CDW Corporation

Hello and welcome to CDW fourth quarter 2022 earnings call. My name is Drew and I'll be your operator today. If you would like to ask a question during today's call, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two. I would now like to turn the call over to Steve O'Brien, Investor Relations. Please go ahead.

Thank you, Drew. Good morning, everyone. Joining me today to review our fourth quarter and full year 2022 results are Chris Leahy, our President and Chief Executive Officer and Chair, and Al Morales, our Chief Financial Officer. Our fourth quarter and full year 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 calls. 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 risks and uncertainties that could cause actual results to differ materially. Additional information concerning these risks and uncertainties is contained in the earnings release in Form 8-K 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 in Form 8K we furnished to the SEC today. Please note all references to growth rates or dollar amount changes in our remarks today are versus the comparable period in 2021 unless otherwise indicated. Replay of this webcast will be posted to our website later today. I 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 our call with an overview of our fourth quarter and full year performance and share some thoughts on our strategic progress and expectations for 2023. Then I'll hand it over to Al, who will take you through a more detailed review of the financials, as well as our capital allocation strategy and outlook. We will move quickly through our prepared remarks to ensure we have plenty of time for questions. Our fourth quarter was an excellent example of the power of our business model when coupled with our broad and deep portfolio of technology solutions. In an extraordinary period of shifting customer priorities, we delivered record profitability. For the quarter, net sales were $5.4 billion, $100 million below 2021, and roughly flat on a constant currency basis. Non-GAAP operating income was $523 million, 23% above last year. And non-GAAP net income per share was $2.50, up 21% year over year, up 22% on a constant currency basis. These results were driven by the team's ability to pivot to meet customer priorities and capture high relevance, high growth opportunities. This led to excellent performance across services, cloud, security, and software. Performance that drove record profitability, an exceptional outcome given market dynamics, and an outcome that is a direct result of the investments we have made in solutions and services over the past several years. Simply put, our ability to deliver outcomes across the full stack and full lifecycle of technology drove strong profit growth, notwithstanding a meaningful decline in client devices. This quarter clearly demonstrates the power of our strategy when combined with the resiliency of our business model. So what happened to client devices this quarter? While we expected some level of contraction in client devices and accessories given the past two years of heavy investment, The magnitude of the decline in the fourth quarter was certainly steeper than anticipated. The primary driver was the K-12 market, which represented roughly half of the client device decline. We also saw a general moderation in client device demand across channels as economic uncertainty increased. As we always do, we stayed the course on our playbook and maintained our discipline with a focus on our customer and our value proposition. This discipline contributed to this quarter's excellent cash flows and strong economic returns. In Q4, the combination of lower transactional business and the team's success delivering on customer demand for solutions and services led to a meaningful shift in our sales mix. Let me put this in perspective for you. You've heard us speak over time about the impact of solutions mix and notably netted down revenue streams on our financial results. As we have grown our netted down revenue streams over time, total annual customer spend has consistently grown a few hundred basis points faster than net sales. In periods where we mix into more solutions business that nets down and mix out of client device business that fully shows up in net sales, that growth rate spread will be wider. In Q4, an extreme mix shift took place. The result was meaningful customer spend growth significantly dampened net sales growth, and very healthy gross margins that drove delivery of gross profit. Now let's turn briefly to the full year results. 2022 was a year of financial performance underpinned by progress on our three-part strategy for growth. The first pillar of our strategy is to capture, share, and acquire new customers. One way we do this is through strategic acquisitions. The addition of Sirius is a great example of this. Sirius elevated and expanded our services capabilities, providing an excellent cross-sell opportunity into our existing customer base. At the same time, Sirius customers represent excellent cross-sell opportunity given the broader CDW portfolio. The second pillar of our strategy is to enhance capabilities in high-growth solutions areas. Strategic coworker investments contributed to excellent solutions performance through 2022 with strong growth in cloud, security, and network upgrades. The third pillar of our strategy is to expand services capabilities. As a key enabler of our value proposition, services are fundamental to our full stack, full lifecycle, full outcomes go-to-market approach. Services engagement solve critical customer problems and drive enduring customer relationships. In 2022, the team delivered more than 20% services growth across the business. No doubt our acquisitions have accelerated our services breadth and depth, and have been foundational to our success. 