Good morning. Thank you for attending today's CDW Second Quarter 2023 Earnings Call. My name is Megan and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to Steve O'Brien with CDW. Steve, please go ahead.

Thank you, Megan. Good morning, everyone. Joining me today to review our second quarter 2023 results are Chris Leahy, our Chair and Chief Executive Officer; and Al Miralles, our Chief Financial Officer. Our second quarter earnings release was distributed this morning and is available on our website, investor.cdw.com, along with supplemental slides that you can use to follow along during the call. I'd like to remind you that certain comments made in this presentation are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. Those statements are subject to a number of risks and uncertainties that could cause actual results to differ materially. Additional information concerning these risks and uncertainties is contained in the earnings release and Form 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. I'll begin today's call as usual with a brief overview of our performance, strategic progress, and our views on the second half of the year. Al will provide additional detail on our results, our capital allocation priorities, and our outlook. We will move quickly through our prepared remarks to ensure we have plenty of time for questions. Our team executed extremely well in a market facing persistent challenges. As expected, commercial top line remained under pressure and public returned to more normal seasonality. For the quarter, the team delivered net sales of $5.6 billion, down 9% in U.S. dollars, down 8% in constant currency. Non-GAAP operating income of $530 million was up 3% and non-GAAP earnings per share of $2.56 was up 3%. These results demonstrate the power of our resilient business model when coupled with our broad and deep portfolio of technology solutions. In an ongoing period of economic uncertainty, our ability to drive outcomes and address customer priorities across the entire IT continuum enabled the team to pivot to where our customers need us most, an ability that reflects the impact of strategic investments we have made to enhance our high relevance and high growth solutions and services. While transactional business remained under pressure, increases in solutions contributed to meaningful margin expansion. Margin expansion that together with ongoing expense discipline delivered strong profitability. Let's take a look at this quarter's key performance drivers. First, our balanced portfolio of end markets. Each of our five sales channels, corporate, small business, healthcare, government, and education is a meaningful business on its own, with 2022 annual sales ranging from $1.9 billion to over $10 billion. Within each channel, teams are further segmented to focus on customer end markets, including geography, verticals, and customer size. Teams are similarly segmented in our UK and Canadian operations, which together delivered US$2.9 billion in 2022 sales. These unique customer end markets often act counter-cyclically given the different macroeconomic and external factors that impact each. Our second quarter results provide an excellent example of this. Economic uncertainty continued to weigh on the commercial market and both our corporate and small business results reflected ongoing cautious customer behavior, caution that once again drove elongated sales cycles, smaller deal sizes, and greater focus on mission-critical projects. Caution that also drove customer focus on short-term ROI with both corporate and small business posting double-digit increases in cloud spend. For corporate, overall sales declined 16%. Mission-critical projects continued to move forward and slowly ticked up throughout the quarter. Large commercial customer spending sequentially improved. Continued postponement of upgrades and utilization of existing products resulted in a double-digit decline in client devices. While we remain cautious on the outlook for client devices, corporate delivered its first sequential volume increase in the past four quarters providing some indication of demand stability. Notably, client device ASPs held buoyed by a mix into higher value, higher functionality units. Momentum around projects focused on increased productivity and enhanced customer and coworker experiences drove excellent growth in cloud spend. Implementation of network modernization projects delivered double-digit network communication growth. Small business declined 21%, reflecting the impact of ongoing caution by economically sensitive customers. Client devices continued to decline, with upgrades on hold pending greater clarity around the economy and employment. Focus on mission-critical priorities around security and efficiency drove double-digit customer spend increases in both cloud and software. Public performance partially mitigated commercial market pressure and was seasonally higher than the first quarter. Sales increased 2% year-over-year with strong performance in government, another quarter of stable performance in healthcare, and an upturn in education. Government increased 12% and continued to benefit from strategic efforts to target complex services enabled hybrid infrastructure and cloud opportunities. Federal delivered double-digit growth in the quarter, largely driven by the team's ability to help agencies implement more efficient solutions to manage and protect data. This delivered excellent net common storage performance. Legacy Sirius relationships contributed to significant growth in services. The state and local team also delivered double-digit growth. Excellent services performance reflected the team's success, helping state and local municipalities address talent gaps through enhanced training as well as professional services engagement. Cloud adoption drove strong software and security performance. Healthcare performance was relatively flat. Talent needs and data center projects remained focus areas as customers increasingly leveraged technology to address complex industry challenges. Customer hesitancy around the cloud continued to dissipate and adoption increased meaningfully in the quarter. Client devices remained under pressure given ongoing customer focus on mission-critical projects that deliver short-term return on investment. Client devices were flat as the volume decline was offset by a mix into higher value units which drove strong ASP performance. For K12, the team continued their success executing on infrastructure opportunities and delivered excellent growth in services network communication and storage. This quarter, the team also delivered a sequential improvement in client devices. As you know, the summer season represents the height of K12 buying. With our June 30 quarter end, we occasionally see anticipated summer sales hit at the end of the second quarter. We experienced this in the quarter with anticipated back half refresh driving a significant sequential improvement, refresh driven by aging devices and higher than historical breakage rates given more students take their devices off campus. Other, our combined UK and Canada business declined 7%. Similar to the U.S., each team continued to execute well and sustained profitability improvements under challenging conditions. The UK posted a low single-digit decline in