CDW Corporation

Hello, everyone, and welcome to the CDW third quarter 2022 earnings call. My name is Seb, and I will be the operator for the call today. There will be an opportunity for Q&A, and if you wish to register a question, you can do so by pressing star 1 on your telephone keypad or press star 2 to withdraw your question. I will now hand the floor over to Steve O'Brien to begin the call. Please go ahead.

Thank you, Seb. Good morning, everyone. Joining me today to review our third quarter results are Chris Leahy, our president and chief executive officer, and Al Morales, our chief financial officer. Our third quarter earnings release was distributed this morning and is available on our website, investor.cdw.com, along with supplemental slides that you can use to follow along 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. 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, and in the company's other filings with the SEC. CDW assumes no obligation to update the information presented during this webcast. Our presentation also includes certain non-GAAP financial measures, including non-GAAP operating income non-GAAP operating income margin, non-GAAP net income, and non-GAAP earnings per share. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You'll find reconciliation charts in the slides for today's webcast and in our earnings release and Form 8K we furnished to the SEC today. Please note our financial results today include results from our acquisition of Serious Computer Solutions, which closed on December 1st, 2021. All references to growth rates or dollar amount changes in our remarks today are versus the comparable period in 2021 unless otherwise indicated. References to growth rates for hardware, software, and services today represent U.S. net sales only and include Sirius. They do not include the results from our CDW UK or Canada References to growth rates for specific products and solutions including cloud and security today represent U.S. net sales only and exclude Sirius. The historic combined information of CDW and Sirius discussed herein is for illustrative purposes only and is not necessarily indicative of results that would have been achieved had the acquisition occurred at the beginning of the periods presented. 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 results and then provide an update on our strategic progress and a summary of our outlook. Al will provide additional details on the financials and outlook, as well as our capital allocation priorities. And then we'll move right to your questions. We had an outstanding third quarter. Once again, we delivered all-time record sales, profits, and margins. Net sales were $6.2 billion, 17% higher than last year. Non-GAAP operating income was $449 million, up 26%. And non-GAAP net income per share was $2.60, up 22% year over year. This exceptional performance is a result of our relentless execution and disciplined investment in our customer-centric strategy, a strategy that underpins our ability to address customer priorities across a broad array of end markets with solutions across the full stack and full lifecycle of IT. The vital need for interconnected and integrated solutions has created levels of complexity never seen before. We cut through the complexity and help customers maximize the impact of technology, technology that delivers mission-critical outcomes. In today's environment of persistent uncertainty, our customers are increasingly leaning on CDW as a trusted partner, and they look to us to provide unbiased, expert advice across the entire spectrum of IT. A trusted partner who helps them tackle their most pressing priorities. Pressing priorities like advancing their digital transformation, driving innovation, and delivering exceptional stakeholder experiences, along with enhancing security and supporting collaboration in today's distributed environment of work, learn, and live everywhere. Priorities that deliver operating efficiency and expense elasticity, like burstable billing in modern hybrid and multi-cloud environments. And infrastructure and new technology investments to optimize flexibility and agility. Our ability to enable solutions in support of all these diverse priorities drove broad-based and balanced performance. There were three main drivers of our results, our balanced portfolio of customer and markets, breadth of our product solutions and services portfolio, and the relentless execution of our three-part strategy. First, the breadth and diversity of our customer and markets. As you know, we have five U.S. sales channels, corporate, small business, healthcare, government, and education. Each channel is a meaningful business on its own with annual sales ranging from $2 billion to over $10 billion over the last 12 months. Within each channel, teams are further segmented to focus on customer and markets, including geographies and verticals. We also have our UK and Canadian operations, which together delivered sales of $2.9 billion. Our portfolio approach enables us to toggle to the best pockets of opportunity, and to be there for our customers along every step of their IT journeys. Our collective team did an exceptional job this quarter. Our corporate team delivered another stellar quarter with a 25% net sales increase. Results were balanced and broad-based. Customers continued to focus on digital transformation through infrastructure modernization and process automation. The team's ability to deliver these outcomes translated to excellent solutions growth led by Netcom, Enterprise Storage, and Cloud. Both professional and managed services posted double-digit increases as the team helped customers achieve their IT priorities by