And remember, you know, sometimes when you get pushed out by a quarter or so in terms of the government decision making, oftentimes you just need to get the PO [ph] in by the end of the year. So it’s possible we see some of it pushed even into the following year. That January sometimes happens. But what I would just tell you is we knew it was coming. We’ve been working with the customers poised to start moving the orders, and I feel quite good around federal playing out seasonally for the year.
Matt Sheerin: Okay. Thank you for that. And then just as a follow up concerning the client device demand that you’re starting to see pick up, are you seeing any interest or traction on AI enabled PCs yet, or is that still early?
Chris Leahy: You know, Matt, I would say it’s still early. And when we looked at the units that we’re selling now, really minimally, AI PCs, they’re the Windows 11 and Apple next generation. And the impetus is really threefold. It’s just refresh aging machines. It’s get to Windows 11, frankly. And it’s also an interest in getting ahead of any increasing demand. You know, we are finding customers having longer memories when it comes to the pandemic and remembering that sometimes just in time doesn’t work because you got to stay ahead of the supply. So that’s also been a factor in the positive signs that we’re seeing. I’d also say, look you know, I mentioned it before, it’s a low friction purchase and it’s a kind of no regrets when you put together aging machines.
The need for Windows 11 with kind of stable landscape, customers are starting to move forward. The AI PCs will come. There is interest. There’s a lot of talk with customers, a lot of talk around which personas are they best going to be used for. But right now, what we’re – what our partners are providing has ample compute power to handle the AI that is in current form.
Matt Sheerin: Okay, thank you very much.
Operator: Our next question comes from Erik Woodring from Morgan Stanley.
Erik Woodring: Great. Thanks so much for taking my questions this morning. Chris, maybe I’d love if you could maybe unpackage some of your pipeline comments a bit more outside of federal if we put that to the side. You mentioned broad pushouts, but can you maybe clarify anything you’re seeing in terms of customer set or price products where you’re seeing this behavior most acutely? Are you seeing any cancellations? Is the pushout behavior this quarter any more notable than past quarters? And is it as simple as the macro is the key factor here that can unlock this spend, or are there any other factors that you see, or when you speak to your clients where they say, listen, we just have to refresh these devices, for example, or we have to modernize our data center infrastructure. And then I have a quick follow up. Thank you.
Chris Leahy: Yeah, sure. Thanks for the question. Let me just start with where you ended. And I would say, as we’ve suggested, the macro overhang really is the predominant factor in the extended and elongated sales cycles. What we’re not seeing is we’re not seeing cancellations. We’re seeing just more deliberation and greater time and more involvement, frankly, by more business units, constituents in the decision making process. And as I said, the AI consideration is a real thing. It’s a bit of a pause. How do we think about this over the long time term? As you know, the progress, the speed with which AI functionality is moving is really fast, and they’re taking that into consideration. But I would say that it feels very similar to 2023.
And as Al mentioned, I mean, this quarter created more uncertainty in some ways than we saw in certain quarters last year. So it’s not that dissimilar. And it really does have to do across what I’ll call complex solution sets. Remember, we don’t really have customers buying point products per se. We are seeing, you know, in some areas of server, for example, refresh. We’re just at the point where customers need to refresh and we’re figuring out how to do that or potentially starting to move some things to cloud. But I would just characterize it as very similar to the trend from last year.
Al Miralles: And maybe Erik just adding on to that and to kind of stitch the story together. We talked about these catalysts. Within those catalysts are plenty of opportunities from a solutions perspective. I think that what we saw transpire is this kind of heightened caution and concern. Kind of [indiscernible] what’s around the corner phenomena, if you will, from a corporate perspective, just caused more delay and deliberation. And then to Chris’s point, you add on AI and the complexity of the what is it ultimately going to mean for these customers, infrastructure environments, and it’s just more impetus to say, let’s take a little time. And I think the corollary there, Erik, would be that we had to pick up in client device and it was literally across our end markets.
And so we would have said that that was a catalyst that was out there and that was a catalyst that started to see some free up, call it modest, but some free up of spend in that regards, because despite it being a catalyst, kind of been held back before, it really was the lowest friction choice for customers. And so that’s how the quarter played out.
