Hello, everyone, and welcome to the CDW Third Quarter 2022 Earnings Call. My name is Seb, and I will be the operator for the call today. There will be an opportunity for Q&A. [Operator Instructions]. I will now hand the floor over to Steve O'Brien to begin the call. Please go ahead..

Thank you, Seb. Good morning, everyone. Joining me today to review our third quarter results are Chris Leahy, our President and Chief Executive Officer; and Al Miralles, our Chief Financial Officer.

Our third quarter earnings release was distributed this morning and is available on our website, investor.cdw.com, along with supplemental slides that you can use to follow along during the call.

I'd like to remind you that certain comments made in this presentation are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. Those statements are subject to a number of risks and uncertainties that could cause actual results to differ materially.

Additional information concerning these risks and uncertainties is contained in the earnings release and Form 8-K, which we furnished to the SEC today and in the company's other filings with the SEC. CDW assumes no obligation to update the information presented during this webcast.

Our presentation also includes certain non-GAAP financial measures, including non-GAAP operating income, non-GAAP operating income margin, non-GAAP net income and non-GAAP earnings per share. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules.

You'll find reconciliation charts in the slides for today's webcast and in our earnings release and Form 8-K we furnished to the SEC today.

Please note, our financial results today include results from our acquisition of Sirius Computer Solutions, which closed on 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 the results from our CDW U.K. 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 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..

one, to capture share and acquire new customers; two, to enhance capabilities in high-growth solutions areas; and three, to expand services capabilities. This strategy delivers on our commitments to our customers and drives both our top line and bottom-line performance.

Over the past 3 years, we have enhanced our relevance to customers by broadening and deepening our capabilities, including in automation, cloud-native and DevOps and cybersecurity. Capabilities necessary to ensure we remain the trusted adviser to our customers as they accelerate their digital transformations.

Capabilities that enable us to best serve customers across physical, digital and cloud-based environments in the U.S. and internationally. A great example of how our services investments deepen relationships and strengthen the value we deliver to customers is a solution we are delivering to a medium-sized hospital system.

With 3 primary hospitals and approximately 70 regional clinics and urgent care facilities, the system was challenged to find, retain and train a sustainable level of technical staff.

Having previously worked with them, providing both hardware solutions and professional services to re-architect their disaster-recovery solution, we had a deep understanding of our customers' environment.

We coupled with the breadth and depth of our services offering, this enabled us to construct a new design, build, run end-to-end services solution that leverages CDW managed services and talent orchestration capabilities.

A solution made possible by the services investments we have made and the technical mastery we've accelerated over recent years, mastery over the broad spectrum of technologies the customer needed for support, including Windows and Linux servers, virtualization, storage, backup and recovery, databases, switching, routing, network access and cloud-based productivity and identity-management tools, our full portfolio of services enabled us to become an extension of the customer's team.

We recently went live under a 5-year contract with monthly recurring revenue in the hundreds of thousands and a total contract value over $10 million. A great example of how our investment and services deliver value to our customers and cause them to lean further into CDW.

Investments in our customer-centric growth strategy are foundational to our ability to consistently and profitably outgrow the U.S. IT market. And that brings us to our expectations for the rest of the year. Our team's terrific execution and relentless focus on our customers delivered significant out-performance to our baseline 2022 outlook.

When combined with our current expectations for fourth quarter performance, we now expect to outperform the U.S. IT market at the high end of the 325 to 425 basis points range. Our estimate of U.S. IT market growth in 2022 remains 4%. Taken together, this equates to year-over-year constant-currency growth at the high end of the 7.25% to 8.25% range.

The high end of the range is applied to the combined CDW 2021 revenues of $22.8 billion, calculated as though Sirius was acquired on January 1, 2021, instead of its actual acquisition date of December 1. On a reported basis, this equates to a constant-currency increase of 18.5% over 2020 results.

Our outlook continues to reflect our baseline expectations that our mix will remain weighted more heavily to netted-down items. We expect this to drive profit growth faster than sales growth, while we continue to thoughtfully invest in our future.

