Hello, everyone, and welcome to the CDW Third Quarter 2023 Earnings Call. My name is Sam, and I will be coordinating the call. I will now turn it over to your host Steve O'Brien from Investor Relations at CDW to start. Steve, it's yours.

Thank you, Sam. Good morning, everyone. Joining me today to review our third quarter 2023 results are Chris Leahy, our Chair and Chief Executive Officer; and Al Miralles, our Chief Financial Officer. Our third quarter earnings release was distributed this morning and is available on our website, investor.cdw.com, along with 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 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 amount changes in our remarks today are versus the comparable period in 2022 unless otherwise indicated. Replay of this webcast will be posted to our website later today. I also want to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast without specific written permission from the company. With that, let me turn the call over to Chris.

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

Thank you, Chris, and good morning, everyone. I'll start my prepared remarks with detail on the third quarter performance, move to capital allocation priorities, and then finish up with our 2023 outlook. This quarter, our continued execution and financial discipline delivered three notable records: record gross margin, record operating margin, and record earnings per share on a diluted basis. We achieved these records on consolidated net sales of $5.6 billion, which were down 9.4% in 2022 on a reported basis and down 8% on an average daily sales basis. Third quarter net sales performance reflected both the impact of uneven market conditions and our continued success providing cloud and SaaS-based solutions that drive meaningful customer spend. On a sequential basis, third quarter net sales increased 1.6% on an average daily sales basis, slightly lower than our outlook, reflecting a higher-than-anticipated mix in the cloud and SaaS-based solutions that are netted down in our top line results, as well as economic conditions that adversely impacted our international business. Gross profit was $1.2 billion, essentially flat versus prior year, as a record gross margin, which increased 200 basis points year-over-year, offset the impact of lower net sales. Our gross margin of 21.8% was driven by two factors: first, the impact of higher mix in complex solutions, which have higher product margins; and second, a higher mix into netted down revenues, which, while dampening net sales growth, also enhanced gross profit margin. These cloud and SaaS-based revenue streams once again outpaced net sales growth. For this quarter, this category represented a record 32.6% of our gross profit compared to 31% in the prior year third quarter. While we expect this mix shift to continue to be an important durable trend within our business, eventually, we anticipate a greater mix back to transactional products, which will balance out both the top-line growth and corresponding gross margin impacts we've experienced in 2023. For the third quarter, non-GAAP SG&A totaled $671 million, down 1.9% year-over-year. The coworker count in the third quarter was approximately 15,000, up slightly from the second quarter. We continue to prioritize investments in our three-part strategy that are important catalysts for the achievement of our growth, profitability, and margin goals. As our customers optimize and rationalize their own IT investments, our disciplined approach to discretionary expenses helped drive non-GAAP operating income of $556 million, up $7 million or 1.3% versus prior year. Non-GAAP operating income margin reached a record 9.9%, up 110 basis points from the prior year. Moving down the P&L, our interest expense tax rate remained in line with our expectations. As you can see on slide 8, our non-GAAP net income was $369 million in the quarter, up 3.5% on a year-over-year basis, with third quarter weighted average diluted shares of 136 million. Non-GAAP net income per diluted share was also an all-time record at $2.72, up 4.4% year-on-year. Moving to slide 9, at period end, net debt was $5.3 billion or 2.4 times net leverage. During the quarter, net debt declined reflecting our continued strong cash flow performance and modest debt repayment during the quarter, consistent with our targeted net leverage range of two to three times. Liquidity remains strong, with cash plus revolver availability of approximately $1.4 billion. Moving to slide 10, the three-month average cash conversion cycle was 15 days, down three days from the prior year and below our targeted range of high teens to low 20s. Our cash conversion reflects our continued diligent management of working capital, particularly with respect to our