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. 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 Miralles, 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 8-K, 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 8-K we furnished to the SEC today. Please note, our financial results today include results from our acquisition of Sirius Computer Solutions, which closed on December 1, 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 U.K. 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 start today's call with a quick overview of our results, followed by an update on our strategic progress and a summary of our outlook. Al will give more details about the financials and our priorities regarding capital allocation. After that, we’ll get to your questions. We had a fantastic third quarter, achieving record sales, profits, and margins. Net sales reached $6.2 billion, which is 17% higher than last year. Our non-GAAP operating income was $449 million, a 26% increase, and our non-GAAP net income per share rose to $2.60, up 22% compared to last year. This remarkable performance stems from our unwavering execution and disciplined investment in our customer-focused strategy, which allows us to address customer needs across various end markets with comprehensive IT solutions. The demand for interconnected and integrated solutions has created unprecedented complexity. We simplify this complexity, enabling customers to maximize technology's impact, driving crucial outcomes. In today's uncertain environment, our customers increasingly rely on CDW as a trusted partner, seeking our unbiased expert guidance across the entire IT spectrum. We assist them in tackling urgent priorities such as advancing digital transformation, promoting innovation, enhancing security, and facilitating collaboration in today’s diverse work, learning, and living environments. Our solutions deliver operational efficiency and cost flexibility, such as burstable billing and modern hybrid and multi-cloud infrastructures, aimed at optimizing adaptability. Our ability to provide solutions for these various priorities resulted in a well-rounded performance. Our results were driven by three main factors: our diverse customer end markets, the breadth of our solution and service offerings, and the relentless execution of our three-part strategy. First, our extensive customer end markets, which include five U.S. sales channels: corporate, small business, health care, government, and education. Each channel operates as a significant business with annual sales between $2 billion and over $10 billion in the last year. Our U.K. and Canadian operations contributed a combined $2.9 billion in sales. This portfolio approach allows us to target the best opportunities and support our customers throughout their IT journeys. Our collective team performed exceptionally this quarter. The corporate team achieved a remarkable 25% increase in net sales. Customers prioritized digital transformation through infrastructure modernization and process automation, leading to substantial growth in solutions driven by NetComm, Enterprise Storage, and Cloud. Both professional and managed services experienced double-digit growth as the team assisted customers in enhancing their technology capabilities. The hybrid work environment continues to thrive, with a sustained focus on collaboration and improving employee experience. The small business sector has seen growth for the seventh consecutive quarter, with a 5% increase following last year's 39% growth. The team supported small businesses in adapting to technology impacts across their operations during challenging times, resulting in double-digit growth in software, security, and cloud services. Our comprehensive support for customers led to significant service performance gains. The government sector recorded a strong 38% growth, significantly driven by the collaborations aimed at capturing various funding opportunities for data center and software projects. The team achieved great results in security as they helped municipalities enhance defenses against evolving cyber threats. Federal activity has rebounded, and seasonal spending saw an uptick at the September fiscal year-end. The education sector experienced a 7.5% decline in sales, with higher education growth offsetting expected drops in K-12. The team is actively helping educational institutions improve endpoint solutions and campus safety. Our combined results from the U.K. and Canada saw an 18% increase, with both regions showing strong market growth. Our varied end markets significantly contribute to our strategic advantage and differentiated performance. The second factor of our success is our comprehensive and diverse portfolio. As technology becomes increasingly integral to strategies, customers need integrated solutions and services. Our focus on addressing these needs drove double-digit growth in our solutions portfolio. U.S. hardware sales grew by 13%, continuing last year's double-digit growth, largely fueled by network modernization. U.S. software performance also saw double-digit increases, with strength in data management and security. Our cloud offerings significantly contributed to performance, maintaining a focus on navigating multiple options for customers. Security threats remain a priority as customers seek cohesive strategies for protection. Our services continued to thrive, with customers treating CDW as an extension of their teams. Strong growth was noted across professional and managed services. Our three-part growth strategy drives targeted investments: gaining market share, enhancing capabilities in high-growth areas, and expanding services. This strategy supports our customer commitments and fuels financial performance. Over the past few years, we've broadened our capabilities, including automation and cybersecurity, ensuring our role as a trusted advisor during digital transformations. For instance, we provided an end-to-end services solution to a medium-sized hospital system, leveraging our managed services and technical expertise to address their staffing challenges. This resulted in a 5-year contract with significant recurring revenue. Our customer-centric growth strategy is crucial for maintaining our competitive edge in the U.S. IT market. Looking ahead, our team's excellent execution positions us to outperform our baseline 2022 outlook. We anticipate growth in line with our current expectations for the fourth quarter, estimating a year-over-year constant-currency growth at the high end of the 7.25% to 8.25% range. On a reported basis, this translates to an 18.5% increase over 2020. We expect profit growth to outpace sales growth as we continue investing in our future, remaining vigilant of potential economic and supply chain challenges. As always, we will provide updates on business conditions and our annual outlook in our next call while continuing to capitalize on our competitive advantages. Now, I'll turn it over to Al for more details on our financials and outlook.

