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

Thank you, Alex. Good morning, everyone. Joining me today to review our first quarter 2023 results are Chris Leahy, our Chair and Chief Executive Officer; and Al Miralles, our Chief Financial Officer. Our first quarter and full earnings release was distributed this morning and is available on our website. investor.cdw.com, along with the supplemental slides that you can use to follow along during the call. I'd like to remind you that certain comments made in this presentation are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. Those statements are subject to risks and uncertainties that could cause actual results to differ materially. Additional information concerning these risks and uncertainties is contained in the earnings release and Form 8-K we furnished to the SEC today in the company's -- and in the company's other filings with the SEC. CDW assumes no obligation to update the information presented during this webcast. Our presentation also includes certain non-GAAP financial measures, including non-GAAP operating income, non-GAAP operating income margin, non-GAAP net income and, non-GAAP earnings per share. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You'll find reconciliation charts in the slides for today's webcast and in our earnings release and Form 8-K. Please note, all references to growth rates or dollar amounts, changes in our remarks today are versus the comparable period in 2022, unless otherwise indicated. Replay of this webcast will be posted to our website later today. I also want to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast without specific written permission from the company. With that, let me turn the call over to Chris.

Thank you, Steve. Good morning, everyone. We have a lot to cover today. I'll begin with an overview of our results and our outlook, and Al will provide a deeper view into the financials as well as an overview of our capital allocation priorities, and then we'll move right to your questions. Market conditions were turbulent with a marked down shift in demand as the quarter progressed, translating into lower business volume. For the first quarter, net sales were $5.1 billion, 16% lower than last year. Non-GAAP operating income was $434 million, down 6% and non-GAAP net income per share was $2.03, down 8%. While clearly not satisfied with these results, our excellent cash flow and record gross margin reinforce the durability of our underlying profitability and integrity of our strategy. So, let's take a look at what happened in the puts and takes of the quarter. First, what happened? In short, demand was weaker than anticipated in our commercial business. When we exited 2022, our forecast called for a moderate softening of IT demand in 2023 and a mid-single-digit year-over-year decline in first quarter sales. As the quarter progressed, IT demand weakened more than expected as a confluence of events intensified already heightened economic concerns and recession fears. This led to a fairly rapid shift in customer behavior, most notably in our large commercial customers. Projects that drove cost reduction, productivity, and financial returns were prioritized. Project justification and budget scrutiny ruled the day. And although deals were not canceled, sales cycles elongated, written sales slowed, and deal sizes compressed. While all of this translated into lower sales, the value of the solutions we provided customers continue to grow. You see the impact of this on our gross margin momentum. Margins were consistent with last quarter with meaningful year-over-year…

Thank you, Chris, and good morning, everyone. I'll start my prepared remarks with detail in the first quarter. Move to capital allocation priorities and finish up with our 2023 outlook. Turning to our first quarter P&L on Slide 7. Consolidated net sales were $5.1 billion, down 14.2% on a reported basis and 15.6% on an average daily sales basis. Net sales results came in below expectations relative to our outlook. Transactions declined more than expected and despite greater resiliency and while flat year-over-year, Solutions also came in lower than anticipated. Notwithstanding the lower-than-expected solutions performance, the decline in transactions drove a mix shift that benefited margins. And as we've shift shared before, the impact of mixing into a higher relative percentage of solutions and specifically netted down revenue has a dampening effect on total net sales, but tends to bolster gross margins, all of equal. Since we are not the primary obligor on these transactions, several important high-value components of our solutions portfolio, including Cloud, Software as a Service, much of security, and partner-delivered services and warranties are recorded on a netted down basis, where gross profit is our revenue. In the first quarter, these netted down revenues, and notably SaaS transactions outgrew our overall net sales and represented 32% of our gross profit compared to 31% in the fourth quarter and prior-year first quarter. This continues to be an important trend in our business. Sequential net sales were down 6.1% versus the fourth quarter on a reported basis and 7.6% on an average daily sales basis. Our outlook anticipated better than normal first quarter seasonality, given the unusually soft demand in the fourth quarter. Our outlook assumes public would have better than historical sequential growth, which it did. It also assumed our commercial channels, corporate and small business will…