local currency, while Canada declined by low double digits. We're seeing growing customer caution in both the UK and Canada, similar to what we heard from U.S. commercial customers a quarter ago. As you can see, the diversity of end market growth this quarter demonstrates the benefit of the first driver of our performance, our balanced portfolio of customer end markets. Category performance demonstrates the benefit of our second performance driver, our broad and deep portfolio of products and solutions which enables the team to pivot and support customers wherever needed. Ongoing economic uncertainty in the commercial space continued to have an outsized impact on both transactions and solutions. While the rate of decline moderated, transactions were down double digits. Solutions performance improved with mid-single-digit growth versus flat performance in the first quarter. Similar to the first quarter, all three of our portfolio categories, hardware, software and services were impacted by commercial pressure with deferral of major hardware projects resulting in lower volumes in services and solutions. Hardware decreased 11% year-on-year. Client device performance in the commercial space significantly impacted hardware performance and corporate continued to have the greatest category impact. NetComm had an exceptional quarter, posting meaningful increases across all customer end markets. This strong performance was largely driven by improvements in supply and continued work on customers' network modernization projects. Services were relatively flat year-on-year. Growth varied widely with strength tied to channel-specific customer priorities, offset by services attached to transactional and solutions hardware. Professional services were solid and while managed services activity was solid, given extended sales cycles and ratable revenue streams, the impact on net sales was minimal. Software customer spending increased by mid-single digits driven by a mix into software-as-a-service. Double-digit increases in network management software and database software were offset by continued declines in software categories tied to full-stack projects and employment levels, and net sales decreased at a mid-single digit rate. Security remained a key focus area for customers with spending up single digits. Top growth categories included endpoint security, email security, identity management, and physical security. Security associated with growth and business expansion remained challenged. Once again, cloud was an important driver of performance across the business contributing meaningfully to gross profit. Productivity, infrastructure-as-a-service and security were the top three workloads in the quarter. Each of our customer end markets posted double-digit increases in cloud, customer spend and gross profit. Profitable growth that was enabled by the strategic investments both organic and acquired that we've made in cloud capabilities over the past 10 years, capabilities that enable us to deliver for our customers and our stakeholders. And this leads to the final driver of our performance in the quarter, our three-part strategy for growth which is to first acquire new customers and capture share, second enhance our solutions capabilities, and third expand our services capabilities. Each pillar is crucial to our ability to profitably advise, design, orchestrate, and manage the integrated technology solutions our customers want and need today and in the future. Our investment in data analytics is a great example of this strategy in action. Like many of our strategic investments, data analytics delivers value across all three pillars. Our data analytics capabilities are underpinned by the intimate knowledge we have about our customers, knowledge earned through deep and long-lasting relationships which range on average over 12 years. They are also underpinned by our broad and comprehensive product portfolio, which provides extensive historical information about buying patterns across industries and verticals. This proprietary customer and product knowledge powers our data analytics that helps create robust and data-driven predictive models, models that identify customer needs and create personalized and targeted outreach to drive tailored services, products, and solutions, solutions that help our customers accelerate their strategies and achieve their missions. We continue to invest in the breadth and performance of these models utilizing machine learning and other advanced analytics techniques and have produced tangible lift in sales conversion and market relevancy. Clearly, our investments in data analytics are delivering for CDW. They are also delivering for our customers. Today we have significant data analytics expertise across server, database, model construction, and training, expertise that delivers outcomes in our ICARE framework, particularly in the areas of innovation, agility, and experience, expertise that bolsters our consultative professional services capabilities including our AI consulting practice. For CDW, AI adoption feels very much like other transformative technologies of the past. Customers recognize the evolutionary benefits of AI, yet they face incredible complexity and choice, complexity and choice that plays to our strengths and our value proposition as a trusted partner and advisor. And just as we have in the past, we have made and will continue to make the investments necessary to ensure we are ready, ready to lead the market and ready to help our customers maximize the return on their AI investments, another excellent example of how we strategically invest for today and the future. And that leads me to the expectations for the balance of the year. You'll recall on last quarter's conference call, we shared our expectations for the U.S. IT market to post a decline of high single digits in 2023. This assumed a moderate improvement in the commercial environment in the back half of the year and a return to normal seasonality in the public space. To date, the demand environment has been consistent with our expectations and our view of the U.S. IT market remains unchanged. Within this environment, we continue to target outperforming the U.S. IT market by 200 to 300 basis points on an organic constant currency basis. Wildcards remain the macro environment, further tightening of credit, and the potential for federal government budget disruptions. And as we always do, we'll provide an updated perspective on business conditions as we move through the year. In the meantime, we'll continue to do what we do best, leverage our competitive advantages and outexecute the competition. We will also continue to judiciously invest to ensure we are there for our customers so they can achieve their mission-critical outcomes today and in the future. I hope you can tell from my comments that this quarter's performance reinforced our confidence that we have the right strategy in place, a strategy that serves us well when confronted with macro or end market specific challenges, a strategy designed to ensure we remain our customer's partner of choice and most importantly, a strategy that enables us to continue to deliver excellent cash flows and profitably outgrow the market. With that, let me turn it over to Al, who will share more details on our financial performance. Al?

