Hello, and welcome to the CDW Second Quarter 2022 Earnings Call. My name is Lauren, and I will be coordinating your call today. [Operator Instructions] I would now hand over to host, Steve O'Brien, Vice President, Investor Relations to begin. Steve, please go ahead.

Thank you, Lauren. Good morning, everyone. Joining me today to review our second quarter results are Chris Leahy, our President and Chief Executive Officer; 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 with this 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 the Company's other filings with the SEC. CDW assumes no obligation to update the information presented during this webcast. Our presentation includes certain non-GAAP financial measures, including non-GAAP operating income, non-GAAP operating income margin, non-GAAP net income, and non-GAAP earnings per share. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You'll find reconciliation charts in the slides for today's webcast and in our earnings release and Form 8-K we furnished to the SEC today. Please note our financial results today include results from our acquisition of Sirius Computer Solutions, which closed December 1, 2021. All references to growth rates or dollar amount changes in our remarks today are versus the comparable period in 2021 unless otherwise indicated. References to growth rates for hardware, software, and services today represent U.S. net sales only and include Sirius. They do not include results for CDW UK or Canada. References to growth rates for specific products and solutions including cloud and security today represent U.S. net sales only and exclude Sirius. The historic combined information of CDW and Sirius discussed herein is for illustrative purposes only and is not necessarily indicative of results that would have been achieved had the acquisition occurred at the beginning of the periods presented. Replay of this webcast will be posted on our website today. I want to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast without specific written permission from the Company. With that, let me turn the call over to Chris.

Thank you, Steve, and good morning, everyone. I'll begin today's call with a brief overview of our results, strategic progress and outlook, and then Al will run through the financials and our capital allocation priorities. And then we will move right to your questions. We had an exceptional second quarter. The teams continued to execute well in a challenging supply environment and delivered all time record sales, margins and profits. For the second quarter, net sales were $6.1 billion, 19% higher than last year and our first $6 billion quarter. Non-GAAP operating income was $516 million, up 23% and non-GAAP net income per share was $2.49 also up 23% year-over-year. These exceptional results reflect our ability to address customers' priorities across a broad array of end markets with solutions across the full spectrum of IT. Digital transformation, agility and security remain top priorities with ongoing focus on hybrid work and return to office driving collaboration, networking and endpoint solutions. Customers also continue to seek ways to manage costs while meeting or exceeding coworker and customer service level requirements. Our ability to meet all of these needs led to a broad-based and balanced performance and was a result of three key drivers. Number one, our balanced portfolio of customer end markets; number two, the breadth of our product and solutions portfolio; and number three, our ongoing execution against our customer-centric strategy. Let's take a look at how each contributed to our growth this quarter. First, the breadth and diversity of our customer end markets. As you know, we have five U.S. sales channels: corporate, small business, healthcare, government and education. Each channel is a meaningful business on its own with annual sales ranging from $1.9 billion to over $8 billion. Within each channel, teams are further segmented to focus on customer…

Thank you, Chris, and good morning, everyone. I'll start my prepared remarks with additional detail on the second quarter, move to capital allocation priorities and finish up with our 2022 outlook. Turning to our second quarter P&L on Slide 8. Consolidated net sales were $6.1 billion, up 19.4% on a reported and an average daily sales basis. On a constant currency average daily sales basis, consolidated net sales grew 20.5%. On an average daily sales basis, sequential sales increased 1.7% versus the first quarter. Second quarter sales were in line with our expectations, reflecting broad-based and balanced growth across our portfolio. On the supply side, consistent with last quarter, we saw pockets of improvement and pockets of pressure. The change in our overall backlog compared to the first quarter was insignificant. Year-over-year, our backlog remains elevated in both transactional and solution categories, and we continue to manage inventory strategically to support our customers through this uncertain supply environment. The team once again did a great job leveraging CDW's competitive advantages to ensure strong returns on working capital. We had excellent profitability in the quarter. Gross profit was $1.2 billion, a year-over-year increase of 32.3%. Gross profit margin was a record 19%, up 180 basis points versus last year. The expansion in gross profit margin was driven by several factors. First, increased netted down revenues, primarily within Software-as-a-Service as the category continued to grow faster than overall net sales. Netted down revenues represented 28% of total gross profit; second, product margins were strong, driven by both mix and resilient demand for certain hardware products; and third, net sales and high-margin professional service business nearly doubled as a result of our recent acquisition. Turning to SG&A on Slide 9. Non-GAAP SG&A totaled $652 million for the quarter. The year-over-year increase in non-GAAP…

