other filings and in the Companys other filings with the SEC CDW assumes no obligation to update the information presented during this webcast our presentation.

Steve O'brien: <unk> also include certain non-GAAP financial measures, including non-GAAP operating income non-GAAP operating income margin non-GAAP net income and non-GAAP earnings per share all non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules, you'll find reconciliation chart.

Steve O'brien: In the slides for today's webcast and in our earnings release and form 8-K. Please note all references to growth rates or dollar amount changes in our remarks today are versus the comparable period in 2024, 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 written permission from the company with that let me turn the call over to Chris. Thank you Steve. Good morning, everyone. I'll begin today's call with a brief overview of our performance our strategic progress and view for the balance of the year al will.

Steve O'brien: All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You'll find reconciliation charts in the slides for today's webcast and in our earnings release in Form 8K. Please note, all references to growth rates or dollar amount changes in our remarks today are versus the comparable period in 2024 unless otherwise indicated. A 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 written permission from the company. With that, I will turn the call over to Chris.

Christine A. Leahy: Thank you, Steve. Good morning, everyone.

Christine A. Leahy: I'll begin today's call with a brief overview of our performance, our strategic progress, and our outlook 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.

Christine A. Leahy: 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 your questions.

Christine A. Leahy: Market conditions remained challenging, and our first quarter results came in below our expectations. For the quarter, gross profit was $1.1 billion, 2% lower than last year. Non-GAAP operating income was $404 million, down 7%, and non-GAAP net income per share was $1.92, down 6%.

Christine A. Leahy: Market conditions remained challenging and first quarter results came in below our expectations for the quarter gross profit was $1 $1 billion, 2% lower than last year non-GAAP operating income was $404 million down, 7% and non-GAAP net income per share was $1 92.

Christine A. Leahy: Down 6% in.

Christine A. Leahy: In the first quarter, customers demonstrated caution and concern given tightened macro uncertainty, weighing on capital investment decisions. At the same time, the complexity of the tech landscape continued to ratchet up, particularly given the additional layer of AI and changes in the IT market landscape. This lengthened decision making as customers deliberated on both how to navigate technology roadmaps and when to spend on infrastructure in a challenging economic environment. While activity was reflected in a solid pipeline, with deals being pushed out, our sales and gross profit lagged. Results were also impacted by the federal budget stalemate, which led to a pause in our federal channels. Bottom line, while many of these factors are beyond our control, we are never satisfied.

Christine A. Leahy: In the first quarter customers demonstrated caution and concern given heightened macro uncertainty weighing on capital investment decisions at the same time the complexity of the tech landscape continue to ratchet up, particularly given the additional layer of AI and changes in the it market landscape.

Christine A. Leahy: This lengthened decision, making as customers deliveries on both how to navigate technology roadmap and when to spend on infrastructure and a challenging economic environment.

Christine A. Leahy: While activity was reflected in a solid pipeline with deals being pushed out our sales and gross profit lagged.

Christine A. Leahy: Results were also impacted by the federal budget stalemate, which led to a pause in our federal channel.

Christine A. Leahy: Bottom line, while many of these factors are beyond our control we are never satisfied and as we do not expect decision cycles to improve in the near term we remain focused on accelerating pipeline growth and using all of our competitive advantages to take share in this low growth environment.

Christine A. Leahy: And as we do not expect decision cycles to improve in the near term, we remain focused on accelerating pipeline growth and using all of our competitive advantages to take share in this low-growth environment. During the quarter, our teams maintained a high level of engagement, working with customers to implement mission-critical projects, help prioritize and evaluate options, develop multi-year plans, and prove out use cases. You see the impact of this in our gross margin, which was a first quarter record, and our excellent cashflow, which together reinforced the durability of our underlying profitability and the integrity of our strategy.

Christine A. Leahy: During the quarter, our teams maintained a high level of engagement working with customers to implement mission critical projects help prioritize and evaluate options develop multi year plans and prove out use cases, you see the impact of this in our gross margin, which was a first quarter record and our excellent cash flow, which together.

Christine A. Leahy: For us the durability of our underlying profitability and integrity of our strategies.

Christine A. Leahy: Whatever the market conditions, we are laser-focused on delivering exceptional value to our customers. To ensure we continue to deliver on this commitment, we remain resolute in our strategy and continue to invest to ensure we have the capabilities to deliver full-stack solutions and services.

Christine A. Leahy: Whatever the market condition, we are laser focused on delivering exceptional value to our customers to ensure we continue to deliver on this commitment we remain resolute in our strategy and continue to invest to ensure we have the capability to deliver full stack solutions and services.

Christine A. Leahy: Broadly speaking, customer priorities included cost optimization, data protection, and workforce productivity, which drove focus on security, cloud, and as-a-service, as well as client demand and interest in AI. Let's take a look at how all of these priorities impacted performance. First, customer and market performance. Recall, we have five sales channels: corporate, small business, health care, government, and education, and market. Each is a meaningful business on its own with 2023 annual sales ranging from $1.6 billion to $9 billion. Within each channel, the teams are further segmented to focus on customer end markets, including geography and vertical.

Christine A. Leahy: Broadly speaking customer priorities included cost optimization data protection and workforce productivity. This drove focus on security cloud and as a service as well as client demand and interest in AI.

Christine A. Leahy: Let's take a look at how all of these priorities impacted performance first customer end market performance.

Christine A. Leahy: Recall, we have five sales channels corporate small business healthcare government and education end markets.

Christine A. Leahy: It's a meaningful business on its own with 2023 annual sales ranging from $1 6 billion.

Christine A. Leahy: To $9 billion.

Christine A. Leahy: Within each channel. The teams are further segmented to focus on customer end markets, including geography and verticals.

Christine A. Leahy: Our commercial operations are organized around geographies, verticals, customer size, and spend. Teams are similarly segmented in our UK and Canadian operations, which together delivered $2.6 billion in 2023 sales. These unique customers and markets often act in a counter-cyclical way given the different macroeconomic and external factors that impact each of them. Corporate top line declined 3% year-over-year.

Christine A. Leahy: Our commercial operations are organized around geographies vertical customer size and spend.

Christine A. Leahy: Teams are similarly, segmented in our UK and Canadian operations, which together delivered $2 $6 billion in 2023 sales.

Christine A. Leahy: These unique customer end markets often act in a counter cyclical way given the different macroeconomic and external factors that impact each of them.

Christine A. Leahy: Corporate tax corporate top line declined 3% year over year decision, making further elongated with heightened focus on ROI and a high level of project scrutiny given interest rate expectations.

Christine A. Leahy: Decision-making further elongated with heightened focus on ROI and a high level of project scrutiny given interest rate expectations. Cloud and security prioritization continue to drive excellent increases in customer spend, and the team capitalized on client device demand, and year-over-year client sales were up low double digits. Corporate saw declines in hardware categories undergoing transition and absorbing capacity, notably servers and netcoms. Storage, however, was a standout category of double digits, driven by data and workload growth as customers improved efficiency and captured savings from newer solutions. Small business posted a 7% year-over-year top line decline but with sequential improvement versus the fourth quarter.

Christine A. Leahy: Cloud and security prioritization continued to drive excellent increases in customer spend and the team capitalized on client device demand and year over year client sales were up low double digits.

Christine A. Leahy: But saw declines in hardware categories undergoing transition and absorbing capacity, notably servers and netcom.

Christine A. Leahy: Storage, however was a standout category up double digits, driven by data and workload growth as customers improve efficiency and captured savings from newer solutions.

Christine A. Leahy: Small business posted a 7% year over year top line decline with sequential improvement versus the fourth quarter.

Christine A. Leahy: The team continued to help customers address mission-critical priorities around security and productivity, which drove meaningful increases in cloud and software customer spend. Consistent with corporate, net common servers declined and storage increased. Small business continued to be accretive to overall margin, client devices posted a sequential increase, yet remain down year over year. Public sales declined 5% from the prior year.

Christine A. Leahy: The team continued to help customers address mission critical priorities around security and productivity, which drove meaningful increases in cloud and software customer spend.

Christine A. Leahy: Consistent with corporate net common servers declined and storage increased.

Christine A. Leahy: <unk> business continued to be accretive to overall margins client devices posted a sequential increase yet remained down year over year.

Christine A. Leahy: Public sales declined 5% from the prior year.

Christine A. Leahy: Healthcare declined 2%. Transactional performance was positive with an increase in client devices while solutions declined. Healthcare performance was similar to commercial with customer caution given the significant focus on cost optimization. Security was also a major focus area, delivering double-digit increases in spend and gross profit. State and local's mid-teens increase was more than offset by a decline in the federal top line, and total government declined 1.5%.

Christine A. Leahy: Health care declined 2% transactional performance was positive with an increase in client devices. While solutions declined healthcare performance was similar to commercial with customer caution given the significant focus on cost optimization security was also a major focus area delivering double digit increases in spend and gross profit.

Christine A. Leahy: State and local mid teens increase was more than offset by a decline in federal topline and total government declined one 5%.

Christine A. Leahy: State and local's performance was broad-based with strikes across transactional and solutions categories. Client devices sales increased for the third quarter in a row, up high teens. Public safety remained a key focus area with security up substantially double digits, and cloud adoption continued to gain pace. Federal's mid-teens decline was driven by the congressional budget impact, which was not resolved until late March.

Christine A. Leahy: State and local performance was broad based with strength across transactional and solutions categories climb.

Christine A. Leahy: Client devices sales increased for the third quarter in a row up high teens.

Christine A. Leahy: Public safety remains a key focus area with security up substantially double digits.

Christine A. Leahy: Cloud adoption continued to gain traction.

Christine A. Leahy: Federal is mid teens decline was driven by the congressional budget impact, which was not resolved until late March some activity related to existing contracts continued including client device refreshes, which drove a mid teen increase larger scale network and data center projects caused engagement remains strong and we expect it.

Christine A. Leahy: Some activity related to existing contracts continued, including client device refreshes, which drove a mid-teen increase. However, larger-scale network and data center projects paused. Engagement remains strong, and we expect to pick up and spend once agencies are able to allocate their appropriated funds.

Christine A. Leahy: Pick up in spend once agencies are able to allocate their appropriated funds.

Christine A. Leahy: It continues to be a challenging environment for education, and the segment posted a 10% decline. Consistent with recent quarters, higher education institutions remained focused on doing more with less, and the team posted a mid-teens top-line decline. Hard work categories declined across the board, while ongoing focus on cost elasticity led to a strong double-digit increase in clouds. K-12's top line decreased by high single digits. Client device sales increased by low single digits, with some school systems refreshing aged Chromebooks, several funded via normal operating budgets and not stimulus programs. However, audiovisual solutions like smart whiteboards and interactive flat panels posted a substantial decline as schools continued to digest purchases from the past several years.

