I'll kick us off. So thanks again everyone for joining. I'm David Vogt, the UBS Enterprise Hardware Networking analyst here. And we're excited to have with us CDW Corp today, and with us from the management team is Chris Leahy, Chairman and Chief Executive Officer, excuse me, and Albert Miralles, SVP, Chief Financial Officer. Bear with me, I'm gonna read a quick disclosure from UBS perspective. There are important disclosures pertaining to our discussion today, and any conversations that we have about any particular company or stock. Please see the UBS Research website at www.ubs.com/disclosures. I'll turn it over to Chris for a quick 30-second disclosure, if she needs one.
Anything we say today is as of Q3.
Great. So with that out of the way, thank you everyone for joining. So Chris, Albert, thank you for joining. I think, you know, heading into this event, what we got from questions from investors, we kinda queried them, and I thought it would be a good place to start with at a high level. You know, I think you'll be at CDW almost six years coming in January, if I'm not mistaken.
Mm-hmm.
How has the business changed strategically under your tenure over the last couple of years, and kind of how do you see the next couple of years kind of evolving going forward?
Well, let me... I'm gonna zoom way out and kinda come back in, if that's okay. So I've been at CDW 20 years, been in this role for-
Six, right?
-for six, yeah. And the business has been around for just about 40, a little over 40 years. And so I think the way I think about CDW is the way that we do, which is, change and continuity, okay? It's a pretty simple but not easy formula. Knowing what to keep, what's essence of your secret sauce, and what to change to evolve to stay in front of our customers. But I think we've done that incredibly well. So when I think about what's stayed the same, what's fundamental, our customer obsession. Focus up... Is this working? Customer obsession. Focus on the customer, in every decision we make. Our value proposition hasn't changed at its core. It's about, maximizing return on investment, for technology dollars. Our, culture and values has not changed. It's just amplified and gotten stronger.
It's highly competitive, it's highly collaborative, it's highly, it's highly caring. Our discipline in investment and in execution hasn't changed. Our investment in people and relationships, all of that has not changed. What has changed over the years is what it takes to deliver on that value proposition. The IT landscape, as we all know, is vast and dynamic, and it has an immense amount of complexity, whether you're choosing a technology, a type of technology, a brand, a consumption model, an economic model. It is getting more and more complex, and at the same time, it is getting more and more important to competitive advantage, to delivering on outcomes, goals, and missions. In addition, what it takes to deliver on those outcomes requires much more than it ever has.
So what CDW has done, and if you look under the hood, we're a different CDW now than we were just five years ago. We have invested behind services. Services to advise, consult, and manage across emerging technologies as well as legacy technologies, with a real emphasis on growing our cloud capabilities and digital capabilities. We have invested and embraced digital from an experience perspective, enablement perspective, and a product perspective to drive enablement of our sales organization, frictionless experiences with our customers, and products that are sticky with our customers and keep them coming back to CDW. We have refined our go-to-market. Our go-to-market is always something that we're refining, to really continue to get the best out of our scale and our One CDW mindset, while also leveraging the uniqueness of our vertical markets.
Our scale allows us to verticalize, and we continue to use that to great success across all of the end markets that we serve. So I guess what I would say is, we've come a long way from a product reseller by staying true to our customer focus, by understanding that evolution and being where our customers need us to be as a trusted advisor is where we need to invest, and we've done that over 20 years. The difference in the last 5, highly service-focused, highly solutions-focused, and what we've achieved is a full stack, full life cycle, full outcomes approach to our customers.
So that's helpful. So how do you think about that evolution today?
Mm-hmm
... and what it means for 2024? 'Cause you've done a great job. Solutions and services have been relatively strong in a relatively difficult macro environment. It helps you weather the storm-
Mm-hmm
... gross margin. So when we think about 2024 and beyond, not into specific guidance or anything, but should we expect more of that type of solutions-oriented sort of focus, whether that's organically through tuck-in M&A? And how does that play as maybe some parts of the other parts of the business maybe come back that are more traditional product-oriented?
Yeah, it's a great question. So, I would say, when I say full stack, I also mean from core to cloud to the edge.
Okay.
So it includes everything. You will continue to see us focus, and I like to use the word accelerate. You know, where are we gonna accelerate our efforts? Where are we gonna focus our efforts and investment? And it will be around some themes. Services, continuing to bolster our services across high growth, high relevance areas like security, like cloud, like digital, like AI, definitely investing there. Cloud will be a big part of of our investment areas as well. Digital, I mentioned this before, continuing to invest in our own digitization, but helping our customers achieve experiences that are intelligent, connected, frictionless, and helping to help them with their transformations. We're also working on our agile operations.
