CDW Corporation

My name is Megan and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to Steve O'Brien with CDW. Steve, please go ahead.

Thank you, Megan. Good morning, everyone. Joining me today to review our second quarter 2023 results are Chris Leahy, our chair and chief executive officer, and Al Morales, our chief financial officer. Our second 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 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. Please note all references to growth rates or dollar amount changes in our remarks today are versus the comparable period in 2022 unless otherwise indicated. Replay of this webcast will be posted to our website later today. I also want to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast without specific 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, as usual, with a brief overview of our performance, strategic progress, and our views on the second half of the year. Al will provide additional detail 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. Our team executed extremely well in a market facing persistent challenges. As expected, commercial top line remained under pressure and public returned to more normal seasonality. For the quarter, the team delivered net sales of $5.6 billion, down 9% in U.S. dollars, down 8% in constant currency. Non-GAAP operating income of $530 million was up 3%, and non-GAAP earnings per share of $2.56 was up 3%. These results demonstrate the power of our resilient business model when coupled with our broad and deep portfolio of technology solutions. In an ongoing period of economic uncertainty, our ability to drive outcomes and address customer priorities across the entire IT continuum enabled the team to pivot to where our customers need us most. An ability that reflects the impact of strategic investments we have made to enhance our high relevance and high growth solutions and services. While transactional business remained under pressure, increases in solutions contributed to meaningful margin expansion. Margin expansion that, together with ongoing expense discipline, delivered strong profitability. Let's take a look at this quarter's key performance drivers. First, our balanced portfolio of end markets. Each of our five sales channels, corporate, small business, healthcare, government, and education is a meaningful business on its own, with 2022 annual sales ranging from $1.9 billion to over $10 billion. Within each channel, teams are further segmented to focus on customer end markets, including geography, verticals, and customer size. Teams are similarly segmented in our UK and Canadian operations, which together delivered 2.9 billion U.S. dollars in 2022 sales. These unique customer end markets often act counter cyclically given the different macroeconomic and external factors that impact each. Our second quarter results provide an excellent example of this. Economic uncertainty continued to weigh on the commercial market, and both our corporate and small business results reflected ongoing cautious customer behavior. Caution that once again drove elongated sales cycles, smaller deal sizes, and greater focus on mission-critical projects. Caution that also drove customer focus on short-term ROI, with both corporate and small business posting double-digit increases in cloud spend. For corporate, overall sales declined 16%. Mission-critical projects continued to move forward and slowly ticked up throughout the quarter. Large commercial customer spending sequentially improved. Continued postponement of upgrades and utilization of existing product resulted in a double-digit decline in client devices. While we remain cautious on the outlook for client devices, corporate delivered its first sequential volume increase in the past four quarters providing some indication of demand stability. Notably, client device ASPs held buoyed by mix into higher value, higher functionality units. Momentum around projects focused on increased productivity and enhanced customer and coworker experiences, and that drove excellent growth in cloud spend. Implementation of network modernization projects delivered double-digit NetCon growth. Small business declined 21%, reflecting the impact of ongoing caution by economically sensitive customers. Client devices continued to decline, with upgrades on hold pending greater clarity around the economy and employment. Focus on mission-critical priorities around security and efficiency drove double-digit customer spend increases in both cloud and software. Public performance partially mitigated commercial market pressure and was seasonally higher than the first quarter. Sales increased 2% year-over-year with strong performance in government, another quarter of stable performance in healthcare, and an upturn in education. Government increased 12% and continued to benefit from strategic efforts to target complex services-enabled hybrid infrastructure and cloud opportunities. Federal delivered double digit growth in the quarter, largely driven by the team's ability to help agencies implement more efficient solutions to manage and protect data. This delivered excellent net common storage performance. Legacy serious relationships contributed to significant growth in services. The state and local team also delivered double digit growth. Excellent services performance reflected the team's success helping state and local municipalities address talent gaps through enhanced training, as well as professional services engagement. Cloud adoption drove strong software and security performance. Healthcare performance was relatively flat. Talent needs and data center projects remained focus across, remained focus areas as customers increasingly leveraged technology to address complex industry challenges. Customer hesitancy around cloud continued to dissipate and adoption increased meaningfully in the quarter. client devices remained under pressure given ongoing customer focus on mission-critical projects that deliver short-term return on investment. In education, a double-digit increase in higher ed was offset by significantly improved but still lower year-over-year performance in K-12, and overall sales decreased 1%. Higher education institutions' ongoing emphasis on student enrollment drove investments in enhanced security as well as campus connectivity and dorm room experiences. The team's ability to deliver these solutions drove double digit growth across cloud, netcom, storage, software, and security. Client devices were flat as a volume decline was offset by mix into higher value units, which drove strong ASP performance. For K-12, the team continued their success executing on infrastructure opportunities and delivered excellent growth in services, net comm, and storage. This quarter, the team also delivered a sequential improvement in client devices. As you know, the summer season represents the height of K-12 buying. With our June 30 quarter end, we occasionally see anticipated summer sales hit the end of the second quarter. We experienced this in the quarter with anticipated back half refresh driving a significant sequential improvement. Refresh driven by aging devices and higher than historical breakage rates given more students take their devices off campus. Other, our combined UK and Canada business declined seven percent. Similar to the US, each team continued to execute well and sustained profitability improvements