CDW Corporation (NASDAQ:CDW) Q4 2022 Earnings Call Transcript

CDW Corporation (NASDAQ:CDW) Q4 2022 Earnings Call Transcript February 8, 2023

Operator: Hello, and welcome to CDW Fourth Quarter 2022 Earnings Call. My name is Drew, and I will be your operator today. . I would now like to turn the call over to Steve O’Brien, Investor Relations. Please go ahead.

Steve O’Brien: Thank you, Drew. Good morning, everyone. Joining me today to review our fourth quarter and full-year 2022 results are Chris Leahy, our President and Chief Executive Officer and Chair; and Al Miralles, our Chief Financial Officer. Our fourth quarter and full-year 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 risks and uncertainties that could cause actual results to differ materially.

Additional information concerning these risks and uncertainties is contained in the earnings release and Form 8-K, we furnished to the SEC today and in the company’s other filings with the SEC. CDW assumes no obligation to update the information presented during this webcast. Our presentation also includes certain non-GAAP financial measures, including non-GAAP operating income, non-GAAP operating income margin, non-GAAP net income and non-GAAP earnings per share. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You’ll find reconciliation charts in the slides for today’s webcast and in our earnings release and Form 8-K we furnished to the SEC today. Please note, all references to growth rates or dollar amount changes in our remarks today are versus the comparable period in 2021, unless otherwise indicated.

Replay of this webcast will be posted to our website later today. I want to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast without specific written permission from the company. With that, let me turn the call over to Chris.

Chris Leahy: Thank you, Steve. Good morning, everyone. I’ll begin our call with an overview of our fourth quarter and full-year performance and share some thoughts on our strategic progress and expectations for 2023. Then I’ll hand it over to Al, who will take you through a more detailed review of the financials as well as our capital allocation strategy and outlook. We will move quickly through our prepared remarks to ensure we have plenty of time for questions. Our fourth quarter was an excellent example of the power of our business model when coupled with our broad and deep portfolio of technology solutions. In an extraordinary period of shifting customer priorities, we delivered record profitability. For the quarter, net sales were $5.4 billion, $100 million below 2021, and roughly flat on a constant currency basis.

Non-GAAP operating income was $523 million, 23% above last year; and non-GAAP net income per share was $2.50, up 21% year-over-year, up 22% on a constant currency basis. These results were driven by the team’s ability to pivot to meet customer priorities and capture high relevance, high growth opportunities. This led to excellent performance across services, cloud, security, and software. Performance that drove record profitability and exceptional outcome given market dynamics and an outcome that is a direct result of the investments we have made in solutions and services over the past several years. Simply put our ability to deliver outcomes across the full stack and full lifecycle of technology drove strong profit growth notwithstanding a meaningful decline in client devices.

This quarter clearly demonstrates the power of our strategy when combined with the resiliency of our business model. So what happened to client devices this quarter? While we expected some level of contraction in client devices and accessories given the past two years of heavy investment, the magnitude of the decline in the fourth quarter was certainly steeper than anticipated. The primary driver was the K-12 market, which represented roughly half of the client device decline. We also saw a general moderation in client device demand across channels as economic uncertainty increased. As we always do, we stayed the course on our playbook and maintained our discipline with a focus on our customer and our value proposition. This discipline contributed to this quarter’s excellent cash flows and strong economic returns.

In Q4, the combination of lower transactional business and the team’s success delivering on customer demand for solutions and services led to a meaningful shift in our sales mix. Let me put this in perspective for you. You’ve heard us speak over time about the impact of solutions mix and notably netted-down revenue streams on our financial results. As we have grown our netted-down revenue streams over time, total annual customer spend has consistently grown a few hundred basis points faster than net sales. In periods where we mix into more solutions business that nets down and mix out of client device business that fully shows up in net sales that growth rate spread will be wider. In Q4 an extreme mix shift took place. The result was meaningful customer spend growth significantly dampened net sales growth and very healthy gross margins that drove delivery of gross profit.