Thank you, Chris, and good morning, everyone. I'll begin with an overview of the third quarter, discuss our capital allocation priorities, and conclude with our outlook for 2022. In the third quarter, consolidated net sales reached $6.2 billion, a 17.3% increase on both a reported and average daily sales basis. On a constant-currency basis, consolidated net sales grew 18.7%. Comparatively, sales rose 1.1% from the second quarter. Third quarter sales met our expectations, showing broad-based growth across our portfolio. Supply conditions improved throughout the quarter, resulting in a decrease in our backlog. Although lead times for client devices have improved, there are still pressures, especially in certain solution categories, and our backlog remains high. We anticipate that our backlog will gradually decrease as supply conditions improve, but the pace will vary across our product offerings. We strategically manage inventory to support customers who remain uncertain about supply, and our team effectively utilized CDW's competitive strengths to ensure robust returns on working capital. We achieved strong profitability, with gross profit of $1.2 billion, reflecting a 34.8% year-over-year increase. Our gross profit margin reached a record 19.8%, up 250 basis points from last year, driven by a higher mix of netted-down revenues and strong product margins, particularly from Software as a Service, as well as increased contribution from high-margin services, which rose 70% year-over-year due to recent acquisitions. In terms of SG&A, non-GAAP SG&A totaled $684 million for the quarter, with the year-over-year increase primarily due to higher payroll associated with increased gross profit and co-worker count. By the end of the third quarter, our co-worker count was nearly 15,000, up around 400 from the previous quarter, reflecting our investments in high-growth solutions and our digital transformation. Our focus on disciplined investments will benefit us in the long term, as evidenced by our record sales and profitability this quarter. GAAP operating income was $466 million, an increase of 20.7% compared to last year, while non-GAAP operating income was $549 million, up 26.2%. The non-GAAP operating income margin hit a record 8.8%, an increase of 60 basis points from the previous year and 40 basis points from the second quarter. While we are pleased with these results, which exceeded our expectations, the growth in operating profit was attributed to various factors within gross margins including a favorable product mix, which we expect to moderate in Q4. Interest expense for the quarter was $63 million, higher than the previous year primarily due to senior notes issued last year for the Sirius acquisition and the impact of higher interest rates on our floating rate debt. This interest expense was as we anticipated. We maintain our estimate of approximately $240 million for the year. Our GAAP effective tax rate was 25.4%, resulting in a third quarter tax expense of $101 million. For our non-GAAP effective tax rate, adjustments were made according to non-GAAP net income add-backs, with the non-GAAP effective tax rate at 25.9%, an increase of 60 basis points from last year due to non-deductible expenses and state taxes. In the third quarter, the weighted average diluted shares outstanding was $137 million, resulting in GAAP net income per diluted share of $2.17. Our non-GAAP net income for the quarter was $357 million, marking a 20% year-over-year increase, and the non-GAAP net income per diluted share was $2.60, up 22%. Year-to-date results can be found in the accompanying slides. As of the end of the period, cash and cash equivalents stood at $358 million, with net debt totaling $5.8 billion. We reduced borrowings under a senior unsecured term loan by $400 million during the quarter in line with our plan to lower leverage. Our liquidity is strong, with cash and revolver availability of around $1.5 billion. The average cash conversion cycle over three months was 18 days, a decrease of 7 days from last year's third quarter and at the low end of our target range, reflecting the impact of Sirius and our diligent working capital management. Our effective management of working capital, combined with strong business growth, produced excellent year-to-date free cash flow exceeding $1 billion. For the quarter, we allocated cash consistent with our 2022 capital allocation objectives, which included returning $68 million to shareholders through dividends and the $400 million debt repayment. Regarding our capital allocation objectives, we remain consistent with what was shared last quarter. First, we increased the dividend in line with non-GAAP net