Hello, and welcome to the CDW First Quarter 2023 Earnings Call. My name is Alex, and I will be your coordinator for today's call. I’ll now hand over to your host, Steve O'Brien with Investor Relations. Please go ahead.

Thank you, Alex. Good morning, everyone. Joining me today to review our first quarter 2023 results are Chris Leahy, our Chair and Chief Executive Officer; and Al Miralles, our Chief Financial Officer. Our first quarter and full earnings release was distributed this morning and is available on our website, investor.cdw.com, along with the 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 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 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. 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. Good morning, everyone. We have a lot to cover today. I'll begin with an overview of our results and our outlook, and Al will provide a deeper view into the financials as well as an overview of our capital allocation priorities, and then we'll move right to your questions. Market conditions were turbulent with a marked down shift in demand as the quarter progressed, translating into lower business volume. For the first quarter, net sales were $5.1 billion, 16% lower than last year. Non-GAAP operating income was $434 million, down 6% and non-GAAP net income per share was $2.03, down 8%. While clearly not satisfied with these results, our excellent cash flow and record gross margin reinforce the durability of our underlying profitability and integrity of our strategy. So, let's take a look at what happened in the puts and takes of the quarter. First, what happened? In short, demand was weaker than anticipated in our commercial business. When we exited 2022, our forecast called for a moderate softening of IT demand in 2023 and a mid-single-digit year-over-year decline in first quarter sales. As the quarter progressed, IT demand weakened more than expected as a confluence of events intensified already heightened economic concerns and recession fears. This led to a fairly rapid shift in customer behavior, most notably in our large commercial customers. Projects that drove cost reduction, productivity, and financial returns were prioritized. Project justification and budget scrutiny ruled the day. And although deals were not canceled, sales cycles elongated, written sales slowed, and deal sizes compressed. While all of this translated into lower sales, the value of the solutions we provided customers continued to grow. You see the impact of this on our gross margin momentum. Margins were consistent with last quarter with meaningful year-over-year expansion in each of our customer end markets. But unlike the fourth quarter, our strong margins did not fully offset the magnitude of our net sales decline. Let's take a look at the puts and takes of the quarter by customer end market. Recall, we have five sales channels: Corporate, Small Business, Healthcare, Government, and Education, each a meaningful business on its own, with 2022 annual sales ranging from $1.9 billion to over $10 billion. Within each channel, the teams are further segmented to focus on customer end markets, including geography and verticals. Our commercial operations are organized around geographies, verticals, and customer size. Teams are similarly segmented in our U.K. and Canadian operations, which together delivered US$2.9 billion in 2022 sales. These unique customer end markets often act in a countercyclical way given the different macroeconomic and external factors that impact each as was the case this quarter. The shift in large commercial customer behavior had an outsized impact on corporate results with sales down 17% year-over-year. Declines were particularly steep in client devices, servers, and storage. Three meaningful hardware categories that require capital outlays, outlays under pressure, and out of favor. The corporate team's success helping customers achieve ongoing network and application modernization led to excellent NetComm performance, up double digits. Momentum continued around projects focusing on increasing productivity and enhancing customer and coworkers' experiences, which drove strong growth in cloud and software spend. The small business team posted another quarter of solutions growth, driven by success helping customers address mission-critical priorities around security and productivity, priorities that drove meaningful increases in cloud and software customer spend on pace with recent quarters. Network upgrade activity also drove a high single-digit increase in NetComm with resilience in demand for solutions, the gross margin of the small business channel continued to be accretive to overall margins. Strong solutions performance was more than offset by the ongoing impact of economic uncertainty on transactions and small business net sales declined 23%. Public sales declined 12%. Performance in government and healthcare held firm as organizations called on CDW to help them extract more value out of their IT footprints while education remained under pressure. Solutions momentum in health care was strong, driven by continued success helping customers adopt technology to drive productivity as an offset to higher costs from rising labor and materials inflation. Cloud performance was excellent, hesitancy over privacy concerns waned and healthcare systems embraced the speed and efficiency that cloud solutions can deliver. Talent needs and data center projects remain focused areas, with customers increasingly using technology to address complex industry challenges. Patient care and patient experience continue to be mission-critical, driving ongoing investment in collaboration solutions. However, similar to our commercial markets, the greater focus on shorter-term ROI and tight budgets resulted in elongated client devices replacement cycles and overall sales were flat. Government activity levels were strong. The credibility and track record of the combined and now fully integrated teams of legacy CDW and Sirius opened doors and led to more seats at the table. Since the first quarter is a seasonally light quarter for both federal and state and local spending, our progress is a bit harder to see. Federal's low-teens growth was offset by a mid-single-digit decline in state and local, and sales were flat to last year. Federal growth was balanced across solutions and transaction categories. The team's ability to help civilian agencies achieve their priorities around data management drove strong server and storage performance and contributed to high single-digit growth in solutions. Services increased high-teens and Cloud spend remained strong. Underscoring the value of our diverse end markets, federal posted year-over-year transactions growth, which was driven by client video, audio, and collaboration. State and local low single-digit growth in solutions reflected the team's success helping customers address talent gaps through enhanced training as well as professional services engagements. Double-digit Cloud spend was driven by both software and security upgrades. Consistent with the fourth quarter, customers made do with their current client devices, and client device declines continued. For education, solid higher-Ed growth was more than offset by the year-over-year declines in K-12 and overall sales declined 27%. The Higher-Ed sustained their track record of enabling student success programs used to promote enrollment. These