Now let’s turn briefly to the full-year results. 2022 was a year of financial performance underpinned by progress on our three-part strategy for growth. The first pillar of our strategy is to capture share and acquire new customers. One way we do this is through strategic acquisitions. The addition of Sirius is a great example of this. Sirius elevated and expanded our services capabilities providing an excellent cross-sell opportunity into our existing customer base. At the same time, Sirius customers represent excellent cross-sell opportunity given the broader CDW portfolio. The second pillar of our strategy is to enhance capabilities in high-growth solutions areas. Strategic coworker investments contributed to excellent solutions performance through 2022, with strong growth in cloud, security and network upgrades.

The third pillar of our strategy is to expand services capabilities. As a key enabler of our value proposition, services are fundamental to our full stack, full lifecycle, full outcomes go-to-market approach. Services engagement solves critical customer problems and drive enduring customer relationships. In 2022, the team delivered more than 20% services growth across the business. No doubt, our acquisitions have accelerated our services breadth and depth and have been foundational to our success. 2022 was indeed a year of strategic performance across all three of our priorities. It was also a year of exceptional financial performance. The team delivered record results with constant currency net sales growth of 15% and each profit category down the P&L statement up 20% or more.

Results enabled by ongoing investment in our three-part growth strategy, investments that have made us a vital technology partner, whether customers’ priorities require transactional or highly complex solutions. You see the impact of these investments on our fourth quarter performance as the team pivoted to meet customer shifting priorities and advise, design and orchestrate full outcomes. Outcomes that deliver five key organizational benefits: innovation, lower cost, agility, risk mitigation, and enhanced experiences for customers and coworkers. Let’s take a closer look at the fourth quarter. There were three main drivers of our fourth quarter results: our balanced portfolio of customer end markets, breadth of our product solutions and services portfolio, and relentless execution of our three-part strategy.

First, the balanced portfolio of our diverse customer end markets. As you know, we have five U.S. sales channels: corporate, small business, healthcare, government and education. Each channel is a meaningful business on its own with annual sales ranging from $1.9 billion to over $10 billion over the last 12 months. Within each channel, teams are further segmented to focus on customer end markets, including geographies and verticals. We also have our UK and Canadian operations, which together delivered sales of US$2.9 billion. Our corporate team delivered another strong quarter with a 7% sales increase. The team helps customers accelerate implementation of priorities to automate tasks, detect fraud and enhance customer and employee experiences.

This drove excellent cloud software and security results. Our ability to address priorities focused on application and network modernization and consumption-based data center solutions led to excellent services and net comp performance, each up double-digits. Economic uncertainty led customers to de-prioritize endpoint solutions, which resulted in a decline in client devices. Small business declined 13%. The team pivoted to help customers address priorities to maximize prior IT investments and identify savings opportunities to fund new and ongoing projects. At the same time, the team helped customers address mission-critical priorities around security and take advantage of the benefits of cloud, both with heightened urgency. Strong growth from security and cloud were balanced against the decline in client devices as customers put upgrades on hold awaiting greater clarity around the economy and employment plans.

Strong results across healthcare and government cannot offset the decline in education driven by K-12 client device dynamics and public sales decreased 9% year-over-year. The healthcare team delivered another excellent quarter of robust growth, up 8%. Talent needs and data center projects remain key focus areas as customers increasingly thought technology solutions to address complex industry challenges. This drove excellent performance in NetComm, servers and services. Mission-critical investments to enhance patient care and experience continued with telehealth and telesitting driving excellent collaboration performance. Government grew double-digits, up 13.5%. Strong state and local sales growth continued, driven by customer adoption of IT strategies for hybrid cloud, as well as network modernization and Zero Trust security frameworks.