Chris Leahy: Yeah. I would just add that the durable categories we’ve seen over the last several quarters are security and cloud.
Erik Woodring: Okay. Very, very helpful. And then just maybe a clarification, quick follow up is you mentioned expectations at least for 2024 US IT market growth to be relatively similar. You did guide to low single digit gross profit growth versus low to mid single digit growth last quarter. So that would presume weak [ph] gross margins would be a bit weaker than when you guided 90 days ago. But Al, you reiterated kind of the expectation for similar gross margins to 2023. So can you just help me maybe unpackage what is the main factor that is causing the gross profit dollar, the slight change in gross profit dollar growth guidance for 2024? And that’s it for me. Thank you so much.
Al Miralles: Yeah, Erik, a couple of things. So look, from a cut, just working from the top, from a customer spend perspective, we’re calling for low single digits plus our typical premium. So that’s come off a bit. And if it were coming off in a category that would probably be substantially from a solutions perspective, that is the slow start that we experienced in Q1. We’re not suggesting we’re going to make that up. So that comes off the top and then that’s basically just kind of works its way down to GP. We’re getting an earlier start to client device, at least for the first quarter than maybe we would have anticipated. So while that doesn’t help from a gross margin perspective, it certainly does help from a gross profit perspective.
Right, because you’re getting the volume. And I think if you look down our P&L for the quarter, you’d see the delta on net sales was closer because we saw more from a client device perspective. So there’s some puts and takes within that. But I’d say, you know, we’re in the range of, with solutions being a little lighter, client being a little stronger, and frankly continued durability of netted down revenues, there’s not much of a change there on the gross margin front.
Erik Woodring: Super. Thanks so much for the color, guys.
Operator: Our next question comes from David Vogt from UBS.
David Vogt: Great. Thanks guys for taking my question. I just want to come back to maybe a longer term kind of discussion on AI and some of your hardware categories. As you guys look out, maybe beyond this year into ’25 as traction starts to really accelerate in AI. How are you thinking about the uplift in maybe configurations, ASPs and how does that flow through your business, so for example, obviously AI PCs, there’s a lot of discussion of having considerably higher price points. The same obviously holds true, I think, with AI enabled optimized servers. Just trying to think about how you’re thinking about that as it impacts your business maybe not this year, but in ’25. Thanks.
Al Miralles: Yeah, David, I’ll take this. Look, I think TBD [ph] to some extent, right, we’re going to see how pricing plays out. What I would tell you is in current context we’re not seeing much in the way of ASP changes. I’d say prices broadly, including on the client device front, held pretty firm. So our growth during quarter was largely units. Certainly there is plenty of buzz out there that as we start to see AI PCs and other AI categories emerge that you could see price increases. But I’m not sure that, you know, we’re fully prepared to kind of call on what that would look like. Just remember for us, look, we’re going to work closely with our customers as we are now, and we’ll continue to. In terms of that, how do you navigate that landscape, how do we help them get in front of it to the extent that they can.
But also remember that for us, in terms of kind of impacts, any lift there on the ASPs may lift the top line, but we’re largely still very much a cost plus provider. So you may not see significant movement from a gross margin perspective.
David Vogt: Got it. Just to clarify, obviously it wouldn’t be subject to ASC 606 [ph] accounting. These would be grossed up revenue and then the commensurate gross profit dollars associated with the revenue correct? Is the right way to think about it?
Al Miralles: As we understand it now and what the new product generations look like, I think that’s true.
David Vogt: Great. Thanks Al.
Operator: We currently have no further questions. I will hand it back over to Chris Leahy, Chair and CEO for final remarks.
Chris Leahy: Thank you. And let me close by reemphasizing my confidence in this team, our strategy and the durability of our resilient business model. Thank you to our CDW coworkers across the globe for your unwavering commitment to our customers. Thank you to our customers for the privilege and opportunity to help you achieve your goals. And thank you to those listening for your time and continued interest in CDW. Al and I look forward to talking to you next quarter.
Operator: This concludes today’s call. Thank you for joining. You may now disconnect your lines.