income, including an 18% increase from $2 to $2.36 per share. This increased annual dividend constitutes about 25% of trailing 12-month non-GAAP net income through September and reflects our confidence in our earnings power and cash flow generation, marking the ninth consecutive year of increases since our IPO in 2013. Our dividend has seen a compound annual growth rate of 34% since its inception. Moving forward, we will aim for a 25% payout ratio, aligning the dividend growth with earnings. Secondly, we have established an appropriate capital structure with a targeted leverage ratio of 2.5 to 3x. We finished the third quarter at 2.7x, down from 3.4x at the end of 2021, which indicates strong business growth and excellent cash generation. While we are in the middle of our targeted net leverage range, we aim to meet rating agency capital expectations, targeting the lower end of our range. We plan to prioritize deleveraging until we more firmly reach our targeted net leverage range and fulfill commitments related to the Sirius acquisition financing, which we expect to complete by the end of 2022. Lastly, while we are temporarily deprioritizing our third and fourth capital allocation objectives of M&A and share repurchases, we are on track to return to those priorities. As for our 2022 outlook, we are aware of potential market variables but remain confident in our ability to execute and capitalize on growth opportunities, outperforming the broader market. We anticipate the fourth quarter to show a greater mix in netted-down revenues. Keep in mind that this accounting treatment dampens our absolute net sales but does not negatively affect gross profit, leading to higher gross margins. We continue to expect 4% U.S. market growth and anticipate being at the upper end of the 325 to 425 basis point range for CDW market outperformance in constant currency, on a combined basis. Previously, we mentioned that improved supply could allow us to be on the higher end of our premium range, while elevated supply constraints might shift us towards the mid- to lower end. CDW's net sales would have been $22.8 billion in 2021, including $2.17 billion from Sirius. For the full year net sales outlook, we expect approximately 18.5% growth in constant currency. Changes in currency rates since our initial outlook are now projected to be a $110 million headwind to net sales in the fourth quarter and $260 million for the full year, based on an exchange rate of $1.13 to the British pound and $0.73 for the Canadian dollar in the fourth quarter. Regarding the P&L, we anticipate full-year non-GAAP operating income margin in the low 8% range, indicating fourth quarter operating profit growth of 20% or more for the fourth consecutive quarter. We expect full-year non-GAAP earnings per diluted share growth to be about 16% in constant currency on a combined basis, translating to approximately 23.5% growth on a reported basis. It is important to note that our 2021 figures would indicate $8.49 per share on a full year combined basis compared to our reported $7.97 per share, which included only one month of Sirius. Changes in currency rates are now anticipated to pose a headwind of $0.04 to EPS for the fourth quarter and $0.08 for the full year. We are committed to delivering our financial outlook on a full-year constant-currency basis. Additional modeling thoughts for annual depreciation, amortization, interest expense, and the non-GAAP effective tax rate are outlined in the accompanying slides. Looking specifically at the fourth quarter, we expect to see a slight sequential decline in average daily sales from Q3 to Q4. This translates to a reported net sales growth rate of 9.75% to 10.75% year-over-year for the fourth quarter. We also expect strong gross profit margins and non-GAAP operating income margins in the fourth quarter, reflective of the year-to-date averages, even with some moderation from Q3 levels. Our forecast for fourth quarter non-GAAP earnings per diluted share is to grow between 18.25% and 19.25% year-over-year on a reported basis. Lastly, we now anticipate that full-year free cash flow will be approximately 5% of net sales, surpassing our long-term target range of 3.75% to 4.25%. Considering the timing impacts on free cash flow, it may vary from quarter to quarter and year to year. We expect our free cash flow for 2021 and 2022 to balance out within our target range over the two years. That concludes the financial overview. We will continue to provide updates on the macro environment and our business in future earnings calls, and with that, I will open the floor for questions, asking each of you to limit your questions to one with a brief follow-up.