augmenting their technology capabilities with dedicated technologists. The hybrid work environment continues to thrive with continued customer focus on collaboration across workspaces and continued need to modernize their employee experience. Small business delivered growth for the seventh straight quarter, a 5% increase, on top of last year's 39% growth. The team continued to help small business customers navigate the impact of technology across all aspects of their business in today's cautious environment and accomplish critical projects that enhance and sustain mission and business outcomes. This drove double-digit performance across software, security, and cloud. Our full-stack, full lifecycle support for customers, which enables us to nimbly shift toward solutions that maximize prior investments, led to double-digit performance in services. Public posted a strong 13% increase this quarter. The healthcare team delivered another excellent quarter of robust growth, up 28%. Once again, results were driven by the team's ability to help healthcare organizations harness technology to drive productivity in an environment of rising costs. Our healthcare customers are increasingly relying on CGW for talent orchestration and to guide their implementations of cloud resources. Healthcare organizations face complex business dynamics, but they are committed to mission-critical projects, and data center and collaboration modernization continues to move forward. Government posted 38% growth. Within government, state and local posted a substantial double-digit increase. Our collaboration with customers to identify and capture various funding opportunities is bearing fruit, with data center and software projects beginning to advance under multi-year phrasing. The team delivered excellent security results as they helped state and local municipalities enhance their defenses against emerging and evolving cyber threats. Remote collaboration continues as a top priority, driving excellent performance across transactional product categories. As expected, federal activity resumed in earnest. Seasonal spending patterns normalized with the September fiscal year end spending uptick. The team helped customers address their top priorities, including upgrades to collaboration and data management infrastructure. This drove strong growth in nearly all categories compared to last year. For education, higher ed's growth was more than offset by the expected decline in K-12 and overall sales decreased 7.5%. The higher ed team continued to deliver student success programs to institutions. These programs promote enrollment through comprehensive endpoint solutions and improved campus connectivity and safety and drive client devices sales and net com growth. Security remains very Security demands were high, driven by solutions that addressed ransomware and hacking threats through CDW-delivered security enhancements. K-12 performance remained strong on an absolute basis, but was obscured by the team's exceptional client device-driven success in 2021. Today, the team is helping school systems determine how to sustain prior IT investments and maintain the learning opportunities provided by digital equity initiatives. At the same time, the team continues to help customers implement industry-leading, innovative, connective learning spaces, as well as enhance campus safety. And this drove strong security and audiovisual performance during the quarter. Other, our combined UK and Canada results increased 18% on a reported basis. Both regions delivered excellent local market growth. The UK's performance was broad-based and balanced as our team showed resolve and resiliency in a complex environment. Canada's performance was also broad-based and balanced with customer priorities similar to the US amid a continued shift into solutions and services. All in, the teams delivered another excellent quarter of end market performance. Our diverse end markets are both a key strategic advantage and a driver of our differentiated performance. The second driver of our performance was our broad and deep portfolio. As technology has become a more vital part of their strategies, customers require comprehensive, integrated, and interconnected solutions and services. Our ability to address these priorities across the entire IT continuum delivered double-digit growth across our solutions portfolio. U.S. hardware increased 13%. This steady performance was on top of 2021 quarter double-digit hardware growth. Network modernization and upgrades drove double-digit increases in enterprise storage and netcom. Video and audio and servers increased healthy single-digit rates. Commercial PC performance was strong on a relative basis, and even more so when we exclude the year-over-year impact of growth from the K-12 market. Relative to the supply environment, conditions improved across several transactional areas. Despite these improvements during the quarter, our overall backlog remains elevated. We expect the backlog to continue to feather out over the coming quarters. U.S. software increased double digits. Strength was broad-based as we continued to help customers manage data, enhance productivity, and secure their IT environments, with strong double-digit increases in storage management, application suites, and database management. Cloud was an important driver of performance across the business. Complexity surrounding cloud has not changed, and navigating between multiple options remains a major area of customer focus. Once again, cloud was a meaningful contributor to profitability with both customer spend and gross profit up by double digits. Infrastructure as a service, productivity, security, application delivery, and