We are cognizant of the current environment, but to date, customer urgency to innovate for the future and the internal and external stakeholder demand has not diminished.

Of course, we remain mindful of wildcards, including economic, geopolitical and the variable nature of the supply chain, and we will keep a watchful eye on these and other potential factors. As we always do, we will provide an updated view on business conditions and our annual outlook on our next call.

In the meantime, we will continue to do what we do best, leverage our competitive advantages and out-execute the competition. Our flexible business model and proven formula for success will continue to serve us well. The accelerated pace of change makes our role as a trusted strategic partner to our customers, more important now than ever.

Now let me turn it over to Al, who will provide more detail on our financials and outlook.

Al?.

Thank you, Chris, and good morning, everyone. I'll start my prepared remarks with additional detail on the third quarter, move to capital allocation priorities and then finish up with our 2022 outlook. Turning to our third quarter P&L on Slide 8. Consolidated net sales were $6.2 billion, up 17.3% on a reported and an average daily-sales basis.

On a constant-currency average daily-sales basis, consolidated net sales grew 18.7%. Sequentially, sales increased 1.1% versus the second quarter. Third quarter sales were in line with our expectations, reflecting broad-based and balanced growth across our portfolio.

On the supply side, some conditions improved during the quarter, resulting in an overall reduction in our backlog. While supply and lead times of client devices have indeed improved, pockets of pressure remain, especially in solution categories and our backlog remains very elevated.

As we've previously shared, we would expect our backlog to feather out over time as supply conditions can begin to ease and this will not likely be symmetrical across product offerings.

We continue to manage inventory strategically to support our customers who is still uncertain about supply environment, and the team did a great job leveraging CDW's competitive advantages to ensure strong returns on working capital. We once again had an excellent profitability in the quarter.

Gross profit was $1.2 billion, a year-over-year increase of 34.8%. Gross profit margin was a record 19.8%, up 250 basis points versus last year. The expansion in gross profit margin was driven by several factors. First, as we expected for the second half of the year, a greater mix in the netted-down revenues.

The category grew nearly twice as fast as overall net sales, primarily driven by Software as a Service. Second, product margins were strong, driven by both mix and demand for certain hardware products; and third, net sales contribution from high-margin services, which increased 70% year-over-year as a result of our recent acquisitions.

Turning to SG&A on Slide 9. Non-GAAP SG&A totaled $684 million for the quarter. The year-over-year increase in non-GAAP SG&A was primarily due to higher payroll consisting with higher gross profit attainment and higher coworker count.

Coworker count at the end of the third quarter was nearly 15,000, up approximately 400 from the prior quarter, reflecting investments in coworkers that support high-growth solutions and services as well as our own digital transformation.

Investments in our coworkers and in our strategy are integral to our ability to outgrow the market profitably and sustainably. We are focused on disciplined and balanced investments that will pay dividends. This is evidenced by our record sales and profitability in the period. GAAP operating income was $466 million, up 20.7% compared to the prior year.

Non-GAAP operating income was $549 million, up 26.2%. Non-GAAP operating income margin was a record 8.8%, up 60 basis points from the prior year and 40 basis points compared to the second quarter.

Overall, while we're very pleased with this outcome, it was above our expectations and driven by a confluence of factors within gross margin, including a favorable mix and rate of product margins, which we'd expect to moderate in Q4. Moving to Slide 10. Interest expense was $63 million.

Higher interest expense compared to the prior year was primarily driven by the senior notes issued last year to fund the acquisition of Sirius as well as the effect of higher interest rates on our floating rate debt. This level of interest expense was in line with our expectation for the quarter.

We have not changed our expectation of approximately $240 million for the full year. Our GAAP effective tax rate, shown on Slide 11, was 25.4%. This resulted in a third quarter tax expense of $101 million. To get to our non-GAAP effective tax rate, we adjust taxes consistent with non-GAAP net income add-backs, as shown on Slide 12.

For the quarter, our non-GAAP effective tax rate was 25.9%, up 60 basis points versus last year's rate as a result of an increase in nondeductible expenses and state taxes. As you can see on Slide 13, the third quarter weighted average diluted shares outstanding of $137 million, GAAP net income per diluted share was $2.17.

