CDW Corporation

Ladies and gentlemen, thank you for standing by and welcome to the CDW third quarter 2020 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. If you require any further assistance, please press star 0. Thank you. I would now like to hand the conference over to your speaker today, Brittany Smith, VP of IR and FP&A. Please go ahead.

Thank you. Good morning, everyone. Joining me remotely today to review our third quarter financial results are Chris Lacey, our Chief Executive Officer, and Palin Kibo, our Chief Financial Officer. Our third quarter 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 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, and in our earnings release in 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 the 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 CDWUK 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 CEW 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 third quarter results and drivers of performance. I'll provide our perspectives on the current macro environment, its impact on our customer and market, and how we are responding. Colin will then take you through a more detailed look at our third quarter financials, as well as our liquidity position and capital allocation strategy. We'll move quickly through the prepared remarks to ensure we have plenty of time for questions. For the third quarter, net sales were $4.8 billion, 3.1% below last year and down 3.3% in constant currency. Non-GAAP operating income was $386 million, an increase of 1.5%. Non-GAAP net income per share was $1.83, 8% above last year on a reported basis, and up 7.7% in constant currency. The quarter demonstrated the balance and strength of CDW's business model. The diversity of our customer and markets served us well. For our most impacted customer and markets, the rate of decline stabilized and generally improved in the quarter. Trends for our more resilient customer and markets continued to be strong. Our value proposition really resonated with customers this quarter. There was a flight to quality as customers sought to de-risk projects and their technology investments. Our teams are trusted, strategic partners to our customers. We compete on value and advice, not only price. We helped customers this quarter across a spectrum of IT priorities. Customers were focused on remote enablement, optimization, cost reduction, security, and leveraging technology for better customer and employee engagement through digital transformation, with an increasing focus on cloud. Customer demand for software as a service increased almost 50% quarter over quarter. customers leveraged our cloud solutions capabilities further bolstered by our acquisition of IGNW at the beginning of the quarter. Our solutions business strengthened this quarter, as some customers resumed projects that had been put on hold earlier in the year, and others started new projects. During the third quarter, we continued to leverage our distribution center's extensive logistics capabilities, deep vendor partner relationships, and strong balance sheet and liquidity position to navigate supply challenges. We successfully procured supply in high-demand categories and managed through longer lead times for others. Now let's take a deeper look at the customer and market performance. Corporate declined 13%, markedly better than May and June. Solutions strengthened, increasing low single-digits year-over-year. The significant quarter-over-quarter improvement in solutions reflected customers restarting infrastructure and project engagements. Transactional projects were down double digits, as spending on remote enablement moderated. Small business also declined 13%, a considerable improvement versus the second quarter. Most product categories declined less this quarter, as small business customers remained focused on remote enablement, security, cost management, and optimization. The government team increased net sales high single digits. federal delivered another strong quarter with net sales up mid single digits. During the quarter, our device as a service solution for the U.S. Census Bureau contributed less incremental growth than other quarters since the majority of last year's revenue was recognized in the third quarter. We are in the final phase of the project. Data collection has ended and devices are returning to us for decommissioning. Our team has done an excellent job navigating the complexity of this program from the very start. Outside of the census project, the federal team continued to help civilian agencies with remote enablement and device refresh. Some Department of Defense solution projects got pushed to future quarters, dampening performance. The state and local team delivered high single-digit growth. IT investments continued to be a priority for public safety. In some cases, budget was reallocated to support technology initiatives. Our team helped customers enable remote capabilities, enhance security, and optimize technology assets. Education increased over 30% with excellent growth in both K-12 and higher ed. In K-12, customers continued to focus on equity and access for students. K-12 growth was driven by strong notebook results and related accessories, security, and software, as well as cloud solutions to support remote learning. Higher ed performance strengthened this quarter as schools turned to us to leverage our extensive logistics capabilities and optimize technology to teach in new formats. Healthcare declined about 25% as budget pressures continued to impact spending. Customers are spending where they have to in areas like security and software. Otherwise, projects were still on hold during this quarter. Other, which represents our UK and Canadian operations, decreased 8% on a reported basis. UK net sales declined high single digits in constant currency. UK's corporate and public channels declined as government support programs ramped down during the quarter. Canada net sales decreased low double digits in constant currency, an improvement compared to second quarter performance as some corporate projects came off hold and education remained strong, driven by remote learning needs. As you can see, our third quarter performance benefited from the diversity of our customer base, It also benefited from our deep and broad product portfolio. We were able to meet the varied and shifting demands of our customers. U.S. hardware was down low to mid-single digits, with client devices declining 2% due to desktop performance. Notebook growth was still strong, driven by our public sector. Software increased low single digits, and software gross profit increased strong double digits, reflecting the impact of mixing into software as a service, Services grew high single digits driven by strong professional services. Transactions were down slightly on top of last year's mid-teens growth. Solutions declined low single digits, a significant improvement from last quarter's double-digit decline, as some customers restarted infrastructure and larger project engagement. We again delivered strong growth in our cloud practice. Cloud customer spend increased double digits across all customer end markets given by robust growth in security, collaboration, infrastructure as a service, and productivity. We expect strong customer demand for cloud solutions to continue. Security also continues to be a top priority for customers. Security customer spend grew strong double digits this quarter as customers improved their security frameworks to respond to increasing threats. Our third quarter operating and financial performance reflected the combined impact of our balanced portfolio customer and market, our full fleet 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 review each. As you know, we have five U.S. sales channels, corporate, small business, government, education, and healthcare. This scale enables us to further align sales teams into vertical customer end markets, including federal government, state and local government, K-12, and higher education, providing us deep industry knowledge and insights into our customers' objectives and goals, and positioning us as a trusted partner. In addition, we have our UK and Canadian operations. The diversity of our customer and markets serve us well when macro or other external challenges impact various industries and customers differently. 