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

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

Yes. Good morning, Amit. Well, let me just take you through and unpack it a little bit. look, the key driver, the overwhelming driver of the performance miss to our expectation was the sharp uptick in concern and caution that we saw with our commercial customers as economic uncertainty intensified through the quarter and the meaningful downshift in customer demand, particularly amongst our large commercial customers as a result. And that translated into an outsized impact on results given the relative size of our commercial business. If I dig a little deeper, look, when our customers got cautious and exhibited a lot of concern, they went into decisions around deferring and pausing and reducing costs generally, which is a playbook for larger customers. And that brought greater scrutiny to projects that brought a focus on shorter-term ROI that brought a focus on overarching cost reductions, all of which created longer sales cycles and shorter duration contracts. I would say we didn't see cancellations, what we saw were delays in smaller deals and the knock-on effects of that. So as a full stack, full life cycle provider, there's a cascading impact across hardware, software, and services. right? So, if you've got large delays in deals, then you have less attach of services and other solutions at that point in time. And when you think about commercial representing more than 50% of our business, the impact just created a major headwind for our top line sales. Now I would say as you go through the rest of the portfolio, the balanced portfolio of customer end markets did help. But particularly given the extreme softness in the client device market, generally, it didn't help as much as we would have liked. So, when you think about government high Ed and health care, they…

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

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

Perfect. Thank you.

Thank you, Amit.

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

Hi, thanks for taking my question. Thanks for all the color today in your prepared remarks. I was just wondering, just starting off with the 2Q guide here for a mid-single-digit sales growth expectation -- now I understand that's not as robust as what you used to see pre-pandemic. But in terms of what's driving the confidence of sort of guiding to a growth into 2Q? And should we expect sort of that growth to continue to and 4Q? Is that sort of how you're thinking about customer activity starting to sort of return and spending start to improve? And just sort of what's baked into the second half, particularly in terms of your client device expectations? And then I have a quick follow-up. Thank you.

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

Okay. Got it. And my follow-up, just maybe if we can -- if I can ask you to double click on the NetComm product momentum or the momentum in -- within your portfolio seems to be an outlier related to what you're seeing otherwise in the other parts of the portfolio. Any color on what's driving your customers to still continue to spend on NetComm. Obviously, it's not been -- it's been supply challenge, but not really demand challenge even for the last couple of years. So, what's driving that momentum there still?

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

Thank you. Thanks for taking my question.

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

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

Yes, Shannon, it's a great question. You're right. There's nobody who's not talking about it. And everybody is talking about it a lot. The good news for CDW is right now, it's moving fast, and it's complex. And there are a lot of work to be done around how the kind of new form of AI can support customers. So, what our customers are saying is frankly, they're saying our CEO says we really need to be all over this. And I say that because there's pressure on the system, which means -- which is always good for CDW because the conversations that we're having around AI and general AI are right now. We're at the front of the design with our customers. And here's how we think about it. Obviously, we think about it internally for CDW, but as importantly, for our customers. So, A we've always helped our customers unlock the potential of technology to meet whatever the needs are for their current and future business, okay? When we think about AI and what we offer our customers, it fits really nicely into the full stack full life cycle, full outcome approach. And what we're trying to do with customers is they're thinking about what the use cases could be going forward. Those are things, as, like workflows to build innovative products or improving efficiencies in the case in their existing workflows, things that we've all been talking about. What do they need from CDW and how can we help them. A it's identifying those use cases and building them out and supporting them up and down the stack, think professional services, right? Think applications and building B2B applications, think computing and data infrastructure need a whole new kind of infrastructure to support what AI is driving and think models and tooling. So, our digital velocity team that practice actually already orchestrates AI initiatives with many customers today, and they're having deeper conversations. But I would just say, look, we're at the forefront of this. There is a lot to be worked out. But it is definitely one of those trends that is -- the hype is real in this case. There is going to be a fast and growing market that AI is going to drive, and it fits really nicely within our full stack solution. And so, we're having lots of conversations with customers. And we're doing the same internally. Look, we're looking at all the ways that we can use the new AI to basically drive efficiency within our organization.

Great. Thank you. And then just -- you're at the high end of cash flow for the year. We're about two years, while not quite, but years past the Sirius acquisition. So, what are your current thoughts on acquisitions, what do you see in the landscape like? Are prices coming down or valuations coming down at this point? Or are people still thinking over or a couple of years back and valuations are high?