inventory levels, and we expect to remain at the lower end of this targeted range this year. As we've mentioned in the past, timing and market dynamics can influence working capital in any given quarter. And we continue to believe our target cash conversion range remains the best guidepost for modeling working capital longer term. Strong profits and effective working capital management drove our strong year-to-date adjusted free cash flow of $1.1 billion, as shown on slide 11, well above our rule of thumb as a percentage of sales. For the quarter, we utilized cash consistent with our 2023 capital allocation priorities, including returning approximately $79 million to shareholders through dividends and $54 million in share repurchases. This brings us to our capital allocation priorities on slide 12. Our execution remained consistent with the objectives we communicated at the start of the year. First, as always, we increased the dividend in line with non-GAAP net income. This morning, we announced a 5% increase in our dividend to $2.48 annually. This is our 10th consecutive year of increasing the dividend; we've grown the dividend at a compound annual rate of approximately 31% from the initial level. Going forward, we will continue to target a 25% payout ratio. Second, ensure we have the right capital structure in place with a targeted net leverage ratio. We ended the quarter at 2.4 times, down from 2.6 times at the end of last year and within our targeted range of two to three times. We continue to convert profits into cash flow and have rigorous processes in place to proactively manage liquidity while maintaining our flexibility. Finally, our third and fourth capital allocations of M&A and share repurchases remain important drivers of shareholder value. For 2023, we now anticipate returning 60% to 75% of adjusted free cash flow to investors through dividends and share repurchases, up from our prior range of 50% to 75%. All in all, strong results given ongoing economic uncertainty and uneven market conditions. We continue to run our playbook and remain laser-focused on margins, cash flow, and predictable profitability. And that leads us to our outlook on slide 13. The uncertain marketing conditions we've operated under throughout the year are persisting and continue to lead to customer caution and prudence. Given this, we expect that the IT market will contract at the upper end of high single digits. With this scenario as our baseline, we expect to deliver a 200 to 300 basis point growth premium to the market, albeit not evident on a net sales basis as the outsized share of netted down revenue makes the impact of our premium. Keep in mind that our premium is most significant when hardware demand is strong, like in 2021 and 2022. We're currently maintaining a meaningful premium to the IT market on a customer spend basis. Moving down the P&L, we expect our full year non-GAAP operating income margin to be in the low to mid-9% range, up from our prior expectation of approximately 9%. This reflects our expectations of continued growth, stronger profit margins, along with expense efficiency as we manage through this uncertain economic environment. Finally, we expect our full year non-GAAP earnings per share to be flat to slightly up year-over-year in constant currency. This reflects an increase from our prior expectations of flat based on our strong third quarter profitability and relatively unchanged profitability expectations for the fourth quarter. 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 14. Moving to modeling thoughts for the fourth quarter, for average daily sales, we now expect a largely seasonal mid-single-digit sequential decline from Q3 to Q4. This equates to a low- to mid-single-digit net sales decline on a year-over-year basis for the fourth quarter in terms of average daily sales. This is lower than we previously expected and reflective of both the current business conditions and top line mix components previously referenced. With this, we also anticipate gross profit and non-GAAP operating margins to be strong, similar to third quarter levels driven by both mix and rate elements. And we expect fourth quarter non-GAAP earnings per diluted share to grow low single digits year-over-year. For full year 2023, we expect adjusted free cash flow to be approximately 6% of net sales, above our prior year expectation of 5% and well above our rule of thumb range of 4% to 4.5%, reflecting our strong cash generation in the first nine months of the year. While we continue to operate in a cautious and uncertain market, we remain confident in our ability to deliver profitability, margin, and cash flow to our stakeholders while continuing to invest behind our strategy. 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. Thank you.