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. As I shared, the balance of our customer and markets in our offerings are especially relevant in the current environment. And the final driver of our performance, our three-part strategy for growth, which is first, to acquire new customers and capture share, second, to enhance our solutions capabilities, and third, to expand our services capabilities. Each pillar is crucial to our ability to profitably assess, design, deploy, and manage the integrated technology solutions our customers want and need today and in the future. Today's environment strengthens our commitment to executing our strategy so we will emerge stronger than ever after this crisis. Let me share a few examples of our strategy in action and how we helped customers this quarter. Our K-12 team was extraordinarily busy this quarter. One reason was the award of a contract from the Mississippi Department of Education to support its equity in distance learning program. This is one of the largest education technology initiatives in the United States in the last decade, funded via the CARES Act. It will help close the technology gap and support all public school districts in the state by providing students and teachers with secure devices and accessories backed by our services. The team leveraged our logistical excellence, our broad services capabilities, and our strong vendor-partner relationships to procure and deploy the devices in a supply-constrained environment, all done within a very compressed timeframe, given the urgency. This is a great example of how our teams align with their customers' missions and deliver creative solutions and differentiated values. Digital transformation, in particular cloud adoption and integration, is a top priority for many of our customers. Cloud creates complexity, especially if customers integrate their infrastructure, balancing applications on-prem and in the cloud. Our team worked with a large retailer to develop its future state business strategy for its on-premise and cloud platforms to operate as one. This is a great example of where our services and products and solutions portfolio combined for the best outcome for our customers. It also demonstrates the value IG&W brings to CW and how we are leveraging its cloud-native service expertise. Another customer in our corporate channel had a problem with its incumbent primary IT partner, which was exacerbated due to the pandemic. The IT director urgently turned to his CW account manager to help move the company's employees to work from home when the other partner failed to deliver. The account manager responded quickly and exceeded expectations, which has since resulted in the customer moving all of its IT business to CDW. Our team has also helped the customer develop a strong collaboration platform and is helping with a variety of initiatives, including lowering IT costs, increasing flexibility of its on-premise backup storage, evaluating cloud options, shoring up its security, and augmenting its IT staff and CDW resources. Our work here represents another example of how customers turn to us for a high level of customer service, expertise across the full IT lifecycle, and thought leadership. These examples highlight CDW's three-part strategy for growth and how IT is crucial to achieving our customers' objectives. This quarter demonstrated the importance of our competitive advantages, the success of past investments in cloud and security, and our trusted partner relationships with customers. I am proud of the way our teams continue to execute and deliver. Let me now update you on our efforts to manage COVID-19's impact on our business. We remain focused on three key principles. Safeguard the health and well-being of our coworkers, serve the mission-driven needs of our customers, and support our communities. Our office coworkers are still working from home, and the team has settled well into the new way of working. We expect most coworkers will be working from home until the start of next summer. Coworker engagement, productivity, and collaboration are strong, testaments to the strength and resiliency of our culture. We are planning for when and how to return to the office and where and how our coworkers will work in the future. We will remain agile in this unpredictable environment. All distribution and configuration centers are operational, and we maintain precautionary measures as advised by public health authorities. These teams have done an exceptional job maintaining the high level of customer service we are known for while taking the necessary precautions. Let's now turn to the fourth quarter. The macroeconomic outlook for the near term and for the foreseeable future remains uncertain. Wildcards include the duration and severity of COVID-19, tomorrow's U.S. elections, additional stimulus programs, supply disruptions, and U.K.-EU trade negotiations. Therefore, we are not providing 2020 targets. Q4 to date writings trends for our corporate channel are in line with Q3. Writings trends have improved for our small business channel. Public strength continues to be driven by education and government offset by healthcare. We are encouraged about our performance and how our teams are executing. That said, we are also cautious about the macro environment. There are a lot of unknowns and factors that we do not control. This is just a time of unprecedented uncertainty. Our customers continue to be 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. It's important to remember that cloud is not an endpoint. Cloud is an element of our customer's IT environment, and it adds complexity, which is a core to our value proposition. Our teams help our customers with a full IT solution stack and full IT lifecycle. We will continue to be trusted partners to help our customers smartly deploy their IT resources, adopt modern software and infrastructure patterns and practices, 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 to come. We have confidence that we have the right strategy in place. The increase to our dividend and restarting of our share buybacks that we announced today demonstrate the confidence that our board of directors and I have in CDW's strategy and future performance. The investments we have made, including investments to support our cloud and security practices, will enable us to continue to meet our customers' needs. We will help our customers navigate the complex IT landscape and adopt new technologies. While there is uncertainty in the near term, we believe we are making the right moves for long-term success. 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. Our role as a trusted, strategic partner to our customers is more important now than ever. we 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 more details on our financial performance. Colin?