Thank you, Chris, and good morning, everyone. I'll begin with an overview of the second quarter, discuss our capital allocation priorities, and conclude with our outlook for 2023. In the second quarter, our consolidated net sales were $5.6 billion, representing an 8.5% decrease year-over-year. However, net sales increased by 10.2% compared to the first quarter, surpassing our expectations of a modest seasonal increase. Generally, we anticipated that the uncertain macro environment from the first quarter would continue, and while our commercial performance met our expectations, public performance exceeded them. This was due to strong solutions performance across various channels and early shipments of anticipated client device refresh volume in K12, leading to a return to year-over-year growth and the strongest sequential growth in this segment since the second quarter of 2020. On the supply side, our backlog dollar value decreased compared to the first quarter, which helped improve our solutions performance. Backlogs and product lead times for transactional products normalized, while we saw continued easing of supply chain challenges. We expect remaining backlogs to clear over time. We have carefully managed our working capital to support our customers while also achieving strong economic returns. Our year-to-date free cash flow performance reflects this approach. Our team achieved strong profitability, with gross profit at $1.2 billion, a year-over-year increase of 1.1%. We recorded a gross margin of 21%, up 200 basis points from last year. Increases in transactional product volume had a mild impact on margins compared to the first quarter, but overall, margins remained strong despite lower net sales. The record gross margin in recent quarters has primarily been driven by improved product margins due to a favorable mix toward complex solutions and a reduced proportion of transactional products. However, we expect this benefit to moderate as we shift back toward transactional products. Furthermore, revenue from netted down sales, which grew 10% year-over-year due to robust software-as-a-service growth, accounted for 31% of our gross profit versus 28% in the prior year's second quarter, marking a significant trend in our business. In terms of expenses, non-GAAP SG&A totaled $652 million for the quarter, remaining flat compared to the previous quarter. Increased payroll expenses due to a modestly higher coworker count were balanced by careful management of discretionary expenses. Our coworker count at the end of the quarter was around 14,900, down from the first quarter as we aligned our cost structure with business demand while prioritizing areas where we can provide the most value to customers. Strategic investments in our solutions and services capabilities are vital to our growth strategy and contribute to our profitability and margin goals. Our GAAP operating income was $412 million, while non-GAAP operating income reached $530 million, a 2.6% increase from the previous year. The difference between GAAP and non-GAAP operating income was larger than typical due to a workplace optimization charge outlined in previous slides. Non-GAAP operating income margin reached 9.4%, a record for the second quarter, up 100 basis points year-over-year and up 90 basis points from the first quarter. We remain focused on leveraging our gross profit growth, even amidst challenging market conditions. Moving to interest expenses, we reported $58 million, which was flat compared to the previous year and aligned with expectations. Our GAAP effective tax rate was 25.7%, resulting in a first-quarter tax expense of $91 million. For non-GAAP purposes, our effective tax rate was 25.9%, within our expected range. With weighted average diluted shares of 136 million, GAAP net income per diluted share was $1.92, and our non-GAAP net income rose to $349 million, an increase of 2.8% year-over-year, with non-GAAP net income per diluted share at $2.56, up 3.2%. At the end of the period, cash and cash equivalents were $204 million, and net debt stood at $5.6 billion, remaining stable as we aim to keep our net leverage ratio between 2 to 3 times. Liquidity remains strong with approximately $1.2 billion available from cash and revolving credit. Our cash conversion cycle averaged 14 days, a reduction from the first quarter and last year’s second quarter, reflecting our continued effective management of working capital, particularly inventory. While market dynamics can affect working capital fluctuations in any quarter, we believe our target range remains a solid indicator for future modeling. Our effective management of working capital also contributed to significant year-to-date free cash flow of $684 million. For the quarter, we allocated cash consistent with our capital objectives, returning about $79 million to shareholders through dividends and $196 million in share repurchases. Our capital allocation remains aligned with the objectives shared earlier this year. We aim to increase the dividend in line with non-GAAP net income, maintaining a payout ratio of 25%. We ended the second quarter at a net leverage ratio of 2.6 times, flat from the previous quarter. We continue to convert cash profits into cash flow and have processes in place for effective liquidity management, maintaining flexibility. Our M&A and share repurchase priorities are key in driving shareholder value, with a target of returning 50% to 75% of free cash flow to investors through dividends and buybacks. Looking ahead to 2023, we remain cautious about the market sentiment of our customers. We anticipate the IT market will contract at the higher end of single digits, with a modest recovery expected in the latter half of the year. We have not observed indications suggesting a major turnaround in our commercial channels. Based on this scenario, we expect to outgrow the market by 200 to 300 basis points, with netted down revenues continuing to surpass other product categories. We also expect a neutral currency impact for the full year, with modest tailwinds anticipated in the second half following headwinds in the first half. For the full year, we expect our non-GAAP operating income margin to remain around 9%, supported by strong gross profit margins. We foresee our full year non-GAAP earnings to be flat year-over-year in constant currency. This is an upward revision from previous expectations due to better-than-anticipated results in the second quarter. Please remember that we are committed to delivering on our financial outlook on a full-year, constant currency basis. Detailed modeling thoughts on annual depreciation, interest, and non-GAAP tax rates can be found in the accompanying slides. For the third quarter, we expect mid-single-digit sequential growth in average daily sales from Q2 to Q3, which translates to a mid-single-digit year-over-year decline for the fourth quarter. We anticipate gross profit margins to be below second quarter levels due to both mix and rate factors, and we expect non-GAAP earnings per diluted share to be flat or slightly down year-over-year. We project full-year free cash flow to be about 5% of net sales, exceeding our typical range of 4% to 4.5%, reflecting strong cash generation in the first half of the year. Although we operate in a cautious market, we are confident in our ability to deliver profitability, margins, and cash flow to our stakeholders. This concludes our financial summary, and as always, we will provide updates on the macro environment and our business in future earnings calls. I’ll now turn it back to the operator for questions and ask that each of you limit your questions to one, with an opportunity for a brief follow-up. Thank you.