Thank you. Our first question today comes from Samik Chatterjee from JPMorgan. Samik, your line is now open. Please go ahead.

Hi, thank you and thanks for taking my question. I'll just have two quick ones, and I'll ask both together, if that's okay. Chris, I think a broad investor concern here has been that most of the resilience we've seen in total spending from customers has been held by the public sector. And beyond that, when you look at the broader customers beyond the public sector, there hasn't been as much momentum. And in fact, momentum in spending is probably deteriorating on the commercial side. Can you dive into what you're seeing from a pipeline perspective going just beyond the public sector? And is there sustainability of demand from the commercial accounts? And for my second one, I mean, obviously, we're getting close to the end of the year here, and maybe any insights you have into how you're thinking about next year’s spending. We haven't seen two consecutive years of significant declines in a while in enterprise spending. So any thoughts if we are at least looking at a year where you should be expecting higher spending from a lower level base, or are we looking for another year of declines from customers? Thank you.

Okay. Good morning, Mr. Samik. Let me get to the first question first on the commercial side. Look, I'll just say again that the environment this year, all year, frankly, has been cautious. It's been uneven and has been challenging. All that said, I would say one thing that has held true is investments in technology continue to be a priority for all of our customers. What that's looked like in terms of their spending has been pretty consistent throughout the year as well. Commercial customers have remained focused on cost optimization throughout the year, on operating efficiency, on experience, both employee and customer experience. They have been more focused on consumption-based and ratable solutions like cloud, much more hesitant to make significant upfront capital investments, and very much focused on managing their costs throughout the year, given the fact that we continue to not have the clarity, I'd say, in the business environment that would give them the confidence to invest more heavily. Now remember, what we're seeing from where our customers are investing and how they're investing across cloud, security, and in some of these areas that I call mission-critical has been very strong. Clouds up double digits, securities up double digits, software is up significantly. And this is the customer reflecting the need for technology to drive their missions forward. In terms of the real impact to commercial, I would look at hardware and in particular clients. We saw some budgets loosening up a little bit in the second quarter, and we anticipated that that would lead to a modest recovery, I'd say, in the back half of the year in hardware, in particular, in the client device. That's not proved to be true. Our customers in corporate and small business are not seeing the clarity of the business climate and therefore not willing to increase their spend in that area. But net-net, what I would say about commercial is they are still investing behind technology in a different bucket—a bucket that is more cloud-based right now, more ratable, more prudent and measured around the immediate spend—but still very much seeing technology as critical to their mission, as I said. As we think about next year, look, we'll give you our views as we get through the year. One thing I'd say again about client devices is we're not seeing the pickup or signs of a pickup that we were hoping to see in the last half of the year. So when that happens, we'll see. But once there's clarity in the market, we might get to see that, but we have not seen those signs just yet. And that's where I'd leave it. I think we've got to get through the last couple of months. Here's what I just close with: the good news, which is the investment behind our strategy positions CDW to be able to offer our customers the broad portfolio, and we are seeing when they need help with their technology no matter where it sits across the full stack or the life cycle. Our sales and technical teams are there. And the good news is I'm really pleased with what I'll say is the engagement, the activity, the discussion, and the depth with which we're ingraining our relationships with those customers. So feeling very good about when we kind of come out of the curve, we'll accelerate out with our customers. You've seen that in the past, and I wouldn't expect it to be any different at this time.

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

Awesome. Thank you very much for taking my questions. I have two as well. Chris, maybe can we just start out. Can you just give us a bit more detail on linearity in the quarter? And specifically how the trends progressed from July through September and into October and how that has influenced your updated expectations for the full year? And then I have a follow-up. Thank you.

Yes, sure, Erik. Here's what I'd say: it was pretty stable throughout the whole quarter. You'll remember, in Q2, we talked about an uptick as we went through the quarter, and that gave us some level of confidence that there might be some more clarity in the business climate. In Q3, we just kind of saw the same level of activity across the three months.

Thank you for that, Chris. Al, I wanted to explore your comments on gross margins further. We have been hearing for several quarters about the shift towards more complex solutions that carry higher margins. As we anticipate a shift back towards more transactional sales, which you've highlighted for us, do you think this will reduce the focus on these complex solutions? Or is it possible for both trends to exist simultaneously? This has significant implications for how we view gross margins moving forward. Could you clarify if this is a scenario where one impacts the other negatively, or if strong transactional sales can occur alongside healthy complex solution sales, and what that would mean for gross margins? Thank you.

Yeah. Thanks, and good morning, Erik. I think they definitely can coexist. I think what we've seen in the environment, Erik, it's essentially, I'll say, commercial customers kind of fixing on their spend and choosing to weight that towards more of these netted down revenue streams, if you will, and holding back on some of these other spend items in IT hardware and particularly in clients. But our expectation and our expectation was that with less uncertainty in the economic environment, we would see an incremental pickup on the hardware side, in particular clients. And so the expectation would be that the durable trend of our netted down revenues would persist and likely outpace net sales, but we also would see a pickup in some other categories. So I do believe that that would co-exist. We're not seeing in the current environment in a more cautious environment, but that's what hopefully the future will hold.