programs, which are focused on improving security, campus connectivity, and delivering enhanced dorm room experiences drove double-digit growth across cloud, NetComm, storage, software, and security. K-12 posted another quarter of excellent solutions performance. Solutions mid-teens increase was driven by networking and data center efforts with substantial double-digit increases in storage, servers, and NetComm. Our ability to wrap services around applications and physical security drove excellent services performance. The K-12 team's solutions performance was more than offset by a meaningful year-over-year decline in client devices and overall sales declined. Similar to last year, customers placed a lower priority on client devices as schools reach student-to-device ratios near or at parity and continue to digest endpoint investments made over the past several years. Instead, schools were focused on networking and data center needs as well as planning for the next horizon of multiyear funding opportunities, opportunities which, given the expertise that we have in this area, will generate even more ways to serve this important customer channel. Our U.K. and Canadian operations, which we report as other, continued to execute very well in the quarter, delivering consistent profit performance as customers prioritize strategic investments and solutions. Similar to the U.S., top-line growth for both markets experienced the impact of heightened economic uncertainty, which especially impacted client device demand. U.K. decreased by mid-single digits in local currency, while Canada decreased by high single digits in local currency. Similar to the U.S., strong gross margins reflected a higher value mix. Now, let's take a look at how the end market performance translated into portfolio performance. The economic uncertainty that led to the downshift in our commercial business impacted performance across all three of our portfolio categories: hardware, software, and services. As a full stack, full life cycle provider, the deferral of major hardware projects results in lower attach of services and other solutions. All the components of the deliverables are delayed, pending the implementation of the project. Delays in pushbacks and hardware may dampen warranty and security opportunities, and focus on in-year ROI often drives compressed deal sizes, as many customers elected to favor short-term deals versus multiyear agreements. First quarter portfolio results were adversely impacted by all these cascading factors. U.S. hardware decreased by 21%, a further step down from the fourth quarter. Large commercial customer client device declines had the greatest category impact as corporations work through the impact of slower hiring and layoffs. NetComm hardware growth was very strong in this quarter and increased across all customer end markets. This strong performance was largely driven by improvements in supply but also reflected better demand than we expected. U.S. services decreased to 2%. Growth was impacted by weakness in services tied to hardware, particularly in warranties. Momentum in Managed Services growth was solid, and professional services continue to grow, though was impacted by the delayed timing of full stack IT integration. U.S. software growth remains strong. Double-digit increases in network management software and storage were partially offset by declines in software categories tied to full stack projects and employment levels. Security remained a key focus area for customers, but results were impacted by the shift in large commercial customers' buying behavior, and U.S. security sales declined slightly year-over-year. Significant growth in identity management, privileged access management, intrusion detection, and risk and governance was offset by declines in firewall. Our largest category, which is also tied to either refresh of physical assets or expansion of customers' footprint. Overall, security demand remained very strong in small business. Once again, cloud was a meaningful contributor to performance with double-digit increases in customer spend and gross profit, led by security, platform, and productivity. Within this period of economic uncertainty and heightened customer caution, our trust and engagement with customers and partners was never stronger. Trust and engagement that, when coupled with our capabilities and deep expertise, serves us well today and trust and engagement that will serve us well when the temporal shift in demand recovers. Although volumes are down, our ability to help our customers drive outcomes across the five components of our eye care framework, especially cost management right now, continues to drive our customer value. Our ability to drive outcomes and address customer priorities across the entire IT continuum enables us to pivot 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, investments that are exceeding our expectations in both capabilities and performance. Investments like our acquisition of Sirius have maximized our differentiation in the market and provided more and better seats at the table, increased customer stickiness, and contributed to our evolution as a one-stop trusted partner. A partner with the capabilities and expertise that can help customers achieve the outcomes they need from the technology and solutions they can trust. The strategic actions we've taken have not only strengthened our value proposition but have also fortified our profitability, contributing to our operating profit margin expansion of more than 100 basis points since 2020. It's our strategy, when combined with our flexible business model, execution rigor, and financial discipline that enables our ability to profitably outgrow the U.S. IT market, and that leads us to our view for the balance of 2023. The initial 2023 U.S. IT market forecast we shared with you on our February call was for flattish growth. Given our belief that first quarter business conditions will persist through at least the second quarter, we now look for the U.S. IT market to contract at a high single-digit rate for the full year. We continue to target outperformance of the U.S. IT market by 200 to 300 basis points. This outlook assumes that we will see a moderate pickup in activity in the back half of the year and anticipates that ongoing economic uncertainty will continue to impact customer behavior. Wildcards include deeper recessionary conditions, heightened credit tightness, and debt ceiling-driven liquidity events. 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. We are operating in choppy waters right now. We have the strategy, capabilities, and discipline to continue to profitably outgrow the market. And while we have a durable process to manage and align cost to opportunity. Given our expectation for market demand, we have amplified our expense discipline to preserve profitability. A hallmark of CDW is to serve our customers whenever and wherever their needs may be. The outcomes technology delivers haven't diminished, and our customers know that we will be there for them regardless of market conditions. CDW is an all-weather team, always adapting and evolving to lead in the market. We have faced turbulent markets in the past and have leveraged our proven business model, unmatched competitive advantages, and deep and trusted relationships to come out stronger. We will do so again. Let me turn it over to Al now who will provide more detail on the financials and outlook.