Thank you. Our first question comes from Asiya Merchant with Citigroup. Your line is now open.

Great. Thank you very much for taking the questions and congratulations on the results. If you could just talk a little bit about seasonality, I know you guys have guided for the third quarter and as you look into the fourth quarter, there's a lot of debate on whether the pull-in, incline devices for the second quarter is going to result in below seasonal growth for the second half, that's on the client devices side, and just generally a lot of caution on other hardware spend, whether it's on the compute or storage side just given a cautious spending environment and shift towards AI. So if you could provide me what you're seeing in the channels and then your end customers, that would be great. And then I just have a follow-up on free cash flow as well. It's -- you're looking like it's pretty strong for this year. How should we think about potential acquisition and a boost to the growth rates that you guys have outlined for this year? Thank you.

Good morning, Asiya. It's nice to have you on the line. Regarding our expectations for the latter half of the year and the idea of pull forward, the quarter unfolded largely as we expected. The commercial sector is still experiencing some pressure due to market sentiment and caution, while public sector demand is returning to a more seasonal pattern, aided by stronger performance from our government and education sectors. Looking at the second quarter compared to the first, I am encouraged by the increase we observed towards the end of the second quarter regarding our commercial clients' activity and sentiment. The public sector appears to be returning to a more normalized seasonality compared to pre-COVID times. Also, our international team, despite facing a decline in sales, has continued to make progress in profitability. Furthermore, the small business segment seems to be stabilizing; it's not deteriorating, which is a positive sign. Overall, I am impressed with our team's ability to execute under challenging circumstances; they've once again risen to the occasion. However, we remain cautious. After experiencing an uptick early in the quarter, we are careful about what the second half holds. We still believe that we are on track to witness a mild-to-moderate recovery in that timeframe, and we are steadfast in this outlook. I mentioned K12 education, where we had a slightly better outcome in the second quarter than anticipated, which is just a matter of timing between quarters. Nevertheless, we see no indicators that suggest the second half will differ from what we are projecting. With over 10,000 sales professionals and technologists in the market, we are receiving real-time feedback that suggests a solid outlook ahead.