Our next question comes from David Vogt of UBS. David, your line is now open. Please go ahead.

Great. Thanks guys for taking my question. So two, if I may. So can you maybe just touch on the demand signals that you're seeing out there, a little bit more robustly in terms of maybe what you're hearing from customers versus the backlog signals that you're hearing? How much of the weakness is macro-related, do you think, versus some continued normalization of backlog? I know you mentioned net comp sounds like it's back at normal historical levels with public as well. But I just want a little bit more color there. And then when you think about calendar 2024, and maybe go back to Sam's point, it certainly sounds like some of your related companies in your ecosystem are talking a little bit more robustly about demand, particularly in, let's say, PC clients. I'm just trying to get a sense for maybe what the disconnect is from a timing perspective, maybe a Windows 11 refresh perspective. Just any more color there would be incredibly helpful. Thank you.

Yeah, sure. Good morning, David, it's Al. I'll start. Overall, I'll just break it down a bit by segment. So look, as Chris suggested in Q2, what we were seeing from customers might have suggested that with a bit more clarity in the economic environment, that things would pick up. And again, we noted that we would have anticipated that that would be more IT hardware and PC. That has not played out. We have seen this really sentiment-driven environment has driven buying behavior. So on the commercial side, corporate and small business, we would say stable but not showing a pickup. With respect to our public business, first, they've executed exceptionally well, but I would say pretty much in line with expected seasonality. And then maybe lastly, I would just note in the international markets, we anticipated that you would see some moderation on the demand side in Q3, and our expectations for Q4, I would say that's worse than expected. And we would call it as maybe a few quarters behind what we've seen in the demand market in the US. So there are a couple of the puts and takes in terms of the demand environment, what we saw in Q3 as well as Q4. And then, David, just to your point on backlog, as Chris suggested in her prepared remarks, our backlog is nearing normalization. Maybe the lagging piece would be more networking, but we're getting close to what we'd call normalization. So no significant impact as we sit here now.

On the PC side, the question you asked about a potential refresh, and I'd say a couple of things. I mentioned earlier that we have not seen picking up in activity around client devices. And as we know, that's the last place that our customers start to spend again once they're feeling better about the business market. But what I would say is we are certainly closer to the end of a downside than we are to the beginning. So that's quite clear. The other point I would make is that consumers tend to react earlier to market changes than the commercial business. So when you see a bit of a lag in terms of what we are suggesting versus what you might see from OEMs, etc., part of that is who is doing the buying. The second is the timing of the market in terms of the kind of flush of inventory into the channel from the OEMs and distributors and then us to the end market. So that will account for a quarter or two of differences.

Our next question comes from Amit Daryanani from Evercore ISI. Amit, your line is now open. Please go ahead.

Good morning, everyone. I have two as well. Chris, there's been some degree of chaos at the federal level from a budget perspective. It sounds like September quarter went relatively fine for you folks. But there's a potential shutdown that I believe expires in a couple of weeks. How are you thinking about federal spending in the December quarter and just the impact of this extended shutdown potentially?

Yeah. Amit, look, I guess I'd say it this way: we've been here so many times before. The team knows how to manage through both the uncertainty and, if we do have a shutdown, how to manage through that. We're past the year-end, which is good. I would say that projects that are in-flight already will stay in flight. There might be some projects that are in flight that might be on hold. I'd say that's really what we're looking at for 2024. But the good news is we have a team that has executed in and out of these environments—these environments many times, and I have great confidence they'll do a terrific job this time as well.

Fair enough. And then if I could just maybe follow up. If I think about the operating margin performance of the company in calendar, based on the midpoint of your guidance in December, it's going to be up like 80, 90 basis points year-over-year on the operating margin side. And there's obviously a bunch of levers over here. Some of it is cyclical client devices not being well; some of it is secular. But how do you think about what's the durability of these operating margins as you go forward? If you reflect on the tailwinds in calendar 2023, how would you say is cyclical that perhaps is not sustained into the out years? Thank you.