Our first question is from Shannon Cross at Credit Suisse.

I was curious if you could elaborate on the EBIT, which was very strong this quarter, as well as the gross margin. How should we view the progression as netted-down revenue starts to make up a larger share of the total? I understand that some of this could be due to lower-client contributions, but it seems like the model might indicate a potential for EBIT to exceed guidance over time.

Yes. Shannon, this is Al. So happy to address that. So as I mentioned, the NGOI margin and dollar result was largely driven by strong gross margin. So if we just take the components of gross margin for the quarter, a few things, Shannon, that I would note first, obviously, the benefit and accretive effect from Sirius which we've seen all year. Number two, the effect of netted-down revenues, right, largely driven by focus on security, cloud, Software as a Service. We would view that component as pretty structural. Next, I would say, contributions from services. Again, we've made a lot of investments in that space. So we view that as largely structural. And then the last component of our gross margin, Shannon, would be on the product side. And we've talked about through the year that we've had really favorable, both mix and rate on the product side. And that would be the 1 variable that we would see potentially could moderate. And so obviously, in this supply environment, we've seen our customers favor a bit more speed over price. And that's led to a favorable mix and also strong rates. And so obviously, as we start to see supply ease a bit here, you could see that moderate, and that's what we're tending towards for Q4.

Okay. And then if you can just talk a bit more about client. I know you provided some comments during the remarks. But if you could talk maybe what you're hearing from your customers in terms of what they're thinking about PC purchases as we look forward, is there any indication that some of the Chromebooks that perhaps were placed in 2020 will need to be refreshed? Or are there any education dollars that are available for that? Just any more color you can give would be great.

Shannon, it's Chris. I want to share some insights on the current trends in the PC market. As expected, the overall PC environment has slowed down compared to the strong growth we experienced in 2021. However, our end markets are not aligned. For instance, we supported our customers in the government sector, both federal and local, with their pent-up demand. While the K-12 sector saw a decline as anticipated, other areas like Commercial Healthcare and higher education are focusing on enhancing their existing setups rather than a full refresh. This involves upgrading to higher-value PCs and integrating collaboration tools and automation for an improved experience. While I can't pinpoint which specific channels will soon increase their client device purchases, we recognize the importance of these devices. Ultimately, we expect to continue outperforming the PC market due to several factors. Firstly, there is a significant opportunity in the commercial PC sector, given the value that PCs add in terms of employee productivity and use cases, along with the product cycle. We are already seeing a number of customers transitioning to Windows 11, primarily for security upgrades, and we anticipate refreshes as older devices from 2018, 2019, and 2020 begin to be replaced. Additionally, the services we provide alongside PCs are appealing to our customers. There are substantial market opportunities for us in cross-selling to our Sirius customers and expanding internationally. Lastly, CDW possesses exceptional capabilities in PC infrastructure, enabling us to significantly outperform the market historically. When our partners need to make advancements, they turn to CDW for assistance. Thus, I believe that while the PC market has moderated, these devices remain essential to our customers’ future. Currently, our customers are focusing on their infrastructure and areas they haven't invested in over the past few years, such as cloud and security, which has shifted the focus away from PCs for now.

Our next question comes from Amit Daryanani from Evercore ISI.

I guess the first one, you obviously have a very sizable upside to gross profit dollars despite the revenue that we think in line with consensus. Maybe to talk about how much of that is a structural shift towards more netted-down revenues versus perhaps mix of a bit more favorable. And really the talk about the netted-down revenue map, I'm curious, at some point, does it start making sense, Chris, to talk about your ability to grow gross profit dollars at premium to IT spend versus talking about revenues going at premium to IT spends?

Yes. Amit, this is Al. So similar to my response to Shannon there, really, if you tick down the list, again, the kind of the priority order of what contributed in gross margin, Sirius for sure, netted-down revenue, contributions from services and then on the product side. And I would say that both the netted down and the contributions from services would be deemed a bit more structural. Certainly, from a product margin perspective, there's a structural component, but you're going to vary depending on mix in any given period. And so that's what we've been seeing. To your question on guiding on gross profit, that's certainly something, Amit, that we talk about. Just remember beauty of our deep and broad portfolio means at any given time, you're going to have puts and takes in terms of where things show up and what our customers need. And so what we discussed really there is there are going to be periods where there's stronger hardware contribution and refreshes and those types of things. And that's where certainly focusing on the net sales is important as well. But as time goes by, and particularly as we see some of the supply conditions change, certainly, we'll talk more about kind of the contribution of gross profit and how we think about that from an outlook perspective.

