Ruplu Bhattacharya: Hi. Thank you for taking my questions. I have two of them, one for Al, one for Chris. Al, is there a way to quantify the impact of netted down items on year-on-year sales growth in 2023? And is there anything unique about this year, or as we look into 2024-2025, should we expect a similar level of year-on-year impact or even higher? Because I mean, it looks like it makes sense for you guys to mix shift more into these items. So just your thoughts on that
Al Miralles: Sure, Ruplu. So a few things. Number one, we’ve said before and we continue to say we would expect, as we look forward, that netted down revenues would outpace our overall net sales, if you will. So I’d say, give you that one data point. I will note that the mix into netted down this year has been more extreme and a couple of metrics that I’ll just note; number one, netted down for the quarter of $400 million was 7% of our net sales, but 32.6% of our GP and you can go back sequentially and look at what that looked like. But it’s notable both sequentially and I’d say, versus prior year. If you try to put those dollars on a more even basis with net sales that grows up, you’d get a sense for the impact. And I think, and Chris alluded to this, it would suggest that our decline in net sales is pretty considerably less than if you looked at it on this customer spend basis.
So there are a couple of things you could look at from a math perspective that would show the pretty notable growth and outsized impact even down has had this year.
Ruplu Bhattacharya: Okay. Thanks for the details there. Chris, let me ask you this. On the prepared remarks, you talked about device refreshes remaining on the back burner. As you look out over the next couple of quarters and 2024, given fundamentals like the age of PCs in the market, I mean, do you expect to see any device refreshes either in the client side or in the data center side. And I think you’ve said that typically, when that happens, CDW’s outperformance to the US IT spend is at the higher end of the 200 to 300 basis points range. So I guess what I’m getting at is even though the macro is weaker today, should we expect that when the macro improves and you get this added benefit of device refreshes that your outperformance can actually be at the higher end of the normal range. So can you give us your thoughts on that, please?
Chris Leahy: Yeah, Ruplu good morning, and I would say you’ve got it right, our track record of outperformance we were seeing refreshing hardware is strong. And part of that is our ability to gain share. And part of that is the fact that those are recognized on the top line net basis. And so we tend to outperform our premium as a result of those two things. In terms of looking forward, I just repeat a little of what I said, Ruplu, which is we do feel that clients, the downswing is kind of we’re at the back end of that cycle, if you will, as opposed to the start of that cycle. That said, as Al mentioned, it’s really a sentiment-driven market right now driving demand. And until our larger commercial customers had a level of confidence in the business climate, we think that client device and even data center refresh will be kind of the last point where they start to invest more dollars.
Now, you’re right, we’re — we’ve got a refresh cycle. We’ve got 40-year-old Tove devices, et cetera. We’ve got Win 11 coming. So there are a lot of things in the market that will certainly be a tailwind for client devices. AI, as we mentioned, embedded in client devices, those are all going to be positive. And I would also add that our teams are definitely having conversations with customers about refresh in terms of planning, we’re just not seeing that convert. And again, we’ll be ready when they’re ready to convert, but it’s just not to converting yet.
Operator: And our last question today comes from Adam Tindle from Raymond James. Adam, your line is now open. Please go ahead.
Adam Tindle: All right. Save the best for last. Al, I wanted to maybe start by reflecting on 2023, the silver lining this year, I think it’s been cost management. You’ve been protecting earnings all year despite very volatile revenue. And I think you mentioned that OpEx to GP is your metric, which makes sense, but it’s now optimal. So the question would be, as we look forward, correct me if I’m wrong, but it sounds like the outlook for 2024, based on what you’re seeing is a little bit more muted. I see you’re not really investing in headcount, it’s up modestly sequentially. Inventory days are very low, so you’re not carrying up for revenue growth. You’ve got mix shifting on — as a headwind for GP dollars. So the question would be how to think about protecting earnings in a more muted environment moving forward? Would it be fair for us to anticipate more negative operating leverage moving forward? Why or why not? Thanks.
Al Miralles: Sure. Thanks, Adam. Great question. A couple of things I would call out. First, like I gave you the range how we think about expenses. Just understand kind of underneath the engine there, there are puts and takes in terms of the — where are we driving productivity, where we’re driving efficiency. Not only to kind of keep within that range, but also to make sure that we can appropriately fund investment opportunities. I think what you can expect is those efficiency efforts will continue, but we will continue to invest. And you noted that our headcount was slightly up, but it was up. If you look at the gross effect of the those — that headcount would look at more significant, if you will, from a gross basis. So look, I think it’s a balancing act.
I think, Adam, as we start to see the demand cycle start to turn in some of the areas we’ve talked about we would certainly accelerate and continue to ramp-up on the investment side. But I would call the efficiency efforts somewhat evergreen. And so therefore, when you add that up, we’re still going to try to remain within a range. I would not be able to tell you definitively every quarter, if we show operating leverage, there could be some quarters where we say there was a great opportunity. And therefore, we have less operating leverage or de-lever but it’s going to be a big quarter-to-quarter with kind of that strategic balance that I mentioned on top of that.
Adam Tindle: Got it. Maybe a quick follow-up on gross margin. I understand that net revenue is benefiting or mix. But we can exclude that, give it a 100% gross margin and strip it out and look at just traditional hardware gross margin. And at current levels, I’d love for you to maybe unpack some of the items that might be more cyclical versus structural and help us to gauge the outcomes, because that analysis can get some pretty scary outcomes of returning back to historical levels. I think you can get over $1 of EPS coming out from reverting that back to the mean. So if you could unpack the ex-net revenue gross margin and what’s cyclical versus structural, that would be helpful. Thank you.
Al Miralles: Yeah, absolutely, Adam. So I’ve talked about in the past, obviously, mix matters, and we’ve had a pretty extreme mix movement particularly this year on these netted down revenues in lieu of hardware, PCs, et cetera. Certainly, we would expect that to balance out over time. And so that is a variable that would dilute gross margins. The other piece, Adam, would be that in general, product margins have held very firm. And if you look back over the last two years, they’ve actually moved up quite a bit. So there’s been resiliency there. I would also note that though in that, there is this component of more upmarket premium spend on higher level, higher value product that is persisting, and we’re seeing that continue to hold up.
And there may be an element there that what you bought in the way of premium product. Now you’re in it and you’re going to continue to invest in that same way. And then the last component, Adam, I would note, and we know this, that over time, you could see commoditization. We’ve not seen that, but it’s conceivable that some of that could come back over time. So we are at pretty significant levels in terms of gross margin when you add those components up. Certainly, components that I referenced that are durable and in some areas, some components that could be somewhat transitory and we could see at a bit over time.
Operator: And with no further questions, I’d like to hand the call back to the CDW team for closing remarks.
Chris Leahy: Thank you very much. And 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 to you next quarter.
Operator: This concludes today’s call. Thank you, everyone for joining. You may now disconnect.
