CDW Corporation

Hello everybody and welcome to CDW third quarter 2023 earnings call. My name is Sam and I'll be coordinating your call today. If you would like to ask a question during the presentation you may do so by pressing star followed by one on your telephone keypad. I'll now hand you over to your host Steve O'Brien with CDW investor relations to begin. So Steve over to you.

Thank you, Sam. Good morning, everyone. Joining me today to review our third quarter 2023 results are Chris Leahy, our chair and chief executive officer, and 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 with the call. I'd like to remind you that certain comments made in this presentation are considered forward-looking statements under the Private Securities and Litigation Reform Act of 1995. Those statements are subject to a number of risks and uncertainties that could cause actual results to differ materially. Additional information concerning these risks and uncertainties is contained in the earnings release in Form 8K refurnished to the SEC today and in the company's other filings with the SEC. CDW assumes no obligation to update the information presented during this webcast. Our presentation also includes certain non-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 FCC rules. You will 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 amounts changes in our remarks today are versus the comparable period in 2022 unless otherwise indicated. Replay of this webcast will be posted to our website later today. I also want to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast without specific written permission from the company. With that, let me turn the call over to Chris.

Thank you, Steve, and good morning, everyone. I'll begin today's call with a brief overview of our performance, strategic progress, and view for the balance of the year. Al will provide additional details on our results, our capital allocation priorities, and our outlook. We'll move quickly through our prepared remarks to ensure we have plenty of time for questions. The team continued to execute extremely well under persistently challenged conditions. Commercial markets remained cautious, and conditions in international markets worsened. Public markets held firm. For the quarter, the team delivered net sales of $5.6 billion, 8 percent lower than last year, record non-GAAP operating income of $556 million, up 1 percent year over year, and record non-GAAP net income per share of $2.72, up 4 percent year over year. Record profitability that underscores the power of our strategy when underpinned by our resilient business model and financial rigor. Profitability driven by relentless execution. And profitability that is a clear demonstration of the value we deliver our customers. Customers maintain their laser focus on mission critical priorities and optimizing costs. And once again, our deep and broad portfolio enable the team to pivot to solutions that address our customers' priorities. Solutions that provide operating efficiency and expense elasticity, like burstable performance in modern hybrid and multi-cloud environments. Or solutions that are usage-based, like SaaS and private cloud. Solutions we are well-positioned to deliver. In today's environment where customers are closely scrutinizing their IT spend, our value as a trusted advisor is greater than ever before. An advisor who helps customers cut through complexity and evaluate options. An advisor who designs, deploys, integrates, and many times manages the solution. Capabilities made possible by the investments we have made in our three-part strategy for growth. Investments that enable us to serve customers across the full stack and full lifecycle. Investments that have made us a vital technology partner. As we have executed our strategy, the amount that customers spend with us has consistently grown faster than net sales, a dynamic that reflects both the success of our strategic investments and increasing customer preferences for cloud and SaaS-based solutions. Recall that these offerings drive significant customer spend but are netted down in our sales and thus dampen our top-line growth while enhancing our gross margin. Let's take a deeper look at quarterly results. There were three main drivers of performance. our balanced portfolio of customer end markets, our breadth of solutions and services portfolio, and ongoing execution of our three-part strategy. First, our balanced portfolio of end markets. Each of our five sales channels, corporate, small business, healthcare, government, and education, is a meaningful business on its own, with 2022 annual sales ranging from $1.9 billion to over $10 billion. Within each channel, teams are further segmented to focus on customer end markets, including geography, verticals, and customer size. Teams are similarly segmented in our UK and Canadian operations, which together delivered $2.9 billion in 2022 sales. These unique customer end markets often act countercyclically, given the different macroeconomic and external factors that impact each. You see the benefit of our balanced portfolio again this quarter, with public performance partially mitigating declines in commercial. Commercial market conditions continue to weigh on customer confidence and drive cautious purchasing behavior. Instead of the modest improvement in hardware we expected, we continue to experience pressure, particularly in client