Thank you, Chris, and good morning, everyone. I'll start my prepared remarks with detail in the first quarter, move to capital allocation priorities, and finish up with our 2023 outlook. Turning to our first quarter P&L on Slide 7. Consolidated net sales were $5.1 billion, down 14.2% on a reported basis and 15.6% on an average daily sales basis. Net sales results came in below expectations relative to our outlook. Transactions declined more than expected and despite greater resiliency and while flat year-over-year, Solutions also came in lower than anticipated. Notwithstanding the lower-than-expected solutions performance, the decline in transactions drove a mix shift that benefited margins. And as we've shared before, the impact of mixing into a higher relative percentage of solutions and specifically netted down revenue has a dampening effect on total net sales but tends to bolster gross margins, all else equal. Since we are not the primary obligor on these transactions, several important high-value components of our solutions portfolio, including Cloud, Software as a Service, much of security, and partner-delivered services and warranties are recorded on a netted down basis, where gross profit is our revenue. In the first quarter, these netted down revenues, notably SaaS transactions outgrew our overall net sales and represented 32% of our gross profit compared to 31% in the fourth quarter and prior-year quarter. This continues to be an important trend in our business. Sequential net sales were down 6.1% versus the fourth quarter on a reported basis and 7.6% on an average daily sales basis. Our outlook anticipated better than normal first quarter seasonality, given the unusually soft demand in the fourth quarter. Our outlook assumed public would have better than historical sequential growth, which it did. It also assumed our commercial channels, corporate and small business would remain firm and deliver close to historical sequential growth levels; they did not. The disconnect came from a downshift in large commercial customer spend, which had an adverse impact on our results. To dimensionalize the shortfall in net sales relative to our expectations, roughly two-thirds of the amount was driven by large commercial customer activity across both transactional and solutions business. On the supply side, the dollar value of our backlog did not change meaningfully relative to the fourth quarter. And while the backlog and product lead times associated with transactional products are essentially back in line with normal levels, supply chain challenges have persisted in NetComm solutions and the backlog here remains elevated. We continue to anticipate this remaining backlog will feather out over time as supply conditions ease. So, this has been more drawn out than anticipated. As always, we continue to judiciously manage our working capital to support our customers while ensuring strong economic returns. Our free cash flow performance, which we'll discuss shortly, is emblematic of this discipline. Our team delivered excellent profitability in the quarter. Gross profit was $1.1 billion, a year-over-year decrease of only 1%, despite a double-digit decline in sales. The gross profit margin was a first quarter record of 21.3%, up 280 basis points versus the prior year period and down only 40 basis points versus the record fourth quarter. The year-over-year expansion in gross profit margin was driven by similar factors as in the fourth quarter. First, product margins benefited both mix into the complex, hybrid cloud solutions and a lower mix of transactional products. When we mix back index transactional products, we expect for this benefit to moderate. Second, as we expected for the first quarter, a greater mix in the netted down revenues. The category outpaced overall net sales growing low single digits in Q1 compared to Q1 in the prior year, primarily driven by double-digit Software as a Service growth; and third, net sales contribution from the high-margin services mix with significant contribution from our recent acquisitions. Turning to SG&A on Slide 8. Non-GAAP SG&A totaled $655 million for the quarter. The year-over-year increase in non-GAAP SG&A was primarily due to higher fixed payroll as our coworker count increased during last year. This was partially offset by a decline in sales payroll expense, reflecting the variable component of our compensation structure, which is principally tied to gross profit attainment. We expect the impact of the higher year-over-year fixed cost SG&A to diminish as we move through the year. To that end, we are focused on our efforts to innovate our operating model and drive productivity and savings. Given the demand environment, we've advanced initiatives to ensure our cost structure is aligned to our opportunity set. This includes driving structural savings as well as pacing our overall coworker count with the level of business demand and in areas where we can provide the most value to our customers. Coworker count at the end of the first quarter was approximately 15,300, up slightly from the fourth quarter, principally due to the most recent acquisition, which added to our technical resources in professional and managed services. Strategic investments in our solutions and services capabilities remain key to our three-part strategy for growth, an important catalyst for achieving our profitability and margin goals. GAAP operating income was $355 million, down $32 million compared to the prior year. Non-GAAP operating income was $434 million, down $28 million versus prior year. Non-GAAP operating income margin was strong at 8.5%, up 70 basis points from the prior year, although down 110 basis points compared to the record fourth quarter. Similar to last quarter, this year-over-year improvement was driven by our strong gross margin. The sequential decline reflected a higher ratio of fixed costs as a result of the lower volume of net sales and gross profit. Moving to Slide 9. Interest expense was $58 million, modestly above the prior year, driven by