Services increased more than 50%, as the team helps state and local municipalities address talent gaps through enhanced training as well as professional services engagements. Federal also continued to grow in the fourth quarter. The team’s ability to help agencies achieve their priorities around data management drove excellent server and storage performance. For education, higher ed high single-digit sales growth was more than offset by declines in K-12 and overall sales decreased. Higher ed continued their success helping implement student success programs, which institutions use to promote enrollment. Our ability to help drive program elements that include improved security, campus connectivity as well as enhanced storm room experiences drove double-digit growth across cloud, NetComm, server, storage, software and security.

For K-12, we expected a continuation of third quarter performance where sales were down low-double-digits but instead experienced a more significant decline with client device units down more than 68%. As we shared last quarter, K-12 customers continued to focus on digesting the past several years’ investments and evaluating multi-year funding opportunities to ensure they are making the best decisions for the future. This quarter, as many schools achieved one-to-one student client device ratios, there was a significantly heightened focus on reevaluating plans, and demonstrating need for ECF awards. When the device per student ratio was below 1:1 demonstrating need was straightforward. Today, with device per student at or above the 1:1 ratio, demonstrating need is more complex.

For example, articulating why new devices with higher processor capability are required to run more complex applications or provide greater security is just a more complicated discussion and takes more time and approval. This heightened focus led some customers to defer or retract awarded funding commitments in order to assess, reevaluate and potentially reapply under the third and final wave of ECF, which is scheduled to end December 31, 2023. For CDW, this equated to several hundred million dollars of CDW awarded funding commitments being pulled back. I should note that even with these dynamic variables in the K-12 client devices arena, the team successfully executed on infrastructure opportunities across services, NetComm and servers, leading to strong gross profit delivery.

And just as we’ve been doing in past cycles with K-12, the team will be there for our customers to help them work through the challenges to achieve their mission-critical outcomes and efficiently utilize available funding mechanisms. Other, our combined UK and Canada results reflected broad-based and balanced performance in both regions in local currency. UK increased low-double-digits in local currency and Canada increased high-single-digits in local currency. These results continue to demonstrate the grit and resilience of our teams and the power of our investments to drive growth in these markets. As you can see, our diverse end markets are both a key strategic advantage and a driver of our differentiated performance. The second driver of our performance was the broad and deep portfolio.

Our ability to address priorities across the entire IT continuum delivered high-single-digit growth across our solutions portfolio. U.S. hardware sales declined mid-teens. Within hardware, network modernization upgrades drove double-digit increases in NetComm. These excellent results were not enough to offset the decline in client devices and wraparound accessories. Supply conditions continued to improve across core transactional areas, while supply and solutions categories remained tight. Once again, we exited the quarter with an elevated backlog and extended lead times and solutions and notably in NetComm. We continue to expect this backlog to feather out over time. U.S. software sales increased 8%. Strength was broad-based as we continue to help customers manage data, enhance productivity and secure their IT environment with strong double-digit increases in operating systems, application suites and data management.

Cloud remained an important driver of performance across the business and was a meaningful contributor to profitability. Once again, gross profit increased by double-digits. Compute database, storage, mobility and connectivity were key cloud workloads during the period. Security remains top of mind for our customers as cyber threats continue to emerge, evolve and increase. Our teams delivered excellent results as they continue to conduct vulnerability assessments, implement identity and access management solutions and provide training to our customers to help manage cloud deployments and enhance endpoint and application security. Services results were stellar again this quarter, up more than 20% with balanced performance across professional and managed services.

Services are integral to today’s complex technology solutions. Customers continue to lean into CDW as an extension of their own teams and leverage CDW services as part of their strategy. And that leads to the third driver of our performance this quarter, relentless execution of our three-part growth strategy. Clearly, investments in our customer-centric growth strategy contributed to our strong profitability this quarter. Investments in services and solutions have elevated our relevance to customers for the highest level it has ever been. Our rigorous strategic process that is designed to ensure we can serve customers across the full stack, full lifecycle has made us a vital technology partner, whether customers’ priorities require transactional or highly complex solutions.