under challenging conditions. UK posted a low single-digit decline in local currency, while Canada declined by low double digits. We're seeing growing customer caution in both the UK and Canada, similar to what we heard from U.S. commercial customers a quarter ago. As you can see, the diversity of end market growth this quarter demonstrates the benefit of the first driver of our performance, our balanced portfolio of customer end markets. Category performance demonstrates the benefit of our second performance driver, our broad and deep portfolio of products and solutions, which enables the team to pivot and support customers wherever needed. Ongoing economic uncertainty in the commercial space continued to have an outsized impact on both transactions and solutions. While the rate of decline moderated, transactions were down double digits. Solutions performance improved with mid single digit growth versus flat performance in the first quarter. Similar to the first quarter, all three of our portfolio categories, hardware, software, and services, were impacted by commercial pressure with deferral of major hardware projects resulting in lower volumes in services and solutions. Hardware decreased 11% year on year. Client device performance in the commercial space significantly impacted hardware performance, and corporate continued to have the greatest category impact. Netcom had an exceptional quarter, posting meaningful increases across all customer end markets. This strong performance was largely driven by improvements in supply and continued work on customers' network modernization projects. Services were relatively flat year on year. Growth varied widely, with strength tied to channel-specific customer priorities, offset by services attached to transactional and solutions hardware. Professional services were solid, And while managed services activity was solid, given extended sales cycles and radical revenue streams, the impact on net sales was minimal. Software customer spend increased by mid-single digits, driven by mix into software as a service. Double-digit increases in network management software and database software were offset by continued declines in software categories tied to full-stack projects and employment levels, and net sales decreased at a mid-single digit rate. Security remained a key focus area for customers with spend up single digits. Top growth categories included endpoint security, email security, identity management, and physical security. Security associated with growth and business expansion remained challenged. Once again, cloud was an important driver of performance across the business, contributing meaningfully gross profit. Productivity, infrastructure as a service, and security were the top three workloads in the quarter. Each of our customer end markets posted double digit increases in cloud customer spend and gross profit. Profitable growth that was enabled by the strategic investments, both organic and acquired, that we've made in cloud capabilities over the past 10 years. Capabilities that enable us to deliver for our customers and our stakeholders. And this leads to the final driver of our performance in the quarter, our three-part strategy for growth, which is to, first, acquire new customers and capture share. Second, enhance our solutions capabilities. And third, expand our services capabilities. Each pillar is crucial to our ability to profitably advise, design, orchestrate, and manage the integrated technology solutions our customers want and need today and in the future. Our investment in data analytics is a great example of this strategy in action. Like many of our strategic investments, data analytics delivers value across all three pillars. Our data analytics capabilities are underpinned by the intimate knowledge we have about our customers, knowledge earned through deep and long-lasting relationships, which range on average over 12 years. They are also underpinned by our broad and comprehensive product portfolio, which provides extensive historical information about buying patterns across industries and verticals. This proprietary customer and product knowledge powers our data analytics and helps create robust and data-driven predictive models. Models that identify customer needs and create personalized and targeted outreach to drive tailored services, products, and solutions. Solutions that help our customers accelerate their strategies and achieve their mission. We continue to invest in the breadth and performance of these models utilizing machine learning and other advanced analytics techniques and have produced tangible lift in sales conversion and market relevancy. Clearly, our investments in data analytics are delivering for CDW. They are also delivering for our customers. Today, we have significant data analytics expertise across server, database, model construction, and training. Expertise that delivers outcomes in our eye care framework, particularly in the areas of innovation, agility, and experience. Expertise that bolsters our consultative professional services capabilities, including our AI consulting practice. For CDW, AI adoption feels very much like other transformative technologies of the past. Customers recognize the evolutionary benefits of AI, yet they face incredible complexity and choice, complexity and choice that plays to our strengths and our value proposition as a trusted partner and advisor. And just as we have in the past, we have made and will continue to make the investments necessary to ensure we are ready. ready to lead the market and ready to help our customers maximize the return on their AI investments. Another excellent example of how we strategically invest for today and the future. And that leads me to the expectations for the balance of the year. You'll recall on last quarter's conference call, we shared our expectations for the US IT market to post a decline of high single digits in 2023. This assumed a moderate improvement in the commercial environment in the back half of the year, and a return to normal seasonality in the public space. To date, the demand environment has been consistent with our expectations, and our view of the US IT market remains unchanged. Within this environment, we continue to target outperforming the US IT market by 200 to 300 basis points on an organic constant currency basis. Wildcards remain the macro environment, further tightening of credit, and the potential for federal government budget disruptions. And as we always do, we'll provide an updated perspective on business conditions as we move through the year. In the meantime, we'll continue to do what we do best, leverage our competitive advantages, and out-execute the competition. We will also continue to judiciously invest to ensure we are there for our customers so they can achieve their mission-critical outcomes today and in the future. I hope you can tell from my comments that this quarter's performance reinforced our confidence that we have the right strategy in place a strategy that serves us well when confronted with macro or end market specific challenges, a strategy designed to ensure we remain our customer's partner of choice, and most importantly, a strategy that enables us to continue to deliver excellent cash flows and profitably outgrow the market. With that, let me turn it over to Al, who will share more details on our financial performance. Al?