higher interest rates, but relatively in line with our expectation for the quarter. Our GAAP effective tax rate, shown on Slide 10, was 22.3%. This resulted in first quarter tax expense of $66 million. Together the non-GAAP effective tax rate, we adjust taxes consistent with non-GAAP net income add-backs, as shown on Slide 11. For the quarter, our non-GAAP effective tax rate was 25.7%, within our expected range of 25.5% to 26.5%. As you can see on Slide 12, with fourth quarter weighted average diluted shares of $137 million, GAAP net income per diluted share was $1.68. Our non-GAAP net income was $279 million in the quarter, down 7.6% on a year-over-year basis. Non-GAAP net income per diluted share was $2.03, down 7.9%. Moving ahead to Slide 13, period-end cash and cash equivalents were $279 million and net debt was $5.5 billion. During the quarter, we reduced our overall debt by almost $130 million, consistent with our plan to maintain our net leverage. Liquidity remains strong with cash plus revolver availability of approximately $1.3 billion. Moving to Slide 14. The three-month average cash conversion cycle was 18 days, down three days from the fourth quarter, two days from the prior year first quarter, and within our targeted range of high teens to low 20s, reflecting our continued diligent management of working capital. Our effective working capital management also drove excellent year-to-date free cash flow of $411 million, as shown on Slide 15. For the quarter, we utilized cash consistent with our 2023 capital allocation objectives, including returning $80 million to shareholders through dividends and $200 million in share repurchases in addition to the $130 million in debt repayment. We also closed the acquisition of Locus Recruiting in February. That brings me to our capital allocations on Slide 16. Our execution remained consistent with the updated objectives we communicated last quarter. First, as always, increase the dividend in line with non-GAAP net income. Last November, we increased the dividend by 18% to $2.36 annually. This increase demonstrated our confidence in the earnings power and cash flow generation of the business. Going forward, we'll continue to target a 25% payout ratio, growing the dividend in line with earnings. Second, ensure we have the right capital structure in place with a targeted net leverage ratio. We ended the first quarter at 2.6 times, flat to the end of the fourth quarter and within our new range of 2 times to 3 times. We continue to convert business performance into cash generation and have a rigorous process in place to maintain our flexibility and proactively manage liquidity. Finally, our third and fourth capital allocation priorities is M&A and share repurchases have remained important drivers of shareholder value. For 2023, we'll continue to target returning 50% to 75% of free cash flow to investors through dividends and share repurchases. In the first quarter, we returned roughly 68%. As a reminder, the Board authorized a $750 million increase to the company's share repurchase program last quarter on top of the remaining dollars from the prior authorization. Moving to the outlook for 2023 on Slide 17. The current overall IT market sentiment reflects the caution and prudence of customers. We expect this to continue in the near term with a modest recovery of demand conditions in the second half of the year. This informs our expectation that the IT market will contract at the upper end of high single digits. With this scenario as our baseline, we look for netted down revenues to continue to grow faster than our other product and solution categories. And we maintain our long-held expectation to outgrow the market by 200 to 300 basis points. Keeping in mind that in times of hardware softness, our overperformance tends to be on the lower end of this range and vice versa. We continue to expect a neutral currency impact for the full year, with modest headwinds in the first half and modest tailwinds in the second half. This assumes an exchange rate of $1.25 to the British pound and $0.77 for the Canadian dollar. Moving down the P&L. We expect our full-year non-GAAP operating income margin to be within the range of 9%. This reflects the expectation of lower net sales and gross profit, balanced with higher gross margins and a reduction in the level of our fixed expenses. Finally, we expect our full-year non-GAAP earnings to decline low single digits year-over-year in constant currency. Please remember, we hold ourselves accountable for delivering our financial outlook on a full-year constant currency basis. Additional modeling thoughts for annual depreciation and amortization, interest expense, and the non-GAAP effective tax rate can be found on Slide 18. Moving to modeling thoughts for the second quarter. Related to average daily sales, we expect mid-single-digit sequential growth from Q1 to Q2. That equates to a low double-digit percent year-over-year reported net sales decline from the second quarter. We anticipate continued strong margin performance in the second quarter with a gross profit margin consistent with levels in Q1 and NGOI margin higher as expense efforts improve operating leverage. And we expect second quarter non-GAAP earnings per diluted share to decline mid-single digits year-over-year. In 2023, we expect full-year free cash flow to be at the high end of our new rule of thumb range of 4% to 4.5% of net sales as we continue to emphasize a return on working capital. While we are clearly operating in a cautious and uncertain environment, given our resilient business model and the rigor of our financial controls, we remain confident in our ability to deliver the profitability margin and cash flow our stakeholders have come to expect. That concludes the financial summary. As always, we will provide updated views on the macro environment and our business on our future earnings calls. And with that, I'll ask the operator to open it up for questions. We would ask each of you to limit your questions to one with a brief follow-up.