And Asiya, maybe I would just put this is out, maybe just add the just kind of to give you the technical component with our Q2 delivery and kind of allocation across the channels, Q3 would essentially look seasonal. That is obviously it's the seasonal peak for public and we'd expect that would play out. And what we experienced from the commercial channels for Q3 would look much like Q2. So when we think about that pickup of activity, modest recovery, probably a little bit more weighted towards Q4 in those segments that have been softer in the last few quarters.

And you had a follow-up, Asiya, on free cash flow?

Yes, just on the free cash flow. Yes, it's obviously trending higher than what you guys had previously anticipated or guided to. How should we think about the use of cash here?

Yes, that's a great question. We've had a strong performance in free cash flow generation for over four quarters, driven by solid cash profits and careful management of working capital despite a challenging environment. We intend to remain cautious with working capital on an ongoing basis, particularly since we've been tighter during this softer economic climate. Looking ahead to the second half, especially regarding our transactional activities, it's reasonable to expect some increase in our working capital needs. Most of our favorable cash conversion has come from our inventory management, so we're preparing for increased working capital demands. For the full year, we provided an updated guideline of 4 to 4.5, and we anticipate reaching around 5 by year-end. Regarding M&A and other initiatives, we will allocate our capital where it aligns best with our strategic goals and offers the greatest value.

Great, thank you.

Thank you. Our next question comes from the line of Adam Tindle with Raymond James. Your line is now open.

Okay, thanks. Good morning. I just wanted to start, it looks like kind of the old CDW that we've come to know and expect in terms of over-delivering relative to expectation is back this quarter. So at a high level, Chris, prior to this quarter, we had two quarters that were very different from plan in Q4 and Q1. I just would be curious for investors that are wondering what changed in Q2 from either a guidance process or what enabled the over-deliverance that we can kind of get confidence that the old CDW is back moving forward?

Good morning, Adam, and thank you. I want to highlight a few points. The macroeconomic environment had a considerable effect on the first and the early part of the second quarter. The main issue arose from the challenges faced by our larger commercial customers, which significantly influenced our overall performance. Additionally, we expected a return to seasonal patterns in the education and government sectors, particularly during the summer months in the third and fourth quarters. The tough economic conditions in Q1 impacted our large commercial clients and the public sector didn't quite recover as we had hoped. Now, we're witnessing the advantages of our diverse end markets really come into play. This situation has involved a degree of timing along with the macro environment. I’d also mention that we are observing some stability. Although client devices remain down, we've seen a sequential increase in commercial performance, and while K-12 is still down, it performed well this quarter. We're also noticing a slight improvement in commercial sentiment, which gives us some optimism. Plus, our team's execution has been exceptional. Given the market changes and the return to seasonality, we're actively pursuing our competitive advantages. Customers have been hesitant to spend for an extended period, but as they begin to ease their spending restraints, we are ready and available to support them.

Got it. And maybe just a follow-up for Al on guidance, just a little bit more in-the-weeds question here. Your Q3 guidance, I think you said mid-single digits sequentially per day, which if I look back historically, that's kind of seasonal, like you said. As I think about Q3, that's typically a big public sector, particularly government quarter, but you also had a very strong public sector result during Q2. So I guess the question would be what gives you confidence that there wasn't pull-in during Q2 in public sector and why guide mid-single digits in Q3 or that seasonal based on that strong Q2 result. Thanks.

Yes, sure. Thanks, Adam, for the question. You're right, Q2 is really strong and particularly in the public segment. All of the data that we see in the pipeline that we evaluate ongoing would suggest there's continued strength there. And I'd say, notably, in the government side and as well higher end that really had a strong performance in the quarter. We mentioned, Adam, that K-12 had some, I'll call it kind of summer seasonal pickup in activity, which some of which we might typically see kind of straddle over to Q3. So there's probably a little bit of that showed up in Q2, but modest enough that we feel comfortable holding to the expectation of seasonal uptick in public overall.

That’s helpful. Thanks and congrats on the results.

Thank you. Our next question comes from the line of Matt Sheerin with Stifel. Your line is now open.

Yes. Thank you. And in terms Chris, your commentary about seeing at least a modest recovery in the commercial markets in Q4, based on what you're hearing from customers, do you see any sort of PC refresh or is that more on the infrastructure and solutions side where projects getting pushed out will get done?