Thank you. [Operator Instructions] Our first question comes from Samik Chatterjee from JPMorgan. Samik, please go ahead.

Great. Thank you. Thanks for taking my questions. I guess, Chris, you mentioned you haven't really seen any impact of the macro on your business yet and you continue to monitor it closely. Maybe if I can ask it another way, when you sort of interact with your customers, and we know a lot of the enterprises are starting to slow down their own hiring plans. Are you seeing a greater sort of intent in relying on CDW and your service capabilities as we head into sort of the next year just on account of them slowing down their plans in terms of hiring engineering resources, et cetera? And I have a quick follow-up. Thank you.

Good morning, Samik. Thanks for the question. And I would say just the short answer is yes. We are seeing our customers rely more heavily on us in the labor shortage world we're in. We've said often that technology has become just absolutely essential, more integral to our customers' success and more vital to their businesses, whether it is delivering experience, whether it is profitability, whether it's teaching kids, whether it's providing health care. It is just essential to what organizations do, and CDW is their trusted adviser. And we are continuing to see our customers lean into us more for some of the things that we referenced in our prepared remarks, for example, advisory services on the front-end professional services as they're going through their disciplined planning, et cetera. But equally, relieving their staffs of important management, like data center security and things like that. So it's been a very positive move for us and is driving some of our growth.

Thank you. And for my follow-up, if I can just ask you on the supply chain. I know your guidance or outperformance is based on certain sort of improvements in supply chain that could potentially happen. But as we talk to a lot of the OEMs, clearly, we're seeing signs of them expecting more availability of components. Where are things in relation to lead times that are communicated to you? Or sort of what are you seeing in terms of lead times? And are you expecting things to get better? Or are you sort of not really seeing much change yet in communication from the OEMs themselves?

Yes, I'll start with that. Al can add, if you'd like. I would tell you that – look, we don't expect supply constraints to meaningfully change beyond what we've experienced in the first half of the year as we look to the back half of the year. I mean it's still, I'd call it, what's the best word, choppy. We're seeing pockets of pressure and pockets of improvement. As I mentioned in my remarks, I'd tell you, we kind of a tick down, which is barely negligible. So not expecting any necessarily meaningful change in the back half of the year. But for us, that means we just continue to navigate and press our competitive advantages and navigate as we have been through these past several years. And that's what I say about the supply chain.

Thank you. Thanks for taking the questions.

Thank you. Our next question comes from Jim Suva from Citigroup. Jim, please go ahead.

Thank you. Chris, now with the rising interest rate environment, can you talk about have customers changed their behavior at all, asked for some better funding, or talked to you about that at all? And how should we think about that interest rate environment also on the financials of CDW? So that's kind of both my questions on the same topic on your customers and then on your own self company. Thank you.

Yes, Jim, good to hear from you. Let me start with the customers. And what I would say, and this is more of a general answer to the current environment and uncertainties out there. Interest rates going up, labor shortages, inflation, everything that we hear about in the headlines. What I would say is customers are being disciplined around their investments, and that is good for CDW in so far as they look to a trusted adviser with the depth of experience we have to be able to work with them towards the best solutions. So the environment, frankly, is playing into our competitive advantages. And we're not seeing that type of macro environment impact. Our sales opportunities, our profit opportunities, on the contrary, is actually being something that pulls us in more closely with our customers. So I'll just answer that part of it, and I'll turn it to Al for interest expense vis-a-vis CDW?