Our first question for today comes from Amit Daryanani from Evercore. Your line is now open. Please go ahead.

Yes. Good morning, and thanks for taking my question. I guess maybe to start with, Chris, one of the concerns I think folks have had is how much of the issues that you saw in the March quarter are macro versus micro really CDW-specific and I think all the reasons you really mentioned sounds like it's a much broader trend rather than CDW's success, but I'd love to hear, do you think there's any company-specific that may have impacted or magnified these issues? And then any change in trends you're seeing for the month of April so far versus what you saw in March?

Yes, good morning, Amit. Let me break this down for you. The primary reason for the performance miss relative to our expectations was the noticeable increase in caution and concern from our commercial customers as economic uncertainty grew during the quarter, which led to a significant drop in demand, especially among our large commercial clients. This had a pronounced effect on our results due to the size of our commercial business. Digging deeper, when our customers became cautious, they tended to defer decisions, pause initiatives, and reduce costs, a pattern commonly seen with larger customers. This resulted in heightened scrutiny over projects, a shift towards shorter-term return on investment, and an emphasis on overall cost cuts, which in turn lengthened sales cycles and shortened contract durations. We did not observe cancellations, but rather delays in smaller deals and their corresponding effects. As a full-service provider, we faced a cascading impact on hardware, software, and services. Significant delays in deals led to a reduced attachment of services and solutions. With commercial making up over 50% of our business, this created a major headwind for our top-line sales. However, across the broader portfolio, balanced customer end markets provided some relief. Nonetheless, the severe softness in the client device market limited the extent of that relief. Government, higher education, and healthcare sectors performed well but faced growth challenges, particularly due to performance pressures in the client area, which did not meet our expectations. Consequently, our top line was affected. In terms of the portfolio itself, NetComm and software showed strong performance, cloud growth remained robust, and our strategic focus areas in services—professional and managed services—were solid. We experienced some softness in warranties affecting services, but overall, we were pleased with our execution. We believe this was mainly a macroeconomic impact. While record margins in Q1 did not fully offset the shortfall's scale, we still achieved excellent free cash flow. I would say the team is doing well in a tough environment, with our cash flow and margins indicating our strategy is effective and our investments are enhancing profitability. Additionally, during uncertain times like these, we strengthen trust and engagement with our customers. We have navigated turbulent periods before, and it’s during these times that our customers look to us and our partners for help with their challenges, knowing we'll stand by them regardless of market conditions, and that we will be ready for them when demand shifts back.

Fair enough. And Chris, can I just follow up on that last part which you were talking about? I think historically, what I mean you see as you come out of these positives or recession or whatever happens in the next six months, you tend to see an inflection of share gains going higher for CDW. So, I'm wondering, I guess, maybe you could touch on what do you think the duration of this path could look like? And do you think you're well positioned to see an acceleration in share gain as you come out of it, given the engagement you have with your customers?

Yes. Amit, I would say, in these times, you can imagine what we're doing, controlling what we can control, staying in front of our customers, playing aggressive offense, and really doubling down on the relationship. And that always bodes us well. We like to say accelerating out of the curve is what we do, and that's what we would expect. In terms of the timing, look, hard for any of us, I think, to predict the timing of client devices significantly turning around, for example. But we do feel absolutely confident that as demand shifts that we will be very well positioned to capture more than our fair share of the uplift.

Our next question comes from Samik Chatterjee from JPMorgan. Your line is now open. Please go ahead.

Hi, thank you for taking my question and for the detailed information in your prepared remarks. I'm curious about the Q2 guidance indicating a mid-single-digit sales growth expectation. While I realize this is not as strong as pre-pandemic levels, what gives you confidence in guiding for growth in Q2? Should we anticipate that this growth will continue into Q4? How are you viewing customer activity and spending as it begins to improve? Also, what are your expectations for client devices in the second half? I have a quick follow-up as well. Thank you.

Yes. Good morning, Samik, this is Al. So, with respect to Q2, I think what you're seeing from our outlook is, again, both expectation that the overall conditions and customer buying behavior would be similar, particularly in commercial that is softer with an offset that, we'd expect that regular seasonality, particularly from our public business, would be in play. So, the lift there largely from that seasonality from public with a bit of a muting from our typical seasonality given the softer conditions otherwise. Now with respect to your question on the second half, so the second half, similar, we would expect we'd have our normal seasonality, including our government business and public having higher seasonality in Q3. And while obviously, we've got extreme conditions we've seen the last couple of quarters, we would anticipate at this point, a pickup in activity. Now that pickup in activity will say kind of balance between clients and solutions. And it's a little bit of a TBD exactly when you'd see client pick up, but there's a reason to believe that we'd see some of that activity in the back half of the year.

Sure. Can you provide more details on the momentum of the NetComm product? It appears to be performing differently compared to other areas of your portfolio. What factors are leading your customers to continue investing in NetComm? Although there have been supply challenges, demand doesn't seem to be an issue over the past couple of years. What is contributing to this ongoing momentum?

Samik, it's Chris. And I'd say a couple of things driving the NetComm momentum. One is network momentum. One is supply chain. Obviously, we've got some relief in the backlog, which has been good. But we are seeing demand and when you think about our customers modernizing their infrastructure and the cloud performance that you're seeing, we do have customers who are moving to the cloud, using networking to handle larger and heavier workloads. We do see customers like our K-12, I mentioned earlier. They're hard at work on classroom upgrades and modernization. When you also think about the trend towards back to the office and in the commercial space, notwithstanding the fact that these large corporate customers are in cost reduction mode. They are focusing on digital transformation and experiences of their own coworkers and their employees, and networking is a very important part of that, obviously, as the data center and networking drive the connectivity out to the employees and to the customers. So, it's not surprising given the amount of client investment that's been made over the past few years, usually ingesting client devices actually requires upgrading networking, and that's what we're seeing.

Our next question comes from Shannon Cross of Credit Suisse. Shannon, your line is now open. Please go ahead.

Thank you very much and good morning. I'm wondering what your customers are saying about artificial intelligence. And I think you have a pretty unique position, I guess, in terms of your diverse customer base and ability to talk to them. And I'm just wondering where are they at in their AI journey? Where are they thinking that they're going to be investing as they look to AI? Anything you can give us would be helpful. Thank you.

