CDW Corporation

Good morning. My name is Cree, and I will be your conference operator today. At this time, I'd like to welcome everyone to the CDW fourth quarter 2020 earnings call. All lights have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to occur a question, press the pound key. Thank you. I would like to turn the conference over to Brittany Smith, VP of IR and FPNA. You may begin.

Thank you. Good morning, everyone. Joining me remotely today to review our fourth quarter and full year financial results are Chris Leahy, our Chief Executive Officer, and Colin Kebo, our Chief Financial Officer. Our fourth quarter earnings release is 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 it accompanies 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 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 CWUK or Canada. Also, there was one fewer selling day in the fourth quarter of 2020 as compared to 2019. 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 fourth quarter and full year results and drivers of performance and share some thoughts on 2021. Colin will take you through a more detailed look at our financials, capital allocation strategy, and outlook. We'll move quickly through our prepared remarks to ensure we have plenty of time for questions. Our fourth quarter and fiscal year results demonstrate the balance and strength of CW's business model and strategy. For the fourth quarter, net sales were $5 billion, 11% above last year on an average daily sales basis, adjusted for the impact of one fewer business day in the fourth quarter of 2020 than 2019, and up 10.7% in constant currency. Gross profit increased 13.3% to $881 million. Non-GAAP operating income was $376 million, an increase of 9.9%. And non-GAAP net income per share was $1.82, 16.1% above last year on a reported basis, and up 15.8% in constant currency. For the year, net sales were $18.5 billion, up nearly half a billion dollars year over year, or 2.4% on a reported and constant currency basis. Gross profit increased 5.6% to $3.2 billion. Non-GAAP operating income increased 2.6% to $1.4 billion. And non-GAAP net income per share increased 8% on a reported and constant currency basis to $6.59. 2020 was an extraordinary year. I'm very proud of how the CDW team quickly and smartly adapted to help our customers and partners during a challenging time. The diversity of our solutions portfolio and customer end markets served us well in 2020, providing balance and driving our exceptional results. During the year, our teams helped customers across the full IT solution staff and the full IT lifecycle, from client devices to cloud, from design to managed services. We've executed against our strategy and continue to invest in high-growth solutions and services capabilities, including three acquisitions, IGNW, a leading provider of cloud-native service expertise and software development capabilities, and ARADI, and Southern Dakota Solutions, which expanded our service mounting. Performance for our customer and markets varied. Demand increased in some and decreased in others, but all experienced change or disruption to their technology needs and to their operations last year due to COVID-19. Our value proposition resonated with customers. We combined our services and broad solutions portfolio with our extensive technical knowledge and logistical and distribution capabilities to deliver the best outcomes for our customers. This led to meaningful outperformance compared to the US IT market. we emerged from 2020 stronger and even more committed to executing our strategy. Turning to the fourth quarter, we continue to help customers with remote enablement, resource optimization, cost reduction, security, hybrid and cloud solutions, and digital transformation. Similar to the third quarter, some customers resumed solutions projects and others started new projects. Performance for our most impacted customer and markets improved, and trends for our more resilient customer and market remain strong. During the fourth quarter, we continue to leverage our distribution centers, extensive logistics capabilities, deep vendor-partner relationships, and strong balance sheet and liquidity position to navigate supply challenges and support our customers, in particular for Chromebooks for K-12 customers where demand greatly outstrips supply. Now let's take a deeper look at fourth quarter customer and market performance. Corporate declined 11% with similar levels of performance for transactions and solutions. In total, there was improvement versus the last two quarters. Customer spend for corporate customers was not uniform. Some customers were doing well and investing in technology, whereas other customers, those who are in challenged industries or geographies more impacted by spikes in COVID cases, were still cautious. Small business declined mid-single digits as notebooks returned to growth. Small business customers tend to be more nimble than corporate customers, which drove its improvement versus the third quarter. The government team increased net sales 30%. Federal delivered another excellent quarter with net sales of strong double digits. During the quarter, our devices of service solution for the U.S. Census Bureau was mostly completed. All devices were returned to us for decommissioning, and we started the process to resell the clean units through third-party remarketers. Our team did an excellent job with this program. It was a multi-year effort to develop and execute this large complex undertaking, moving