Sure, Amit. Thanks for the question. So a couple of things I would note. I think if I kind of parse the pickup we've had in our operating margins, a few things; number one is we benefited from obviously really strong gross profit margins up 200 basis points year-over-year. And that is a function of a few things, but I'd say most notably a mix of business. A lot of that gross profit margin pickup is dropping down into our operating margins. The other piece, Amit, would be really just our efforts to align our expenses with what we're seeing in the business and demand vectors, and that is our efforts in Q1 and Q2 along those lines certainly helped. We have kind of a targeted range, and I've talked about this before, of high 54s into the 55 of expenses relative to GP, and that's kind of our sweet spot in this environment. That's where we're operating. Now I'll just say that is notwithstanding; we continue to invest behind our strategy, but at the same time we have significant efforts to drive productivity, efficiency, managing our expenses commensurate with where we stand. So they are the major components that are driving our operating margins. So Amit, I would just maybe just say that in terms of durability, you can expect we're going to continue on the efficiency front while we invest the impacts or influence of gross margin. Certainly, the netted down growth is going to continue to help that in that regard. But as we mix more into transactional products and PC start to come back, you could have some dilution effect there. So we certainly have moved quickly on the operating margin. Some of that ultimately could see giving back, but you're going to see different geology in our income statement as it plays out.

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

Yes, thanks and good morning. I'm hoping, Chris, that you can elaborate on the comments about the weakness in the international markets. You're not the first one calling out that specifically in Europe. So is that something that you saw throughout the quarter? And Al, you did mention that you expect that softness to continue over the next couple of quarters. So anything more you can add would be great.

Yeah. Good morning, Matt. On the international front, we did start to see a downtick in Q2, which we mentioned on our last call. I would just say it continues with a steepness we hadn't anticipated in the third quarter. And that is across the business, very, very similar to what we've seen in the US throughout the year. Our expectation is, as Al mentioned, is we're probably a couple of quarters behind on the international front, that's both the UK and Canada, in terms of performance and demand and the certainty in the market there. So that's what we're seeing.

Okay, great. Thank you. Just regarding PCs, there's been buzz recently about AI-enabled PCs down the line and potentially being another catalyst for the upgrade cycle. Are you hearing that at all from customers and suppliers? And is that something that folks will get excited about at some point?

Yeah. Matt, it's a great question. AI is on everybody's mind. And I think the short answer to your question is, yes, we do expect customers to get excited about AI-enabled client devices. And if we just take a step back, and I mentioned in my prepared remarks that we're at the front end of commercialization and development, but obviously, it's going very quickly. And the way we think about it is we're building what I would call our end-to-end full stack capabilities. AI is going to be integrated into all technology products across the full stack. It's going to need the infrastructure optimized to support AI. It's going to need services to be able to move from arrival to adoption. And so we are very much aligned with all of our partners, in fact, building practices with our partners around AI-enabled technology. And so yes, we think customers will be excited. And again, CDW is well-positioned to help them make across the full stack and, in particular, client devices. It's just that there's more choice and complexity in the market. And thinking years back, Matt, where customers had to think about the technology choice, the brand choice, then we had consumption, then we have CapEx versus OpEx models. Now we've got intelligence across all of the full stack, it's getting more complicated. That said, there's a very high expectation within all of our customers that their CTOs and CIOs and their line of business leaders are thinking about how artificial intelligence can help drive their efficiency and their experiences for their customers. So look, we see it as an accelerant. I think from a timing perspective, it will move fairly quickly, but we are still at the very front end stages.

And our next question comes from George Wang from Barclays. George, your line is now open. Please go ahead.

Well, hey, guys. Thanks for taking my questions. I have two quick ones. Firstly, can you just maybe talk about share gains, especially by geo? You guys talked about kind of weaker international UK, Canada. Just curious if the industry weakness or maybe some share shifts? Maybe you can kind of double-click on the share gains both in the US and also in the overseas markets?