Yes. Matt, it's a great question. We've been all asking ourselves this for a long time, when our PCs are going to start to come back and that, as we all know, is really tied to the market and projects that are related to growth initiatives within organizations and employment. And look, I think that the farm has not yet been cleared and I don't think our customers yet are on the kind of solid footing of they're ready to open the coffer, so to speak. They're still being incredibly judicious in their spending. They're scrutinizing relentlessly, frankly. And so what we're hearing is more focused around mission-critical, and I'll call that more solutions oriented endeavors right now. So it's hard to gauge on the PC refresh and when we'll start to see it come back. That said, look, we all know that the PCs are the productivity tool, right? They're what connect people to the applications. I think we all agree on that. We also know that we've got devices that are sitting old in the system. We talked about K-12 as an example, two to three years old, breakage five times higher than it was pre-pandemic, frankly. And Win 11 is right around the corner. Now you heard us talk about ASPs and customers buying devices that are kind of higher functionality, higher productivity; those would be Win 11 devices. So we do see customers starting to explore the benefits of Win 11, and that's going to set in at some point, and that's going to be a nice tailwind. Whether it will be Q3, Q4, 2024, it feels a little longer term than this year.

Okay, thank you. And on the Infrastructure & Advanced Solutions side, I guess there's some concern that we're seeing backlog across many companies come down because of component availability, product availability is much better now. And then also as customers maybe refresh servers, they move to a cloud model. I guess that would benefit you. But are you seeing any signs of any of those things playing out?

Yes. So on the networking side, we certainly saw a healthy flush this quarter, and I would say that we had double-digit growth across all of our customer segments, and that was largely due to backlog flush and continuation of network modernization projects. In terms of the movement to cloud and AI, look, I would just say that this is a topic of conversation. I've used the word frenzy before, but it's a topic of conversation and as I said in my prepared remarks, there's a lot of complexity. There are a lot of questions out there. What will it drive? And what I would just say, Matt is, look, the benefit of our broad portfolio and the investments we've made across high growth type solutions areas as well as the services capabilities in particular, position us well to support customers wherever they are on the IT spectrum and whatever they're buying. So in any case, I do really see the customer decisions benefiting CDW because we'll benefit them with the portfolio and our capabilities.

Okay, thank you very much.

Thank you. Our next question comes from the line of Amit Daryanani with Evercore ISI. Your line is now open.

Thanks and congratulations on a great quarter. Chris, I'd like to revisit the question about the upside you’re seeing for the June quarter, yet you haven't raised the full-year guidance. Could you clarify what factors are preventing you from adjusting the full-year guidance to reflect the June upside? Was it just a one-time pull-in or a more conservative approach? I’m curious to understand why, despite the strong performance in June, you’re hesitant to raise the full-year guidance.

Thank you for the question, Amit. It's still too early to determine the full-year outlook. We're currently assessing things on a quarter-by-quarter basis. On the commercial front, there remains a sense of caution and prudence in the market despite a slight improvement towards the end of the quarter. However, a few weeks or a month of performance does not establish a solid trend yet, so we need a bit more time. While I see some positive indicators, they aren't sufficient for a definitive call. We believe maintaining a moderate outlook is more appropriate than anticipating a major turnaround. Regarding the public sector, we closely monitor projects from the beginning of the year, particularly in the first quarter. This gives us good visibility into seasonal trends and what to expect during peak periods. The K-12 sector has been performing well and meeting projections. We're not concerned about some project activity shifting from June in our second quarter to the third quarter because we are noticing an increase in refresh needs. We previously discussed how breakage rates were expected to drive refresh cycles, and that is indeed happening. Overall, things feel quite normal in the public sector as well. We're not jumping ahead in our assessments for either commercial or public segments, merely calling it as we see it as the quarter wraps up. Al, do you want to add anything?

Yes. I would just echo Chris' comments there and just say, Amit, that, look, we had called for in the last quarter a modest recovery based on the information we had at that time. Q2 did come in a bit stronger. We're now effectively saying Q3 looks seasonal, and Q4 ultimately looks above seasonal on that expectation of a pickup. And so there are still plenty of puts and takes that could call that into question, but we're comfortable overall with what we're seeing and kind of all of the data that we evaluate. That pickup is appropriate, but certainly wouldn't expect at this point that it's going to be much more of a churn than that.

Perfect, thank you. And then I guess, Al, maybe if I could ask you this question. Gross margins are up fairly nicely, I think, 140 basis points in the first half of this year versus last year. And you touched on a couple of things that are helping you there, but maybe you can talk about how much of an uplift do you think is cyclical in nature of the fact that the PCs are down a lot versus things that might be a bit more structural in nature. I'd love to just understand how do you think about gross margin run rate as you go forward from here? Thank you.

Yes, sure, Amit. So you're right. Look, 2022, we ended 2022 with gross margins of just shy of 20%, which were new record levels, and we're up from there. If I had to parse it kind of year-over-year Amit, I think it's both a combination of, I'll call it, kind of thematic components of netted down revenue and that continued growth there, right? So particularly focused in cloud, SaaS, security, if you will. So we do think there are durable themes there. But there have also been factors driven by both mix and rate. So on the mix side, obviously, the tough environment has shifted more customer spend into solutions, which come at higher margins. So we have good reason to believe that that could/would balance out over time. And when that does and particularly with client, you could see some moderation there. And then on the rate side, look, I've talked a couple of quarters now about product margins being firm and they've held up and even in this quarter continue to hold up, and some of that is, I'd say a more durable theme from all indications of customers going a bit up market in terms of kind of products, but also it's just been a really firm environment, I think, substantially driven by supply chain. So there are some of the puts and takes. So look, we feel good overall. We're holding to our NUI margin of 9% for the full year, but it's reasonable to expect that you could soften a bit here on gross margin.