Our non-GAAP net income was $357 million in the quarter, up 20% on a year-over-year basis. Non-GAAP net income per diluted share was $2.60, up 22%. Year-to-date results can be found on Slides 14 through 19. Moving ahead to Slide 20. At period end, cash and cash equivalents were $358 million and net debt was $5.8 billion.

During the quarter, we reduced borrowings under a senior unsecured term loan by $400 million, consistent with our plan to reduce leverage. Liquidity remains strong with cash plus revolver availability of approximately $1.5 billion. Moving to Slide 21.

The 3-month average cash conversion cycle was 18 days, down 7 days from last year's third quarter and at the low end of our targeted range of high teens to low 20s, reflecting the impact of Sirius and our continued diligent management of working capital.

Our effective working capital management, along with strong growth in the business also drove excellent year-to-date free cash flow of over $1 billion, as shown on Slide 22.

For the quarter, we utilized cash consistent with our 2022 capital-allocation objectives, including returning $68 million to shareholders through dividends in addition to the $400 million in debt repayment, which brings me to our capital allocation on Slide 23. Our objectives remain consistent with what we shared last quarter.

First, increase the dividend in line with non-GAAP net income, including today's 18% increase to the dividend from $2 to $2.36 per share. The increased annual dividend represents approximately 25% of a trailing 12-month non-GAAP net income through September.

The Q4 2022 dividend demonstrates our confidence in the earnings power and cash flow generation in the business and marks the ninth consecutive year of increases since our initial public offering in 2013. Our dividend has grown at a compound annual growth rate of 34% from its initial level.

Going forward, we will continue to target a 25% payout ratio, growing the dividend in line with earnings. Second, we have the right capital structure in place with a targeted leverage ratio of 2.5 to 3x. We ended the third quarter at 2.7x, down from 3.4x at the end of 2021, demonstrating strong growth in the business and excellent cash generation.

While we're at the middle of our targeted net leverage range, we are balancing rating agency capital expectations, which would call for us to be towards the bottom of our range.

As such, we will continue to prioritize delevering until we are more firmly in our targeted net leverage range and can satisfy the commitments we made when we financed the acquisition of Sirius. We continue to expect to achieve this by the end of 2022.

And finally, while we continue to temporarily put a lower priority on our third and fourth capital-allocation objectives of M&A and share repurchases, we are firmly on the path to getting back to these priorities. Moving to the outlook for 2022 on Slide 24.

While we're cognizant of potential market variables as we look forward, we remain confident in our ability to execute, pivot to growth opportunities and outperform the broader market. We continue to expect the fourth quarter will reflect a greater mix in the netted-down revenues.

Recall that the accounting treatment for netted-down revenues as a dampening effect on our absolute net sales dollars but is neutral to gross profit dollars and thus results in higher gross margins, all else equal. With this in mind, we continue to expect U.S.

market growth of 4% and now expect to be at the upper end of our 325 to 425 basis point range of CDW market out-performance in constant currency, on a combined basis. Recall, we previously shared, we would expect to be at the higher end of our premium range if supply improves.

Conversely, if we experience elevated levels of supply constraints, or mix more into netted-down revenue streams, we would expect to be at the mid- to lower end of our premium range. On a combined basis, CDW's net sales would have been $22.8 billion in 2021, including $2.17 billion from Sirius.

On a reported basis, our full year net sales outlook equates to approximately 18.5% growth in constant currency. The change in currency exchange rates from our initial original outlook is now expected to be a headwind of $110 million to net sales in the fourth quarter and $260 million for the full year.

This assumes an exchange rate of $1.13 to the British pound and $0.73 for the Canadian dollar in the fourth quarter. Moving down the P&L. We continue to expect full year non-GAAP operating income margin to be in the low 8% range. This implies the fourth quarter will be the fourth consecutive quarter of 20% or higher operating profit growth.

We now expect full year non-GAAP earnings per diluted share growth to be roughly 16% in constant currency on a combined basis. This equates to approximately 23.5% full year growth in constant currency on a reported basis.