Got it. And then if I just follow up, there's really notable deviation, I think, in the growth we're seeing out of the SMB bucket versus corporate. I know you talked about kind of what's driving this trend with net count that commentary and so on. But maybe just tell on why are we seeing such a big divergence? And then is 1 a more leading indicator or not? Or is that not the way to think about it? Just any help on the deviation would be helpful.

Amit, it's Chris. On small business, it's been interesting. I would just start with the execution from the team. It's a cautious environment for sure, but the team is really helping customers navigate what's become ubiquitous impacts of technology across literally every aspect of their business. And in the small-business arena, like all of our customers right now, there's a focus on mission-critical priorities. And that tends to be software, cloud and security led. And so CDW, with the capabilities we've built within that segment, you'll recall we separated it out about 4, 5 years ago, we bring the full stack, full lifecycle support for customers. And we've been able to, over the past several quarters, really nimbly shift towards the solutions that maximize their prior investments and add services to the mix there. So look, we continue to see momentum behind the strategic execution in small business, and we're really confident in our ability to leverage our broad-solution portfolio and pivot where the customers need us. And that right now is infrastructure solution and modernizing and optimizing and securing their networks. What I would say also is this notion that technology has become more critical to business strategy is the same in small businesses. It's really no difference there. So thematically, customers are very much prioritizing their technology investments. And while there's pressure on budgets for sure, and customers are being prudent, technology is getting a priority. So the pulse of our customers is pretty strong right now, and we're just staying very close to them in what's top of mind.

Our next question comes from Erik Woodring at Morgan Stanley.

Maybe I'll have one for each of you. So Chris, maybe if I just start with you. Maybe can you help us understand what has been the biggest change to either kind of your end-market outlook or your customer discussions since we all were on your 2Q call 90 days ago, anything that is notable that you'd call out in terms of changes, either it's positive or negative? And then I have a follow-up.

Yes. Sure, Erik. Here's what I'd say between the 2 calls. And it's the words I just used before, where there's certainly, I'd say, incrementally more pressure on budgets generally for our customers. Look, there's persistent uncertainty out there. And when that happens, there's just pressure. That said, customers are being prudent and what we are seeing consistently is notwithstanding that added scrutiny. Technology is being prioritized because it's reframed from a cost center to an asset of innovation, an enabler of cost efficiency and agility and risk mitigation and resilience and experience. So technology touches everything that drives competitive advantage for our customers. Further, we are continuing to see a scarcity of talent in the market, coupled with the heightened complexity that technology brings and security risks continue to essentially explode. So you have all of that happening in a more pressured budget environment. The good news for CDW is in those environments, our customers lean even more into CDW. And so the strategy that we've been executing with discipline over the last few years has really strengthened our value prop. I would say our value proposition and the broad-based portfolio, particularly of solutions and services has never been stronger. It's never been more relevant. It's never been more resonant with our customers and they can look to us to help them make the best decisions in an unbiased outcome-based way. So I guess the point is more pressure right now, persistent uncertainty, but that actually drives the need for CDW even more.

That's really helpful. Al, I have a follow-up for you. Typically, we see an increase in gross margins in the December quarter. You mentioned that margin rates may be decreasing from the third quarter. Could you clarify the factors we should consider regarding the fourth quarter margins, whether on the gross or operating side? This would help us understand how seasonality may differ from historical trends. That's all from me.

Yes, sure. Thanks, Erik. So look, I would say Q4, I think, is going to be a decent reflection of what we've seen year-to-date, which has been really strong margins, both gross margins and NGOI. Q3 was exceptional. And I think I've called out some of the areas that really drove that, particularly on the product margin side. So I would say it's stay the course pretty much on par with what we've seen for the year, notwithstanding that, again, as we start to see this feathering out of supply, it's conceivable you could see a bit of a moderation on the product margin side. So that's basically been what you've seen year-to-date is low 19s on gross margin and low 8s on NGOI margin may be slightly better.