Yes, sure, Jim. So first on your question, on any change in attitude or direction with customers with respect to financing, et cetera. I would say no, nothing material there. As we typically would, with every customer, we're looking at the avenues of whether they would like financing solutions or otherwise. But nothing's changed materially there. With respect to the impact to us from a financing perspective and interest expense, based on my prepared remarks, we do have a component of our debt that's floating rate. We did see in the quarter a bit of a tick up in the interest expense commensurate with that. And we've got that baked into our outlook. We do have interest rate caps in place, we just haven't quite hit those yet. We do feel like that's kept out, and it's certainly manageable.

Thank you so much for the details and clarifications. It's greatly appreciated.

Thanks, Jim.

Thank you. Our next question comes from Erik Woodring from Morgan Stanley. Erik, please go ahead.

Thank you so much. And thanks for taking my questions this morning, guys. Maybe, Chris, if I start with you, if we take a step back, you've obviously – CDW has obviously consistently outperformed IT market growth from anywhere between 200 to 500 basis points in any given year. How do you think about kind of – in the potential that this market gets more challenging, how do you think about the potential to increase those share gains? And kind of what I'm getting at is maybe the implication would be slower IT market growth in that type of scenario, but given your scale, you reach the broad breadth of products that you have, do you see a more recessionary type of environment as an opportunity for CDW to gain share perhaps in excess of your average annual outperformance versus the IT market? And then I have a follow-up. Thanks.

Yes, sure, Erik. Again, the answer is yes, some of these short answers. The answer is yes. We certainly perceive and – look, we have historically been well positioned and outperformed the market and our peers in challenging macro environments. And we would expect that to be similar going forward. In fact, I would say that we are better positioned now than ever to be opportunistic in down markets given the full spectrum of our technology solutions. For our customers now needing a trusted adviser that can – that brings the comprehensive suite of solutions in the complete end-to-end services is required has become more integral and more essential to how they do business. And so the answer is yes, we would intend to press our competitive advantages and we see great opportunity. And that's been part of what we've been really focused on building over the past couple of years through executing our strategy and ensuring that our portfolio is fulsome and has the services that are relevant to delivering on the solutions our customers need.

Okay. Super. And then maybe, Al, one for you. Obviously, 19% gross margin. I think that's an all-time high, obviously, very strong. You kind of went through the three different drivers earlier in your prepared remarks. I'm just wondering if there's any way you can kind of quantify or help us better understand the significant of those three factors relative to each other, meaning how significant was the mix of netted down revenue to gross margins perhaps versus the inclusion of Sirius versus perhaps mix on the non-netted down revenue side? Would just love to get a better understanding there, and that's it for me.

Sure, Erik. So first, I didn't mention Sirius, right, because we would think of Sirius more kind of macro level. But I would just note that the contribution from Sirius and really the power of putting the teams together, we are seeing exactly what we would have expected in terms of accretive effect on gross margin. On the netted down revenues, I mentioned grew 30% year-over-year, 28% of gross profit. That was a solid contribution there, absolute dollar amount consistent with Q1. But what was the different for this quarter is we had even stronger contributions from professional services, right, which is coming online and accelerating. And then firm margins on product. And so multiple variables there. In terms – as we look forward and we think about durability, look, there's always going to be puts and takes, and that's why our outlook focuses on in July margin because it's just a little bit more balanced, a little bit more stable. But certainly, this quarter, you saw all those contributions on the gross margin front come to four.

Great. Thank you, Al.

Thank you. Our next question comes from Matthew Sheerin from Stifel. Matthew, please go ahead.

Yes. Thank You. Good morning. I wanted to ask another question regarding the PC market and your outlook there. You talked about double-digit growth on the commercial side and very strong backlog still. But you also talked about solutions growing faster in the back half as it did last quarter. So could you give us an outlook there in terms of backlog and supply improving there? And is that enabling you to fill that backlog? And do you see that falling off in the second half?