Thank you. Our next question comes from the line of Erik Woodring with Morgan Stanley. Your line is now open.

Awesome. Thank you. Good morning guys. Congrats on the quarter. Chris, I was wondering if you could just maybe elaborate on some of the pricing dynamics you are seeing in the market today, meaning are discounts accelerating? And if so, where conversely are you pulling back on any discounting? How are customers responding to any pricing changes? How do you expect that to trend into the second half? Just broadly, any incremental color you could share on pricing would be helpful. Thank you.

Yes. Let me start by saying that we're operating on a price plus model, which you are familiar with. When OEM prices increase, we typically pass those costs on to the customer. However, I'd like to focus on a different point for now. I would characterize the pricing as remaining fairly stable in a highly competitive market, largely due to the team's efforts in demonstrating the value that CDW provides. I recognize that we're in a very competitive environment, and I understand the scrutiny surrounding purchasing processes at this time. Nonetheless, average selling prices are holding steady for CDW. Looking into the second half of the year, I expect the market to continue to be competitive, but I believe the value we add, particularly in the way we enhance our client devices, resonates with customers, and I anticipate that we will maintain our average selling prices quite firmly.

Awesome. That is super helpful. And then I'd love to follow up again with you. Just on some of the nuances or comparing and contrasting a bit what you're hearing from the existing corporate clients versus the smaller SMBs, just any differences or similarities that you're hearing from them, maybe slightly nuanced, but anything that you could call out would be super helpful. Thank you.

Yes, no problem, Erik. Small businesses are responding like typical small businesses, showing high sensitivity to the economy, especially regarding hiring. Currently, there is still uncertainty; without more clarity on economic growth and hiring potential, these businesses are somewhat in a holding pattern, focusing only on mission-critical projects related to productivity and security, which tend to be lower cost, like cloud solutions rather than large hardware purchases. Interest rates have significantly affected this customer segment's access to capital. I believe we have reached a stabilization point at the bottom. In contrast, when examining larger commercial customers, we've noticed a shift from the first quarter to now; they were a primary drag on the overall results in the first quarter, but we are now seeing an uptick. In the last month of the quarter, we began to observe movement back towards mission-critical projects that had been delayed. This segment is showing some stability and a sequential increase in client devices. The recovery for small businesses will take a bit longer for them to return to significant purchasing, whereas larger entities are starting to gradually re-engage, which contributes to our confidence for the latter part of the year. Does that help?

That's very helpful. Thank you so much and congratulations again. Thanks, everyone.

Thank you. Our next question comes from the line of Samik Chatterjee with JPMorgan. Your line is now open.

Hi, thanks for taking my questions. I guess, Chris, maybe to some extent, following up here on Erik's question about what you're hearing from customers. With supply generally improving, is the visibility that customers are providing you or even the heads-up in terms of projects that they're planning, is that starting to come in and sort of get compressed a bit more? What are you seeing on that front? And I have a follow-up. Thank you.

Yes, that is part of it. We consider various types of activity, such as quoting and the data we track in our CRM system. This also includes invoicing and writings. All these customer interactions contribute to our pipeline analysis, helping us understand what to expect in the future. We're beginning to notice some easing in those critical areas, which indicates a slight increase in writing across our full range of solutions. So, to answer your question, it's about the activity we gather from customer interactions and the discussions we have.

Okay, got it. And if I can just ask more specifically to NetComm, that has continued to be an area of growth, but you did mention that you have continued to work down backlog. I think one of the questions we get often is, how sustainable can growth be once the backlog gets drawn down and normalized, any thoughts around that? I mean, are you expecting a similar pickup in NetComm sort of in the pipeline once spending recovers to a more normalized level? Or is backlog going to be a headwind in relation to growth?

Yes. It's a fair question. Here's how I think about network modernization. There is a lot that is driving a continuous need for network modernization. Take any of the segments or customer end markets, higher and it's all about willing students, which means it's all about experience, which means their networks have to be improved. When you think about kind of leveling into a hybrid work or back to work, that has major network requirements. It's basically if you tickle AI, frankly, as you're thinking about consulting and advising customers around AI use cases, that has network upgrade, if you will, modernization requirements. As we think about a refresh coming down the pike, that's going to have upgrade requirements. Our classrooms definitely are focused on modernization. So while the backlog was quite helpful to results this quarter, I don't expect that we're going to see network modernization dramatically slowdown in the near term given the needs.