I would remind you that 2021 would have been $8.49 per share on a full year combined basis compared to our reported $7.97 per share, which included only 1 month of Sirius. The change in currency exchange rates from our original outlook is now expected to be a headwind of -- to EPS of $0.04 in the fourth quarter and $0.08 for the full year.

Please remember, we hold ourselves accountable for delivering our financial outlook on a full year constant-currency basis. Additional modeling thoughts for annual depreciation, amortization, interest expense and the non-GAAP effective tax rate can be found on Slide 25.

Moving to modeling thoughts for the fourth quarter, related to average daily sales, we expect a 0 to low single-digit sequential decline from Q3 to Q4. This equates to 9.75% to 10.75% year-over-year reported net sales growth rate for the fourth quarter.

We anticipate continued strong gross profit margin and NGOI margin in the fourth quarter at or above year-to-date average levels for both, reflecting some moderation from what we experienced in Q3. And we expect fourth quarter non-GAAP earnings per diluted share to grow in the range of 18.25% and 19.25% year-over-year on a reported basis.

Finally, we now expect full year free cash flow to be approximately 5% of net sales, exceeding the top end of our long-term free cash flow rule of thumb of 3.75% to 4.25% of net sales. As you know, timing has a meaningful impact on free cash flow, and it may ebb and flow by quarter and across years.

If you recall, 2021 free cash flow was 2.3% of net sales. In aggregate, we expect our 2021 and 2022 free cash flow to balance out and be within our free cash flow rule of thumb over the 2 years. That concludes the financial summary. As always, we will provide updated views on the macro environment and our business on future earnings calls.

And with that, I'll ask the operator to open it up for questions. We would ask each of you to limit your questions to 1 with a brief follow-up. Thank you..

[Operator Instructions]. Our first question is from Shannon Cross at Credit Suisse..

I guess I was wondering if you could talk a bit more about the EBIT, and it was very strong this quarter, obviously, and gross margin was strong. And I'm wondering how we should think about the progression as netted-down revenue becomes a larger percentage of the total -- I realize, obviously, some of it was probably from lower-client contribution.

But it seems that the model towards maybe a bit higher than EBIT guidance over time might be in place?.

Yes. Shannon, this is Al. So happy to address that. So as I mentioned, the NGOI margin and dollar result was largely driven by strong gross margin. So if we just take the components of gross margin for the quarter, a few things, Shannon, that I would note first, obviously, the benefit and accretive effect from Sirius which we've seen all year.

Number two, the effect of netted-down revenues, right, largely driven by focus on security, cloud, Software as a Service. We would view that component as pretty structural. Next, I would say, contributions from services. Again, we've made a lot of investments in that space. So we view that as largely structural.

And then the last component of our gross margin, Shannon, would be on the product side. And we've talked about through the year that we've had really favorable, both mix and rate on the product side. And that would be the 1 variable that we would see potentially could moderate.

And so obviously, in this supply environment, we've seen our customers favor a bit more speed over price. And that's led to a favorable mix and also strong rates. And so obviously, as we start to see supply ease a bit here, you could see that moderate, and that's what we're tending towards for Q4..

Okay. And then if you can just talk a bit more about client. I know you provided some comments during the remarks.

But if you could talk maybe what you're hearing from your customers in terms of what they're thinking about PC purchases as we look forward, is there any indication that some of the Chromebooks that perhaps were placed in 2020 will need to be refreshed? Or are there any education dollars that are available for that? Just any more color you can give would be great..

Shannon, it's Chris. I'll give you some color maybe on the overall PC trends we're seeing. And as expected, overall, the PC environment has moderated a bit versus the robust client device growth in 2021. But that said, our end markets are not synchronized.

So looking at the client-device growth across channels, for example, we helped customers with pent-up demand in our government segment in both federal and state and local.

Obviously, K-12 was down as expected, but our other segments, Commercial Healthcare, higher-ed channels, what they saw was upgrade experience, not right now a broad refresh but upgrading of experience, meaning higher-value PCs along with the collaboration tools and automation that helps with that experience.

