CDW Corporation

Good morning, my name is Jake and I'll be your conference operator today. At this time, I would now like to welcome everyone to the CDW second quarter 2020 earnings call. All lines will be on mute throughout the duration of today's call. After the speaker's remarks, there will be a question and answer period. At that time, if you have a question, please press star 1 on your telephone keypad. To withdraw your question, simply press the pound sign. I would now like to turn the call over to our host, Brittany Smith, Vice President of IR and Financial Planning and Analysis. Ma'am, the floor is yours.

Thank you. Good morning, everyone. Joining me remotely today to review our second quarter financial results are Chris Leahy, our Chief Executive Officer, and Colin Kebo, our Chief Financial Officer. Our second quarter earnings release was distributed this morning and is available on our website, investor.cw.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 in 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 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 in our earnings release and form 8K we furnished to the SEC today. Please note that all references to growth rates or dollar amount increases in our remarks today are versus a comparable period in 2019, unless otherwise indicated. In addition, all references to growth rates for hardware, software, and services today represent U.S. net sales only and do not include the results from CDW UK or Canada. Replay of this webcast will be posted to our website later today. I also want to remind you that this conference call is a 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.

Thank you, Brittany. I'll begin this morning with an overview of second quarter results and drivers of performance. I'll provide our perspectives on the current macro environment, its impact on our customers and markets, and how we are responding. Colin will then take you through a more detailed look at our second quarter financials as well as our liquidity position and capital allocation strategy. We'll move quickly through our prepared remarks to ensure we have plenty of time for questions. For the second quarter, net sales were $4.48, 5.7% below last year and down 5.3% in constant currency. Non-GAAP operating income was $338 million, a decrease of 5.6%. Non-GAAP net income per share was $1.56, 2.6% below last year on a reported basis and down 2.3% in constant currency. For the quarter, net sales performance varied by month and by customer and market. As we shared on our last earnings call, we entered April with a healthy backlog of remote workforce enablement solutions, which contributed to strong performance in April. As the quarter progressed, for some of our customer end markets, projects were postponed and demand declined as the economic toll of the crisis impacted customer spend. In other customer end markets, IT investment was prioritized and remained healthy. During the quarter, we helped customers across a spectrum of IT priorities. Remote enablement, business and operations continuity, and security remained top customer focus areas to manage remote environments at scale and to prepare to work and learn from home in some capacity for longer. Customers also focused on initiatives to reduce cost, optimize resources, and leverage technology for better customer and employee experiences through digital transformation. CDW teams orchestrated turnkey solutions from our broad portfolio of client devices, accessories, collaboration tools, security, software, and cloud offerings to help customers build these capabilities and achieve their goals. At the end of the first quarter, we had strategic stocking positions in key remote enablement categories to meet expected customer demand. During the second quarter, we continued to leverage our distribution centers, extensive logistics capabilities, deep vendor-partner relationships, and strong balance sheet and liquidity positions to successfully navigate supply challenges. We continued to procure supply in key remote enablement categories and manage through longer lead time for others. Now let's take a deeper look at customer and market performance. Corporate and small business both declined double digits. As you know, these channels include our small and medium business customers. The unique nature of the COVID-19 crisis has posed greater challenges for some small and medium businesses. Intra-quarter net sales results decelerated each month as software writing impacted subsequent month performance. During the quarter, corporate and small business customers' spend was prioritized on three areas. First, remote work enablement and new use cases. driving notebook and mobile device spend. Second, infrastructure support and optimization, which resulted in strong growth in cloud offerings in several software categories, including security, network management, and virtualization. And third, maximizing of past IT purchases and reduction in expenses through extended maintenance contracts and shorter commitments for new contracts and licenses. The government team increased net sales 24%. Federal delivered another excellent quarter with net sales up almost 50%. During the quarter, our device-as-a-service solution for the U.S. Census Bureau contributed meaningfully to our federal results. Guild operations to collect data from non-responders has started. This solution will continue to be a meaningful contributor to federal net sales for the remainder of 2020. Excluding census results, federal was up healthy double digits. Growth was driven by civilian projects and demonstrated the team's great work delivering CW's value proposition to multiple agencies. The team delivered strong transactional growth with almost 100% growth in notebooks and double-digit growth in enterprise storage, video, collaboration hardware, and security software. The state and local team delivered low single-digit growth driven by double-digit transactional growth