2022 was indeed a year of strategic performance across all three of our priorities. It was also a year of exceptional financial performance. The team delivered record results with constant currency net sales growth of 15% and each profit category down the P&L statement up 20% or more. Results enabled by ongoing investment in our three-part growth strategy. Investments that have made us a vital technology partner, whether customers' priorities require transactional or highly complex solutions. You see the impact of these investments on our fourth quarter performance as the team pivoted to meet customer shifting priorities and advise, design, and orchestrate full outcomes. Outcomes that deliver five key organizational benefits. Innovation, lower costs, agility, risk mitigation, and enhanced experiences for customers and coworkers. Let's take a closer look at the fourth quarter. There were three main drivers of our fourth quarter results, our balanced portfolio of customer end markets, breadth of our product solutions and services portfolio, and relentless execution of our three-part strategy. First, the balanced portfolio of our diverse customer end 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 $1.9 billion to over $10 billion over the last 12 months. Within each channel, teams are further segmented to focus on customer and market, including geographies and verticals. We also have our UK and Canadian operations, which together delivered sales of $2.9 billion. Our corporate team delivered another strong quarter with a 7% sales increase. The team helped customers accelerate implementation of priorities to automate tasks, detect fraud, and enhance customer and employee experiences. This drove excellent cloud software and security results. Our ability to address priorities focused on application and network modernization and consumption-based data center solutions led to excellent services and NetCon performance, each up double digits. Economic uncertainty led customers to deprioritize endpoint solutions, which resulted in a decline in client devices. Small business declined 13%. The team pivoted to help customers address priorities to maximize prior IT investments and identify savings opportunities to fund new and ongoing projects. At the same time, the team helped customers address mission-critical priorities around security and take advantage of the benefits of cloud, both with heightened urgency. Strong growth from security and cloud were balanced against the decline in client devices as customers put upgrades on hold, awaiting greater clarity around the economy and employment plans. Strong results across healthcare and government could not offset the decline in education driven by K-12 client device dynamics, and public sales decreased 9% year over year. The healthcare team delivered another excellent quarter of robust growth, up 8%. Talent needs and data center projects remained key focus areas as customers increasingly sought technology solutions to address complex industry challenges. This drove excellent performance in netcom, servers, and services. Mission-critical investments to enhance patient care and experience continued, with telehealth and tele-sitting driving excellent collaboration performance. Government grew double digits, up 13.5%. Strong state and local sales growth continued, driven by customer adoption of IT strategies for hybrid cloud, as well as network modernization and zero trust security frameworks. Services increased more than 50% as the team helped state and local municipalities address talent gaps through enhanced training, as well as professional services engagement. CEDRAL also continued to grow in the fourth quarter. The team's ability to help agencies achieve their priorities around data management drove excellent server and storage performance. For education, higher ed's high single-digit sales growth was more than offset by declines in K-12, and overall sales decreased. Higher ed continued their success helping implement student success programs, which institutions use to promote enrollment. Our ability to help drive program elements that include improved security, campus connectivity, as well as enhanced dorm room experiences, drove double-digit growth across cloud, netcom, server storage, software, and security. For K-12, we expected a continuation of third quarter performance where sales were down low double digits, but instead experienced a more significant decline with client device units down more than 60%. As we shared last quarter, K-12 customers continued to focus on digesting the past several years' investments, and evaluating multi-year funding opportunities to ensure they are making the best decisions for the future. This quarter, as many schools achieved one-to-one student-client device ratios, there was a significantly heightened focus on reevaluating plans and demonstrating need for ECF awards. When the device per student