And that leads us to our 2023 outlook. Our baseline view of the U.S. IT market in 2023 is for flattish growth, factoring in both expected mix and the level of overall economic uncertainty. Consistent with economic forecast, this outlook assumes stronger growth in the second half relative to the first half. We continue to target CDW market outperformance of between 200 basis points and 300 basis points. Our current view of the market recognizes we are operating under greater uncertainty as it incorporates the potential impact of some of our recent wildcards and indeed, most notably the economy. With thousands of sellers connecting with customers every day, we have a real-time pulse of the market. As we always do, we will provide an updated perspective on business conditions and refine our view of the market as we move through the year.

In the meantime, we will continue to do what we do best, leverage our competitive advantages and out-execute the competition. Our fourth quarter results highlight that although we cannot definitively know where our customers will place their priorities; there are two things we know for sure. Technology will continue to be a critical driver of outcomes. And with our agility and broadened deep portfolio, we will be there to support our customers wherever their priorities now live. Now let me turn it over to Al, who will provide more detail on our financials and outlook. Al?

Al Miralles: Thank you, Chris, and good morning, everyone. I’ll start my prepared remarks with additional detail on the fourth quarter and full-year, move to capital allocation priorities and then finish up with our 2023 outlook. Turning to our fourth quarter P&L on Slide 8. Consolidated net sales were $5.4 billion, down 1.8% on a reported and an average daily sales basis. On a constant currency average daily sales basis, consolidated net sales declined 0.4%. Net sales were impacted by the significant change in client device demand during the quarter. With the decline in transactional products, there was a meaningful mix shift to solutions and services. Before moving down the rest of the P&L, I want to take a moment to talk about the impact of mixing into solutions and services on our results.

Certain solutions such as Software-as-a-Service, software assurance and warranty solutions as well as aging commission fees generate meaningful customer spend but are recorded on a netted-down basis. Since we are not the primary obligor on these solutions, we record gross profit as our revenue. That is why you sometimes hear us refer to these netted-down revenues as 100% gross margin items. You certainly see the impact of this in both our net sales and our gross margin performance this quarter. As we continue to execute on our growth strategy and scale our solutions and services, we expect to continue to grow our netted-down revenue streams. All else equal, this mix dynamic will pressure net sales while remaining neutral to gross profit dollars and expanding gross margins.

While much of what I’ve described is tied into the accounting treatment, it is also reflection of our success in the execution of our three-part strategy to capture share, enhance capabilities in high-growth solutions and expand services. The impact of this strategy was on full display this quarter as we experienced a significant mix shift out of client devices and into netted-down revenues, reflective of our customers’ priorities. Returning to the P&L. Sequentially, net sales decreased 12.5% versus the third quarter. Fourth quarter sales historically decreased versus the third quarter but this quarter was exacerbated by the decline in demand for client devices. To dimensionalize the shortfall in net sales relative to our expectations, two-thirds of lower net sales were related to the public sector and driven primarily by K-12.

In aggregate, solution categories delivered results above our expectations. Notwithstanding the noted mix shift of customer priorities, with respect to customer behavior, we did see increased scrutiny and deeper evaluation of projects and extra signatures increasingly required. In this environment, our sellers are staying close to their customers and working with their technical coworkers to help customers maximize return on investments. While we’ve not seen meaningful customer cancellations, we have seen some postponements and re-architecting on more complex hybrid cloud solutions as customers balance cost and utility. On the supply side, we saw similar conditions as in the third quarter with some improvement across categories but pockets of pressure remaining, especially in the solutions space.