When you think about the scale that we bring to bear, continuing to make sure that we get the most out of that scale through our own agility is something we're also equally focused on. So yes, you will continue to see us investing behind a high growth, high relevant strategic areas, solutions and services. You'll see us continue to look at acquisitions to do that, while we're also investing organically, and you'll see us continue to improve and refine our own operating model to make sure our flywheels, those muscles we have around things like digital experience, core, et cetera, we can do it better than anyone.
Does the pivot or the evolution to a more services solution-based business with AI and-
Mm-hmm.
Digitization and some of the faster growing end markets, kind of change how you think about the business long term in terms of what you can accomplish, in terms of growth and ultimately profitability long term? Or should investors think about the business as, you know, obviously, you know, the U.S. IT spending environment has a big impact on your business, presumably going forward as well, and the model as we know it today is kind of what the model looks like going forward, with maybe some slight nuances around the edges?
Yeah, I think there are two parts that I'd consider in this. I would say, number one, yes, the business is dependent on the IT market rate of growth in any given year, but our commitment is to outgrow-
Right
... the market. We will maintain that commitment. Equally, I think if you look back over the last 10 years and then five years, what you'll see is a kind of slow and consistent expansion of our gross margins and our operating margin-
Right
Our NGOI margin, and that is absolutely intentional. You know, the higher relevance, high growth areas that customers are, are needing and in demand, should continue to drive that march upward in our profit measures. And, you know, so we expect that to happen. We always say, look, if, depending on what the mix is, if it is more hardware-oriented in a particular year, like a Client Device-
Right
Refresh, right? That will mute the top line a bit, and that will drive the margins down a bit. So it's not gonna be a straight up and to the left, but it is gonna be a march with a little bit of a kinda up and down, up and to the right.
And maybe just keeping it at a high level, you know, we get a lot of questions from investors. When you think about the journey of your customers along these paths, whether it's, you know, enterprise, small, medium business, public sector, can you help us kind of understand where your verticals are relative to maybe where they are in their journey?
Mm.
Right, where do you see companies or industries maybe a little bit further along, and where the opportunity is to maybe, you know, obviously hit the steeper part of the inflection curve, if you will?
Yeah, you know, it's very interesting, because if you'd asked me this question three years ago, I would have had a very different answer for the various segments in terms of something like cloud, okay? Healthcare is a great example. I would have said three years ago, healthcare is still concerned about cloud-based because of privacy, et cetera. Not anymore. Embracing cloud, understands the benefits, understands the costs, the economics of it, and, and has conviction around the security that can be maintained. So if you look... So just starting with something that is similar across, I would say our enterprise, our small business, our public sector, healthcare, education, all of those segments are really kind of in similar stages of cloud adoption. They get it. They're figuring it out. They're trying to optimize it and, and, and use it to drive outcomes. It's kind of interesting.
In terms of something like AI.
Right
... I would say there are pockets in verticals, take financial services, for example, figuring it out fast for very obvious reasons. But I'd say across the rest of our commercial space, there is a lot of energy right now going into advisory and consulting services. Okay, now we're aware, how do we adopt? Where do we adopt? Why do we adopt? Who do we adopt with? What, what are the real use cases that are going to generate a return? Remember, we've been talking about scrutiny for a long time...
Right
... scrutiny on return on investments, and the same holds true for AI. There was a flurry for about six months, right? Now, customers are settling in, saying: "What's the return on investment that we're gonna get out of this use case?" They don't wanna make decisions and end up having obsolescence to deal with, okay?
So, does that mean... So, to your point about maybe increased scrutiny, you know, we've had a challenging macro environment.
Mm-hmm.
You know, deal terms, not just what you do, but other technology vendors have talked about elongating sales cycles. Do you think AI would fall? I think it sounds like you just said that, but AI falls under that umbrella as well, in the sense that, you know, it, it's not gonna be the proliferation of spending next year on AI just because it's AI and it sounds, you know, particularly attractive in terms of what the use cases may be. Maybe the S part of the curve is maybe not as steep, or we're not there yet in terms of customers' willingness to really spend aggressively on that part of the ecosystem.
Yeah, I would say we are seeing customers being measured-
Okay
... in making decisions around AI, with a goal of finding some, you know, golden use cases and some maybe smaller return use cases.
Okay.
