Chris Leahy: Good morning, Amit. And yeah, in terms of priorities, they’re consistent with what we said in the prepared remarks. I mean, customers in the commercial space in particular are focused on cost optimization, customer employee experience, and things that revolve around that. There’s still a heavy focus on digital transformation, obviously, and security as well. AI, which is where you’re getting to, AI is a hyper focus. I think last call, we mentioned that you can’t have a conversation with a customer without AI coming up, and it’s been very exciting because we’ve had a data AI practice for several years, and that practice, I would say, we deepened it and we scaled it, particularly when we brought IGNW and Sirius into the CDW family.
And currently, I’d say there’s burgeoning demand for consultative services in particular, and I’m talking deep technical capabilities as well as industry specific capabilities. And so, we’re seeing quite a bit of momentum in our practice there. What I would tell you is that a number of customers are at the front end of their experiences, and we’re helping them through use cases and what the efficiencies are to be had. And then we’ve got customers who are actually piloting some really interesting capabilities, and we’re helping them work through those. Here’s what we’re not seeing. We’re not seeing a budget shift out of IT. What we are seeing and hearing is that budgets are coming from elsewhere in the organization, the functional areas that are going to be improved through AI innovation, like HR, like finance, like marketing, literally across the organization.
Organizations are using budgets there to allocate to AI improvements because they’re thinking about it merely as business transformation. So we haven’t seen a shift, and frankly, we’re not expecting that to happen. We’re very excited about the opportunities that lie ahead, though.
Amit Daryanani: Perfect. Thank you for that. And I guess, Al, if I could ask you a question. Gross margins in ’23 are up about 210 basis points. I think if I go from ’21 to ’22, they’re up 0 to 400. I always get a question on like what is the right gross margin range for CDW. But as you look at this performance, maybe for calendar ’23, to the extent you can parse that, how much of this do you think the gross margin expansion is secular versus cyclical? And is there a normalized range once you think about gross margins for the company?
Al Miralles: Sure. Thanks, and good morning, Amit. Look, if I peel back 2023, three core drivers, the most significant would be the pickup and mix shift, the netted down revenues, and particularly SaaS and cloud. And that was the most significant component. Number two would be that hardware was softer, and therefore that less mix of hardware and particularly PCs benefited us from a mixed perspective. And then three, and we’ve noted this before, overall product margins were firm in 2023. And so that was a positive contributor to the gross margin story. So if I scroll that forward, which I think is the logical question on it, we expect that the netted down revenue trend is durable and will continue. And particularly, we would know we expect strength in the first half, and then you’ll get some balancing out with hardware.
Number two, on the hardware front, we are expecting a modest recovery in the back half on hardware, including PCs. So that would have the effective diluting margin somewhat. To be candid, though, we don’t believe that that shift in what we’re calling modest would significantly move the gross margins. And then finally, on the product margin front, but we studied this closely, and really our assessment at this point would be that product margins are holding firm. And I think that’s a reflection of both a competitive environment, but not any rational environment for pricing and margin perspective. And then I’ve mentioned this before, but there’s a trend of, I’ll call it richer configurations on the product front, right, customers moving up the value chain.
And we do feel like that trend is and will persist. And so really, that’s the rationale overall for our outlook on gross margins being substantially similar to 2023, maybe a tick up.
Amit Daryanani: Thank you.
Operator: Our next question comes from Keith Housum of Northcoast Research. Keith, the line is yours.
Keith Housum: Great. Thank you. Appreciate it. Good morning. As we think about AI and understanding it’s very nascent still for you guys and the rest of the industry. Is this more of a solution or a hardware or a software or consulting, you know, opportunity for AI and for a CDW? And how does that evolve over the next several years? How should we think about that?
Chris Leahy: Yes, it’s a great question. I would say currently nascent, the opportunity and the burgeoning demand right now is because of the complexity and the speed and trying to figure out and test use cases. So we are seeing most of the activity for us in our advisory and consulting services. I think I use the word burgeoning. The momentum has been significant. But if you think longer term, this is a full stack play. And that’s why CDW is a scaled full stack full life cycle provider with expertise, not just technically, but deep into each industry vertical is positions as well to help our customers. And as you know, when we think about CDW strategy and the growth over the years, we have been moving our capabilities to ensure that we are moving closer to the front end of the value chain.
AI is a great example of that strategy and action given the consulting momentum that we’ve been seeing. But at the end of the day, we’re talking about the need for power and consumption and data center enhancements and up and down the stack. So in terms of timing across the next several years, it’s hard to say exactly when the various components of the stack will hit. But what I would say is just like any kind of revolutionary technology change, it moves fast and this will move faster. So we’re seeing AI as an accelerant in our business and one that we think will play out fairly quickly over the next 24 months.