What I would say is, I can't tell you exactly which channels are going to start picking up their client devices soon, but we are continuing to see the criticality of client devices [Technical Difficulty]. And so at the end of the day, we'll continue to profitably outperform the PC market for several reasons.

Number one, as we've said before, there's a very compelling commercial PC opportunity. When you think about the value PCs deliver -- so employee productivity, for example, and use cases and also PC product cycle.

We're already seeing some customers who are moving to Windows 11, a number of customers moving to Windows 11, particularly for things like security updates. And then the natural refresh. We've talked a lot about the aging of devices from 2018, '19, '20, and we'll see those refreshes start to kick in.

The other thing is think about the services that CDW wraps around PCs, which are very attractive to our customers. There are massive market opportunity available to us, addressable market opportunities when we think about cross-selling to our Sirius customers and also international.

And then the thing I finally say is that CDW has got the absolute best PC muscle in infrastructure, which has allowed us to outperform the market significantly in the past. And remember, when our partners are looking to move the needle in any arena, they look to CDW to help them do that.

So very confident PCs are critical to the future, moderated a bit, but still fundamentally part of the solution customers are looking for.

What I would say is right now, in terms of prioritizing, our customers are largely leaning into their infrastructure, the things that they had not invested in over the last couple of years, so infrastructure, cloud, security, things like that and priority and PCs are a little lower on the priority list..

Our next question comes from Amit Daryanani from Evercore ISI..

I guess the first one, you obviously have a very sizable upside to gross profit dollars despite the revenue that we think in line with consensus. Maybe to talk about how much of that is a structural shift towards more netted-down revenues versus perhaps mix of a bit more favorable.

And really the talk about the netted-down revenue map, I'm curious, at some point, does it start making sense, Chris, to talk about your ability to grow gross profit dollars at premium to IT spend versus talking about revenues going at premium to IT spends?.

Yes. Amit, this is Al. So similar to my response to Shannon there, really, if you tick down the list, again, the kind of the priority order of what contributed in gross margin, Sirius for sure, netted-down revenue, contributions from services and then on the product side.

And I would say that both the netted down and the contributions from services would be deemed a bit more structural. Certainly, from a product margin perspective, there's a structural component, but you're going to vary depending on mix in any given period. And so that's what we've been seeing.

To your question on guiding on gross profit, that's certainly something, Amit, that we talk about. Just remember beauty of our deep and broad portfolio means at any given time, you're going to have puts and takes in terms of where things show up and what our customers need.

And so what we discussed really there is there are going to be periods where there's stronger hardware contribution and refreshes and those types of things. And that's where certainly focusing on the net sales is important as well.

But as time goes by, and particularly as we see some of the supply conditions change, certainly, we'll talk more about kind of the contribution of gross profit and how we think about that from an outlook perspective..

Got it. And then if I just follow up, there's really notable deviation, I think, in the growth we're seeing out of the SMB bucket versus corporate. I know you talked about kind of what's driving this trend with net count that commentary and so on.

But maybe just tell on why are we seeing such a big divergence? And then is 1 a more leading indicator or not? Or is that not the way to think about it? Just any help on the deviation would be helpful..

Amit, it's Chris. On small business, it's been interesting. I would just start with the execution from the team. It's a cautious environment for sure, but the team is really helping customers navigate what's become ubiquitous impacts of technology across literally every aspect of their business.

And in the small-business arena, like all of our customers right now, there's a focus on mission-critical priorities. And that tends to be software, cloud and security led.

And so CDW, with the capabilities we've built within that segment, you'll recall we separated it out about 4, 5 years ago, we bring the full stack, full life cycle support for customers.

And we've been able to, over the past several quarters, really nimbly shift towards the solutions that maximize their prior investments and add services to the mix there.

So look, we continue to see momentum behind the strategic execution in small business, and we're really confident in our ability to leverage our broad-solution portfolio and pivot where the customers need us. And that right now is infrastructure solution and modernizing and optimizing and securing their networks.