Finding them, testing them, refining them, and then an expectation that the return will be faster-
Got it
... that they'll be able to light it up. But very measured right now in terms of what they can be.
and do you think that's because of the broader macro environment, or maybe companies ran a little bit too fast, too quickly, too far, and the use cases haven't been borne out? I guess what we, we hear a lot from investors is: How do I separate the macro backdrop-
Hmm.
versus adoption curves? And let's say, hypothetically, the macro improves modestly next year. Does that kind of impact how you're thinking about this, or your customers are thinking, or partners are thinking about this?
Yeah, that's a really fair point. So I would say, I think macro, macro's been driving the business climate and performance. I would say that is, that is the-
Right
... main reason. What is happening, like any other really revolutionary technology change, customers are digging into artificial intelligence and trying to figure out what is best. The good news for CDW is that plays into our strength.
Right.
Okay, so when I look at the activity in our pipelines, I see a lot of activity around professional services, advisory services, consulting services that are literally geared towards artificial intelligence and use cases over a period of time now to figure it out. So I think that when the macro does start to recover, we're gonna have a lot of customers that are prepared. They're not gonna start like they're preparing now-
Right.
My expectation is that they'll be prepared to make some pretty interesting decisions around use of AI.
That's good. Great. And then maybe if we could just stick to sort of some of your comments that you've made historically, given macro, given verticals. You know, how do you think some of your verticals respond to an improvement in macro?
Hmm.
Which, maybe which sectors are more quickly able to turn on sort of the spending decision spigot effectively? Who's a little bit more deliberate? Who's a little bit more thoughtful? I know your crystal ball is not perfect, but if you had to take an educated guess in terms of where would you see a recovery first, do you think, based on maybe a historical analog or how companies think about their spending decisions?
Yeah, I mean, if you just look historically, even back to, take the Great Recession, that's probably more relevant than 2020 even. But the Great Recession, the first back in were the enterprise customers. So, you know, small business pulls up generally first, and then you've got the commercial customers-
Right
... but then commercials lead out. So, I would expect if history repeats itself, for our commercial customers to be the ones who start to see recovery as the macro recovers first. Small businesses, you know, they, they have been investing in technology. It's just been, you know, those areas that net down, those areas that are more consumption-based, so that they're-
Okay
... you know, spending over, over periods of time. They're very invested in technology and technology driving their competitive advantage, but again, they need to, they generally lag via the enterprise.
And presumably, small business is more impacted by the rate environment.
Yeah.
Right, so financing availability and rates. So, you know, as an outsider looking in, is a reasonable indicator of what potential demand could look like, maybe change in underlying rate structure, GDP? Is it all of it? Like, how do you think about what you're looking at besides your sales funnel and your conversations with your customers and your partners? How to think about... You know, I'm not asking you to call a turn, but just some of the signposts that maybe some people could look at externally to kinda judge, "Hey, we're moving in the right direction. Things are getting a little bit healthier as we move forward.
Yeah. Look, I, I would say stabilization is always a good thing, whether it's stabilization in inflation or interest rates or conflicts across the globe. When you get to a status of stabilization that starts to feel good to corporations, that's usually a sign-
Okay
... you know, that's usually an environment where you start to get some more conviction, and caution starts to reduce. So I can't call when that will happen, but those are the types of— I mean, it's about getting stabilization.
Yeah, I would call this kind of an uncertainty sentiment that's driven a lot of the activity. So just greater clarity across the board, whether it's direction or rates, kinda are we finding a landing spot on inflation? Some of the geopolitical risks, you know, abating. All those things, I think greater clarity will drive the greater conviction around buying.
Got it. Well, maybe on that note, maybe, Albert, can I ask, you know, we also get a lot of questions on... I know you guys have made public comments on your earnings, but any help in how... I know it doesn't feel like Q4 from all of our customer conversations has changed dramatically over the last couple of months. Anything that you see out there on the horizon that's either, you know, stronger, softer, or status quo relative to what we've been seeing out there?
Yeah, I'll just maybe tick through some of the channels. So, you know, coming into the third quarter, we had anticipated that we'd see a modest pickup in activity, and some of that was emanating from commercial sector indications that maybe budgets were loosening up. Lo and behold, it didn't quite play out that way.