Our next question comes from Keith Housum at Northcoast Research.

Question for you guys on price increases that we've seen over the past year. Have you guys seen a moderation of those price increases from the vendors and your ability to pass those on? And how has your customers buying decisions changed as most recently as a result of those based on the current environment?

Keith, it's Chris. Yes, I would say on the price increases, first of all, the ubiquitous across the industry. We haven't seen them abate really. We have been able to pass them along. And right now, given the continued supply constraints and the prioritization of technology, we're not expecting to see those abate anytime soon because customers are okay taking those on. We might start to see that sometime in 2023. But for right now, they're holding strong.

Yes, Keith, I'll address that. It varies by channel and product. There are certain areas where we've experienced strong unit growth, while in other cases, net sales have been supported more by average selling prices. This will differ by channel and product. Referring back to Chris' comment, for the quarter and our current observations, average selling prices remain stable. However, we are aware that as supply changes and customer behaviors possibly shift, we might see some easing. This is why we're being cautious regarding product margins.

Our next question is from Ruplu Bhattacharya from Bank of America Merrill Lynch.

I have 1 question on revenue growth and 1 on margin expansion. So maybe I'll first the first one on revenue growth to you, Chris. At a high level, when we look at the commentary in the prepared remarks, it seems to indicate that there's ongoing strong end-market demand. And yet, you are seeing some deceleration in year-on-year growth first half versus second half. So like the second half is growing mid-teens year-on-year based on your full year guidance versus low 20% year-on-year growth in the first half. That's still strong growth, but it is a decel. So my question is, are you seeing any end-market demand deceleration in any end markets? Or is it all just a matter of more netted-down items and a change in mix?

Yes, Ruplu, I would say that the situation is more about the mix than the demand itself. As we anticipated, we have incorporated more netted-down items, even slightly more than we expected, and that is the main factor putting pressure on our top line. Regarding deceleration, as I mentioned earlier, there is some pressure. PCs have shown a moderation, as noted. However, overall, we are experiencing what I would consider to be quite strong demand and performance.

Okay. Thanks for that. Maybe I'll ask the margin question to Al. So the full year guide is for a low 8% operating margin, and that's really good margin performance compared to your peers. But my question would be like can you talk to us about factors that can drive margin expansion beyond that? And if the U.S. were to go into a more protracted recession, can you still expand margin? So what do you need to have either from a revenue growth standpoint or a mix standpoint? I mean do you think that even in a slower demand environment or in a recessionary environment, are there factors, are there levers that you have to expand margins beyond this?

Sure, Ruplu. I’ll take that. This is Al. To revisit my earlier comments on the various components, starting with gross margin, we recognize the more netted-down categories. Keep in mind that cloud, security, and Software as a Service are structural elements. My comments are not only relevant over time but also thematically significant in the current environment. When we consider what’s at stake, many customers are focused on improving productivity, transitioning to the cloud, and cutting costs. Thematically and structurally, we believe there is durability in these areas. The same applies to services; we have made substantial investments in services. During times like these, our customers turn to us for support more than ever. These components are extremely important. Furthermore, when looking beyond gross margin to NGOI margin, it is crucial for us to remain diligent and thoughtful about our expenditures, just like our customers. We stay attuned to customer needs and ensure that the timing, size, and significance of our investments are always a priority, which is how we aim to manage our margin profile over time. I hope this provides clarity.

Our next question comes from Samik Chatterjee from JPMorgan Chase.

I guess for the first one, we've seen a few other enterprise suppliers report already. And I think in relation to sort of pulled back or a bit of a sort of pressure on customer budgets that's not as surprising to hear at this point. But they've also indicated a bit more pressure when it comes to the international markets, particularly EMEA. I was just wondering, Chris, I mean, is there a difference you're seeing in terms of engagement with customers in the U.S. versus in the international markets? Is there a bit more of a pushback or a pullback in terms of thinking about budgets for next year in the international markets? Maybe your insights on that front will help. And I have a follow-up.