Our solutions backlog remains elevated versus historic levels and lead times are still extended. We expect our backlog to feather out over time as supply conditions ease, although not likely symmetrical across product categories. We continue to manage inventory strategically to support our customers through this still uncertain supply environment. And just like our customers in this environment, our team is diligently managing working capital as we seek to enable profitable growth while ensuring strong economic returns. Our coworkers delivered excellent profitability in the quarter. Gross profit was $1.2 billion, a year-over-year increase of 21.1%, lapping for the first time a one-month serious contribution in the fourth quarter of 2021. Gross profit margin was a record 21.7%, up 410 basis points versus last year and 190 basis points above our prior year quarter record.

The year-over-year expansion in gross profit margin was driven by several factors. First, product margins benefited from both mix into complex hybrid cloud solutions and lower mix of transactional products. When we mix back into transactional products, we would expect for this benefit to moderate. Second, as we expected for the fourth quarter, a greater mix in the netted-down revenues. The category outpaced overall net sales growing 26% in Q4 2022 compared to the prior year quarter, primarily driven by Software-as-a-Service. And third, net sales contribution from high-margin services, which increased 28% in Q4 2022 compared to the prior year quarter with significant contribution from our recent acquisitions. Turning to SG&A on Slide 9. Non-GAAP SG&A totaled $658 million for the quarter.

The year-over-year increase in non-GAAP SG&A was primarily due to higher payroll consistent with higher gross profit attainment and higher coworker count. SG&A declined by $26 million compared to the third quarter, reflecting the variable component of our compensation structure, which is principally tied to gross profit attainment. In this uncertain economic environment, we are also being mindful of our discretionary spending and our pace of our hiring. Our fourth quarter expense levels reflect both the benefits of our variable cost model and our prudent expense management. Coworker count at the end of the fourth quarter was nearly 15,100, up approximately 1,100 in the last year and essentially unchanged since the third quarter. Investments in our coworkers and in our strategy continue to be integral to our ability to outgrow the market profitably and sustainably.

We are focused on disciplined and balanced investments that drive value. This is evidenced by our record profitability in the period. GAAP operating income was $447 million, up 31.6% compared to the prior year. Non-GAAP operating income was $523 million, up 23.2%. Non-GAAP operating income margin was a record 9.6%, up 190 basis points from the prior year and 80 basis points compared to the third quarter. Similar to the third quarter, this improvement was driven by a confluence of favorable factors within gross margin. Moving to Slide 10. Interest expense was $59 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. This level of interest expense was in line with our expectation for the quarter.

Our GAAP effective tax rate, shown on Slide 11, was 24.7%. This resulted in fourth quarter tax expense of $94 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 25.2%, 30 basis points below our expected range of 25.5% to 26.5% due to lower state taxes as well as non-deductible items. As you can see on Slide 13, with fourth quarter weighted average diluted shares of $137 million, GAAP net income per diluted share was $2.09. Our non-GAAP net income was $343 million in the quarter, up 20% on a year-over-year basis. Non-GAAP net income per diluted share was $2.50, up 21%. Turning to full-year results on Slide 14 through 19.

As Chris mentioned, 2022 performance reflected exceptional execution, relentless focus and a strategy that is working. Net sales were $23.7 billion, an increase of 14% on a reported and an average daily sales basis. On a constant currency average daily sales basis, full-year consolidated net sales grew 15.2%. On a combined constant currency basis, we estimate full-year sales increased 5%, below our prior expectation of 8.25% due to the moderation in IT market growth as well as a contraction in our premium in the fourth quarter. Gross profit was $4.7 billion, up 31.3% and grew 19.7%, up approximately 260 basis points year-over-year. In 2022, software and services accounted for more than 40% of the total gross profit. Organic and inorganic investments in our services and solutions capabilities and a continued shift in the netted-down revenues are driving growth.