Right
... and the uncertainty persisted. So at this point, you know, for the remainder of the year, we called for probably a lot of the same dynamics that we've experienced, and I would say into 2024. If I just tick through, you know, some of the channels, we talked about small. Small spend has been stable but certainly low, kinda bouncing-
Right
... along the bottom. Enterprise, obviously softer, a bit of a fits and starts, and we've talked about kinda uneven demand, but fits and starts, indications that things might open up, and then they would kinda tighten again, and things would get pushed out or they'd shift to cost optimization. Public sector obviously has been resilient, and I would say largely has followed seasonal patterns, but that's been a resilient segment for us. And then lastly, international worsening. So we would say the international sector there may be a couple of quarters behind the U.S., and we'd expect that's gonna persist into 2024.
Got it. That's helpful. I'll just remind everyone in the room, if you have a question, feel free to submit one. We'll get them up here, and we'll take them. So maybe going back to the macro, and you mentioned international is maybe a couple of quarters behind. You know, obviously, it's not a big part of the business today, relatively speaking. When you think about maybe the different sort of dynamics that are going on in that market, is it as critical of a business or industry vertical or, excuse me, geographic vertical as the rest of the business going forward? So what I'm trying to think through is, you know, the U.S. is- North America has tended to be a little bit more resilient in IT spend as of late.
So, when you think about your priorities over the multi-year period, how important is international expansion for the business?
Well, you know, I think of it this way, two things. First are the CDW UK has a track record of growth and success-
Right
- since, you know, we've bought it. So it's growing within its own locale-
Locale.
The international component of that business has also been growing. When we bought it, it was about 10% outside of the U.K., and now it's closer to 30%. So the value proposition that we were going after, which was to serve all our multinational customers-
Right
has played out. I think the next question we ask ourselves is, Is there another market that can drive the kind of growth, organic growth, in-country growth that we've seen through Kelway, and can also continue to help us service our multinational customers? It's a question that we ask ourselves. It could be very attractive. We look at that in conjunction and, against other opportunities within the U.S., for example, tuck unders-
Right
in some of those areas that I talked about. So whenever we're looking at growth opportunities, where an acquisition is likely required to get that level of scale quick-
Scale.
Yeah. Geographic is always part of the conversation.
So, as a follow-up then, when you think about capital allocation priorities, whether it's here domestically or overseas, how do you see the market developing from the opportunity set? What I mean by that is, are there... I would imagine your pipeline is healthy enough, but have valuations come back to a point where they're attractive, as we think about—'cause, look, leverage is coming down. You've done a great job deleveraging the balance sheet, following several transactions, and so we get asked questions all the time, you know, leverage is gonna get close to two turns again. So how do we think about what maybe, not specifically next quarter or the following quarter, but where your priorities lie today?
Maybe some of the metrics that you look at, some of the qualities of the businesses that you're looking at that sort of augment the CDW growth strategy today.
Yeah, you know, and we've used this before. You know, does it fit our strategy?
Right.
Does it, well, fit with us operationally? What's the financial return, and culturally, will it fit? And you've all heard us say before, culture, culture is very important, and you've seen 10, 10 successful acquisitions in five years. You know, there's a reason for that, and it's picking companies where the culture fits. So we'll continue to assess based on our high growth areas that we're focusing on building services in particular, tuck in or large. We'll continue to look at international, and I would just say we do have a strong pipeline. You know, we're always in the market. Has the market become more conducive to an acquisition now? I would say it's better now than it was 12 months ago. But we've got a lot of companies in the pipeline and feel very good about the opportunities we might have.
Got it. That's helpful. And so when you think about your vision for 2024, 2025, 2026, long-term, 2027, how critical is M&A versus maybe other sources of... Or, or the uses of your cash flow in terms of, you know, you do have a buyback-
Mm-hmm.
- in place. Just trying to think through kind of like the priority structure. Maybe if you can, I don't know, rank order is probably too strong of a statement-
Yeah
But just maybe share with you your views on that.
I was gonna start with just services, and then I'll let Al respond as well. You know, we think about investing back in the business as a priority. M&A, to me, is part of that. If we stack rank our priorities, M&A comes before shareholder repurchases-
Yeah
- generally.
Mm-hmm.
So that's, that's about driving the strategic, advantage and winning position of the business. So I, I would just say that, we will Look, services is fundamental to our value proposition, period. And so we will continue to find places to accelerate our growth in services. If we can do that through organic build, great. Oftentimes, that requires, again, back to scale, acquisitions.
Right.