Yes, sure. What I would say on that one is I focus in on the U.K., it's a pretty complex environment there right now for all the reasons we know. And I'd say a couple of things. First of all, our position in the market is very similar to CDW U.S. We've got the most broad-based portfolio of solutions and services capabilities. We have customers focusing on the same types of things: digital transformation, security, cloud, collaboration, et cetera. And also the criticality of technology is obviously central to companies and organizations over in the U.K. That said, it is a tougher environment. And so I would just say that I attribute our ability to perform as well as we have been and in particular, this quarter, which was exceptional performance to the execution of the team and their ability to stay close to their customers, know what their customers need access, supply and provide the professional services at the front end for advice and counseling to ensure the highest return on technology investment. And that trusted adviser role, you can never underestimate the impact that has on results in a market that is really in. It's very dynamic, I would say. So we expect them to continue to perform well despite the external factors.

Okay. Got it. And a follow-up, if I could get an update on the growth rate you're seeing or the growth trajectory you're seeing at Sirius and I know you mentioned sort of challenges around hiring talent at your customers, but what sort of constraints you might be having at the same time on Sirius and your ability to sort of scale that business? What are you trying to think about sort of how accretive it is to your out-performance to underlying industry growth, particularly as we start thinking about next year?

Certainly. On the talent front, many are feeling the pressure in the labor market, but our reputation as the best workplace has remained strong for a long time. We haven't experienced any delays in filling positions or a decrease in quality. We are quite satisfied with our talent acquisition efforts. This is largely due to the fact that it's a great work environment, and particularly, the growth of our technical talent is a top priority. For instance, this year we've seen a significant increase in certifications, especially in areas like cloud and security services. CDW is an attractive destination for technologists, which is advantageous in the current market. Consequently, this strength is reflected in our performance, enabling us to assist customers with talent orchestration in areas where they face scarcity, and we have efficiently staffed our professional services engagements. While the market is challenging, we are not currently hindered by it, which is a positive outcome.

Our next question comes from Mark Cash at Raymond James.

This is Mark on for Adam. It sounds like cloud and SaaS are doing very well for you and up by about 4Q. But assuming out of that, I think there's some earnings on the hyperscaler slowing down. Are you starting to see any of that impact to the pipeline? Or just the broad customer base, things like the strong digital transformation and security demand help keep you insulated from that somewhat?

No, we aren't seeing that slowdown actually. We're seeing cloud continue to accelerate. I don't need to explain all the reasons for that. Regarding our customers, some are just starting their journey to the cloud, some are in the midst of it, and others are optimizing or transitioning between cloud and on-prem solutions. There are plenty of opportunities to support customers in this journey, and we are certainly not seeing it start to slow down.

Okay. Perfect. And then just a follow-up. I appreciate the update on the backlog you guys provided. Also wonder if you can update on what you're seeing around potential risk of double ordering and cancellations and a slowdown to the backlog.

Yes. Sure, Mark. We continue to not see any evidence of double ordering or canceling. So I would say that just the clarity and the commitment of our customers to the products they originally want and what we're delivering has been pretty solid, pretty seamless. So no concerns there.

Our next question then comes from James Suva at Citigroup.

Great. I had a question about higher labor rates, both on your cost of goods sold buying as well as your kind of OpEx line. Do the clients and customers kind of see it or notice it? Or is it just kind of all built-in? And are those creating a little bit more challenging thing for your customers? And then as we approach the end of this calendar year, can you remind us about like annual merit increases or anything like that on the OpEx line regarding higher wages and just cost of living adjustments and things like that?

Yes, that’s a great question regarding labor since it's a very dynamic market. Concerning our team, we operate with a variable compensation structure that links a significant portion of pay to performance. This is beneficial because it reduces pressure on baseline costs, allowing for opportunities to increase compensation based on performance. Regarding professional service fees, we do raise them in line with inflation, similar to the rest of the industry, but this adjustment can lag due to existing contracts. So far, when it comes to critical projects, customers do not hesitate to pay for the expertise they need because they recognize the importance of getting the technology right amidst significant pressures. As for salary increases going into next year, we are currently assessing that and will have clarity on our approach as we move into the next year.

We have no further questions on the call. So I will hand back to Chris Leahy to conclude.

Okay. Well, thank you, Seb. Let me close by recognizing the incredible dedication and hard work of our nearly 15,000 coworkers around the globe. Their ongoing commitment to serving our customers is what makes us successful. 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 with you next quarter.

This concludes today's conference call. Thank you all for dialing in. You may now disconnect your lines.