devices. Corporate net sales decreased 12%. Momentum continued around projects focused on increasing productivity, as well as projects focused on enhanced customer and co-worker experiences. With a shorter-term ROI lens, customers favored solutions enabled by cloud, which contributed to double-digit increases in corporate customer spend on cloud. AI and security were also major customer focus areas, with CIOs increasingly being asked two questions. What are you doing with AI and how are you protecting our data? While AI remains in early stages of commercialization and development and not yet translating into meaningful customer spend, our full portfolio of security offerings contributed to double-digit increase in security spend. Ongoing network modernization also led to excellent net comp performance, once again, up double digits. Corporate top line performance continued to reflect meaningful year-over-year client device declines, with ongoing postponement of upgrades and utilization of existing products. Small business net sales declined 22%. Market conditions were consistent with the second quarter, and customers continued to see clarity around the economy and more conducive conditions for hiring and new business formation. Focus remained on cost management and the prioritization of projects that need to get done. Projects that were more wants rather than needs remained paused. Consistent with the second quarter, solutions increased up below single digits while transactions declined by double digits. Focus on shorter term ROI for mission critical priorities drove double digit spend in cloud and software. Client devices continued to drive small business top line performance as refresh remained on the back burner and declines were on par with the second quarter. Public sales increased 1% year over year. Healthcare and education each posted a 2% increase while performance was flat in government compared to last year's exceptional near 40% growth. Government performed relatively in line with historical seasonality, with federal's mid-single-digit growth offset by a mid-single-digit decline in state and local. The federal team continued its success helping agencies implement more efficient solutions to manage and protect data. This delivered excellent server performance up strong double digits. The team also continued its work with agencies to optimize existing cloud investments and deliver new cloud solutions, which require rigorous proof of concept. The state and local team delivered solid sequential growth well above the historical averages of 4%, but net sales declined mid-single digits compared to last year's double-digit growth. Solid solutions growth was more than offset by a decline in transactions. Cloud-enabled solution adoption was strong, delivering double-digit increases in customer spend. Healthcare net sales increased 2%. Augmenting talent needs, modernizing data centers, and driving cost savings and efficiency projects remain focus areas for customers. With complex industry challenges and tight operating budgets, healthcare systems continue to turn to cloud solutions. Armed with our full portfolio, which includes proprietary cloud-based healthcare solutions, the team drove a significant increase in cloud spend. Our broad portfolio of solutions also contributed to a double-digit increase in security spend growth as they helped customers address heightened cybersecurity needs, needs driven by the disproportionate percentage of all ransomware attacks that target healthcare organizations. For education, net sales increased low single digits, the first positive growth quarter for education in over eight quarters. K-12 low single digits increased more than offset a low single digit decline in higher ed. Higher ed's high single-digit increase in solutions was offset by a double-digit decline in transactions, a decline largely driven by ongoing declines in client devices. Institutions continue to invest to improve security, campus connectivity, and student experiences. The team's continued focus on delivering these impactful solutions led to double-digit growth across netcom, services, and software. It also delivered low-teens growth in cloud spend. For K-12, the team continued their success helping schools in their efforts to achieve digital equity and improve learning outcomes, which delivered excellent growth in services and net cost. Solutions grew meaningfully while transactions declined low teens, reflecting ongoing moderation of client device spend. Security remained a key focus area with double-digit growth in customer spend. Other, our combined UK and Canada business, came in below our expectations. down mid-teens. While the teams continued to execute well, the deterioration in market conditions in the UK and Canada were deeper than we anticipated. Both the UK and Canada decreased by double digits in local currency. Our diverse end markets are both a key strategic advantage and enable consistent performance amid an uncertain and uneven macro environment. The second strategic advantage and driver of our performance was our broad and deep portfolio, which enables us to pivot to address our customers' evolving needs. Similar to the second quarter, solution sales increased mid-single digits, while transactions remained under pressure, down high teens. Hardware declined by double digits. Similar to the second quarter, performance continued to reflect depressed