Yes, Shannon, that's an excellent question. You're correct that it's a topic everyone is discussing extensively. The positive aspect for CDW is that we are currently seeing rapid movement and complexity in this area. There's a significant amount of work to be done regarding how this new form of AI can benefit our customers. Our customers have indicated that our CEO emphasizes the need to fully engage with this development. This situation creates pressure in the system, which is advantageous for CDW as it prompts conversations about AI, positioning us at the forefront of design alongside our customers. We consider both our internal needs and, importantly, our customers' needs. We have always aimed to help them leverage technology to satisfy their current and future business requirements. When we examine AI and what we can provide to our clients, it aligns well with our comprehensive approach. We're assisting customers in exploring potential use cases moving forward, such as workflows for creating innovative products or enhancing efficiencies in existing processes. Our focus is on identifying these use cases and implementing support throughout the stack, including professional services, B2B application development, and the necessary computing and data infrastructure to handle AI's demands. Our digital velocity team is already managing AI initiatives with numerous customers and engaging in more in-depth discussions. We're at the leading edge of this trend, and while there is much to resolve, the excitement around AI is justified. A rapidly expanding market driven by AI complements our full stack solution, leading to numerous customer interactions. Internally, we're also investigating how to use the new AI to enhance efficiency within our organization.

Thank you. You're currently at the high end of cash flow for the year and a couple of years have passed since the Sirius acquisition. What are your current thoughts on acquisitions? How do you perceive the landscape? Are prices or valuations decreasing at this point, or are people still evaluating based on valuations from a couple of years ago?

It's really interesting because I would say valuations have not ticked down significantly. Although the pipeline and the outreach has increased. So that tells you something about what the landscape might look like three to four months from now.

Our next question comes from Erik Woodring of Morgan Stanley. Erik, your line is now open. Please go ahead.

Thank you very much. Good morning, everyone. Chris, I have a question for you. I appreciate the detailed insights you've shared regarding the end markets and products. It seems there are many factors at play. If we take a step back to consider your product exposure and how it aligns with the guidance you provided in February, could you clarify which products are primarily responsible for the downward revision or the shortfall in the first quarter, as well as the reduced guidance for the remainder of 2023? I’m trying to grasp what has shown incremental weakness as we transitioned through March and into April, and which products are most influencing this guidance. I will have a follow-up after that. Thank you.

Yes, good morning, Erik. Let me start with hardware and client devices, as that was the main area of impact. The largest effect came from our larger commercial customers. On the client side, we continue to see significant softness in the market, which persists. This affected our performance, and we noticed a further decline in the client space as the quarter progressed. Staff reductions across all industries are also impacting client device purchases. I mentioned earlier that the client device category from our large commercial customers experienced the most notable downturn in the corporate sector. In addition, server storage and hardware are areas where our customers are trying to save money, contributing to the decline. When hardware refresh cycles are delayed or paused, it creates a cascading effect. If projects are on hold, associated services can't be implemented until the product integration is completed. Warranty costs will also have a greater impact when hardware purchases are reduced. Overall, this situation is driven by large customers looking to cut costs quickly, such as reducing hardware investments and extending the useful life of their assets. For instance, when purchasing software, companies may opt for a one-year deal rather than a three-year deal to avoid commitment. We also observed softness in strategic areas due to delays or deferrals of larger projects. Our services business remains strong in strategic areas, excluding warranties, with professional services and managed services performing well. Security remains strong in our investment areas, but we saw weaknesses in firewalls due to purchases of physical assets or geographical expansion. Conversely, our cloud services continue to be very robust across all customer segments. I'm trying to be detailed here, and I hope this addresses your question. Ultimately, this situation stems from the general climate of cost containment.

No, that was exactly what I was looking for. And then maybe my follow-up. We've gotten a lot of questions about CDW's definition of U.S. IT market growth versus how other companies might portray it. And obviously, there is an impact of netted down revenue mix that would be helpful to maybe understand. But said differently, if U.S. IT market growth in CDW is down high single digit year-over-year, how would you think about your overall customer spending to trend in 2023? I think that would be helpful just again, because there is an impact of this netted down revenue that dampens the view of your U.S. IT market growth. So, I just want to unpackage that, please. Thank you.

Yes, Eric, let me take that. This is Al. So just a couple of things. You're definitely right with respect to netted down revenues and the impact from that. The other component is obviously you have a mix component. If you think about the broader IT market relative to our mix, there is a translation, if you will. I think most notably, in normalized years that does not create significant distortion in a year like this where the mix has shifted significantly. That is client coming down considerably and more solutions and netted down revenues being up. It does create more exaggerated results. So, what I would tell you is if you think about our full year guide with respect to the IT market, it is high single digits decline, if we think about that on a gross spend basis, obviously, that would be more muted than that decline. Does that help you?

Our next question comes from Adam Tindle of Raymond James. Adam, your line is now open. Please go ahead.

Okay. Thanks, good morning. Al, I hate to be the one to question guidance again, but it's a question that we're getting a lot here this morning. Q2 is obviously very clear, so I appreciate all the details, but more on the shape of the back half of this year embedded in your guidance? And if I look last year, you guided Q3 to low single-digit sequential growth. And if I applied that here, it would imply a really big hockey stick in Q4. Conversely, if Q3 was above that level, it's implying a bigger Fed quarter, but we've got debt ceiling concerns causing a potential Fed slowdown in that quarter. So, a little bit of a double-edged sword. And just wondering if there's any way we could be thinking about waiting in the back half because there's a fear that this might not be the last cut.