connectivity were key cloud workloads during the period. Security remains top of mind for our customers as cyber threats continue to emerge, evolve, and increase. Our teams continue to guide customers through a cohesive strategy of security assessments, data protection, and threat mitigation to improve their security frameworks and respond to increasing threats. This drove strong double-digit growth in customer spend. U.S. services performance continued to advance this quarter. customers are leaning into CDW as extensions of their own teams and leveraging CDW services as part of their strategies. This produced broad-based and balanced growth driven by professional services, managed services, and warranties. Services net sales were roughly twice last year's levels and represented 8% of total sales, up from 5% in 2021. Services are fundamental to our go-to-market approach and are a key enabler of our value proposition. To support this, we have been making organic and inorganic investments in services over the past several years, and those investments quickly gained traction in the market. And that leads to the third driver of our performance this quarter, relentless execution of our three-part growth strategy. Our targeted investments are guided by our three-part strategy, which is one, to capture, share, and acquire new customers, two, to enhance capabilities in high-growth solutions areas, and three, to expand services capabilities. This strategy delivers on our commitments to our customers and drives both our top-line and bottom-line performance. Over the past three years, we have enhanced our relevance to customers by broadening and deepening our capabilities, including in automation, cloud native and DevOps, and cybersecurity, capabilities necessary to ensure we remain the trusted advisor to our customers as they accelerate their digital transformation, capabilities that enable us to best serve customers across physical, digital, and cloud-based environments in the U.S. and internationally. A great example of how our services investments deepen relationships and strengthen the value we deliver to customers is a solution we are delivering to a medium-sized hospital system. With three primary hospitals and approximately 70 regional clinics and urgent care facilities, the system was challenged to find, retain, and train a sustainable level of technical staff. Having previously worked with them, providing both hardware solutions and professional services, to re-architect their disaster recovery solution, we had a deep understanding of our customer's environment. When coupled with the breadth and depth of our services offering, this enabled us to construct a new design, build, run, end-to-end services solution that leverages CDW managed services and talent orchestration capabilities. A solution made possible by the services investments we have made and the technical mastery we have accelerated over recent years. mastery over the broad spectrum of technologies the customer needed for support, including Windows and Linux servers, virtualization, storage, backup and recovery, databases, switching, routing, network access and cloud-based productivity, and identity management tools. Our full portfolio of services enabled us to become an extension of the customer's team. We recently went live under a five-year contract with monthly recurring revenue in the hundreds of thousands and a total contract value over $10 million. A great example of how our investments and services deliver value to our customers and cause them to lean further into CDW. Investments in our customer-centric growth strategy are foundational to our ability to consistently and profitably outgrow the US IT market. And that brings us to our expectations for the rest of the year. Our team's terrific execution and relentless focus on our customers delivered significant outperformance to our baseline 2022 outlook. When combined with our current expectations for fourth quarter performance, we now expect to outperform the U.S. IT market at the high end of the 325 to 425 basis points range. Our estimate of U.S. IT market growth in 2022 remains 4%. Taken together, this equates to year-over-year constant currency growth at the high end of the 7.25% to 8.25% range. The high end of the range is applied to the combined CDW 2021 revenues of $22.8 billion, calculated as though Sirius was acquired on January 1, 2021, instead of its actual acquisition date of December 1. On a reported basis, this equates to a constant currency increase of 18.5% over 2020 results. Our outlook continues to reflect our baseline expectations that our mix will remain weighted more heavily to netted down items. We expect this to drive profit growth faster than sales growth, while we continue to thoughtfully invest in our future. We are cognizant of the current environment, but to date, customer urgency to innovate for the future and meet internal and external stakeholder demands has not diminished. Of course, we remain mindful of wild cards, including economic, geopolitical, and the variable nature of the supply chain, and we will keep a watchful eye on these and other potential factors. As we always do, we will provide an updated view on business conditions and our annual outlook on our next call. In the meantime, we will continue to do what we do best, leverage our competitive advantages and out-execute the competition. Our flexible business model and proven formula for success will continue to serve us well. The accelerated pace of change makes our role as a trusted strategic partner to our customers more important now than ever. Now let me turn it over to Al, who will provide more detail on our financials and outlook. Al?