Operating income was $1.7 billion and non-GAAP operating income was $2.1 billion, up 24.6%. Net income was $1.1 billion, and non-GAAP net income was $1.3 billion, up 19.9%. Non-GAAP net income per share was $9.79, up 22.9%. Moving ahead to Slide 20. At period end, cash and cash equivalents were $315 million and net debt was $5.6 billion. During the quarter, we reduced borrowings under our senior unsecured term loan by $200 million, consistent with our plan to reduce leverage. Liquidity remains strong with cash plus revolver availability of approximately $1.4 billion. Moving to Slide 21. The three-month average cash conversion cycle was 21 days, down three days from last year’s fourth quarter, and within our range of high teens to low-20s, reflecting 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 $1.3 billion, as shown on Slide 22. For the quarter, we utilized cash consistent with our 2022 capital allocation objective, including returning $80 million to shareholders through dividends in addition to $200 million in debt repayment, which brings me to our capital allocation on Slide 23. Our execution remains consistent with objectives we communicated last quarter. For 2023, we’re updating those objectives as follows: first, as always, increase the dividend in line with non-GAAP net income. Last November, we increased the dividend 18% to $2.36 annually. This increase demonstrates our confidence in the earnings power and cash flow generation of the business.

Going forward, we’ll continue to target a 25% payout ratio growing the dividend in line with earnings. Second, ensure we have the right capital structure in place with a targeted net leverage ratio. We ended the fourth quarter at 2.6x net leverage, down from 3.4x at the end of 2021, demonstrating strong growth in the business and excellent cash flow generation. As we expected and communicated during the third quarter call, 2.6x had us near the lower end of our 2022 targeted net leverage of 2.5x to 3x. For 2023 and beyond, our targeted net leverage ratio will be 2x to 3x, a range that is consistent with our commitment to an investment-grade capital structure and provides us with flexibility to proactively manage liquidity over time. Finally, we have successfully satisfied the commitments we made when we financed the acquisition of Sirius.

As such, we are pleased to have reestablished our third and fourth capital allocation priorities of M&A, and share repurchases, respectively in 2023. For 2023, we will target returning 50% to 75% of free cash flow to investors through dividends and share repurchases. This is supported by the Board’s authorization for a $750 million increase in the company’s share repurchase programs. Moving to the outlook for 2023 on Slide 24. While we are cognizant of potential market variables as we look forward, we remain confident in our ability to execute, pivoted growth opportunities and outperform the broader market. While the overall IT market growth rate sentiment has been mixed, in the near-term, we continue to expect netted-down revenues will grow faster than other product and solution categories.

With this in mind, we expect the IT market to be approximately flattish, reflecting our expectation of mix and the level of economic uncertainty. We maintain our long-held expectation to outgrow the market by 200 basis points to 300 basis points per year. Currency is expected to be neutral for the full-year, with modest headwinds in the first half and modest tailwinds in the second half. This assumes an exchange rate of $1.24 to the British pound and $0.77 for the Canadian dollar in the first quarter. Moving down the P&L. We expect our full-year non-GAAP operating income margin to be in the mid to high 8% range. We expect full-year non-GAAP earnings per diluted share growth to be at the upper end of a mid-single-digit range in constant currency.

Please remember, we hold ourselves accountable for delivering our financial outlook on a full-year constant currency basis. Additional modeling thoughts for annual depreciation and amortization, interest expense and the non-GAAP effective tax rate can be found on Slide 25. Moving to modeling thoughts for the first quarter related to average daily sales, we expect low-single-digit sequential growth from Q4 to Q1. This equates to a mid-single-digit percent year-over-year reported net sales decline for the fourth quarter. We anticipate continued strong gross profit margin and NGOI margin in the first quarter above the full-year 2022 levels for both but reflecting some moderation from what we experienced in Q4. And we expect first quarter non-GAAP earnings per diluted share to grow low-single-digits year-over-year.

Finally, in line with the reevaluation of our capital priorities, we’re adjusting our long-term rule of thumb for full-year free cash flow. In 2023, we expect full-year free cash flow to be within a range of 4% to 4.5% of net sales, up from our prior range of 3.75% to 4.25%. As you know, timing has a meaningful impact on free cash flow, and it may ebb and flow by quarter and across years. That concludes the financial summary. As always, we will provide updated views on the macro environment and our business on our future earnings calls. With that, I’ll ask the operator to open up for questions. We’d ask each of you to limit your questions to one with a brief follow-up. Thank you.