Keith Housum: Great. Thanks. And maybe a follow-up, maybe to touch on a little bit here, but it did occur to you guys to announce some optimization charges within the EPS. So perhaps Al, you can perhaps touch on the genesis of what those items were?
Al Miralles: I’m sorry, Keith, can you say that one more time?
Keith Housum: Yes. Just when we look at your non-GAAP EPS, we see that you had some optimization charges or restructuring charges in there. Perhaps you can just highlight what those items were made up of?
Al Miralles: Yes, sure. So largely, Keith, they would fall in the category of workforce optimization, really two components to that. We did have, as you know, some co-worker events during 2023. And that was really about aligning our fixed cost base and our co-worker count base with the level of the business and activity we were seeing. So that’s one, call that more really one-time nature. The other element within that category would be real estate. As you would expect, and you’re seeing more broadly, we are and continue to take a hard look at our real estate portfolio, where we are in the hybrid phase, if you will, of our workforce and making sure that we constantly re-rationalize our real estate portfolio. And so there are some charges that are coming through that front.
Keith Housum: Great. Thank you.
Al Miralles: You’re welcome.
Operator: Our next question comes from Samik Chatterjee of JPMorgan. Samik, the line is yours.
Samik Chatterjee: Hi. Thanks for taking my question. And maybe for the first one, if I could just follow up on the AI questions and so the question Amit asked. We understand sort of your comments about being more heavy towards consulting in sort of the early days of these AI sort of discussions with their customers. But when you think of a full stack solution or Envision One in sort of when the customers deploy it, does this even take you further down the road of netted down revenue mix increasing in the overall mix of your business? Or does it really bring back or sort of pull back the netted down revenue mix in terms of balancing out the hardware and the software sales? Just curious about how you see a full stack solution playing out. And I have a quick follow-up. Thank you.
Chris Leahy: Yeah, I’ll start and then Al jump in. You know, I think it’s hard to say at this point. What I would say is when we think about AI as a tool to increase productivity and results, just like we say technology is essential to every component of every organization being competitive and winning and delivering on their mission. AI is going to be central to that proposition, because artificial intelligence is going to be embedded in every component and everything that we sell from the edge to the core. And so, however that plays out in terms of how of our customers consume it, how they purchase it and how they consume it, we will be able to deliver across the full stack to them in terms of what that looks like in netted down revenue specifically. Again, hard to really have a crystal ball as to how it’s going to play out in that regard. Al, any thoughts on that?
Al Miralles: Yes, I think that’s right. And Samik, look, we will see exactly how this evolves at this point. Like you said, it is a bit more consultative and maybe services oriented, which is not netted down substantially. Chris hit it earlier. This is ultimately a full stack opportunity for us. And that would certainly include hardware. So we think that will be meaningful. As I would contemplate the netted down component that would likely show up and spend associated with cloud and SaaS. So is it conceivable that we would see that come through? Certainly, it just becomes kind of a matter of when and the pacing and track, if you will, for customers and how they ultimately deploy AI.
Samik Chatterjee: Okay. Thank you. And I have a follow-up. I mean, just curious, given the change we’ve had here in the inflation backdrop, are you starting to see any changes from the customer side in relation to their discussions around pricing with you or even with the relation to the OEMs themselves? How they think about pricing or are you preparing for a different sort of pricing regime than we’ve been in the last sort of couple of years? Thank you.
Al Miralles: Sure, Samik. I’ll start and Chris may want to add. As I think as I mentioned, we have not seen an environment that’s irrational on the pricing or the margin front. I would say, ASPs have largely held firm. So, looking forward at this point, we wouldn’t see any drastic changes. We’re not seeing activities from partners or customers that would suggest that we’re going to see any sharp movements up or down. So our outlook is based on the presumption that we’d be largely firm here.
Samik Chatterjee: Thank you.
Operator: Our next question comes from Erik Woodring of Morgan Stanley. Erik, please go ahead.
Erik Woodring: Thank you. Good morning, guys. Thank you for taking my questions. Maybe, Chris, to start off, you know, it’s been a few quarters now where you’ve been clear that the spending environment is challenging. And in some cases, some of that hardware spent hasn’t come through in the way that you perhaps thought it was. As you talk to your customers or you look at your pipeline, what is that catalyst that will unlock the recovery in the second half of the year right now? What gives you confidence? What are you hearing or what are you seeing that that allows you to take that view as we sit here today? And then I have a follow-up. Thanks.