It continues to be a challenging environment environment for education, and the segment posted a 10% decline consistent with recent quarters higher Ed institutions remained focused on doing more with less and the team posted a mid teens top line decline hardware categories declined across the board while ongoing focus on cost elasticity.

Christine A. Leahy: <unk> led to a strong double digit increase in cloud.

Christine A. Leahy: K 12 topline decreased by high single digits client device sales increased by low single digits with some school systems refreshing, aged chromebooks several funded via normal operating budgets and not stimulus programs.

Christine A. Leahy: Cardio visual solutions like smart Whiteboards and interactive flat panels posted a substantial decline as schools continue to digest purchases from the past several years Sip.

Christine A. Leahy: Security remained a top priority in both top-line and gross profit, which increased by mid-single digit. Our UK and Canadian international operations, which we report as other, continue to experience challenging market conditions, and each declined by mid-single digit. Both teams continue to execute well and are leveraging their capabilities to deliver great outcomes for our customers. For the most part, portfolio performance was consistent across customers and markets. Transactional product sales performed somewhat better than solutions and modestly increased sequentially. However, both posted year-over-year declines, with a greater decline in solutions due to the fits and starts of decision making.

Christine A. Leahy: Security remains a top priority in both topline and gross profit increased by mid single digits.

Christine A. Leahy: Our UK and Canadian International operations, which we report as other continued to experience challenging market conditions in each declined by mid single digits. Both teams continue to execute well and are leveraging their capabilities to deliver great outcomes for our customers.

Christine A. Leahy: For the most part portfolio performance was consistent across customer end market transactional product sales performed somewhat better than solutions and modestly increase sequentially, both posted year over year declines with a greater decline in solution from the fits and starts of decision making.

Christine A. Leahy: At the portfolio level, hardware revenue decreased by 4%. Services also decreased by 4% as weakness in services tied to hardware more than offset growth in managed services, which increased by a low teen. Even though software net sales declined by 7%, gross profit increased slightly year-over-year.

Christine A. Leahy: At the portfolio level hardware top line decreased by four 4% services also decreased by 4% as weakness in services tied to hardware more than offset growth in managed services, which increased by low teens.

Christine A. Leahy: Even though software net sales declined by 7% gross profit increased slightly year over year topline performance was driven by declines in licensed software due to accelerated transition to SaaS models.

Christine A. Leahy: Top line performance was driven by declines in licensed software due to accelerated transitions to SAS models. Now, let's turn now to the topic that is getting a lot of attention, AI, and specifically what we are doing for our customers in this space. Right now, most of our customers are at the initial stages of the assessment process, developing and analyzing use cases, and adopting data governance best practices to deliver insights and ensure end-to-end security. Essentially, they are exploring the art of possibility and working through the science of exactly how we do this.

Speaker Change: Let's turn now to the topic that is getting a lot of attention AI and specifically what we are doing for our customers in this space.

Speaker Change: Right now most of our customers are at the initial stages of the assessment process developing in analyzing use cases, and adopting data governance best practices to deliver insights and ensure end to end security.

Speaker Change: Essentially they are exploring the art of the possibility and working through the science of exactly how do we do this.

Christine A. Leahy: This is exciting work for all of us and our customers. The complexity of adopting AI plays to our strengths. We know how to bridge the gap between the promise of technology and transformational outcomes. And since deploying AI drives a need for technology investment across the full stack, with entry points across the entire stack, we are uniquely positioned to serve our customers. And we are doing that today.

Speaker Change: This is exciting work for all of us and our customers the complexity of adopting AI plays to our strength, we know how to bridge the gap between the promise of technology and transformational outcomes and since deploying AI drive the need for technology investment across the full stack with entry points across the entire stack we are uniquely positioned.

Speaker Change: And to serve our customers and we are doing that today to support our customers as they navigate successful AI adoption. We offer two broad areas of consulting services first connecting AI to outcomes and ROI, which we call AI discovery and second a practical approach to implementing AI, including data governance and security.

Christine A. Leahy: To support our customers as they navigate successful AI adoption, we offer two broad areas of consulting services. First, connecting AI to outcomes and ROI, which we call AI discovery. And second, a practical approach to implementing AI, including data governance and security, which we call Master Operational AI Transition (MOT).

Speaker Change: Which we call master operational AI transition, where moat well.

Christine A. Leahy: While still in the early innings, these services are gaining traction. We scoped a broad AI opportunity around four areas of focus, workforce productivity, notably end-use assistance and edge devices, high-value use cases, broad-scale vertical solutions, and full stack, where customers rely on us to provide the infrastructure underlying applications and solutions. A great example of full stack is a corporate training and development domain-specific large language model solution we shared with you last quarter

Speaker Change: While still early innings. These services are gaining traction.

We scope the broad AI opportunity around four areas of focus.

Force productivity, notably end use assistance in edge devices high value use cases broad scale vertical solutions and full stack where customers rely on us to provide the infrastructure underlying applications and solutions.

Speaker Change: Great example of full stack as a corporate training and development domain specific large language model solution, we shared with you last quarter.

Christine A. Leahy: Our broad-scale solutions are vertically based. As you know, we have expertise across many verticals, including healthcare, financial services, and many key industry segments. This expertise enables us to deeply understand the unique needs and challenges faced by organizations in these sectors and tailor solutions and services that directly address their opportunities and pain points. Let's take a look at a couple of vertical AI examples. First, our AI offering for the K-12 market.

Speaker Change: Our broad scale solutions are vertically based as you know we have expertise across many verticals, including healthcare financial services and many key industry segments.

Speaker Change: Expertise enables us to deeply understand the unique needs and challenges faced by organizations in these sectors and tailor solutions and services that directly address their opportunities and pain points, let's take a look at a couple of the vertical AI examples.

Speaker Change: First our AI offering for the K 12 market AI presents an exciting opportunity to empower teachers and improved learning outcomes, but it must be done very carefully our education team has leveraged its expertise and relationships in the field to offer its safe AI platform that is specifically designed for K 12.

Christine A. Leahy: AI presents an exciting opportunity to empower teachers and improve learning outcomes, but it must be done very carefully. Our education team has leveraged expertise and relationships in the field to offer a safe AI platform that is specifically designed for K-12 classrooms with a custom large language model that generates responses from vetted educational content, not the entire internet.

Speaker Change: Last room with a custom large language model that generates responses from embedded educational content not the entire internet.

Christine A. Leahy: The second example is a proprietary CDW healthcare solution, PatientRoomNext. While AI holds the promise of medical breakthroughs, our solution addresses the intense pressure institutions face to manage costs while sustaining high levels of patient outcomes. Our solution combines AI and connected devices to transform patient rooms, improve care delivery, and enhance the overall healthcare experience. The solution is HIPAA compliant and runs on an end-to-end intelligent platform powered by GPUs, a platform that provides real-time insights from data and automated documentation. One current application serves over 300 beds and builds $4 million in annual life.

Speaker Change: The second example is a proprietary CDW healthcare solution patient room next while AI holds the promise of medical breakthroughs our solution addresses the intense pressure institutions face to manage costs, while sustaining high levels of patient outcome.

Speaker Change: Our solution combines AI and connected devices to transform patient rooms improved care delivery and enhance overall healthcare experiences. The solution is HIPAA compliant and runs on an end to end intelligent platform powered by Gpus, a platform that provides real time insights from data and automated documentation one.

Speaker Change: Current application serves over 300 beds and those $4 million in annual licensing.

Christine A. Leahy: Add to that the services and equipment we provide for an end-to-end solution like cameras, network connections, and servers, and you can see the opportunity this represents to deliver value for our customers and for CDW. Of course, AI will take time to become embedded across our entire customer set. We know that.

Add to that the services and equipment, we provide for an end to end solution like cameras network connections and servers and you can see the opportunity this represents to deliver value for our customers and proceeded W.

Speaker Change: Of course, AI will take time to become embedded across our entire customer set we know that we have been here before as we've helped our customers adopt cloud and while the hype cycle is much shorter than cloud the Arco adoption is very similar.

Christine A. Leahy: We have been here before as we've helped our customers adopt the cloud. And while the hype cycle is much shorter than for the cloud, the arc of adoption is very similar. Bottom line, we are here for our customers today and will be there for them in the future as they continue to ramp up their efforts. And that leads me to our thoughts on the balance of 2024. You will recall that on last quarter's conference call, we shared our expectations for 2024 US IT market growth in the low single digits and our target to grow 200 to 300 basis points above market.

Speaker Change: Bottom line, we are here for our customers today and will be there for them in the future as they continue to ramp their efforts.

Speaker Change: And that leads me to our thoughts on the balance of 2024, you will recall that on last quarter's conference call. We shared our expectations for 2024 U S. It market growth in the low single digits and our target to grow 200 to 300 basis points above market. Despite the slow start to the year, we still see potential for market growth let me.

Christine A. Leahy: Despite the slow start to the year, we still see potential for market growth. Let me be clear that we do not expect demand to rocket, but we do see potential for client device refresh and for improved solutions performance. Wildcards include further dampening of capital investment from sustained high interest rates, worsening of geopolitical issues, as well as unusual election year uncertainty.

Speaker Change: To be clear that we do not expect demand hockey stick, but do see a potential for client device refresh and for improved solutions performance. Wildcards include further dampening of capital investment from sustained high interest rates worsening of geopolitical issues as well as unusual election year uncertainty.

Christine A. Leahy: As we always do, we will update our view of the market as we move through the year. A hallmark of CDW is to serve our customers wherever their priorities lie. As we look ahead, our customers face a compelling need to address cloud workload growth, protect against increasing security threats, manage an aging client device base, and navigate all things data as they build out their plans to leverage AI to capture insights and achieve their productivity aspirations.

Speaker Change: As we always do we will update our view of the market as we move through the year.

Speaker Change: A hallmark of CDW is to serve our customers wherever they are priorities lie as we look ahead, our customers face a compelling need to address cloud workload growth protect against increasing security threats manage an aging client device space.

Speaker Change: NAV again, all things data as they build out their plans to leverage AI to capture insights and achieve their productivity aspirations armed with our full stack full outcomes full lifecycle portfolio and unique vertical expertise no. One is more prepared to help our customers successfully navigate this period of unprecedented change with that let me.