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

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

Thank you, so much. Good morning, guys. Chris, maybe I'll ask you a question. I appreciate all the color you provided by end market and product. And clearly, there's a lot of moving pieces. I guess if we step back and think about your product exposure and think about what you reported relative to how you guided in February. Can you just understand which products are kind of most responsible for the guide down or maybe for the miss in 1Q and then for the guide down for the rest of 2023? Just trying to understand kind of what is incrementally weaker as we moved through March and into April? And how -- which products are impacting that guide the most? And then I have a follow-up. Thanks.

Yes, sure. Good morning, Erik. Well, let me start with the client device -- let me just start with hardware and client devices because that really was the core of the impact. And again, primarily are the largest impact came from our larger commercial customers. So, number one, on the client side, we continue to see, the market generally has got kind of an extreme -- is an extreme softness right now and that continues. Okay. So that had an impact. And we saw in the client space moderating either -- even further down as we progress throughout the quarter. And you continue to see staff reductions across every industry. And those things are impacting client device purchases. And I think I mentioned in my prepared remarks that the large commercial customers client device category was the biggest down shift in the corporate space. So, client device is number one. Server storage, hardware, things that are customers are looking at, and finding ways to save money. That's another source of the down shift. And what happens when you've got hardware either being refreshed not refreshed delayed or paused if you have a knock-on effect. It's like a cascading effect. So, if projects are delayed, the services that go with the project obviously aren't implemented some of them until the integration of the product. You also have things like warranty that are going to be a bigger impact to warranty when you're not buying hardware. So, if I come back to the categories, I'd say it all starts with large customers reducing their costs immediately, which means let's reduce hardware, let's extend the useful life of assets. When we're purchasing software, for example, we can purchase a one-year deal instead of a three-year deal. They're pausing on making decisions on things because they don't want to get locked in. But it does start with the areas of hardware. And then where we saw softness in places that I would say are very strategic for us, that really was, again, an effect of the delay or deferral of larger projects. I would say, overall, look, our services business is very strong in the areas that are strategic. If you take out warranties, professional services, managed services, strong, yet impacted security, strong in the areas that we've been investing heavily in weaker in firewalls, which are related primarily to the, when you're buying physical assets or extending your geographic footprint. And then cloud. I mean cloud is continuing to be extremely robust across every one of our customer segments. So, I'm trying to dig into the weeds a little bit here for you, and I hope I'm getting to the heart of your question. but it's starting with the climate. I mean that's really what happened, starting with the climate and climate of cost containment.

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

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

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

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

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

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

Yes, Adam, it's a great question as well. And as you can imagine, we approached a decision like that with great care and respect. And I'll tell you, look, we have been -- we are operating discipline -- cost discipline is something that is evergreen. We are always focused on finding productivity and efficiencies. It's just how we operate. as we've been in a cautious environment, we've been very prudent and I think proactive in calling our costs and calibrating to the environment. which, as we've mentioned in Q1, really, we got a pickup in intensity of the economic uncertainty. And so, we went into high gear in terms of our prudence. And what we've done is really pull every lever we can pull to align our current cost structure with the demand that we're seeing. And when I say every lever, I mean all the things you would imagine, discretionary spend, hiring, promotion, staffing, geographic locations, et cetera. And one of the decisions we had to make was to adjust our staffing to current demand environment. Now look, these are really hard decisions. I'm proud of the team and how they put it together and how we communicated it. And everybody was very respectful. Now all that said, the teams have -- are looking forward because that's what the organization needs to do. We're pivoting to the future. and focused really heavily on our customers. But you're right, it was a tough decision but the right decision for the business and for the customers ultimately.

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

Understood. Thank you, very much.

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

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

Matt, it's Chris. I'd say both actually. We're seeing large customers who are optimizing for sure, particularly in this environment of cost optimization and reduction opportunity for CDW with our professional services and our FINOP services and things that we can offer to our customers to help them do exactly that and then potentially convert that into managed services going forward. But equally, we are seeing organizations that are kind of optimizing their cloud environment, not just workloads on the cloud, but the cloud environment and continuing to make decisions about where workloads are best optimized, whether it's on-prem whether it's -- now we're moving towards private on-prem, but where that should sit in multi-cloud public arena as well, so moving workloads potentially from one public cloud to another public cloud, again, for optimizing either for performance, functionality, costs, et cetera. All of this requires health from CDW to design the movements to actually do the migrations. And as I said, ultimately, we're seeing more and more opportunity to convert some of this into managed services, cloud managed services, which, of course, is a is a positive thing for us and for our customers.