What I would say also is this notion that technology has become more critical to business strategy is the same in small businesses. It's really no difference there. So thematically, customers are very much prioritizing their technology investments.

And while there's pressure on budgets for sure, and customers are being prudent, technology is getting a priority. So the pulse of our customers is pretty strong right now, and we're just staying very close to them in what's top of mind..

Our next question comes from Erik Woodring at Morgan Stanley..

Maybe I'll have one for each of you. So Chris, maybe if I just start with you.

Maybe can you help us understand what has been the biggest change to either kind of your end-market outlook or your customer discussions since we all were on your 2Q call 90 days ago, anything that is notable that you'd call out in terms of changes, either it's positive or negative? And then I have a follow-up..

Yes. Sure, Erik. Here's what I'd say between the 2 calls. And it's the words I just used before, where there's certainly, I'd say, incrementally more pressure on budgets generally for our customers. Look, there's persistent uncertainty out there. And when that happens, there's just pressure.

That said, customers are being prudent and what we are seeing consistently is notwithstanding that added scrutiny. Technology is being prioritized because it's reframed from a cost center to an asset of innovation, an enabler of cost efficiency and agility and risk mitigation and resilience and experience.

So technology touches everything that drives competitive advantage for our customers. Further, we are continuing to see a scarcity of talent in the market, coupled with the heightened complexity that technology brings and security risks continue to essentially explode. So you have all of that happening in a more pressured budget environment.

The good news for CDW is in those environments, our customers lean even more into CDW. And so the strategy that we've been executing with discipline over the last few years, has created -- has really strengthened our value prop.

I would say our value proposition and the broad-based portfolio, particularly of solutions and services has never been stronger. It's never been more relevant. It's never been more resonant with our customers and they can look to us to help them make the best decisions in an unbiased outcome-based way.

So I guess the point is more pressure right now, persistent uncertainty, but that actually drives the need for CDW even more..

Perfect. That's really helpful. And then, Al, maybe a follow-up for you. Historically, you do see a sequential expansion of gross margins in the December quarter. You made some comments about margin rates moderating from 3Q.

So maybe if you could just help us understand, again, some of the moving pieces as we think about 4Q margins, whether that's on the growth -- gross and/or operating side, just so we could think about what that might mean for seasonality versus what normal seasonality has historically looked like? And that's it for me..

Yes, sure. Thanks, Erik. So look, I would say Q4, I think, is going to be a decent reflection of what we've seen year-to-date, which has been really strong margins, both gross margins and NGOI. Q3 was exceptional. And I think I've called out some of the areas that really drove that, particularly on the product margin side.

So I would say it's stay the course pretty much on par with what we've seen for the year, notwithstanding that, again, as we start to see this feathering out of supply, it's conceivable you could see a bit of a moderation on the product margin side.

So that's basically been what you've seen year-to-date is low 19s on gross margin and low 8s on NGOI margin may be slightly better..

Our next question comes from Keith Housum at Northcoast Research..

Question for you guys on price increases that we've seen over the past year.

Have you guys seen a moderation of those price increases from the vendors and your ability to pass those on? And how has your customers buying decisions changed as most recently as a result of those based on the current environment?.

Keith, it's Chris. Yes, I would say on the price increases, first of all, the ubiquitous across the industry. We haven't seen them abate really. We have been able to pass them along.

And right now, given the continued supply constraints and the prioritization of technology, we're not expecting to see those abate anytime soon because customers are okay taking those on. We might start to see that sometime in 2023. But for right now, they're holding strong..

Great.

And what kind of -- and how should that contribute to actually your top-line growth you say this quarter?.

Yes, Keith, I'll take that. So I would -- it varies by channel and obviously varies by products. Certainly, there are pockets where we've had very solid unit growth. And then in some cases where net sales is more bolstered by ASP. And so that's going to vary by channel and by product.

But back to Chris' point, I would say, for the quarter and what we see now, ASPs continue to be firm. But we're certainly cognizant as supply changes, potentially some customer behaviors change, you could maybe see a bit of that easing of that, and that's why we're just being a little bit prudent on the product margin side..