Christine A. Leahy: Armed with our full stack, full outcomes, full lifecycle portfolio, and unique vertical expertise, no one is more prepared to help our customers successfully navigate this period of unprecedented change. With that, I will turn it over to Al.

Speaker Change: Turn it over to al.

Albert Joseph Miralles: Thank you, Chris, and good morning, everyone. I will start my prepared remarks with detail on our first quarter performance, move to capital allocation priorities, and then finish with our 2024 outlook. In the first quarter, we began 2024 experiencing the same uneven IT market conditions that we faced throughout last year. Caution and uncertainty reigned.

al: Thank you, Chris and good morning, everyone I will start my prepared remarks with detail on our first quarter performance move to capital allocation priorities and then finish with our 2024 outlook.

al: Turning to the first quarter, we began 2024 experiencing the same uneven.

al: Market conditions that we faced throughout last year caution on an uncertainty range I.

Albert Joseph Miralles: High interest rates and growing pessimism towards the timing of rate cuts have put deals under even greater scrutiny and ultimately led to the dampening of capital investment. Meanwhile, customers are evaluating and optimizing their IT spending. And while we actively partner with them to build out tech roadmaps to support their strategies, the overhang of economic and financial uncertainty has led to delay in deliberation and ultimate decision-making, exacerbating elongated sales cycles. During the quarter, we were able to capitalize on demand for client devices as some customers could no longer postpone refresh activities.

al: Interest rates and growing pessimism towards the timing of rate cuts, but deals under even greater scrutiny and ultimately led to the dampening of capital investment customer.

al: Customers are evaluating optimizing their it spending and while we actively partner with them to build out tech roadmaps to support their strategies, the overhang of economic and financial uncertainty as I delay and deliberation and ultimate decision, making exacerbating elongated sales cycles.

al: During the quarter, we were able to capitalize on demand for client devices at some customers could no longer postponed refresh activity at sales of more complex solutions tied to digital transformation and network modernization more weaker notwithstanding you see the potential for both client device refresh activity to continue.

Albert Joseph Miralles: Sales of more complex solutions tied to digital transformation and network modernization were weak. Notwithstanding, you see the potential for both client device refresh activity to continue and for improved future conversion of our solid solutions pipeline. Moving on to the specific results.

al: For improved future conversion of our solid solutions pipeline.

Albert Joseph Miralles: First quarter gross profit was $1.1 billion, down 2.4% versus the prior year and below our original expectations for low single-digit growth for the quarter. Consolidated first quarter net sales of $4.9 billion were down 4.5% versus the prior year on a reported N average daily sales basis. Gross margin increased roughly 50 basis points year over year and partially offset the impact of lower net worth. Gross margin of 21.8% was a first quarter record and was broadly in line with both full year 2023 levels and our expectations for 2024. First quarter margin expansion was primarily driven by higher mixing and eddy-down revenue.

al: Moving on to the specific results first quarter gross profit was $1 1 billion down two 4% versus prior year and below our original expectations for low single digit growth for the quarter.

al: <unk> first quarter net sales of $4 9 billion were down four 5% versus prior year on a reported and average daily sales basis gross margin increased roughly 50 basis points year over year, and partially offset the impact of lower net sales.

al: Gross margin of 28.

al: 121, 8% was a first quarter record and was broadly in line with both full year 2023 levels and our expectations for 2024.

al: Our first quarter margin expansion was primarily driven by higher mixing into netted down revenues. This category grew by 6% once again outpacing overall net sales growth and representing 35, 1% of our gross profit compared to 32, 3% in the prior year first quarter as our teams were successful.

Albert Joseph Miralles: This category grew by 6%, once again outpacing overall net sales growth and representing 35.1% of our gross profit compared to 32.3% in the prior year first quarter, as our teams were successful in serving customers with cloud and SaaS-based solutions. While we continue to expect the mix of netted down revenues to be an important and durable trend within our business, it is important to recognize that this mix may fluctuate with customer priorities and product demand.

al: Serving customers with cloud and SaaS based solutions.

al: While we continue to expect the matter of the mix of netted down revenues to be important and durable trend within our business. It is important to recognize that this mix may fluctuate with customer priorities and product demand.

Albert Joseph Miralles: However, even with a higher mix of client devices, margins remain firm in the quarter, consistent with our expectations. First quarter gross profit was down 7.8% compared to the fourth quarter on a reported basis. On a sequential average daily sales basis, first quarter net sales decreased 4.4 percent.

al: However, even with a higher mix of client devices margins remained firm in the quarter consistent with our expectations.

al: First quarter gross profit was down seven 8% compared to the fourth quarter on a reported basis on a sequential average daily sales basis first quarter net sales decreased four 4%.

Albert Joseph Miralles: While first quarter net sales and gross profit were typically low and are typically lower than the fourth quarter, we had anticipated a more modest sequential decline as early 2024 customer engagement suggested more balanced spending across categories than we ultimately experienced. Instead, the sequential decline this quarter was more in line with traditional seasonality, reflecting continued uncertain conditions impacting the spending of our corporate customers in addition to the Congressional budget impasse delaying the spending of federal customers. Turning to expenses for the first quarter, non-GAAP SG&A totaled $660 million, a 0.7% year over year increase.

al: While first quarter net sales and gross profit were typically low are typically lower than the fourth quarter. We had anticipated a more modest sequential decline as early 2024 customer engagement suggested more balanced spending across categories and we ultimately experienced instead the sequential decline this.

al: Quarter was more in line with traditional seasonality, reflecting continued uncertain conditions impacting spend of our corporate customers. In addition to the congressional budget impasse delaying spending our federal customers.

al: Turning to expenses for the first quarter non-GAAP SG&A totaled $660 million a.

al: <unk>, 7% year over year.

Albert Joseph Miralles: Expenses were consistent with the expectation we shared on our last earnings call, with the first quarter higher than the fourth quarter as we reset some of our variable expenses for the year and accrued for other seasonally higher items. This played out as expected, but our expense efficiency ratio was further elevated due to our lower gross profit production for the quarter. As we scroll forward, we continue to manage discretionary expenses prudently and diligently while balancing this against both our expectations for the year and the need to expand our capabilities and drive future growth. Our discipline was also reflected in our co-worker count at the end of the first quarter, which was approximately 15,000 and down slightly, slightly relative to year-end 2023. The customer-facing coworker count was also unchanged at approximately 10,900.

al: Expenses were consistent with the expectation we shared on our last earnings call with the first quarter higher than the fourth quarter as we reset some of our variable expenses for the year and accrued for other seasonally higher items. This played out as expected, but our expense efficiency ratio with further elevated.

al: Due to our lower gross profit production for the quarter.

al: As we go forward, we continue to manage discretionary expenses prudently and diligently while balancing this against both our expectations for the year and the need to expand our capabilities and drive future growth.

al: Our discipline was also reflected in our co worker count at the end of the first quarter, which was approximately 15000 and down slightly slightly relative to year end 2023.

al: Customer facing coworker count was also unchanged at approximately 10900 <unk>.

Albert Joseph Miralles: As we expand our solutions and services capabilities, we are concurrently driving efficiency and cost leverage for a broader operation intended to fund these. Following along on slide 8, we delivered non-GAAP operating income of $404 million, down 7.1% versus the prior year, driven by the combination of our gross profit shortfall and flat expenses year-over-year, non-GAAP operating income margin of 8.3%, down 20 basis points from the prior year. As reflected on slide 9, our non-GAF net income was $261 million in the quarter, down 6.4% on a year-over-year basis. With first quarter weighted average diluted shares of approximately $136 million, non-GAAP net income per diluted share of $1.92 was down 5.5% year-over-year. Moving ahead to slide 10.

al: As we expand our solutions and services capabilities, we are concurrently driving efficiency and cost leverage from our broader operations in.

al: <unk> tended to fund these investments.

al: Following along on slide eight we delivered non-GAAP operating income of $404 million down seven 1% versus the prior year driven by the combination of our gross profit shortfall and flat expenses year over year non.

al: non-GAAP operating income margin of eight 3% was down 20 basis points from the prior year.

al: As reflected on slide nine our non-GAAP net income was $261 million in the quarter down six 4% on a year over year basis with first quarter weighted average diluted shares of approximately $36 million non-GAAP net income per diluted share of $1 92 was down five five.

al: 5% year over year.

Albert Joseph Miralles: At period end, net debt was $4.8 billion. Net debt declined by approximately $230 million from the fourth quarter, primarily reflecting our increased cash position alongside modest debt repayment during the quarter. Equity remains strong, with cash plus revolver availability of approximately $2.1 billion. Moving to slide 11.

al: Moving ahead to slide 10 at period end net debt was $4 8 billion.

al: Net debt declined by approximately $230 million from the fourth quarter, primarily reflecting our increased cash position alongside modest debt repayment during the quarter.

al: Liquidity remains strong with cash plus revolver availability of approximately $2 1 billion.

Albert Joseph Miralles: The three-month average cash conversion cycle was 16 days, down two days from the prior year and slightly below our target range of high teens below 20. Our cash conversion reflects our effective management of working capital, particularly with respect to our inventory level. As we've mentioned in the past, timing and market dynamics will influence working capital in any given quarter or year. However, we continue to believe our target cash conversion range remains the best guidepost for modeling working capital longer term.

al: Moving to slide 11 to three months average cash conversion cycle was 16 days down two days from the prior year and slightly below our target range of high teens to low twenties.

al: Our cash conversion reflects our effective management of working capital, particularly with respect to our inventory levels as.

al: As we've mentioned in the past timing and market dynamics will influence working capital in any given quarter or year.

al: We continue to believe our target cash conversion range remains the best guidepost for modeling working capital longer term.

al: Despite profit profit that was modest moderately lower than our expectations.

Albert Joseph Miralles: Despite a profit that was moderately lower than our expectations, effective working capital management drove strong adjusted free cash flow of $364 million, as shown on slide 12. Over the last 12 months, adjusted free cash flow has been 104% of non-GAAP net income, well above our stated rule of thumb of 80 to 90%. As we've mentioned in the past, timing will impact adjusted free cash flow throughout the year, but we're pleased with our first quarter performance, and we'll continue to update our outlook on this front as the year plays out.

al: Second working capital management drove strong adjusted free cash flow of $364 million as shown on slide 12.

al: Over the last 12 months adjusted free cash flow was 104% of non-GAAP net income well above our stated rule of thumb of $80 to 90%.

al: As we've mentioned in the past timing will impact adjusted free cash flow throughout the year, but we're pleased with our first quarter performance and we will continue to update our outlook on this front as the year plays out.