Hi. Matt, let me start on this, and then we can dive into the backlog a little more specifically. The way I would characterize it is we do continue to expect resilient commercial demand. As we've said a number of times, end client devices, endpoint devices are low-cost productivity enhancing investment. And given the changing dynamics of delivering goods, digital curbside, et cetera, they've just become part and parcel of the solutions for every commercial business. In terms of the total client device sales and backlog, we had healthy – I think it was low single-digit client device growth this year, which compared to anything out there, I think, has been really solid. In terms of the backlog, we have had some backlog open up a little bit over the last six months or so, I think. But Al, did you want to add more about the backlog specifically?

Yes. Matt, I would say, as we mentioned, no significant changes thematically in the backlog in terms of the pressure points versus relief. To Chris' point on client device, it's just more fluid, right. So we see a bit more flow. And we've mentioned this before, but if nothing else, we have a bit more read into transparency of what to expect on lead times. But look, the friction is still there on the solutions space, and we wouldn't expect that, that's going to change. Our job is to continue to navigate it and be there for the customers to get some stuff as quick as we can and most effectively.

Okay. Thanks very much for that. And then just turning to your outlook on the solutions side and specifically, investments from customers in infrastructure. We're picking up from our VAR survey that customers are taking longer to close larger deals, being a little bit more scrutinous on deals requiring more sign-offs. Are you seeing that at all in terms of hesitation or a little bit more scrutiny from customers on deals?

Yes, I guess here's how I characterize it. With the context of the last couple of years, where I'd say your normal purchasing process kind of was put aside a little bit, I would just say that we're kind of back to a normalized disciplined buying process. And I wouldn't characterize it beyond that. And as I said earlier, that's actually good for CDW because we're a trusted adviser and can help our customers make the best, most cost-effective, most effective decisions in the process.

Okay. Thank you.

Thank you. Our next question comes from Ruplu Bhattacharya from Bank of America. Ruplu, please go ahead.

Hi, good morning. Thanks for taking my questions. Chris, in the past, you've talked about the SMB or small medium business segment as a bellwether for the macro environment, as they react fast to the macro changes. This quarter looks like revenue growth slowed to 4% year-on-year albeit on tough compares. And you've kept the full year guidance changed and you had a strong fiscal 2Q. So first, can you give us your thoughts on what the SMB segment is indicating to you? And then second, on the – in the prepared remarks, you talked several times about continuing to invest in the business. It looks like CapEx as a percent of sales declined slightly to 0.6%. So just give us your thoughts on what areas of investment you would like to make in this environment? And how would you just judge the success of those investments?

Good morning, Ruplu. Let me start with small business. And look, we're pleased with small business results. We're just – we're not seeing weakness to date. And I just would say investors and analysts should not extrapolate from the decelerating growth rates. As I mentioned in my prepared remarks, small business customer spend was up, but it was in the categories of areas that net down. So a more appropriate barometer of the health of demand in small business, we think, is gross profit performance, which increased at more than twice the rate of sales growth. So I would just keep focused on that. Cloud and Software Solutions were really, really well – delivered really, really well this quarter. We also, just to be clear, continue to see strong momentum in the strategic execution and small business across a wide variety of solutions that customers are investing in. So whether it's solutions to modernize and optimize their infrastructure, whether it's continued remote enablement, which we're still seeing resilience in. But we're not looking at small businesses softening at this point. It's really been resilient and momentum is strong. In terms of investments, what I would tell you is we're a people business. So when you think about investments that are maybe noncapital-intensive related, that's all about people. If you look at the acquisitions and the number of folks in our technology organization that we've brought to CDW, the number that we've hired over the year, they're organically brought in. But then think about things like our CRM program and modernizing our CRM program using Salesforce. If you think about our unique training programs that are very specific to CDW, our training programs are best in the business. When you think about leadership development. When you think about all of the things that we're doing that drive efficiency and effectively and productivity for our sales organization, and the ability for our technical organization and sales organization to go to market as a one CDW company, as one team, all those investments are the kinds of things that we're doing to continue to execute our strategy.