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Q&A Session

Operator: Thank you. We’ll now start today’s Q&A session. . Our first question today comes from Matt Sheerin from Stifel. Your line is now open.

Matt Sheerin: Yes. Thank you, and good morning, everyone. I was hoping to ask just questions regarding your take on the client device environment. Not a big surprise that it was down significantly, particularly in K-12. But could you talk about the commercial side of the business? It sounds like some customers are being more cautious on upgrades. What’s your thought on the PC cycle on the commercial side of the business and how you see that playing out this year?

Chris Leahy: Good morning, Matt. Yes. It’s a good question. We have seen customers elongate the replacement cycle given the uncertain times. I mean you’re seeing what we’re seeing with hiring freezes and layoffs and things like that. So right now, there’s just more pause than we had seen earlier in the year. Eventually, the benefit of enhanced productivity and security from the newer replacements will certainly drive a replacement cycle, but it’s not happening right now with the level of uncertainty.

Matt Sheerin: Okay. And that’s not contemplated then in your forecast for the year?

Chris Leahy: A rebound?

Matt Sheerin: In terms of a — yes, yes.

Chris Leahy: Yes. Our forecast contemplates the environment to feel pretty much like it feels now. That’s what we’ve reflected in the forecast. I mean we do expect the PC market to remain larger than it was pre-pandemic. But right now, our forecast reflects the current environment and the current temperature.

Matt Sheerin: Okay. And then in line with that, are you also seeing pricing pressure or ASP declines as memory and other component prices come down? And is that also going to be reflected in your business?

Al Miralles: Yes. Good morning, Matt. This is Al. We are not seeing — I would say ASPs in the fourth quarter and ongoing continue to be really firm. And so that is not contemplated in our outlook.

Operator: Our next question today comes from Ruplu Bhattacharya from Bank of America Merrill Lynch. Your line is now open.

Ruplu Bhattacharya: Hi, thank you for taking my questions. Chris, from the prepared remarks, I mean it’s clear that client devices are weak and likely will remain weak in the near-term. But if we think about it, if SMB is really a bellwether for the macro economy, are you concerned that demand for advanced solutions or data center devices like servers and storage that demand can also moderate? So what have you assumed for sustainability of that demand through 2023? And I think in the prepared remarks, you guided for kind of the seasonality in this year to be skewed more to the second half versus the first half. So what are you expecting to be stronger in the second half of 2023?

Chris Leahy: Good morning, Ruplu. Let me break that out. There are a couple of questions in there. Let me just start with the small business. And what I’d say on small business is the team is really executing well in a fairly cautious environment. And as I did mention, we are helping customers with priorities around infrastructure, networking, et cetera, primarily led by software and cloud. And of course, security is still top of mind. So what we’re not seeing is a dampening in the small business of the need to modernize their infrastructure and maximize their prior investments. So we’re seeing — what I would say is continued steady demand from our small business customers for sure, with an emphasis again on cloud and security.

In terms of the split, first half to second half of the year, I’m going to let Al address that in terms of the seasonality there. And then I think there was another question in there that you had, which was — was there another question that you had?

Ruplu Bhattacharya: Or just the sustainability of demand for servers and storage and solutions throughout the year. I mean do you think that, that can be better in the second half? Or do you think it’s a sense at this level throughout the year?

Chris Leahy: Yes. Here’s what I’d say. I think as we’ve said for a while now, technology has become more vital to every walk of life into competitive advantage into success, et cetera. And we believe it’s going to probably be more resilient to a challenging economic environment. Equally, given our business model and the strength of our portfolio, our ability to capture opportunity in a more difficult environment is pretty strong. But our expectation is for a level of resiliency in the technology space.