Albert Joseph Miralles: For the quarter, we utilized cash consistent with our 2024 capital allocation objectives, including returning approximately $83 million to shareholders through dividends and $52 million in share repurchases. We remain committed to our target to return 50 to 75 percent of adjusted free cash flow to shareholders via the dividend and share repurchases in 2024. That brings me to our capital allocation priorities on slide 13. Our first capital priority is to increase the dividend in line with non-GAF net income.

al: For the quarter, we utilized cash consistent with our 2024 capital allocation objectives, including returning approximately $83 million to shareholders through dividends and $52 million in share repurchases.

al: We remain committed to our target to return, 50% to 75% of adjusted free cash flow to shareholders via the dividend and share repurchases in 2024.

al: That brings me to our capital allocation priorities on slide 13, our first capital priority is to increase the dividend in line with non-GAAP net income.

Albert Joseph Miralles: Last November, we announced a 5% increase in our dividend to $2.48 annually, our 10th consecutive year of increasing the dividend. We will continue to target a 25% payout ratio in 2024, growing the dividend in line with. Our second priority is to ensure we have the right capital structure in place for the targeted net leverage ratio. We ended the first quarter at 2.3 times, down from 2.4 times at the end of 2023 and within our targeted range of two to three.

al: Last November we announced a 5% increase of our dividend to $2 48 annually.

al: Our 10th consecutive year of increasing the dividend, we will continue to target a 25% payout ratio in 2024 growing the dividend in line with earnings.

al: Our second priority is to ensure we have the right capital structure in place with a targeted net leverage ratio. We ended the first quarter at two three times down from two four times at the end of 2023.

al: And within our targeted range of two to three times, we will continue to manage liquidity, while maintaining flexibility.

Albert Joseph Miralles: We will continue to manage liquidity while maintaining flexibility. Finally, our third and fourth capital allocation priorities of M&A and share repurchases remain important drivers of shareholder value. We currently have over $1 billion of availability under our current share repurchase program.

al: Finally, our third and fourth capital allocation priority of M&A and share repurchases remain important drivers of shareholder value. We currently have over $1 billion of availability under our share repurchase program.

Albert Joseph Miralles: And that leads us to our outlook on slide four. Uncertain market conditions we operated under throughout 2023 have persisted into 2024. Customer sentiment remains cautious and prudent. Last quarter, we spoke about a slow start to the year for 2024 IT spending, which has come to fruition and will likely continue in the near future. However, as we look forward, we continue to see a compelling need to address cloud workload growth, increasing security threats, aging client devices, and all things data as we help our customers build out their plans to leverage AI and capture insights and achieve their productivity aspirations.

al: And that leads us to our outlook on slide 14, the uncertain market conditions, we operated under throughout 2023 have persisted into 2024 and customer sentiment remains cautious and prudent.

al: Last quarter, we spoke about a slow start to the year for 2020 for it spending.

al: Which has come to fruition and will likely continue in the near term. However, as we look forward, we continue to see a compelling need to address cloud workload growth increasing security threats aging.

al: <unk> client devices, and all things data as we help our customers build out their plans to leverage AI and capture insights and achieve their productivity aspirations.

Albert Joseph Miralles: Our updated full year 2020 expectation is for a low single-digit gross profit. Reflecting the slower start to the, we maintain our view that customers will spend their IT budget in the upcoming quarters, but within the context of the historical season. With this also comes an unchanged expectation for 2024 gross margin to be similar to the full year 2020. Finally, we expect our full-year non-GAAP earnings per diluted share to be up low single digits year over year.

al: Our updated full year 2024 expectation is for low single digit gross profit growth, reflecting a slower start to the year, we maintain our view that customers will spend their it budgets in the upcoming quarters, but within the context of historical seasonality.

al: With this also comes in unchanged expectation for 2020 for gross margin to be similar to the full year 2023.

al: Finally, we expect our full year non-GAAP earnings per diluted share to be up low single digits year over year.

Albert Joseph Miralles: Please remember that 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-gap effective tax rate can be found on slide 15. Moving to modeling thoughts for the second quarter, we anticipate low single-digit gross profit growth compared to the prior year, with no change to our expectation that gross margin will be comparable to full year 2023 and Q1 2024.

al: Please remember that we hold ourselves accountable for delivering on our financial outlook on a full year constant currency basis.

al: Additional modeling thoughts for annual depreciation and amortization interest expense and the non-GAAP effective tax rate can be found on slide 15.

al: Moving to modeling thoughts for the second quarter, we anticipate low single digit gross profit growth compared to the prior year with no change to our expectation that gross margin will be comparable to full year 2023, and Q1 2024.

Albert Joseph Miralles: Our first half slash second half split is slightly more weighted to the second half than historical levels, in keeping with our expectations for the market. However, we still anticipate seasonal quarterly patterns to reasonably hold, including a lower fourth quarter compared to the third quarter. Moving down the P&L, we expect second-quarter operating expenses to be moderately higher than the second quarter of 2023 on a dollar basis but reflecting a more normalized ratio relative to gross profit than we experienced in Q1.

al: Our first half slashed second half split is slightly more weighted to the second half and historical levels in keeping with our expectation for the market.

al: We.

al: We still anticipate seasonal portable quarterly patterns to reasonably hold including a lower fourth quarter compared to the third quarter.

al: Moving down the P&L, we expect second quarter operating expenses to be moderately higher than the second quarter of 2023 on a dollar basis, but reflecting a more normalized ratio relative to gross profit than we experienced in Q1.

Albert Joseph Miralles: Finally, you expect second quarter non-GAAP earnings per diluted share growth to be in the low single-digit range year-over-year. For 2024, we're maintaining our expectation for adjusted free cash flow to be in the range of 80 to 90% of our non-GAAP net income, assuming a higher level of working capital investments to support growth. That concludes the financial summary. As always, we'll provide updated views of the macro environment and our business on our future earnings calls. And with that, I will ask the operator to open it up for questions. We would ask each of you to limit your questions to one with a brief follow-up. Thank you.

al: Finally, we expect second quarter non-GAAP earnings per diluted share growth to be in the low single digit range year over year.

al: For 2024, we're maintaining our expectation for adjusted free cash flow to be in the range of 80% to 90% of our non-GAAP net income assuming a higher level of working capital investments to support growth.

Speaker Change: That concludes the financial summary.

Speaker Change: Always will excite updated views on the macro environment and our business on our future earnings calls and with that I will ask the operator to open it up for questions. We would ask each of you to limit your questions to one with a brief follow up thank you.

Operator: Thank you all. If you would like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Adam Tindle from Ringling Jane.

Speaker Change: Thank you.

Speaker Change: If you would like to ask a question. Please press star followed by one key.

al: Keith.

al: If you change your mind, Please press star followed by Q2.

Speaker Change: Ask your question. Please thanks, George or devices admitted locally.

al: Our first question comes from Adam Tindle from Raymond James.

al: Okay.

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

Adam Tyler Tindle: Okay. Thanks, Good morning, Chris I, just wanted to start you know one of the big themes during earning season is spending on AI is very very strong and I. Appreciate all your comments in the prepared remarks.

Adam Tyler Tindle: But it's hard not to dovetail that with CDW results here for Q1 that were a little bit weaker than expected showing a decline in solutions, where presumably AI would be reporting.

Speaker Change: Just figured I'd throw it out there to address any investor concerns that perhaps cdw's not participating in AI spending what would that thesis be missing and if theres portions of that that might be fair things that you can do to capitalize more on AI spending whether that's organic or inorganic. Thanks.

Christine A. Leahy: Adam, thanks for the question. If I could, let me zoom out first and then zoom back into AI.

Speaker Change: Well Adam Thanks for the question if I could let me zoom out first and then zoom back into AI, let.

Christine A. Leahy: Let me just start with the environment that we experienced in Q1. You know, there are a couple of factors that impacted results and complex solutions results. And look, we had a dynamic and a pretty complex environment that manifested in what I would call fits and starts in both the market and our customers, who had a lack of certainty and visibility. You take the first economic and financial uncertainty, in other words, the interest rate and inflation environment, and that was really the primary driver of the impact for our corporate team and our small business team.

Speaker Change: Let me just start with the environment that we experienced in Q1, there were a couple of factors that impacted results in complex solutions.

Speaker Change: Results and look we had a dynamic in a pretty complex environment that manifested in what I would call fits and starts of both the market and our customers who have lack of certainty and visibility. If you take the first economic and financial uncertainty in other words, the interest rate and inflation.

Adam Tyler Tindle: Environment and that was really the primary driver of the impact for our corporate team and our small business team and that created an overhang.

Christine A. Leahy: And that created an overhang in the environment, which drove what I'll call an uneven market condition situation, pretty similar to the trends we saw in 2023. And as a result, our customers remained cautious; they remained prudent. There was relentless scrutiny on deals across the board in the solution space, in particular, as customers focused on cost optimization and short-term ROI. And ultimately, that dampened capital investment in the period.

Adam Tyler Tindle: In the environment, which drove what I'll call, an uneven market condition situation pretty similar to the trends we saw in 2023 and as a result, our customers remained cautious they remain prudent.

Adam Tyler Tindle: There was relentless scrutiny on deals across the board in the solutions space in particular.

Adam Tyler Tindle: <unk> focused on cost optimization and short term ROI.

Adam Tyler Tindle: And ultimately that dampened capital investment in the period I'd also say to a lesser degree.

Christine A. Leahy: I'd also say to a lesser degree. AI considerations as an added complexity in the deliberation process enter the picture. We're at a real inflection point with AI, a critical decision for all of our businesses, understanding what it means for their business and their workforce, what it means for their roadmaps, technology roadmaps, and what the implications are for infrastructure. I just would highlight a couple of other pressure points during the quarter, a lesser impact, but we had some changes in the IT landscape with some consolidation and acceleration into as a service, which creates a natural interruption, I would say, in just the customer process.

Adam Tyler Tindle: AI considerations as an added complexity in the deliberation process entered the picture we're at a real inflection point with AI.

Adam Tyler Tindle: Critical decision for all of our businesses understanding what it means to their business and their workforce what it means to their roadmap technology road maps and what the implications for infrastructure or I, just would highlight a couple of other pressure points during the quarter, a lesser impact, but we you know we had some changes in the landscape with some consolidation and acceleration.

Adam Tyler Tindle: Into as a service, which creates a natural interaction I would say and just the customer process.