ratio was below one-to-one, demonstrating need was straightforward. Today, with device per student at or above the one-to-one ratio, Demonstrating need is more complex. For example, articulating why new devices with higher processor capability are required to run more complex applications or provide greater security is just a more complicated discussion and takes more time and approvals. This heightened focus led some customers to defer or retract awarded funding commitments in order to assess, reevaluate, and potentially reapply under the third and final wave of ECF, which is scheduled to end December 31st of 2023. For CDW, this equated to several hundred million dollars of CDW awarded funding commitments being pulled back. I should note that even with these dynamic variables in the K-12 client devices arena, the team successfully executed on infrastructure opportunities across services, net common servers, leading to strong gross profit delivery. And just as we've been doing in past cycles with K-12, the team will be there for our customers to help them work through the challenges to achieve their mission-critical outcomes and efficiently utilize available funding mechanisms. Other, our combined UK and Canada results reflected broad-based and balanced performance in both regions in local currency. UK increased low double digits in local currency, and Canada increased high single digits in local currency. These results continue to demonstrate the grit and resilience of our teams and the power of our investments to drive growth in these markets. As you can see, our diverse end markets are both a key strategic advantage and a driver of our differentiated performance. The second driver of our performance was the broad and deep portfolio. Our ability to address priorities across the entire IT continuum delivered high single digit growth across our solutions portfolio. U.S. hardware sales declined mid-teens. Within hardware, network modernization upgrades drove double-digit increases in netcom. These excellent results were not enough to offset the decline in client devices and wraparound accessories. Supply conditions continued to improve across core transactional areas, while supply and solutions categories remained tight. Once again, we exited the quarter with an elevated backlog and extended lead times in solutions, and notably in netcom. We continue to expect this backlog to feather out over time. U.S. software sales increased 8%. 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 operating systems, application suites, and data management. Cloud remained an important driver of performance across the business and was a meaningful contributor to profitability. Once again, gross profit increased by double digits. Compute database, storage, mobility, 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 delivered excellent results as they continue to conduct vulnerability assessments, implement identity and access management solutions, and provide training to our customers to help manage cloud deployments and enhance endpoint and application security. Services results were stellar again this quarter, up more than 20%, with balanced performance across professional and managed services. Services are integral to today's complex technology solutions. Customers continue to lean into CDW as an extension of their own team and leverage CDW services as part of their strategy. And that leads to the third driver of our performance this quarter, relentless execution of our three-part growth strategy. Clearly, investments in our customer-centric growth strategy contributed to our strong profitability this quarter. Investments in services and solutions have elevated our relevance to customers to the highest level it has ever been. Our rigorous strategic process that is designed to ensure we can serve customers across the full stack, full lifecycle, has made us a vital technology partner. whether customers' priorities require transactional or highly complex solutions. And that leads us to our 2023 outlook. Our baseline view of the US IT market in 2023 is for flattish growth, factoring in both expected mix and the level of overall economic uncertainty. Consistent with economic forecasts, this outlook assumes stronger growth in the second half relative to the first half. We continue to target CW market outperformance of between 200 and 300 basis points. Our current view of the market recognizes we are operating under greater uncertainty as it incorporates the potential impact of some of our recent wildcards and indeed, most notably, the economy. With thousands of sellers connecting with customers every day, we have a real-time pulse of the market. As we always do, we will provide an updated perspective on business conditions and refine our view of the market as we move through the year. In the meantime, we will continue to do what we do best, leverage our competitive advantages and out-execute the competition. Our fourth quarter results highlight that although we cannot definitively know where our customers will place their priorities, there are two things we know for sure. Technology will continue to be a critical driver of outcomes, and with our agility and broad and deep portfolio, we will be there to support our customers wherever their priorities lie. Now let me turn it over to Al, who will provide more detail on our financials and outlook.