Okay, thanks for the clarification and the details there. For my follow-up, if I can just ask, it was great to see the federal business grew year-on-year. Do you think that strength continues? And within Government, how should we think about the relative growth from federal versus state and local in the second half of this year? Thanks, again.

Yes, I'll start with that one. Yes, so we've said that we would expect Fed to continue growth, start growth in the second half of the year and continuing – it will – I would expect it to look more seasonal. I think we're kind of back into more of a seasonal rhythm with federal. And state and local has been interesting because, as you know, the budget – the funding that they've received has allowed them to make investment decisions over a more extended period of time versus the one year that they typically do. And we've been supporting customers with that. All that said, given things like data proliferation, et cetera, they're still investing now. So you can expect to see solid growth across both of those sales channels in the second half of the year.

Thanks for all the details and congrats on the strong execution.

Thank you really appreciate it.

Thank you. Our next question comes from Keith Housum from Northcoast Research. Keith, please go ahead.

Good morning. Chris, maybe perhaps talk about CDW's own hiring plans for the rest of the year and how you're seeing that growth?

Hi, Keith. Our hiring plans for the rest of the year?

Yes. I'm just trying to understand – yes, please.

Yes, we're still investing in people. Obviously, we've got our eyes on the headlines. We're being prudent in how we run our business, but we're continuing to invest in those areas that support the important capabilities that our customer needs from us. And we're investing in areas to drive efficiency. So we have not slowed down our investment in people at this point, and we feel very confident with that.

Great. I appreciate it. And then maybe talk to investors in terms of the concerns about the chip manufacturers and concerns that PCs will be slowing down. How would you address that question? And is this soon the chips, is that perhaps a canary of the coal mine for the entire tech industry?

I had a hard time hearing the beginning. Can you just repeat the question, please?

Yes, absolutely. So the question from investors that we're getting oftentimes is looking at the sales of PCs and with the chip manufacturers now believing that the chips will be down to personal computers by, say, 10% to 15% for the rest of the year, there's concerns that, that might be a canary in the coal mine for technology spending. How will you respond to that question?

Yes. What I would say is I think technology spending is going to be even more resilient in the face of all kinds of challenges going forward because it's so essential to businesses, whether it is challenges around chips, challenges around the macro environment, et cetera, businesses can't win in the marketplace without utilizing technology to drive efficiency, effectiveness, experience, all the things we talk about. So we aren't concerned about some of that talk track. We feel very confident that our customers and we see the momentum. Our customers are continuing to invest in technology across the spectrum from endpoint solutions to hybrid infrastructure. And we feel very confident that we'll be able to press our competitive advantages and have access to the technology needed for our customers given our size and scale.

Great. Thanks, Chris. I appreciate it.

Thank you. Our final question comes from Lauren Lucas from Evercore. Lauren, please go ahead.

Hi. This is Lauren on for Amit. Thanks for taking the question. Could you guys provide some more color on the change in expectations to netted down revenues for the second half? So I know you guys talked about SMB shifting spend this way. But I mean, how should we be thinking about this kind of in terms of where gross margins could reach? Thank you.

Yes. Thanks, Lauren. This is Al. I think look, previous to today, we talked about we expected a higher level of netted down revenues in the second half, and that still holds true. If we look at Q2 and the contributors to our gross margin, otherwise, I talked about professional services, obviously, at a macro level the accretive effect of Sirius and product margins were firm. But the theme kind of as we look at the second half as well as really ongoing with netted down revenues, which makes up just for clarity, SaaS software assurance, warranty and commissions, those themes continue. And we continue to expect that they will outpace our net sales overall.

Got it. Thank you.

Thank you. That is the end of the Q&A session today. So I will now hand you back over to Chris Leahy for closing remarks.

Thank you very much, Lauren. Let me close by recognizing the incredible dedication and hard work of our over 14,600 coworkers around the globe. Their dedication to serving our customers is what makes us successful and in particular, embracing a better together approach and philosophy as we've brought together many amazing companies over these last few years. 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 for joining. You may now disconnect your lines.