Christine A. Leahy: Fed budgets were delayed, and then the education market is transitioning really back to a more normalized funding mechanism. And the result of all of that was, collectively, we had to spend deficit. What I would say is our engagement overall has been incredibly strong.

Adam Tyler Tindle: Fed budgets delayed and then the education market is transitioning really back to a more normalized funding mechanism and the result of all of that was collectively we had to spend deficits.

Adam Tyler Tindle: What I would say is our engagement overall has been incredibly strong and really pleased with the engagement and we are seeing that our value continues to build as we help our customers manage the complex tech environment and a dynamic period, but what didn't happen is solid.

Christine A. Leahy: I'm really pleased with the engagement, and we are seeing that our value continues to build as we help our customers manage the complex tech environment and a dynamic period. But what didn't happen is the solid pipeline that that translated into did not then translate into invoicing in the solutions portfolio, as it would in a normal operating environment. Now, while we have seen a pause on the complex solutions, we are helping customers who need to refresh their point and actually start doing that, and that shows some positive signs in what I'll call a lower risk, lower friction client category. But at the end of the day, right, it was solutions that impacted our results overall. Now, if I turn to your question on AI, here's what I'd say. Look, we're in the early innings.

Adam Tyler Tindle: Solid pipeline that that translated into did not then translate into invoicing in the solutions portfolio as it would in a normal operating environment now while we have seen the pause on the complex solutions, we are helping customers, who who need to refresh client actually.

Adam Tyler Tindle: Start doing that and have some positive signs in what I'll call, a lower risk lower friction client category, but at the end of the day right. It.

Adam Tyler Tindle: It was solutions that.

Adam Tyler Tindle: Impacted our results overall and then if I flip to your question on a on a here's what I'd say.

Christine A. Leahy: Some of our customers are advanced, but really, most are in an assessment and experimentation stage, and that's going to unfold over time. CDW is uniquely positioned in the space to take advantage of what will be ubiquitous as a full stack opportunity. We know how to take customers on a journey. We've done it before.

Adam Tyler Tindle: Look we're in the early innings some of our customers are advanced but really most are in an assessment and experimentation stage and it's going to unfold over time.

Adam Tyler Tindle: CDW is uniquely positioned in this space to take advantage of what will be ubiquitous in our full stack opportunity, we know how to take customers on the journey. We've done it before this art and science of New technologies, We've got the full stack and broad portfolio. So we can help customers at every entry point and we've got services.

Christine A. Leahy: This is the art and science of new technologies. We've got the full stack and a broad portfolio, so we can help customers at every entry point, and we've got services against the entire part of the stack across the life cycle. And so we have the ability to deliver integrated solutions. We also understand our customers' pain points and opportunities given our deep vertical expertise and our intimacy with our customers. So we can create packaged solutions that can scale pretty quickly, as well as customized solutions.

Adam Tyler Tindle: <unk>.

Adam Tyler Tindle: The entire part of the stack across the lifecycle and so we've got the ability to deliver integrated solutions. We also understand our customer's pain points and opportunities given our deep vertical expertise and our intimacy with our customers. So we can.

Adam Tyler Tindle: I think repackaged solutions that can scale pretty quickly as well as customer customized solution. So you think about it in terms of the choice we help them identify the best solution compatibility developing roadmaps for integration and cost.

Christine A. Leahy: So you think of it in terms of choice; we help them identify the best solution, compatibility, develop roadmaps for integration, and cost, and Value Analysis. In the areas of opportunity, there are four that I mentioned in the prepared remarks, and I'll just emphasize those, and then I'll talk about where we're seeing pickup now and what we anticipate going forward.

Adam Tyler Tindle: And value analysis now in.

Adam Tyler Tindle: In the areas of opportunity that there are four that I mentioned in the prepared remarks, and I will just emphasize those and then I'll talk about where we are seeing pick up now and what we anticipate going forward first in workforce think productivity tools and assistance. We're the leader here with regard to many of our partners and.

Christine A. Leahy: First, in the workforce, think productivity tools and assistance. We're the leader here with regard to many of our partners, and there is much interest in workforce AI impact currently. High-value use cases, think horizontal and aligned personas, things like security and customer experience, chatbots that can be deployed horizontally across many of our customers. Think broad-scale vertical applications where they're deeply verticalized and multidimensional.

Adam Tyler Tindle: And there is much interest in workforce.

Adam Tyler Tindle: AI impact currently high value use cases think horizontal and aligned persona is things like security and customer experience chatbot.

Adam Tyler Tindle: Yeah.

Adam Tyler Tindle: It can be deployed horizontally across many of our customers think broad scaled vertical applications, where they're deeply vertical is multi dimensional and then the full stack infrastructure to underpin the applications and solutions now we.

Christine A. Leahy: And then the full-stack infrastructure to underpin the applications and solutions. Now, we're leveraging our deep partner relationships to understand and use our customer knowledge to influence our roadmaps, very similar to what we've done in the past, whether it was cloud or security, and to bring to market products that are suitable for, or fit for certain customers. We're expanding our engineering and services capabilities. We're partnering with innovative AI startups, and we're developing our own internal experience, which helps us operationally but builds credibility with our customers.

Adam Tyler Tindle: We're leveraging our deep partner relationships to understand and use our customer knowledge to influence our roadmaps.

Adam Tyler Tindle: Very similar to what we've done in the past, whether it's cloud or security and to bring to market.

Adam Tyler Tindle: Products that are suitable for fit for certain customers, we're expanding our engineering and services capabilities, we're partnering with innovative AI startups, and we're developing our own internal experience, which helps us operationally, but builds credibility with our customers where we sit now Adam is primarily a services <unk>.

Christine A. Leahy: Where we sit now, Adam, is primarily a services engagement. We have a lot of activity around those two solutions, Moat and Discovery, that I mentioned. And typically, in those, we find that customers come to find that their data is not in the shape that it needs to be, and that leads to engagement around data and data governance and data security, et cetera. Over time, we would expect the arc of AI to move from the application layer and the services that we're providing through to inference at the edge and then into the data center.

Adam Tyler Tindle: <unk>, we have a lot of activity around those two solutions molten discovery that I that I mentioned and typically in those.

Adam Tyler Tindle: We're finding that customers come to find that their data is not in the shape that it needs to be and that leads to engagement around data and data governance and data security et cetera.

Adam Tyler Tindle: Over time, we would expect.

Adam Tyler Tindle: The arc of AI to move from.

Adam Tyler Tindle: The application layer and the services that we're providing through tier inference at the edge and then into the data center, but it's going to be it's going to be a journey and where the early innings and we've seen this before play out we certainly feel absolutely confident that it will be a full stack play and that our strategy and the strength of the partnership.

Christine A. Leahy: But it's going to be, it's gonna be a journey, and we're in the early innings, and we've seen this before play out. We certainly feel absolutely confident that it will be a full stack play and that our strategy and the strength of the partnerships are gonna, you know, we're positioned and are already capturing the ability to navigate our customers through the journey.

Adam Tyler Tindle: It's just going to work.

Adam Tyler Tindle: <unk> and are already capturing.

Adam Tyler Tindle: The ability to navigate our customers through the journey.

Christine A. Leahy: Yep, complexity is typically good for CDW. That makes sense. Just a quick follow-up, Al, on guidance. The gross profit dollar for Q2, where you talked about low single-digit year-over-year growth, I think if I did the math on a sequential basis, it's like low double digits. And the last couple years, it's been more like 6 to 8% sequentially. So, you know, above the last couple years. Just given a little bit weaker than expected trends in Q1 and not wanting to get into that situation again in Q2, maybe just help us with how you thought about that gross profit dollar guidance in Q2. And is there anything that maybe underpins that sequential growth, whether it was maybe pushouts from Q1 or something like that? Thank you. Yeah, sure, Adam, happy to address that.

Speaker Change: Yes complexity is typically good for CDW that makes sense, just a quick follow up on guidance.

Speaker Change: The gross profit dollar for Q2, where you talked about low single digit year over year growth I think if I did the math on a sequential basis.

Speaker Change: Like low double digits in the last couple of years, it's been more like 6% to 8% sequentially. So above the last couple of years.

Speaker Change: Just given a little bit weaker than expected trends in Q1, and not wanting to get into that situation again in Q2, maybe just help us with how you thought about that gross profit dollar guidance in Q2 and is there anything that maybe underpins that sequential growth whether it was maybe push outs from Q1 or something like that thank you.

Speaker Change: Yes.

Albert Joseph Miralles: Yeah, sure, Adam. Happy to address that. A couple of things. First, I think we mentioned our prepared remarks. Look, we feel encouraged by the pipeline that we have and kind of what's out there from a customer spend perspective. And a lot of that would be more in the solutions category, as we talked about. So that's number one.

Speaker Change: Yes, sure Adam happy to address that.

Speaker Change: A couple of things first I think we mentioned in our prepared remarks.

Speaker Change: Look we feel encouraged by the pipeline that we have.

Speaker Change: And kind of what's out there from a customer spend perspective and.

Speaker Change: And a lot of that would be more on the solutions category as as we talked about.

Albert Joseph Miralles: The thinking, Adam, is, look, if you look back over the history of seasonality, historical seasonality would be more in the mid-teens level. And so when we take the sum of the catalyst that Chris mentioned up front, that is, the workload and data growth that we need on the security front and the obsolescence of client devices, we think that there's both a catalyst there but also kind of an existing tangible pipeline that we see. So when you add that together and you think about the context of historical seasonality in the mid-teens, our Q2 outlook would actually be short of that seasonality modestly.

Speaker Change: That's number one.

Speaker Change: The thinking Adam is look if you look back over our history of seasonality.

Speaker Change: Historically and that would be more in like the mid <unk>.

Speaker Change: Teens.

Speaker Change: Level and so when we take the some of the catalysts that Chris mentioned.

Speaker Change: Upfront that is that where the workload and data growth.

Speaker Change: The need on the security front and <unk>.

Speaker Change: <unk> of client devices.

Speaker Change: Think that Theres, both catalyst there, but also kind of an existing tangible pipeline that we see so when you add that together and you think about the context of historical seasonality in the more mid teens, our Q2 outlook would actually be short of that seasonality modestly.

Albert Joseph Miralles: And we think that knowing that Q1 was a slower start, there's a decent pipeline there, and we know that ultimately, our customers have to get back to these critical spend items. We have confidence in our ability to get to that level from a seasonality perspective in the second quarter.

Speaker Change: And we think that knowing that Q1 was a slower start there is a decent pipeline there and we know that old simply our customers have to get back to these critical spend items.