Our next question is from Ruplu Bhattacharya from Bank of America Merrill Lynch..

I have 1 question on revenue growth and 1 on margin expansion..

Ruplu, we can't hear you..

Can you hear me?.

Not quite..

Can you hear me?.

Yes. Perfect. Thank you..

Okay. Great. Sorry about that. I had 1 question on revenue growth and 1 on margin expansion. So maybe I'll first the first one on revenue growth to you, Chris. At a high level, when we look at the commentary in the prepared remarks, it seems to indicate that there's ongoing strong end-market demand.

And yet, you are seeing some deceleration in year-on-year growth first half versus second half. So like the second half is growing mid-teens year-on-year based on your full year guidance versus low 20% year-on-year growth in the first half. That's still strong growth, but it is a decel.

So my question is, are you seeing any end-market demand deceleration in any end markets? Or is it all just a matter of more netted-down items and a change in mix?.

Yes, Ruplu, I would tell you that it is more mix than demand generated. Really, as we had expected, we have mixed more heavily into netted-down items, even a little bit more than we expected, and that really is the main driver of the pressure on the top line. And that's -- from a deceleration perspective, like I said before, there's pressure.

PCs have moderated, as we said. But really, otherwise, we're seeing what I would consider pretty robust demand and performance as a result..

Okay. Thanks for that. Maybe I'll ask the margin question to Al. So the full year guide is for a low 8% operating margin, and that's really good margin performance compared to your peers. But my question would be like can you talk to us about factors that can drive margin expansion beyond that? And if the U.S.

were to go into a more protracted recession, can you still expand margin? So what do you need to have either from a revenue growth standpoint or a mix standpoint? I mean do you think that even in a slower demand environment or in a recessionary environment, are there factors, are there levers that you have to expand margins beyond this?.

Sure, Ruplu. I'll take that. This is Al. Back to my comments on just the components really starting with gross margin and the fact that we would deem the more netted-down categories. Remember, cloud, security, Software as a Service as structural.

And my comments there are more kind of over time, but also certainly thematically important in this environment. If you think about what we're talking about there, right? You got a lot of customers that are focused on how do I drive productivity, how do we get to the cloud, how do I reduce my costs.

So thematically, structurally, we think there's durability there. Same thing with services, right? Now we've bolstered and we've made significant investments on services. But also in times like this, this is where our customers look to us, they need assistance more so than ever. So those components really, really important.

And then just look to the beyond the gross margin down to NGOI margin, it's important for us that we, just like our customers, remain very diligent and thoughtful about our spend, and we are on the pulse of our customers and what's happening and making sure that both the timing, the size and the criticality of our investments are always top of mind, and that's how we try to manage -- kind of manage the margin profile over time.

So hopefully, that's helpful..

Our next question is from Samik Chatterjee from JPMorgan Chase..

I guess for the first one, we've seen a few other enterprise suppliers report already. And I think in relation to sort of pulled back or a bit of a sort of pressure on customer budgets that's not as surprising to hear at this point. But they've also indicated a bit more pressure when it comes to the international markets, particularly EMEA.

I was just wondering, Chris, I mean, is there a difference you're seeing in terms of engagement with customers in the U.S. versus in the international markets? Is there a bit more of a pushback or a pullback in terms of thinking about budgets for next year in the international markets? Maybe your insights on that front will help.

And I have a follow-up..

digital transformation, security, cloud, collaboration, et cetera. And also the criticality of technology is obviously central to companies and organizations over in the U.K. That said, it is a tougher environment.

And so I would just say that I attribute our ability to perform as well as we have been and in particular, this quarter, which was exceptional performance to the execution of the team and their ability to stay close to their customers, know what their customers need access, supply and provide the professional services at the front end for advice and counseling to ensure the highest return on technology investment.

And that trusted adviser rule, you can never underestimate the impact that has on results in a market that is really in. It's very dynamic, I would say. So we expect them to continue to perform well despite the external factors..

Okay. Got it.