Yes. Sure, Adam. Happy to address that. So, on the back half, first of all, let me just say our expectation that Q2 would look a lot like Q1 obviously informs then the seasonality for the rest of the year, right, because we would apply our typical seasonality. Q3 definitely reflects, I'll call it, reasonably normal public seasonality. And so, you have that in play. Look, the comps, frankly, for Q3 are much tougher than Q4. Q4 was really the first time that we felt the effect of softening and particularly in client. And so, I think Q3 probably looks a little bit more normalized from a seasonality perspective. And then Q4, I'll call it more of the pickup there, particularly given the lower comps that we saw there with education and with client.

Okay. Got it. And maybe just as a follow-up, Chris, I'll ask a higher-level one. You often talked about the CDW story and culture as a differentiator, in particular for the company. It leads to your ability to outperform the IT market consistently and profitably. Here, most recently, you have made a tough decision to reduce coworker count. So, I'm just wondering how you thought about that decision to implement layoffs essentially in efforts that you made to try and preserve culture. And Al, if you wanted to maybe talk more quantitatively about how you're able to maintain expectations to outperform the market by 200 basis points to 300 basis points while reducing workforce with your sales productivity expectations look like post that would be helpful. Thank you.

Yes, Adam, that's a great question. We approached such a decision with great care and respect. We've always maintained a strong focus on cost discipline, continuously looking for productivity and efficiencies in our operations. In light of the cautious environment, we've been careful and proactive in managing our costs, especially considering the recent increase in economic uncertainty. We've taken significant steps to align our cost structure with the current demand, pulling every lever possible, including discretionary spending, hiring, promotions, staffing, and geographic locations. One tough decision was to adjust our staffing to meet the current demand environment. These decisions were not easy, but I’m proud of how the team handled it and communicated the changes. Everyone acted with respect during this process. Moving forward, our teams are focused on the future and on serving our customers. While it was a difficult decision, it was ultimately the right one for the business and our customers.

Adam, I'll just add a couple of comments to your questions on productivity and hitting on our goals, if you will. So to Chris' point, look, this was not a reaction. We had been pacing our hiring and our coworker count and our discretionary spend in the quarter is building up. Obviously, we saw a sharp turn in Q1, and we expect some of that to persist. We had structural efforts, activities in place to drive productivity and savings, and we basically just amplified those efforts. So let me just parse it for you. When we think about kind of allocation of our coworkers, first from a revenue-producing GP and going through something like this, we're looking at where are the areas and the practice areas that the demand vectors are stronger and we should allocate more resources and where areas where maybe that demand could be softer for a more prolonged period. And so, that was part of the calculus in going through that. And then when we think about kind of more of the support layer and the infrastructure, again, we got structural initiatives, but we also expect that we're going to drive productivity, coworker savings from that. And so, there are all the things that went into this decision and these actions. And we believe while difficult obviously to go through, ultimately, we'll add the greatest value for our customers and obviously, improve efficiency.

Our next question comes from Matt Sheerin from Stifel. Matt, your line is now open. Please go ahead.

Thank you, and good morning. I have a question on your cloud-related revenue, which continues to be strong. There are some concerns that large customers are now digesting their cloud investments and looking to optimize those investments. Are you seeing any signs of that? Or do you expect continued strength as customers elect to move workloads off-prem instead of refreshing their own data centers?

We are indeed observing both trends. Large customers are definitely looking to optimize, especially in this cost-conscious environment, and they are utilizing our professional services and FINOP services to assist with this. This could lead to potential conversions into managed services in the future. At the same time, organizations are optimizing their cloud environments—not just the workloads in the cloud, but the overall cloud setup. They are making decisions about where their workloads are most effectively placed, whether on-premises or in the growing field of private on-prem environments, and we're witnessing shifts between public clouds as they seek to optimize performance, functionality, and costs. This transition requires support from us at CDW to facilitate migrations effectively. Ultimately, we see increasing opportunities to transform this into managed cloud services, which benefits both us and our customers.

Thank you for that. I have a question about your comments on maintenance contracts, which seem weak. In my previous experience with CDW during downturns, I've noticed an increase in maintenance contracts and renewals as customers tend to extend the life of their assets. What's different this time? Or am I overlooking something?

It's a great question. We discussed earlier what's different this time. We notice that when customers are maximizing the use of their assets, they are typically extending warranties, but for shorter time frames. Normally, during a hardware renewal with a three-year contract, warranties would come in for that duration, but now we see them being shorter. Additionally, some customers are choosing not to extend warranties at all. This indicates a general softening in that area. We also don't have compensating hardware or software purchases to balance this out, with new warranties coming into play. Even though you would expect an increase in warranties as customers are extending the useful life of their assets, the size of those warranties and the associated deals are smaller, which is reducing their positive impact on the top line.

And Matt, let me add a couple of comments. First, remember that the warranty business appears as netted-down revenues. For us, the recognition occurs upfront. Therefore, if we have a typical four-year warranty, it effectively turns into one year, which obviously leads to muted recognition and results for us. Additionally, it’s somewhat obvious that the focus on shorter ROI and the associated financial impacts are leading to more discussions with customers. There is an emphasis on utilizing assets efficiently, but there is an expectation that that business will rebound. This includes refreshing some infrastructure and clients, as well as, in some cases, renewing software assurances and warranties, which we are observing in a shorter timeframe.