that enabled remote work capabilities, including notebooks and collaboration hardware, Software to enhance security and optimize technology assets, and investments to accelerate e-government initiatives. Education increased 13% with strong double-digit growth in K-12 and a mid-single-digit decline in higher ed. In K-12, customers continued to focus on equity and access for students. K-12 growth was primarily driven by strong Chromebook results. as our team helped school districts prepare to start classes later this month or early next month in a variety of teaching formats. Higher ed performance reflected the uncertainty that universities and colleges are facing. IT spending on remote enablement such as notebooks and collaboration tools was strong. It was offset by delayed infrastructure projects due to budget concerns. Healthcare declined low double digits with strong April results followed by net sales declines in May and June as COVID-related response efforts took priority and budget pressure intensified. Our team continued to work closely with healthcare customers on expanded virtual care capabilities as healthcare delivery in the U.S. fundamentally changes. Other, which represents our U.K. and Canadian operations, decreased 8% on a reported basis. The U.K. team delivered high single-digit growth in constant currency with strong public sector demands and more muted corporate customer demand. Canada net sales decreased double digits in constant currency due to a higher mix of small business customers who have been more impacted by COVID-19 and pressure on the oil and gas industry in Alberta. As you can see, our second quarter performance was varied across customer and market. This also drove varied performance across our major product and services categories. U.S. hardware was down mid-single digits, However, client devices grew almost 6%. Software declined low double digits and services grew mid-single digits. Transactions declined low single digits on top of last year's mid-teens growth. Solutions declined low double digits as some customers deprioritized infrastructure and larger project engagement. We delivered strong growth in our cloud offerings. Customer spend increased double digits driven by strong growth in analytics, Collaboration, Data Storage and Recovery, Compute, and Security. We expect strong customer demand for cloud offerings to continue. On July 1st, we acquired IGNW, a leading provider of cloud native services expertise and software development capabilities. IGNW is a leader in digital velocity solutions, including advisory, consulting, and development services, and has been a partner of CDW since 2018. IG&W presents an exciting growth opportunity for our business, our customers, our partners, and our coworkers. It brings the right talent and strategic capabilities we want to deliver to our customers. We are pleased to welcome IG&W's approximately 170 coworkers to the CDW family. This is a great example of our continued investment in our cloud capabilities. M&A is an important part of our capital allocation strategy to expand CDW's strategic capabilities. During our 35-plus year history, BW has a successful track record of evolving with customer needs in the IT industry, in part through acquisition. Our second quarter operating and financial performance reflected the combined impact of our balanced portfolio of customer and market, our full suite of solutions and services across the IT landscape, and our ongoing success executing our three-part strategy for growth. They are important drivers of our past and future performance. Let me take a moment to review each. First, our balanced portfolio of customer and market. As you know, we have five U.S. sales channels that each generate annual net sales of more than $1.5 billion in 2019. Corporate, small business, government, education, and healthcare. This scale enables us to further align sales teams into vertical customer and market, including federal government, state and local government, K-12, and Higher Education, providing us insights into our customers' objectives and goals and positioning us as a trusted partner. In addition, we have our UK and Canadian operations, which together delivered over $2 billion of net sales in 2019. The diversity of our customer and market serves us well when macro or other external challenges impact various industries and customers differently. This balance is especially relevant in the current environment. Next, our offerings are broad and deep. With over 100,000 products, services, and solutions from more than 1,000 vendor partners, we are well-positioned to meet our customers' total needs across the spectrum of IT and can pivot quickly to trends in customer demand. For example, in response to the current environment, customers have turned to us for return-to-work technology solutions beyond our traditional offerings, including enhanced video surveillance, temperature scanners, and device sanitizer solutions. We now offer a full suite of IT-enabled solutions to meet these demands. Our teams have productized different solutions for our various customer end markets. This is a great example of our thought leadership and ability to pivot to growth opportunities. And the final driver of our performance, our three-part strategy for growth, which is to first, acquire new customers and capture share, second, enhance our solutions capabilities, and third, expand our services capabilities. Each pillar is crucial to our ability to profitably assess, design, deliver, and manage the integrated technology solutions our customers want and need today and in the future. Today's environment doesn't impact our commitment to executing our strategy. In fact, it strengthens our resolve so we will emerge stronger than ever. Let me share a few examples of our strategy in action and how we help customers this quarter. A financial services company turned to our team to mobilize its employees to work from home. Only 30% of its workforce