Speaker Change: Confidence in our ability to get to that level from a seasonality perspective in the second quarter.

Speaker Change: Got it thank you very much.

Speaker Change: Yep.

Operator: Our next question comes from Samik Chatterjee from J.P. Morgan.

Samik Chatterjee: Our next question comes from some make chatterji from Jpmorgan.

Samik Chatterjee: Hi, thanks for taking my question. I guess, Chris, I sort of appreciate all your comments about what you're seeing in terms of a challenging sort of customer spending environment. I'm just more curious when I contrast this to last year. Obviously, the challenges or sort of the scrutiny on budgets are new, but throughout last year, we did see solutions remaining quite robust, and it was more the transactional business that was sort of impacted.

Samik Chatterjee: Hi, Thanks for taking my question I guess, Chris.

Samik Chatterjee: So I appreciate all your comments about what youre seeing in dumps.

Samik Chatterjee: Challenging customer spending environment I'm just curious when you contrast, this to last year.

Speaker Change: Obviously, the challenges are sort of the scrutiny on budget isn't new but two last year, we did see sort of solutions remaining quite robust and it was more of a transactional business that was sort of impacted so as you know starting to see the transaction business open up a bit but the solutions with us pulling back any sort of insight.

Samik Chatterjee: So as you now are starting to see the transactional business open up a bit with the solutions business pulled back, any sort of insights or sort of reading into sort of what the change in customer thinking is or what we might be able to see in terms of recovery in that solutions business from the insights you have from the transactional business as well? Just curious about that, and I have a quick follow-up. Thank you.

Samik Chatterjee: Sort of read into sort of what the change.

Samik Chatterjee: Customer thinking is or.

Samik Chatterjee: When what we might be able to see in terms of recovery in that solutions business from the insights you have from the transaction business as well just curious on that and I have a quick follow up thank you.

Christine A. Leahy: Yeah, let me start on that one. I think what we're seeing now is we talked about the macro environment and the added complexity now of AI as a consideration. And as our customers this year are continuing on that kind of pause and deliberation, added to it the AI factor, if you will, they are also faced with the need to refresh client devices. And so I tell you what I think we're seeing is a need to go ahead and spend budget on things that they really can't hold off on anymore.

Speaker Change: Yeah, let me start on that one.

Speaker Change: I think what we're seeing now is as we talked about the macro environment and the added complexity now there is a consideration and as our customers. This year are continuing on that kind of pause and deliberation added to it the the AI factor if you will.

Speaker Change: They are also faced with the need to refresh client.

Speaker Change: Devices, and so I'll tell you what I think we're seeing is a need to go ahead and spend budget on things that they really can't hold off on anymore. They they'd like to have all devices they'd like to get over to the new operating system. They want to make sure of the devices are available as demand will start to pick up in and there is some.

Christine A. Leahy: They have old devices. They'd like to get over to the new operating system. They want to make sure the devices are available as demand will start to pick up, and there's some shifting of the budget over to the devices right now. I think that's a behavior we certainly are seeing. In terms of the trend as we go through the year, I'll let Al speak to the outlook and our expectations regarding the outlook.

Speaker Change: Switching of the budget over to the devices right now I think that's a behavior, we certainly are seeing.

Speaker Change: In terms of the trend as we go through the year I'll, let al speak to the outlook our expectation regarding the outlook.

Albert Joseph Miralles: Yeah, sure. And good morning, Samik.

al: Yes, sure and good morning stomach a couple a couple of things I had mentioned when we think about the parallel to.

Albert Joseph Miralles: A couple things I would mention. When we think about the parallel to 2023, look, a year later, a lot of the caution and concern that we experienced has persisted, and I would say, to some extent, in Q1, it became even more heightened. And look, there is a mixed story on the economy. But when you think about the financial aspects, intra-quarter, we went from an expectation in the market of a number of rate cuts to the potential of now just a few. So there's been quite a whipsaw effect.

al: 2023 look a year later, a lot of caution and concern that we experience has persisted and I would say to some extent in Q1 became even more heightened.

al: Look there is a mixed story on the economy, but when you think about the financial aspects.

al: Intra quarter or we went from an expectation in the market of a number of rate cuts too.

al: The potential of now just a few so there has been quite the whipsaw effect. So just to give that kind of backdrop. If you will that the economic and financial environment continues tab.

Albert Joseph Miralles: So just to give that kind of backdrop, if you will, that the economic and financial environment continues to get more complicated, Samik, for sure. The other element I would add is on the solutions front a year later, notwithstanding those comments about macro uncertainty persisting, we've got several categories that obviously have gone through pretty significant market transitions and digestion of capacity. And really, it all points back to as the clock moves forward, we get closer and closer to those catalysts that we talked about, such as the need for network modernization and the need to address workload and data growth.

al: To get more complicated.

al: Summit for sure the other element I would add is on the solutions front.

al: A year later, notwithstanding those comments about macro uncertainty persisting.

al: We've got several categories that obviously have gone through pretty sick negative significant market transitions.

al: And digestion of capacity.

al: And really it all points back to as the clock moves forward.

al: We get closer and closer to those catalysts that we talk talked about that is need for network modernization.

al: Need to address workload and data growth and so.

al: Our confidence on the solutions front.

Albert Joseph Miralles: And so our confidence on the solutions front is that, ultimately, customers will have to act on those things. And I would say our pipeline reflects a lot of those intended actions. Just the space that we're in right now is that customers are deferring, taking longer, and having more decision makers to get to that solution spend. But we know that it's out there. So that would be how I compare the different periods. Look, hopefully, we'll get more economic and financial clarity that will help.

al: Is that ultimately customers will have to act on those things and I would say our pipeline reflects a lot of those intended actions.

al: Just that the space that we're in right now is customers are deferring taking longer have more decision makers to get to that solution spend but we know that it's out there so that would be how I compare the different periods.

al: Look hopefully, we will get more economic and financial clarity that will assist.

Albert Joseph Miralles: Hopefully, we'll get further down the path of customers thinking about what their IT roadmaps will look like in this era of AI. And then we do believe that we will see more balanced spending across those solutions and transactions.

al: Hopefully, we will get further down the path of customers thinking about what their roadmaps will look like in this era of AI.

al: And then we do believe that we would see more balanced spending across both solutions and transactions.

Samik Chatterjee: Got it, got it. And Alec, a quick follow-up for you, just in terms of expectations for the gross margin as we progress through the year, you sort of did a 21.8 in one queue, you're guiding to a similar number for the full year, is it going to be pretty similar through all four quarters as you sort of see solutions spend improving maybe through the year, but client devices being a headwind on that margin, like how should we think about progression

Speaker Change: Got it got it.

Speaker Change: Follow up for you just in terms of expectations for <unk> gross margin as we progress through the your use sort of the liquidity one eight in <unk>, you're guiding to similar number for the full year or is it going to be pretty similar to all four quarters.

Speaker Change: You sort of see solution spend improving maybe through the year, but client devices being a headwind on margin like how should we think about progression.

Albert Joseph Miralles: Sure, Samik. For the full year, I would say we're holding to our expectation for gross margin that we gave, which was that it would be similar to 2023 all in. I think there's going to probably be some variability quarter to quarter, obviously most notably driven by mix, but at this juncture, we would hold to those expectations. Certainly, given that the mix has shifted a bit in Q1, and we saw stronger client device growth and less solutions, you'd expect that that would have some impact on our gross margin.

Speaker Change: Sure summit for the full year I would say, we're holding to our expectation on gross margin that we gave which was that it would be similar to 2023, all in I think there's going to probably be some variability quarter to quarter. Obviously most.

Speaker Change: Notably driven by mix, but.

al: At this juncture, we would hold to those expectations.

al: Certainly given that the mix has shifted a bit in Q1, and we saw stronger client device growth and less solutions you would expect that that would have some some impact on our gross margin, but I would say when we think about the contribution of netted down revenue, which we think is durable.

Albert Joseph Miralles: But I would say when we think about the contribution of netted down revenue, which we think is durable, that's helped to hold those margins in. So, at this juncture, we're holding to that expectation of that kind of high 21% gross margin similar to 2023.

al: That has helped to hold those margins and so at this juncture, we're holding to that expectation of that kind of high 21 gross margins similar to 2023.

Samik Chatterjee: Okay, thank you. Thanks for taking my question.

Speaker Change: Okay. Thank you thanks for taking my questions.

Operator: Our next question comes from Amit Daryanani.

al: Our next question comes from Mitch Diary.

al: Bonnie.

Mitch Diary: So evercore.

Amit Jawaharlaz Daryanani: Good morning, everyone. I have a question and a follow-up as well. You know, when you folks talked about the hardware categories, one of the things that really stood out was storage performance. I'm curious, like historically speaking, does storage tend to be a leading indicator for what you see eventually with netcom and servers, or not? I'd love to kind of understand from a historical perspective, is storage a better indicator? And then, you know, maybe related to that, the netcom weakness, do you think it's more inventory digestion at this point, or is it really demand that's weak?

Mitch Diary: Good morning.

Mitch Diary: Everyone I'll have I guess a question then a follow up as well.

Mitch Diary: When you folks talked about the hardware categories are one of the things that really stood out was storage performance was fairly good.

Mitch Diary: Like historically speaking the storage tend to be a leading indicator, but what do you see eventually with netcom and servers.

Mitch Diary: I'd love to kind of understand from a historical perspective of storage a better indicator and then maybe related to that the net called weakness do you think it's more inventory digestion at this point or is it demand is weak.

Christine A. Leahy: Ami, it's Chris. You know, I think what we're seeing with storage right now is a confluence of two things. One, we have a number of customers who are investing in networking and implementing networking over the last few years, and storage is kind of coming. Storage kind of was the next investment, if you will, so we're seeing positive results there. The other thing is, you know, we've got some new, exciting products out in the market, and that's always appealing to our customers, and that's really what I think is driving that storage growth over this period.

Speaker Change: Oh that it's great that you know.

Speaker Change: I think what we're seeing with stored right now are a consequence of two things one we had a number of customers who are investing in networking.

Speaker Change: Implementing networking over the last few years in storage is kind of coming into your stores kind of with the next investment. If you will so we're seeing positive results there.

Speaker Change: The other thing is we've got some new exciting products out in the market and Thats always appealing to our customers. So that's really what I think is driving that storage.

Speaker Change: The storage growth in this period.

Speaker Change: Okay.