client device demand, particularly in the commercial space. Overall client performance was roughly in line with the second quarter's double digit decline. Netcom increased double digits with stable demand. Backlog continues to feather out and it's now approximating historic levels. Cloud spend increased nearly 20% with increases across every end market. Roughly half of our total third quarter cloud spend came from commercial customers and half from public. Security spend increased by double digits with a significant portion being delivered via software and the cloud. Cloud and security success contributed to a mid-teens increase in software. Increases across virtualization and network management and security were partially offset by declines in categories tied to full-stack projects and employment levels. Solid managed and professional services growth was more than offset by the impact of continued drag from lower services attached to transactional and solutions hardware, and overall services net sales declined. As you can see, performance varied significantly across the portfolio. That is the power of our deep and broad portfolio. It enables us to meet our customers where they are, and it is power driven by the investments we have made in our growth strategy. And that leads to the third driver of our performance this quarter, relentless execution of our growth strategy. A strategy guided by three pillars. First, capture, share, and acquire new customers. Second, enhance capabilities in high-growth solutions areas. And third, expand services capabilities. Over the past five years, we have broadened and deepened our capabilities. Our comprehensive lifecycle management capabilities now deliver design, deployment, integration, and management. Capabilities that have deepened our relevance to customers and fortified our role as trusted advisor to our customers. Capabilities that enable us to best serve customers across physical, digital, or cloud-based environments in the US and internationally, and capabilities that drive favorable outcomes for our customers. In today's uncertain macro environment with customers increasingly reluctant to make big upfront capital investments, our ability to deliver the cost savings outcome of our iCare framework is a major competitive advantage. Armed with our consultative approach to problem solving, the teams both identify and implement consumption-based solutions with lower upfront costs, solutions that enable customers to move ahead with mission-critical projects, solutions that deliver value to our customers and deepen customer relationships. Many of these solutions are enabled by our cloud ready assessments, enablement migration services, which are second to none in the industry. A great example of this in action is a solution we provided to an Illinois school district that had a legacy converged storage environment reaching end of life. The customer had three priorities. First, student teacher and administrator experience. Second, agility to meet, excuse me, agility to meet end of school year deadlines. and third, deliver costs that they manage within the constraints of their fixed budget. After a comprehensive evaluation of the wide range of on-premise and hybrid cloud solutions we can provide, the team determined that a consumption-based approach would provide the best outcome for the customer, ultimately developing a private cloud hyper-converged solution. A solution that supports deployment and management of modern applications and provides the ability to seamlessly scale for future growth. one that delivered needed flexibility and cost predictability, and deepened our relationship as a trusted advisor, another great win-win. 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. You will recall last quarter we shared our expectations for the US IT market to post a decline of high single digits in 2023. This assumes three things. First, greater clarity in the market would lead to a modest improvement in the commercial IT hardware market in the back half of the year. Second, a moderate deterioration in the UK and Canada. And third, a return to normal seasonality in the public space. We did see a return to normal seasonality in public, and while commercial spend has been stable, there was a greater shift to solutions that net down in lieu of IT hardware spend. We also saw a deeper-than-expected international market deterioration. Current conditions and border-state customer interactions lead us to expect these trends to continue. Our estimate of US IT market growth in 2023 remains at a high single-digit decline, and we continue to expect to profitably outperform the US IT market by 200 to 300 basis points. when adjusted for this year's meaningful shift in customer spend toward complex solutions that net down. We are cognizant of the significant wild cards our customers and the markets face in this environment, a list that has grown more complex and now includes intensifying geopolitical instability and potential for federal government shutdown. We will continue to keep a watchful eye on these and other potential factors, as we always do, and we will provide an update on business conditions on our next call. In the meantime, we will continue to do what we do best, leverage our competitive advantages, and out-execute the competition. Now, let me turn it over to Al, who will provide more detail on our financials and outlook. Al?