had work-from-home capabilities. The customer delegated an emergency blanket purchase order for $3.5 million for our team to have full responsibility to develop the right solutions across client devices, remote access, security, and its data centers. We leveraged our longstanding relationships with the customer to get it right and with our vendor partners to get supply. A large corporation was challenged with improving productivity for its remote employees. The customer needed to provide employees with additional IT equipment consistent with corporate standards but did not have the systems in place to identify which employees required equipment, to place thousands of orders, or to deliver the equipment to the employee's homes. The customer turned to us due to our robust e-commerce platform and extensive logistics capabilities. Our team created a digital catalog that integrated CDW and the customer's e-procurement system, making a complicated process simple. Through this project, we expanded the partners and products we sold to the customer. Our team did such a great job that the customer canceled RFP midstream to award us another meaningful engagement. Another example is a 5,000-student school district in Ohio turned to us to create a complete remote learning environment for its students. Our teams help the district with client devices and develop a collaboration platform for its teachers and students in the cloud. This is one of many examples from the quarter where our teams helped customers with cloud collaboration tools. These examples also show how quickly solutions need to be implemented in this environment. Customers turn to us for expertise, thought leadership, and a high level of customer service. We won a ServiceNow engagement for a leading medical school after a two-week sales cycle, less than half the typical cycle time, because of our past experience with this customer and our ability to deliver in a compressed timeframe. These examples highlight CDW's three-part strategy for growth, including CDW as a trusted advisor and how IT is crucial to achieving our customers' objectives. I now want to update you on our efforts to manage COVID-19's impact on our business. As I shared previously, we have a cross-functional response team in place. The team has three key principles. Safeguard the health and well-being of our coworkers, serve the mission-driven needs of our customers, and support our community. Our office coworkers are still working from home. We have excellent IT capabilities and the culture of collaboration, so coworker engagement and productivity have been strong. We continue to evaluate when and how to return to the office and where and how our coworkers will work in the future. All distribution and configuration centers are operational and we maintain precautionary measures advised by public health authorities, including social distancing, segmented shifts, personal protective equipment, enhanced facility cleaning and temperature scanners. These teams have done an exceptional job maintaining the high level of customer service we are known for while taking the necessary precautions. During the quarter, more of our sellers and technical specialists began to re-engage in-person with customers. We have taken proactive measures to keep co-workers safe in these settings as well. Our teams have done a great job adapting to virtual channels to ensure we reach our customers and we continue to develop our co-workers. For example, our marketing and events transitioned from in-person to virtual so customers could continue to learn from our technical experts. Also during the quarter, our sales and technical teams completed over 20,000 Our marketing and events and co-worker services teams have done an excellent job adapting to the different environments. They demonstrate the strength and resiliency of our culture, a culture we believe is important competitively to us. Let's turn now to the balance of the year. The economic outlook for the foreseeable future remains uncertain as the duration and severity of COVID-19 are unknown and also uneven. Therefore, we are not providing 2020 targets. We continue to watch closely the near-term impact of COVID-19 on our customer and market. For Q3 to date writing, the rate of decline has stabilized for our most impacted customer and market, and trends for more resilient customer and market continue. While encouraging, we believe it's premature to call this a trend as weekly writing do fluctuate. Customers are in various phases of responding to the macro environment. Some customers remain focused on remote enablement and operational continuity. Others are moving forward with organizational efficiency and optimization. And other customers are investing behind digital transformation, including cloud migration and automation strategies. Our teams can help with all phases and will continue to be trusted partners to our customers to help them smartly deploy their IT resources and solve some of their toughest challenges. We believe that technology will be more essential to all sectors of the economy and will play an increasingly important role in the years ahead. We have confidence that we have the right strategy in place. We will help our customers navigate the complex IT landscape and adopt new technologies. We are committed to investing in our three-part growth strategy, including the capabilities that will position us to best serve our customers, optimize our productivity, and enhance our competitive position. We will also keep a watchful eye on the impact of COVID-19, the macro environment, and other unpredictable variables such as potential supply disruptions, trade policies, and upcoming U.S. elections. CDW will continue to do what we do best, leverage our competitive advantages to help our customers address their IT priorities and achieve their strategic objectives and out-execute our competition. Now, Colin will share some more details on our financial performance. Colin?