Amit Jawaharlaz Daryanani: Got it. And then, you know, Al, just for you, on capital allocation, the buybacks were fairly minimal in the quarter given, you know, how good the free cash generation was and the fact that leveraged towards the lower end of that two to three-time range that you folks talk about. How do we deal with buybacks for the rest of the year? And is the intent to perhaps short some capital or cash for the debt paydown that you might have to do by the end of this year and early next year? Or would you use it for buybacks? Yeah, thanks Amit. I appreciate the question.

Speaker Change: Got it and then I guess.

Speaker Change: Just for you on capital allocation, the buybacks with fairly minimal in the quarter given how good the free cash flow generation was and the fact that leverages towards the low run about two to three time when did you folks talk about.

Speaker Change: How do we think about buybacks for the rest of the year is the intend to perhaps short some capital or cash for the debt pay down that you might have to do by the end of this year and early next year or would you use it for buybacks.

Albert Joseph Miralles: Yeah, thanks, Amit. I appreciate the question.

Speaker Change: Yes, Thanks, Amit I appreciate the question.

Albert Joseph Miralles: Look, we will continue to do what we've done in terms of balancing both the strategic and tactical elements on the capital allocation front. And I think, look, I think 2023 is probably a good guidepost for you in terms of what that looks like. At any given time, we're going to look at all of the elements of what's going to provide the best short-term return. How do we feel about the valuation front, and where do we get the most strategic value?

Speaker Change: Look we will continue to do what we've done in terms of balancing both the strategic and tactical elements on the capital allocation front and I think look I think 2023 is probably a good guidepost for you in terms of what that look like at any given time, we're going to look at all of the elements of the what's going to provide the best.

Speaker Change: Short term return how do we feel about the valuation front.

Speaker Change: And where do we get the most strategic value I think the opportunity for us in 2024 is well.

Albert Joseph Miralles: I think the opportunity for us in 2024 is that we'll continue to be patient and opportunistic. But with eight hundred million dollars of cash on the balance sheet, I'd say we have a pretty consistent track record here of cash flow generation. We feel like we've got plenty of opportunity and optionality to be able to create value across all four of the priorities in our capital allocation.

Speaker Change: We will continue to be patient and opportunistic, but with $800 million of cash on the balance sheet, I'd say pretty consistent track record here of cash flow generation.

Speaker Change: We feel like we've got plenty of opportunity and optionality to be to be able to create value across all four of the priorities in our capital allocation scheme.

Speaker Change: Thank you.

Operator: Our next question comes from Matt Sheerin from Stifle.

Speaker Change: Our next question comes from Matt Sheerin from Stifel.

Matthew John Sheerin: Yes, thank you. Good morning.

Matthew John Sheerin: Yes. Thank you good morning, Chris I Hope you can elaborate more on what youre seeing in the government sector as you talked about the budget related push outs in federal so and I know there is obviously.

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

Matthew John Sheerin: Some seasonality, particularly in the September quarter, So what should we expect in terms of the seasonality across those markets.

Christine A. Leahy: Yeah. Good morning, Matt.

Matthew John Sheerin: Yeah.

Matthew John Sheerin: On federal I would tell you that the federal budget delay, which was about pushes things out by about six to eight weeks.

Christine A. Leahy: On the federal level, I tell you that the federal budget delay, which pushes things out by about six to eight weeks, creates pretty much a complete pause. But once the budget is implemented, then the trickle-down effect starts to happen, and the money is making its way to the agencies. We have seen, I call it, very strong activity in both projects and programs that were ready to go, and that's been a positive and very strong activity on those that will take a little while to get through the pipeline.

Matthew John Sheerin: It creates a pretty much a complete pause, but what's the budget was implemented then the trickle down effect starts to happen and the money is making its way to the agencies.

Matthew John Sheerin: We have seen a call it very strong activity in both.

Matthew John Sheerin: Ah projects and programs that were ready to go and Thats been a positive and very strong activity on those that will take a little while to get through the pipeline. So what I would say Matt is as we think about seasonality back to the full year lending more on what you'd see is the federal seasonal year with it.

Christine A. Leahy: So, what I would say, Matt, is, you know, as we think about seasonality back to the full year, landing more on what you'd see as a federal seasonal year with it being more back-end loaded. And remember, you know, sometimes when you get pushed out by a quarter or so in terms of government decision-making, oftentimes you just need to get the P.O. on by the end of the year. So, it's possible we could see some of it pushed into the following year.

Matthew John Sheerin: A more backend loaded.

Matthew John Sheerin: And remember.

Matthew John Sheerin: Sometimes when you get pushed out by a quarter or so in terms of the government decision making.

Matthew John Sheerin: Oftentimes you just need to get that by the end of the year. So its possible we see some of it pushed even into the following year that January sometimes happens, but what I would just tell you is.

Christine A. Leahy: That January sometimes happens. But what I would just tell you is we knew it was coming. We've been working with the customers poised to start moving the orders, and I feel quite good about federal playing out seasonally for the year.

Matthew John Sheerin: We knew it was come in we've been working with the customers poised to start moving the orders.

Matthew John Sheerin: And I feel quite good around federal playing out seasonally for the year.

Matthew John Sheerin: Okay, thank you for that. And then, just as a follow-up concerning client device demand that you're starting to see pick up, are you seeing any interest or traction on AI-enabled PCs yet, or is that still early?

Speaker Change: Okay. Thank you for that and then just as a follow up concerning the client device demand that youre starting to see pickup are you seeing any interest or traction on AI.

Speaker Change: Enabled Pcs, yet or is that still early.

Christine A. Leahy: You know, Matt, I would say it's still early, and when we look at the units that we're selling now, really minimally AI PCs. They're the Win11 and Apple next generation, and the impetus is really threefold. It's just a refresh of aging machines. It's get to Win11, frankly, and it's also an interest in getting ahead of any increasing demand. You know, we are finding customers having longer memories when it comes to the pandemic and remembering that sometimes just-in-time doesn't work because you've got to stay ahead of supply. So that's also been a factor in the positive signs that we're seeing. I'd also say, look, you know, I mentioned it before, it's a low-friction purchase, and there's kind of no regrets.

Speaker Change: You know, Matt I would say, it's still early and when we looked at the units that we're selling now.

Speaker Change: Really minimally AI Pcs there the 111 in Apple next generation and the impetus is really threefold. It's just refresh aging machines as get to win 11, frankly, and it's also an interest in getting ahead of any increasing.

Matthew John Sheerin: Demand.

Matthew John Sheerin: We are finding customers having longer memories when it comes to the pandemic and remembering that sometimes just in time doesn't work because you got to stay ahead of the supply. So that's also been a factor in the positive.

Matthew John Sheerin: <unk> that we're seeing I would also say look.

Matthew John Sheerin: You know I mentioned it before.

Matthew John Sheerin: Low friction purchase.

Matthew John Sheerin: And it's kind of no regrets when you put together aging machines the need for win 11 with the kind of stable landscape.

Christine A. Leahy: When you put together aging machines, the need for Win11 with a kind of stable landscape, customers are just starting to move forward. The AI PCs will come. There is interest. There's a lot of talk with customers, a lot of talk around which personas they are best going to be used for, but right now, what our partners are providing has ample compute power to handle the AI that is in current form.

Matthew John Sheerin: Customers are starting to move forward. The AIP fees will come there is interest there is a lot of talk with customers a lot of talk around which personas are they best going to be used for but right now what we're what our partners are providing ample compute power to handle the AI that is in current form.

Matthew John Sheerin: Okay, thank you very much.

Speaker Change: Okay. Thank you very much.

Operator: Our next question comes from Erik Woodring of Morgan Stanley.

Erik William Richard Woodring: Our next question comes from Eric would rank from Morgan Stanley.

Erik William Richard Woodring: Okay.

Erik William Richard Woodring: Great, thanks so much for taking my questions this morning. Chris, maybe, I'd love if you could maybe unpackage some of your pipeline comments a bit more. You know, outside of federal, if we put that to the side, you mentioned broad pushouts, but can you maybe clarify anything you're seeing in terms of customer set or products? Where are you seeing this behavior most acutely? You know, are you seeing any cancellations?

Eric: Great. Thanks, so much for taking my questions. This morning, Chris maybe.

Eric: I'd Love, if you could maybe unpack some of your pipeline comments a bit more.

Eric: Outside of federal if we put that to the side you mentioned broad push outs, but can you maybe clarify anything youre seeing in terms of customer set or products, where you're seeing this behavior most acutely.

Eric: Are you seeing any cancellations.

Erik William Richard Woodring: Is the pushout behavior this quarter, you know, any more notable than past quarters? And is it as simple as, you know, the macro is the key factor here that can unlock this spend? Or are there any other factors that you see or when you speak to your clients where they say, listen, we just have to refresh these devices, for example, or we have to modernize our data center infrastructure? And then I have a quick follow-up. Thank you.

Eric: Shopping heavier this quarter any more notable than past quarters and as simple as the macro is the key factor here that can unlock this spend or are there any other factors that you see or when you speak to your clients, where they say listen we just we just have to refresh. These devices for example, or we'd have to modernize their take or data center.

Eric: Our infrastructure and then I have a quick follow up thank you.

Christine A. Leahy: Yeah, sure. Thanks for the question. Let me just start with where you ended.

Speaker Change: Yeah sure. Thanks for the question, let me just start with where you ended in I would say as we've suggested the macro overhang really is the predominant factor in the extended elongated sales cycles. What we're not seeing is we're not seeing cancellations we're seeing.

Christine A. Leahy: And I would say, as we've suggested, the macro overhang really is the predominant factor in the extended and elongated sales cycles. What we're not seeing is we're not seeing cancellations. We're seeing just more deliberation and greater time and more involvement, frankly, by more business unit constituents in the decision-making process. And as I said, the AI consideration is a real thing. It's a bit of a

Speaker Change: Just more deliberation and.

Speaker Change: Greater time and more involved in it frankly by more business unit.

Speaker Change: <unk> in the decision, making process and as I said the AI consideration is a real thing it's a bit of a pause how do we think about this over the long time term as you know the.

Christine A. Leahy: How do we think about this over the long-term? As you know, the progress, the speed with which AI functionality is moving is really fast, and they're taking that into consideration. But I would say that it feels very similar to 2023. And as Al mentioned, I mean, this quarter, we created more uncertainty in some ways than we saw in certain quarters last year. So it's not that dissimilar, and it really does have to be done across what I'll call complex solution sets.

Speaker Change: The progress the the speed with which AI functionality is moving is really fast and they're taking that into consideration, but I would say that the it feels very similar to 2023 and as al mentioned I mean, this quarter accretive more uncertainty in some ways than we saw on certain.