the nation's once a decade population count from paper to digital for the first time. Our services and logistical capabilities and multi-vendor solutions set us apart from the competition. We are unique in what we can deliver to our customers. Outside of the Census project, the federal team continued to help civilian agencies with remote enablement and device refresh. We also delivered on Department of Defense projects that were awarded at the end of the third quarter. The state and local team delivered strong double-digit growth. IT investments continued to be a priority despite budget pressure. Our team helped customers enable remote capabilities and restart solution projects. Education increased an extraordinary 140%. driven by phenomenal growth in K-12. K-12 customers continued to focus on equity and access and remote learning, which drove triple-digit growth for notebooks related to accessories, related accessories, and solutions, as customers turned to us for holistic capabilities. Higher education increased below double digits as schools continued to help students with remote enablement and resumed net-com projects with a focus on creating connected communities to enhance the student experience. Healthcare declined mid-teens, a meaningful improvement compared to the third quarter. Customers continued to be cautious with their spend due to ongoing budget pressure, focusing on key areas like remote enablement, telehealth, and support infrastructure. Other, which represents our UK and Canadian operations, was flat on a recorded basis. UK net sales increased mid-single digits in constant currency, and Canada net sales decreased low double digits in constant currency. Performance for both markets was driven by strong education demand to enable remote learning and healthcare spending to address the pandemic with softer corporate performance. In the UK, there was some pulling of customer demand before the announcement of the agreement with the EU as customers prepared for a potential hard exit. Over the last several weeks, the UK team has executed against its well-planned Brexit mitigation strategy and has done a great job helping customers navigate through the complexity of the new agreements. Our fourth quarter performance benefited from the diversity of our customer base and our deep and broad product portfolio. We continued to meet the critical demands of our customers across all categories. Hardware was up strong, double-digit, driven by excellent notebook growth, in particular for our public segment customers, leading to over 30% client device growth. While software was flat, software gross profit increased mid-teens, reflecting continued mix into software as a service. Services grew low double digits, driven by device decommissioned services for the census project and configuration services. Services are fundamental to our go-to-market approach and a key enabler of our value proposition. Transactions increased strong double digits, solutions declined low single digits, and some customers continued to restart infrastructure and larger project engagement. The team delivered excellent growth in our cloud practice. Cloud customer spend increased strong double digits across all customer end markets, driven by robust flows and collaboration, infrastructure as a service, security, and productivity. We expect strong customer demand for cloud solutions to continue. Let me also share a little more color on our security practice, given its importance to our customers, as cyber threats are constantly emerging and evolving and increasing. Security customer spend grew strong double digits as customers improved their security framework to respond to increasing threats. Last year, customers spent $2 billion with us on security. Our fourth quarter and full year operating and financial performance reflected the combined impact of our balanced portfolio of customer end markets, our full suite of solutions and services across the IT landscape, and our ongoing success executing our three-part strategy. They are important drivers of our past and our future performance. The diversity of our customer end markets serves us well when macro or other external challenges impact various industries and customers differently. Our extensive product services and solutions portfolio positions us to meet our customers' total needs across the spectrum of IT and can pivot quickly to trends and customer demand. As I shared, the balance of our customer end markets and our offerings are especially relevant in current environments. And the final driver of our performance, our three-part strategy for growth, is first to 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 advise design orchestrate and manage integrated technology solutions our customers want and need today and in the future let me share a few examples of our strategy and action and how we helped customers last quarter Our small business team helped a born-in-the-cloud financial technology company add more agility and flexibility to its operations and technology stack by becoming multi-cloud. The customer initially came to our team requesting help to implement a backup solution for its existing public cloud provider. After a review by our digital velocity team, our team uncovered a need for the customer to become multi-cloud with additional capabilities and redundancies. Our team helped the customer build a secure second public cloud environment and address additional needs, including application development functionality