Yeah, I think the question was on share gains. Hi, George, good morning. Here's what I'd say. We hold ourselves accountable over the long term to outperforming the market by 200 to 300 basis points. We feel very confident that we're continuing to do that. When I think about other periods when we had weaker hardware environment 2016 comes to mind. In that environment, we had hardware declines, but we noted that our netted down solutions, which in those back in 2016 would have been software and software assurance, and things like that, were growing at a faster rate, fast forward to now. When we look at the customer spend, what customers are investing through CDW, we're seeing a delta of more than 5%. So it's a fairly big delta, and we feel very confident that we continue to take share across our markets, and we'll do so in 2023 and over the long run.

Okay. Great. Just a quick one, if I can, just as a follow-up. Just in terms of any tuck-in kind of bolt-on deals, given just netted down kind of margin accretion and the kind of bad guidance. Just curious, any thoughts and color you can share just on continuing to sort of roll up kind of tuck-in deals, seeing any segments do you want to cut off?

Yeah. I would say on the M&A side, I think about that as a vehicle for investing behind our strategy. You've seen us invest both organically and through acquisitions very successfully. Again, kudos to the team on companies that we've joined with on both sides for moving quickly and creating more value for our customers as a result of those investments. Those have been primarily, as you know, along capabilities that are advanced solutions related: cloud, security, digital—things that you are now seeing really strength in the market and strength in our business. So we'll continue to look at M&A opportunistically. If it's the right fit, we certainly would consider moving forward as always on the docket. We're never out of the market. But I'll have Al chat a little bit about cash position.

Yeah, George, I would just add: obviously, M&A is always front and center for us. As we think about our capital priorities, we're going to balance strategically where are the opportunities that are going to add value to us as well as the tactic where our valuations and where can we kind of best deploy our money. So stay tuned on that. You can see that we do have a cash position in place, and it is a volatile and variable environment. We certainly value optionality with respect to our capital in this environment. George, to your comment about where can we expect we're going to look across, and we’ll continue to look across the ecosystem of opportunities. Our last acquisition was Enquizit that was in the cloud space, mostly focused on federal. So you can imagine some of those revenue streams would have a higher concentration than netted down. But I wouldn't per se say that's part of our strategy. It's going to be more about the capabilities. So more to come on that front.

And our next question comes from Ruplu Bhattacharya from Bank of America. Ruplu, your line is now open.

Hi. Thank you for taking my questions. I have two of them, one for Al, one for Chris. Al, is there a way to quantify the impact of netted down items on year-on-year sales growth in 2023? And is there anything unique about this year, or as we look into 2024-2025, should we expect a similar level of year-on-year impact or even higher? Because it looks like it makes sense for you guys to mix shift more into these items. So just your thoughts on that.

Sure, Ruplu. So a few things. Number one, we've said before, and we continue to say, we would expect, as we look forward, that netted down revenues would outpace our overall net sales, if you will. So I'd say, give you that one data point. I will note that the mix into netted down this year has been more extreme. A couple of metrics that I'll just note: number one, netted down for the quarter of $400 million was 7% of our net sales, but 32.6% of our GP, and you can go back sequentially and look at what that looked like. It's notable both sequentially and I'd say, versus prior year. If you try to put those dollars on a more even basis with net sales that grows up, you'd get a sense for the impact. It would suggest that our decline in net sales is considerably less than if you looked at it on this customer spend basis, so there are a couple of things you could look at from a math perspective that would show the pretty notable growth, and the outsized impact even down has had this year.

Okay. Thanks for the details there. Chris, let me ask you this. On the prepared remarks, you talked about device refreshes remaining on the back burner. As you look out over the next couple of quarters and 2024, given fundamentals like the age of PCs in the market, do you expect to see any device refreshes either on the client side or on the data center side? And I think you've said that typically, when that happens, CDW's outperformance to the US IT spend is at the higher end of the 200 to 300 basis points range. So I guess what I'm getting at is, even though the macro is weaker today, should we expect that when the macro improves and you get this added benefit of device refreshes that your outperformance can actually be at the higher end of the normal range? So can you give us your thoughts on that, please?