Speaker Change: Orders last year, so it's not that dissimilar and it really does have to do across what I'll call complex solutions sets remember, we don't really have customers buying point products per se. We are seeing in some areas. It's server for example.

Christine A. Leahy: Remember, we don't really have customers buying point products per se. We are seeing, in some areas, server refresh. We're just at the point where customers need to refresh, and we're figuring out how to do that or potentially starting to move some things to the cloud. But I would just characterize it as very similar to the trend from last year.

Speaker Change: Refresh we're just at the point, where customers need to refresh and we're figuring out how to do that or potentially starting to move some things to cloud.

Speaker Change: But I would just characterize it as very similar to the trend from last year.

Albert Joseph Miralles: And maybe, Erik, just adding on to that and to kind of stitch the story together, we talk about these catalysts. Within those catalysts, there are plenty of opportunities from a solutions perspective. I think that what we saw transpire is this kind of heightened caution and concern, kind of the what's around the corner phenomenon, if you will, from a corporate perspective that has caused more delay and deliberation. And then, to Chris' point, you add on AI and the complexity of what it is ultimately going to mean for these customers' infrastructure environments. And it's just more impetus to say, "Let's take a little time."

Speaker Change: And maybe Erik just adding on to that and kind of stitch to story together, we talk about these catalysts.

Speaker Change: Within those catalysts are plenty of opportunities from a solutions perspective.

Erik: Think that what we saw transpire is this kind of heightened caution and concern and kind of what's around the corner phenomenon. If you will from a corporate perspective.

Speaker Change: Just caused more delay in deliberation, and then to Chris's point, you add on AI and the complexity of the what is it ultimately going to mean for these customers infrastructure environments and it's just more impetus to say, let's take a little time and I think the corollary there Eric would be.

Albert Joseph Miralles: And I think the corollary there, Erik, would be that we had to pick up in the client device, and it was literally across our end markets. And so we would have said that that was a catalyst that was out there. And that was a catalyst that started to see some free up, call it modest, but some free up of spend in that regard because despite it being a catalyst that had kind of been held back before, it really was the lowest friction choice for customers. And so that's how the quarter played out. Yeah, I would just add that.

Speaker Change: And that we had a pick up in client device and it was literally across our end markets and so we would have said that that was a catalyst that was out there and that was a catalyst that's starting to see some free up call it modest but some free up.

Speaker Change: Spending in that regards because dish.

Speaker Change: Despite it being a catalyst kind of had been held back before it really was the lowest friction choice for customers and so that is how the quarter played out yes, I would just add that the durable the durable categories. We've seen over the last several quarters, our security and cloud.

Christine A. Leahy: I would just add that the durable categories we've seen over the last several quarters are security and cloud.

Erik William Richard Woodring: Okay, very helpful. And then maybe a clarification, quick follow-up: you mentioned expectations at least for 2024 US IT market growth to be relatively similar. You know, you guided to low single-digit gross profit growth versus low to mid-single-digit growth last quarter. So that would presume, you know, gross margins would be a bit weaker than when you guided 90 days ago, but Al, you reiterated the kind of expectation for similar gross margins to 2023.

Speaker Change: Okay very very helpful. And then and then just maybe a clarification quick follow up as you know.

Speaker Change: You mentioned expectations at least for for 2024 U S. ICD market growth to be relatively similar you did guide to low single digit gross profit growth versus low to mid single digit growth last quarter.

Speaker Change: Presume.

Speaker Change: Gross margins would be a bit weaker than when you guided 90 days ago, but all you reiterated kind of the expectation for similar gross margins to 2023. So can you just help me maybe on package what what is the main factor that is causing the gross profit dollar the slight change in gross profit dollar growth guidance for 'twenty 'twenty four and that's it for me. Thank you so much.

Erik William Richard Woodring: So can you just help me maybe unpackage what is the main factor that is causing the gross profit dollar, the slight change in gross profit dollar growth guidance for 2024? And that's it for me. Thank you so much.

Albert Joseph Miralles: Yeah, Erik, a couple things. So look, just working from the top, from a customer spend perspective, you know, we're calling for low single digits plus our typical premium. So that's come off a bit. And if it were coming off in a category, that would probably be substantially from a solutions perspective. That is the slow start that we experienced in Q1. We're not suggesting we're going to make that up

Speaker Change: Yeah, Eric a couple of things so look from a cut just working from the top from a customer spend perspective.

Speaker Change: We're calling for low single digits, plus our typical premiums so that's come off a bit.

Speaker Change: And if it were coming off an a and a category that would probably be substantially from a solutions perspective that is the slow start that.

Speaker Change: We experienced in Q1, we're not suggesting we're going to make that up.

Albert Joseph Miralles: So that comes off the top. And then that basically just kind of works its way down to GP. We're getting an earlier start to client devices, at least for the first quarter, than maybe we would have anticipated. So while that doesn't help from a gross margin perspective, it certainly does help from a gross profit perspective, right? Because you're getting the volume.

Speaker Change: So that comes off the top and then that's basically just kind of works its way down to GP, we're getting an earlier start to client device at least for the first quarter than maybe we would've anticipated so while that.

Speaker Change: Doesn't help.

Albert Joseph Miralles: From a gross margin perspective, it certainly does help from a gross profit perspective, right because youre getting the volume and I think if you look down our P&L for the quarter you would see the delta on net sales was closer because we saw more from a client device perspective. So.

Albert Joseph Miralles: And I think if you look down our P&L for the quarter, you'd see the delta on net sales was closer because we saw more from a client device perspective. So there are some puts and takes within that. But I'd say, you know, we're in the range of with solutions being a little lighter, client being a little stronger, and frankly, continued durability of netted down revenues. There's not much of a change there on the gross margin front.

Albert Joseph Miralles: There is some puts and takes within that but I'd say, we're in the range of.

Albert Joseph Miralles: Solutions being a little lighter client being a little stronger and frankly continued durability of netted down revenues.

Speaker Change: There is not much of a change there on the gross margin front.

Erik William Richard Woodring: Super. Thanks so much for the call, guys.

Al Morales: Super Thanks, so much for the color guys.

Operator: Our next question comes from David Vogt from UBS.

Speaker Change: Our next question comes from David vote from UBS.

David Vogt: Great. Thanks, guys, for taking my question. I just want to come back to maybe a longer-term kind of discussion on AI and some of your hardware categories. As you guys look beyond this year into 2025 as traction starts to really accelerate in AI, how are you thinking about sort of the uplift in maybe configurations, ASPs, and how does that flow through your business? So, for example, obviously AI PCs, there's a lot of discussion about having considerably higher price points. The same obviously holds true, I think, with AI-enabled optimized servers. So, just try to think about how you're thinking about that as it impacts your business, maybe not this year but in 2025. Thanks.

David Vogt: Great. Thanks, guys for taking my question I, just wanted to come back to maybe a longer term kind of discussion on AI and some of your hardware categories. As you guys look at maybe beyond this year into 'twenty five as traction starts to really accelerate in AI. How are you thinking about sort of the uplift in maybe configurations.

Speaker Change: <unk> and <unk>.

Chris Leahy: Does that flow through your business. So for example, obviously ITC is there's a lot of discussion of having considerably higher price points. The same obviously holds true I think with AI enabled optimized servers. So I'm just trying to think about how youre thinking about that as it impacts your business, maybe not this year, but in 'twenty five specs.

Christine A. Leahy: Yeah, David. I'll take it. I'll take this.

Speaker Change: Yes, David I'll take it I'll take this.

al: Look I think TBD to some extent right, we're going to see how pricing plays out what I would tell you is in current context, we're not seeing much in the way of ASP changes I'd say prices broadly, including on the client device front held pretty firm so our growth during the <unk>.

David Vogt: <unk> was largely units.

David Vogt: Certainly there is plenty of buyers out there that as we start to see AI Pcs and other AI categories emerged that you could see price increases, but I am not sure that we are.

David Vogt: Fully prepared to kind of call on what that would look like just remember for us.

David Vogt: Look we're going to work closely with our customers as as we are now and will continue to in terms of that how do you navigate that landscape how do we help them get in front of it to the extent they can.

Albert Joseph Miralles: Look, I think TBD to some extent right now. We're going to see how pricing plays out. What I would tell you is, in the current context, we're not seeing much in the way of ASP changes. I'd say prices, broadly, including on the client device front, held pretty firm. So our growth during the quarter was largely units. But also remember that, for us, in terms of the kind of impacts, any lift there on the ASPs may lift the top line, but we're largely still very much a cost-plus provider, so you may not see significant movement from a gross margin perspective.

David Vogt: But also remember that for us in terms of kind of impacts.

Albert Joseph Miralles: Any lift there on the Asps may.

Albert Joseph Miralles: Lift the top line, but we're largely still very much have cost plus provider. So you may not see significant movement from a gross margin perspective.

David Vogt: Got it. Just to clarify, obviously, it wouldn't be subject to ASC 606 accounting. This would be grossed up revenue and then the commensurate gross profit dollars associated with the revenue, correct? Is that the right way to think about it? As we understand it now.

Speaker Change: Got it so just to clarify obviously wouldn't be subject to ASC 606, accounting. These would be grossed up revenue and the commensurate gross profit dollars associated with the revenue correct. It was the right way to think about it as as we as we understand it now and what the new product generations. It looked like I think that's true.

Albert Joseph Miralles: As we understand it now and what the new product generations will look like, I think

Speaker Change: Great. Thanks Al.

Operator: We currently have no further questions. I will hand it back over to Chris Lee, Chair and CEO, for final remarks.

Albert Joseph Miralles: We currently have no further questions I'll hand, it back over to Chris Li Chairman and CEO for final remarks.

Christine A. Leahy: Thank you, and let me close by re-emphasizing my confidence in this team, our strategy, and the durability of our resilient business model. Thank you to our CDW colleagues across the globe for your unwavering commitment to our customers. Thank you to our customers for the privilege and opportunity to help you achieve your goals. And thank you to those listening for your time and continued interest in CDW. Al and I look forward to talking to you next quarter.

Christine A. Leahy: Thank you and let me close by re emphasizing my confidence in this team our strategy and the durability of our resilient business model. Thank you to our CDW coworkers across the globe for your unwavering commitment to our customers. Thank you to our customers for the privilege and opportunity to help you achieve your goals and thank you to those listening for your time.

Speaker Change: And continued interest in CDW al and I look forward to talking to you next quarter.

Christine A. Leahy: Okay.

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

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