Okay. Thanks for that. And I had a question regarding your comments on maintenance contracts, which I -- which appears to be weak. In my past experience with CDW in down cycles, you've actually seen an increase in maintenance contracts and renewals as customers look to so-called sweat your assets longer. What's different this time? Or am I missing something?

No, no, you're not. It's a great question. We asked the question earlier. What's different? What's different is we do see when folks are sweating assets, they are extending warranties typically, they're extending them for short periods. So, at a time when you would typically see a hardware renewal with a three-year contract, for example, warranties are coming in at shorter time periods. We also have some folks who are making the decision not to extend warranties. So, we're just seeing softening across the board there. And what we don't have is the offset of hardware purchases elsewhere, software purchases elsewhere, we're seeing new warranties come into play. So, it's a bit of a while you'd expect warranties to have an uptick because people are -- our customers are extending the useful life of their assets. The size of those warranties, the deals are smaller so it's muting the impact of the top line.

And Matt, maybe just let me add just a couple of comments. Number one is just recall that warranty business shows up as netted down revenues. For us, the recognition is upfront. And so therefore, if we have a typical four-year warranty, that turns into a one year, obviously, the recognition and the result for us obviously becomes muted. The other element I would just add here and look, maybe somewhat obvious is just the -- some of this focus on shorter ROI and the financial impacts therein are creating more conversations that will come back around with customers. That is the -- there's a sweating assets, but an expectation that, that business will come back around, both in terms of refreshing some of the infrastructure and some of the clients, but as well as, in some cases, renewals of software assurance software and warranties that we're seeing in a little bit shorter duration here.

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

Thank you.

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

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

Good morning, Keith, it's Chris. I think I understood your question was around kind of when assets have to be replaced? Was that the question? I just want to make sure I was getting the question right.

Yes. I think PCs have been under -- particularly have been under pressure and the thought process was that in the second half of the year, you might see some recovery. I'm assuming one that's not the same assumption anymore. And then two, like PCs or client devices, when they are sweated. Is there a period of time that you can no longer sweat them forward and you really have to make the investment regardless?

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

Great. Thank you.

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

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

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

And maybe Ruplu, just one component I'd add there is just the -- just remember, one of the big drivers always is funding. And we would say, from a funding perspective, both government and education, we're at a reasonable level there. So, we think that there certainly is the impetus and catalyst there for continued spending.

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

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

Yes, Ruplu. I would add -- look, let me just start with how we shape our view of the IT market, and it's substantially grounded in 11,000 customer-facing coworkers who are in market every day. And so there -- they've got the pulse of what's going on in the market and what customers are doing, saying and feeling. And while we have a number of market factors that we look at and analyze that the customer pulse is the most relevant one that we consider. So, I'd just say that's 1 thing that we are looking at. And then we're factoring in as we think about the year, the caution and concern that we've already mentioned that, that will continue at least in the short run, and we've reflected that in our Q2 outlook. And then expecting some moderation in the back end, some moderating recovery in the back end. So, all of that combined is a reflection of, as I said, what we're seeing in the market, the current activity in terms of written demand, in terms of back order, in terms of all of the things that we triangulate. And frankly, that's just -- that's where we end up. because of what we're seeing because of seasonality. We've already kind of gone through Q2. It's going to feel about the same as Q1, right? We'll get a little bump in seasonality, but that will be muted as Al mentioned earlier. And when you think about the back half of the year, what we have benefiting us there is seasonality from our government business, for example, and education running into the third quarter. And we also have lower overlaps, compares are easier in the last quarter. So, all of those things combined, you put them together, and that's just -- that's where we end up.

Okay. Thanks for the details, appreciated.

Thank you.

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

All right. Well, thank you very much. Let me close by reemphasizing my confidence in this team in our strategy and the durability of our resilient business model. Thank you to our CDW coworkers across the globe for your unwavering commitment to our customers. Thank you to our customers for the privilege and opportunity to help you achieve your goals. And thank you to those listening for your time and continued interest in CDW. And Al and I look forward to seeing you next quarter.

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