Yeah, Ruplu. Good morning, and I would say you've got it right. Our track record of outperformance—when we start seeing refreshing hardware—is strong. Part of that is our ability to gain share. Part of that is the fact that those are recognized on the top line net basis. We tend to outperform our premium as a result of those two things. In terms of looking forward, I just repeat a little of what I said, Ruplu, which is we do feel that clients—the downswing—we're at the back end of that cycle, if you will, as opposed to the start of that cycle. That said, as Al mentioned, it’s really a sentiment-driven market right now driving demand. Until our larger commercial customers had a level of confidence in the business climate, we think that client device and even data center refresh will be kind of the last point where they start to invest more dollars. Now you're right, we've got a refresh cycle; we've got 40-year-old devices, etc. We've got Win 11 coming. So there are a lot of things in the market that will certainly be a tailwind for client devices. AI, as we mentioned, embedded in client devices—those are all going to be positive. Our teams are definitely having conversations with customers about refresh in terms of planning; we’re just not seeing that convert—again, we'll be ready when they're ready to convert, but it's just not converting yet.

And our last question today comes from Adam Tindle from Raymond James. Adam, your line is now open. Please go ahead.

All right. Save the best for last. Al, I wanted to maybe start by reflecting on 2023. The silver lining this year, I think, has been cost management. You've been protecting earnings all year despite very volatile revenue. I think you mentioned that OpEx to GP is your metric, which makes sense, but it's now optimal. So the question would be, as we look forward, correct me if I'm wrong, but it sounds like the outlook for 2024, based on what you're seeing is a little bit more muted. I see you're not really investing in headcount. It's up modestly sequentially. Inventory days are very low, so you're not carrying up for revenue growth. You've got mix shifting on as a headwind for GP dollars. So the question would be: how do you think about protecting earnings in a more muted environment moving forward? Would it be fair for us to anticipate more negative operating leverage moving forward? Why or why not?

Sure, Adam. Great question. A couple of things I would call out. First, like I gave you the range how we think about expenses. Just understand kind of underneath the engine there, there are puts and takes in terms of where we’re driving productivity, where we’re driving efficiency—not only to kind of keep within that range, but also to make sure that we can appropriately fund investment opportunities. I think what you can expect is those efficiency efforts will continue, but we will continue to invest. You noted that our headcount was slightly up, but it was up. If you look at the gross effect of those—that headcount would look at more significant, if you will, from a gross basis. I think it's a balancing act. As we start to see the demand cycle start to turn in some of the areas we've talked about, we would certainly accelerate and continue to ramp up on the investment side. But I would call the efficiency efforts somewhat evergreen. When you add that up, we're still going to try to remain within a range. I would not be able to tell you definitively every quarter if we show operating leverage; there could be some quarters where we say there was a great opportunity, and therefore, we have less operating leverage or de-lever, but it's going to be a big quarter-to-quarter with that strategic balance that I mentioned on top of that. Yeah, absolutely, Adam. So I've talked about in the past, obviously, mix matters, and we've had a pretty extreme mix movement, particularly this year on these netted down revenues in lieu of hardware, PCs, etc. Certainly, we would expect that to balance out over time. That is a variable that would dilute gross margins. The other piece, Adam, would be that in general, product margins have held very firm. If you look back over the last two years, they've actually moved up quite a bit, so there's been resiliency there. I would also note that, though, in that, there is this component of more upmarket premium spend on higher-level, higher-value products that is persisting, and we're seeing that continue to hold up. There may be an element there that what you bought in the way of premium product. Now you're in it, and you're going to continue to invest in that same way. The last component, Adam, I would note, and we know this, is that over time, you could see commoditization. We've not seen that, but it’s conceivable that some of that could come back over time. We are at pretty significant levels in terms of gross margin when you add those components up. Certainly, components that I referenced that are durable and in some areas, some components that could be somewhat transitory, and we could see a bit over time.

And with no further questions, I'd like to hand the call back to the CDW team for closing remarks.

Thank you very much. Let me close by recognizing the incredible dedication and hard work of our nearly 15,000 coworkers around the globe. Their ongoing commitment to serving our customers is what makes us successful. Thank you to our customers for the privilege and opportunity to help you achieve your goals, and thank you to those listening for your time and continued interest in CDW. Al and I look forward to talking to you next quarter.

This concludes today's call. Thank you, everyone, for joining. You may now disconnect.