And a follow-up, if I could get an update on the growth rate you're seeing or the growth trajectory you're seeing at Sirius and I know you mentioned sort of challenges around hiring talent at your customers, but what sort of constraints you might be having at the same time on Sirius and your ability to sort of scale that business? What are you trying to think about sort of how accretive it is to your out-performance to underlying industry growth, particularly as we start thinking about next year?.

Yes, sure. On the talent side, I would say, look, everybody is feeling tightness in the labor markets, but our position as the best place to work has been pretty solid for a very long time. And we have not seen length to fill or quality diminish at all. We've been very pleased with our ability to bring in talent.

Part of that, I believe, is because it's a great place to work, but equally, the development of our technical talent in particular, is top of the list. So if you even look this year at the number of certifications has increased dramatically, particularly around cloud services, for example, in security services.

So CDW is a place to be if you're a technologist and that bodes well in the market. And as a result, obviously, we've been able to -- it's reflected in the performance.

As a result, we've been able to help our customers with talent orchestration where they have talent scarcity and we've been able to staff professional services engagements at a very fast pace. So we're -- look, it's tough, it's a tough market, but we aren't inhibited by it right now, which is great..

Our next question comes from Mark Cash at Raymond James..

This is Mark on for Adam. It sounds like cloud and SaaS are doing very well for you and up by about 4Q. But assuming out of that, I think there's some earnings on the hyperscaler slowing down.

Are you starting to see any of that impact to the pipeline? Or just the broad customer base, things like the strong digital transformation and security demand help keep you insulated from that somewhat?.

No, I think it could be a short answer. No, we aren't seeing that slowdown actually. We're seeing cloud continue to accelerate. And I don't need to take through all the reasons for you why that's happening. But look, with regard to our customers, we've got customers who are -- some are just starting the journey to the cloud. Some are on the journey.

Some are trying to optimize the cloud. Some are moving optimized cloud and on-prem. And there's just a lot of opportunity to support customers in this journey. But we certainly are not seeing it start to slow down..

Okay. Perfect. And then just a follow-up. I appreciate the update on the backlog you guys provided. Also wonder if you can update on what you're seeing around potential risk of double ordering and cancellations and a slowdown to the backlog..

Yes. Sure, Mark. We continue to not see any evidence of double ordering or canceling. So I would say that just the clarity and the commitment of our customers to the products they originally want and what we're delivering has been pretty solid, pretty seamless. So no concerns there..

Our next question then comes from James Suva at Citigroup..

Great. I had a question about higher labor rates, both on your cost of goods sold buying as well as your kind of OpEx line.

Do the clients and customers kind of see it or notice it? Or is it just kind of all built-in? And are those creating a little bit more challenging thing for your customers? And then as we approach the end of this calendar year, can you remind us about like annual merit increases or anything like that on the OpEx line regarding higher wages and just cost of living adjustments and things like that?.

Yes, good question about labor because it's a pretty dynamic and fluid market. With regard to our own folks, remember that we are a highly variable compensation organization with a significant amount of compensation geared to performance.

So that is a positive thing, and it doesn't really put as much pressure on kind of raising cost at the baseline level because there's opportunity on the upside with performance. With regard to fees for professional services, for example, we do bring those up, like the rest of the industry in line with inflation.

And that lags a little bit, right, when you bring it up because you got contracts in place. But so far, customers again, when it's a critical -- and it's a critical project, customers do not back at the expertise they need.

It's just you've got your go-to trusted advisers and you're willing to pay for that because, look, there's pressure, and there's a lot at stake in getting the technology right. In terms of our raises going into next year, performance raises, we're in the middle of evaluating that, and we'll know what we're doing when we get to next year..

We have no further questions on the call. So I will hand back to Chris Leahy to conclude..

Okay. Well, thank you, Seb. Let me close by recognizing the incredible dedication and hard work of our nearly 15,000 coworkers around the globe. Their ongoing commitment to serving our customers is what makes us successful.

Thank you to our customers for the privilege and opportunity to help you achieve your goals and thank you to those listening for your time and continued interest in CDW. Al and I look forward to talking with you next quarter..

This concludes today's conference call. Thank you all for dialing in. You may now disconnect your lines..