Yeah, I would just add, look, capital allocation, as you'd expect, is a balance of strategic and tactical. We always lead with the strategic and with the long term, and how do we build out our capabilities and continue to kind of build our scale where we need it. And then the tactical is, holding that constant, where's the best dollar deployed? And we'll continue to pivot where we need to. You've seen that in 2023 with respect to our share purchases, paying down some debt, some M&A, pretty balanced, and we'll do the same. I would say on the M&A front, right, in terms of relative value, more opportunities, but to Christine's point, when we think about kind of the increase in cost of capital,
Mm-hmm
... hasn't come down as much. We are persistently patient and opportunist. We'll continue to be.
Can I just follow up on that? Obviously, your cost of capital, I would think, is significantly better or cheaper than maybe some of your competitors in the marketplace today, given your execution and your access to capital in the market. Is that a source of advantage going forward, as you would think about it today?
... It is, but you know, the economics still have to make sense, right?
Right.
Right. We start from a better square, we think, from multiple components as a buyer, but it, it has to add up for us.
Got it. And then maybe, I know we've got a couple more minutes. You know, we just got one question that talks about your categories. I, I know you're a little bit reluctant to talk about different sort of, end markets, but you talked about regionally, is there anything that maybe you can share with us on what you're seeing, either better, worse, unchanged, you know, seasonal, sub-seasonal, however you want to define it, up to you, going forward? You know, there's a lot of public data out there. Some of the end markets have been a bit softer, some are coming back. Just anything that you can kinda share with us, if that's okay?
Yeah, I think I shared some of the kinda puts and takes across the channels, right? We would expect small continue to be softer and bouncing along the bottom, public continue to be resilient. We do think that international is a few quarters behind. Across the product arena, obviously, we've not seen a return to PC. A lot of the strength has been in some of the categories Chris talked about, cloud, SaaS, security. For those that are new as investors, a lot of those categories would fall into what we call netted down. And so what we've experienced from that is great growth, outpacing our sales overall, has the tendency to dampen our net sales, but then bolster our gross margins. 'Cause as we act as agent, we're effectively recording in net sales the same as we record in gross profit.
We think those trends are durable and will continue. At some point, we're gonna see a pickup on hardware, and particularly client, which will bolster the top line, will also likely balance out and dilute our gross margin a bit. We've obviously got benefits from gross margin during this trend towards netted down. At some point, you're gonna see a balancing in the portfolio.
Got it. And then maybe just another question that we got through email is on margins. Without getting into the specifics, but obviously, mix matters-
Yeah
... netted down versus product. I you talked a little bit about it on your last conference call. Maybe if you can just kinda share your thoughts on what that might look like in 2024, without getting into specifics, but again, to your point about puts and takes. So if the client endpoint PC market comes back, obviously, that would put a little bit of pressure on gross margin, but solutions have been strong, service is strong, so that's kind of an offset. Just maybe kind of help frame that a little bit for, I think, some people that are newer to the story.
Yeah. So again, again, I'll just say that those netted down revenues, SaaS, the biggest one, and cloud-oriented software assurance, warranty solutions, and anywhere where we're acting as agent. We do think they're durable themes, and even if, as we see a mix back into hardware and PC, we'd expect that those would persist. And so that obviously bolsters our gross margin. You would just see, all else equal, a return to PC cycle diluting our, our-
Right
... gross margins, but obviously, bolstering growth on the top line.
Got it. So I think we have, like, a minute left. Chris, maybe just wanna leave it with you. Anything that, you know, you want—that's pressing, you know, you want investors to walk away from this conversation with, in terms of how to think about CDW and kinda what your vision is for the business? And just, I think 'cause we get a lot of questions from newer investors since we picked up coverage. You know, you've been very clear, at least with us, what your vision is, but just anything you wanna leave with, you know, with the audience today? I'll leave the floor to you.
Yeah, David, well, I appreciate that. Yeah, I think what I would- I'd like to leave people with is, CDW is more well-positioned to win today than it's ever been, for a number of reasons. It's the investments that we've made in full stack, full life cycle, full outcomes for our customers, and what we bring to there in terms of the breadth and depth of our portfolio, the expertise that we bring, the execution excellence that we bring every single day is resonating. You know, it's an organization that is built on relationships with customers, and they are long, and they are enduring and expanding. And the technology world is only getting more complex-
Mm
... massively complex, and we help our customers cut through that complexity in a way that they trust us. So, you know, I see CDW of the future as a can't-live-without partner, and we're already seeing that right now. So, more excited about the future, and I've been at CDW 20 years, more excited about the future of this business than I've ever been before.
Great. All right. Thank you, Chris, Albert, thank you for your time. Thank you, everyone.
Thank you.
Thank you.
Thank you.
Thank you. David, thank you very much.
You're welcome.