And Samik, this is Al. Just to maybe add one thing. What we experienced with the backlog with NetComm in the quarter was what we would call pretty orderly. We have been saying we expected that backlog would work its way down, and it did. So while it contributed to the performance for NetComm, certainly underneath there, there's still continued written demand, as Chris suggested.

Thank you. Our next question comes from the line of Shannon Cross with Credit Suisse. Your line is now open.

Thank you very much. Chris, can you share some insights on the conversations you're having with customers regarding AI? I'm interested in whether any of your customer segments are further along than others. I'm not sure if state and local government is one of those, but I'm curious about where everyone stands in their discussions around AI. Specifically, are there areas where they might be considering the initial deployment of generative AI solutions? Additionally, I'd like to know how you see this evolving, given your unique position in engaging with various customer groups. Thank you.

Yes. Good morning, Shannon. When we think about AI, we see it in two main parts. The first is a catalyst for CDW to enhance and broaden our internal applications. The second is an opportunity to support our customers in evolving their use of our service and transactional capabilities. While it may seem straightforward, our focus is on equipping coworkers and customers with tools that simplify their tasks. CDW's comprehensive approach allows us to assist customers throughout the entire value chain, from foundational services to advanced applications. We offer advisory services, application development, modeling, and the necessary computing and data structures. Currently, we are engaging in advisory discussions centered on assessing AI maturity, utilizing AI instances, and deciding between private or public clouds. On the application side, we are focusing on the integration of AI tools and ensuring customers understand the benefits they can gain, as well as how to effectively use those benefits along with the infrastructure needed to develop specific use cases. Regarding particular industries, contact centers represent a significant opportunity, with rapid adoption noted across sectors like financial services and retail. Additionally, we are involved in topics such as marketing transformation and enhancing customer and knowledge assistance. These dialogues are occurring across various industries like retail, food service, and financial services. We are also having more tailored conversations with clients about unique monetization strategies relevant to their specific sector or organization. There is a lot of engagement happening right now. Please continue, Shannon.

Got you. I was just going to say, are you hearing from customers that like next year's budgets might expand because they're finding so much benefit from AI and it's so early in the investment cycle that they see their IT expenditures may be growing above trends? I know the trend right now is down, but in theory?

Sure. I would say that our customers are currently leading the conversation. We have implemented solutions in several contact centers, and they are already seeing positive results. At this point in the year, considering the current environment, customers are not yet willing to increase their budgets for AI in 2024 because they are still planning for that year. However, I believe that in the next six to eighteen months, customers will begin to grasp the significant advantages of AI. This change is evolutionary and transformative; it's a technology that will greatly alter how businesses function and the benefits they gain. We will need to wait a bit longer to fully understand the potential and when it will materialize, but we believe that it will definitely happen.

Thank you. Our last question will go to the line of Keith Housum with North Coast Research. Your line is now open.

Good morning guys. Just a little bit broader question in terms of the M&A strategy. You guys made two acquisitions this year at least this year that we know of, Locus Recruiting and Enquizit. But perhaps can you just touch real quick on what both of those acquisitions add to you guys and how it makes CDW better going forward?

Both acquisitions were relatively small and did not significantly impact our financials, but they are strategically aligned with our strengths. The first is Locus, a consulting firm in our talent orchestration area. They enhance our ability to provide professional and managed services engineers, effectively expanding our technical talent base. This acquisition has allowed us to implement a flexible model for our technology resources. Locus has doubled the size of that division quickly, and we have already seen great success in addressing customer needs in networking, cloud, and security. The second acquisition is Enquizit, an AWS Premier Cloud service provider focusing on government, education, and not-for-profit sectors. They complement our digital velocity team by offering professional services for application modernization and cloud migration. Enquizit has a unique tool that combines these services with intellectual property to automate migration processes, which has gained traction in our federal sector. Both acquisitions are exciting additions to our portfolio and are already proving beneficial.

Great. Thank you.

Thank you. That will conclude the question-and-answer session. So I will now pass the conference back over to CDW for closing remarks.

Thank you. I want to acknowledge the remarkable dedication of our coworkers worldwide and their exceptional commitment to serving our customers, partners, and all CDW stakeholders. You demonstrate the power of excellent execution every day. I also want to thank our customers for the privilege of serving you, as well as our investors and analysts joining this call. We appreciate your ongoing interest and support for CDW. Al and I look forward to speaking with you again next year.

That concludes the CDW Second Quarter 2023 Earnings Call. Thank you for your participation. I hope you have a wonderful rest of your day.