and consumption management. Our team has established CW as a trusted partner with extensive cloud capabilities to help with research, evaluation, procurement, implementation, and management. Our customers are increasingly adapting cloud, but are also finding a growing need to become multi-cloud. CDW's cloud expertise and cloud management platform across multi-public clouds are a differentiator in the marketplace. Let me share another story in the healthcare sector. To address COVID, healthcare customers have turned to CDW to provide care in new settings and in new ways. An independent nonprofit healthcare provider in the U.S. Northeast needed our guidance to enable remote COVID testing and vaccine distribution in numerous outdoor locations. The CDW account manager engaged one of our networking specialists to develop a solution that would deliver the required performance and scale quickly. The solution has since been rolled out to all locations, and we next work with the customer on the site's wireless connectivity, further leveraging our technical resources and strengthening their relationship. Our team saved the customer time and energy and provided great service as a forward-thinking partner who the customer can trust. The pandemic has created new issues requiring creative solutions and leading customers to rely on us more than ever as an extension of their team. This is the value that CDW brings to our customers. We pair our broad solutions portfolio with our deep technical expertise to deliver the full outcomes that customers need. Finally, the digital divide has created significant learning challenges around the world. Our teams have worked closely with education customers in the U.S. in the UK and in Canada to tackle this challenge. In the UK, we are working with the London Grids for Learning, a charitable trust dedicated to the advancement of education to provide technology for hundreds of schools across the country. Last quarter, our team developed and provisioned unique turnkey solutions comprised of client devices, accessories, software, and services, leveraging our strong logistical and distribution capabilities and deep vendor relationships. There has been tight collaboration with our client-vendor partner to provide the best possible device availability for the customer due to the current global Chromebook supply constraints. Our distribution center in the UK has done a tremendous job to deliver over 100,000 units to date to hundreds of schools. CUW is uniquely positioned to deliver for our customers and our vendor partners. This is a great example of our critical role. These examples highlight CDW's three-part strategy for growth and demonstrate the success of investments in cloud, our strong relationships with customers and vendors, and the importance of our competitive advantages. I am proud of the way our team continues to deliver. Let me briefly update you now on our COVID response efforts. Since the beginning of the pandemic, we have followed three key principles. First, safeguard the health and well-being of our coworkers. Second, serve the mission-driven needs of our customers. And third, support our community. I'm proud of how the team has managed the impact of COVID-19 on our business. Teams at our distribution and configuration centers have done an outstanding job maintaining the high level of customer service we are known for while adhering to new protocols that safeguard the health and well-being of our coworkers who come to work every day. We've also taken deliberate actions to foster collaboration and coworker engagement and to maintain connectivity and productivity to preserve and bolster our culture even while we are distant. These actions include leveraging new tools and learning and development opportunities, expanded health and well-being programs, increased content from our business resource groups, and compensation investments to recognize the team's tremendous efforts and performance. Now, let me share some thoughts on 2021. The near-term global health and macroeconomic environment is still uncertain. Our current outlook is for the U.S. IT market to return to growth and grow between 2.5% and 3%. As you know, we hold ourselves accountable for growing faster than the IT market, and we expect our top line in 2021 to grow 200 to 300 basis points faster than the market in cost concurrency. There are many wild cards, though, including COVID-19 government restrictions and vaccine rollout, policies from the new U.S. administration, including stimulus programs and tax changes, and supply constraints, in particular for Chromebooks. We are encouraged about our Q1 performance to date and how our teams are executing, but we are also cautious about the macro environment. Even though uncertainty continues, our confidence in the prospects for the business has never been higher. 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. Last year, we went through our rigorous strategic planning process, as we do every three years, and we are now accelerating investment and execution against it. We have confidence that we have the right strategy to best serve our customers and partners, to enhance our competitive position, and to deliver sustainable, profitable growth. This confidence has led our board of directors to increase our share repurchase authorization by $1.25 billion. 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, of course, out-execute the competition. Now Colin will share more details on our financial performance. Colin?