And I would just add to what Al said, I think it's an important point. The delays, the pauses, the deferrals that we're seeing is really just that. We haven't seen the cancellation. So, all of this really reflects itself in pipeline in the future. And so that's a positive sign.

Our next question comes from Keith Housum from Northcoast Research. Keith, your line is now open. Please go ahead.

I know we’re running late, always get the one in here. I know client devices have been very important for you guys. And as you look out going forward, I think it was as early as last quarter, you guys were talking about perhaps a return of client devices. I'm assuming that thought process has changed a little bit. And as you think about client devices, in particular, is there a period for which you can no longer sweat these assets? Is it a few quarters it goes out to a few years? Any color around that would be helpful. Thank you.

Yes. Okay. I got the question. It's a good question. I'd say, look, when it comes to PCs, the PC themselves can go for four years, five years. I'd say four, five, 5.5 years. That's not ideal because the feature functionality gets to be very old by that point in time. But if customers are really sweating the assets because they're in a financial situation needs to do so, it can go that long. All that said, if you look back over the last four years to five years, you're going to see a number of PC refresh requirements that are coming up. And I'd add that you have things like Windows 11, which is going to add more pressure to those device refreshes. So, we've said this before, we do expect a refresh cycle to be starting sooner rather than later, whether it's federal government when we know when their buying cycle is, whether it's Chromebooks. I mean, we're seeing a number of large RFPs related to Chromebooks for our education students already. So our expectation is refreshes are going to be under pressure to begin later in the year into 2024. And when they do, we'll reap the benefit of that.

Our next question comes from Ruplu Bhattacharya from Bank of America. Ruplu, your line is now open. Please go ahead.

Hi, thanks for taking my question. Chris, in the past, in a downturn, corporate and small business typically decline first, followed later by government and other public sector channels. Revenues from government and health care looks like in 1Q were slightly up year-on-year. Are you seeing any weakness in those sectors? And are you concerned at all about those end markets? And what have you factored in for the full year for those end markets? And I have a follow-up.

Okay. Good morning, Ruplu. In terms of federal and health care, the countercyclicality that you pointed to, we're a bit in the reverse of that, actually. We had some softness in the public space going back a bit. And what we're seeing now is public, federal, in particular, we're seeing strong activity, I’d say, getting back to our normal seasonality and stronger activity as we run into the back half of the year. In fact, their performance this quarter was quite balanced across transactions and solutions. So, we're not seeing any issues there that we're concerned about and expect normal seasonality in the back half of the year. Health care is another one. It's been a pretty good balance across transactions and solutions, a little tougher in the client space but health care is really doing well. Given the increases in costs and wage inflation and everything they're experiencing, they're needing more help on technology and people help as well. So, we're actually seeing our value proposition with our health care customers accelerate in many ways, and you add our Sirius team into the mix here. And as I said before, it opens doors and gets more seats at the table. Health care is also equally feeling very robust. So, we don't have concerns of either of those end markets going into the end of the year.

One component I would add is to remember that one of the significant drivers is funding. From a funding perspective, both government and education are at a reasonable level. Therefore, we believe there is certainly the motivation and opportunity for continued spending.

Okay. Thanks for the details. Can I just ask, Chris, why is high single digits year-on-year the correct number for U.S. IT market growth? I mean, why not down double digits or down even mid-single digits? I mean, just if you could give a little bit more color on what you're assuming for data center products like server, storage, networking growth versus PC growth? And how much of the backlog that you have factors into your particular revenue growth of down mid-single digits year-over-year in 2023? Thank you.

Let me just maybe, Ruplu, start on the backlog. So, backlog, not a meaningful contributor in our expectations I think I mentioned in my prepared remarks that NetComm continues to be a sticking point. We would expect that to feather out. It's taken longer, but we would not consider that to be a meaningful contribution for the remainder of the year. So.

Yes, Ruplu. I'll begin by outlining how we perceive the IT market, which is largely based on insights from our 11,000 customer-facing team members who engage with the market daily. They truly understand the current market dynamics, as well as customer sentiments and behaviors. Although we analyze various market factors, the insights from our customers are the most significant. That's a primary focus for us. Additionally, we are considering the caution and concerns we've previously mentioned, which we expect to persist in the short term, and we've incorporated this into our Q2 projections. We anticipate some moderation in recovery later in the year. All these factors reflect our market observations, including demand trends, backlog issues, and other metrics we assess. This leads us to our conclusions, especially considering seasonal impacts. We've already experienced Q2, which is likely to mirror Q1 in performance. While we expect a slight seasonal uptick, it will be less pronounced than we've seen before. Looking to the latter half of the year, we will benefit from seasonal trends in our government and education sectors as we move into the third quarter, along with more favorable comparisons in the last quarter. When we combine all these elements, that's where we see ourselves heading.

Okay. Thanks for the details, appreciated.

Thank you.

Thank you. At this time, we have no further questions. I'll hand back to the CDW team for any further remarks.

All right. Well, thank you very much. Let me close by reemphasizing my confidence in this team in our strategy and the durability of our resilient business model. Thank you to our CDW coworkers across the globe for your unwavering commitment to our customers. 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 seeing you next quarter.

Thank you for joining today's call. You may now disconnect your lines.