Q3 2020 CDW Corp Earnings Call
At this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone keypad. If you require any further assistance. Please press star zero. Thank you I would now like to hand, the conference over to your speaker today Britney.
Yes.
By our SP and Amy Please go ahead.
Thank you good morning, everyone. Joining me remotely today to review our third quarter financial results are Chris Leahy, Our Chief Executive Officer, and Cowen key about our Chief Financial Officer.
Third quarter earnings release was distributed this morning and is available on our website investor that CDW dotcom, 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 sub.
Victor risks and uncertainties that could cause actual results to differ materially additional.
Additional information concerning these risks and uncertainties is contained in the earnings release and form 8-K, we furnished to the FCC today, none of 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 Google.
You'll find reconciliation charts in the slides for today's webcast and in our earnings release and form 8-K, we furnished yesterday 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 were hardware software and services today represent us net sales only and do not include the results from CDW UK or Canada revenue.
A replay of this webcast we posted to our website later today.
I want to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast 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 will provide our perspective on the current macro environment its impact on our customer end market and how we are responding.
Collin 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 question.
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 one dollar at 83 cents, 8% above last year on a reported basis and up 7.7% in constant currency.
The quarter demonstrated the balance and strength of CDW. This model.
The diversity of our customer end markets served us well.
And most impacted customer end markets the rate of decline stabilized and generally improved in the quarter.
Transfer are more resilient customer end 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 help customers this quarter across a spectrum of IC 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 IDN W. At the beginning of the quarter.
Our solutions business strengthen this quarter as some customers presumed projects that have been put on hold earlier in the year and others started new projects.
During the third quarter, we continue to leverage our distribution centers extensive logistics capabilities. These vendor partner relationships and strong balance sheet and liquidity position to navigate supply challenges.
We successfully procured supply and high demand categories and manage through longer lead times for others.
Now, let's take a deeper look at the customer end 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 engagement.
Transactional products were down double digits.
Spending on remote enablement moderated.
Small business also declined 13% a considerable improvement versus the second quarter most.
Most product categories declined less this quarter as small business customers remain focused on remote enablement security cost management and optimization.
The government teen increase 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 US 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 fences project the federal team continued to help civilian agencies with remote enablement and device refreshed seven.
From Department of Defense solution projects got pushed to future quarters dampening performance.
The state and local team delivered high single digit growth IP investments continued to be a priority for public safety in some cases budget was reallocated to support technology initiative.
Our team helps 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 continues to focus on equity in excess for students take.
K 12 growth was driven by strong notebook results and related accessories security and software as well as cloud solutions to support support remote learning.
Higher Ed performance strengthened this quarter as schools turned to us to leverage our extensive logistics capability to optimize technology to teach and new format.
Healthcare declined about 25% as budget pressures continue to impact spending.
Customers are spending where they have to in areas like security and software.
Otherwise projects, we're 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 and constant currency UK.
UK corporate and public channels declined as government support programs ramped down during the quarter.
Canada net sales decreased low double digits in constant currency and improvement compared to second quarter performance and some corporate projects came off totaled and education remains 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.
US hardware was down low to mid single digits with client devices declining 2% due to desktop performance.
The 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 engagements.
We again delivered strong growth in our cloud practice cloud customer spend increased double digits across all customer end markets driven by robust 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 improve their security framework to respond to increasing threats.
Our third quarter operating and financial performance reflected the combined impact of our balanced portfolio customer end markets, our full suite of solutions and services across the IP landscape and our ongoing success executing our three part strategy for growth there.
They are important drivers of our past and future performance.
Let me review each.
As you know we have five us sales channels corporate small business government education and healthcare.
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 end 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 100000 products services and solutions for more than 1000 vendor partners. We are well positioned to meet our customers' total needs across the spectrum of IP and can pivot quickly to trends in customer demand.
As I shared the balance of our customer end 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.
Second to enhance our solutions capabilities and third to expand our services capabilities.
Each pillar is crucial to our ability to profit profitably assessed 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 in how we help customers this quarter.
Our K 12 team with extraordinarily busy this quarter. One reason was the award of a contract from the Mississippi Department of education to support it 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 care that.
It will help close the technology gap and support all public school districts in the state by providing students and teachers with security 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 are aligned with their customers mission and deliver creative solutions and differentiated value.
Digital transformation in particular cloud adoption and integration is a top priority for many of our customers cloud.
Cloud creates complexity, especially at customers integrate their infrastructure balancing applications on prem and in the cloud.
Our team worked with a large retailer to develop future state business strategy for on premise and cloud platform to operate as one.
This is a great example of where our services and products and solutions portfolio combined with the best outcome for our customers it.
It also demonstrates the value IBW brings to CDW and how we are leveraging its cloud native service expertise.
Another customer in our corporate channel had a problem with the incumbent primary partner, which was exacerbated due to the pandemic.
I see director urgently turned into CDW 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 it by key business to CDW.
Our team has also helped the customer more develop a strong collaboration platform and is helping with a variety of initiatives, including lowering costs, increasing flexibility of its on premise backup storage evaluating cloud options shoring up the security and augmenting its IP staff 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 IP lifecycle and thought leadership.
These examples highlight CDW three part strategy for growth and how it is crucial to achieving our customers objective.
This quarter demonstrated the importance of our competitive advantages the.
The success of past investments in cloud and security and our trusted partner relationships with customers.
I am proud of the way our team continues to execute and deliver.
Let me now update you on our efforts to manage cobot ninetys impact on our business we.
We remain focused on three key principles safeguard the health and wellbeing of our co workers shared 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 co workers will be working from home until the start of next summer.
Coworker engagement productivity and collaboration our strong testament 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 who work in the future we.
Will remain agile in this unpredictable environment.
[music].
All distribution and configuration centers are operational and we maintain precautionary measures as advised by public health authorities. These.
These teams have done an exceptional job maintaining a 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.
Wild cards include the duration and severity of over 19.
Tomorrow's us elections additional stimulus programs supply.
Supply disruptions and UK EU trade negotiations.
Therefore, we are not providing 2020 targets.
Q4 to date writings trends for our corporate channel are in line with Q3.
Whitings trends have improved for our small business channel.
Public strength continues to be driven education and government.
Offset by health care.
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 the time of unprecedented uncertainty.
Our customers continue to be in various phases of responding to the macro environment. Some.
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 the cloud is not an endpoint cloud is an element of our customers' environments and it adds complexity, which is core to our value proposition.
Our teams help our customers with a full solution stack and full IP lifecycle.
We will continue to be trusted partners to help our customer smartly deploy their IP resources.
Adopt modern software infrastructure patency 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 hadn't CDW strategy and future performance.
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 IP 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 IC priorities and achieve their strategic objectives and out execute our competition.
Now, how we will share more details on our financial performance.
Collyn.
Thank you Chris Good morning, everyone I'm going to provide more detail on our third quarter results liquidity position and capital allocation priorities.
Turning to our third quarter PNM on slide nine consolidated net sales were $4.8 billion down 3.1% on a reported and average daily sales basis.
In constant currency consolidated net sales declined by 3.3%.
On an average daily sales basis sequential sales increased 8.9% versus the second quarter. This was higher than historical seasonality, primarily due to the adverse impact of COVID-19 on second quarter results.
Our customer channels generally performed consistent with the demand and writings commentary shared on our last earnings call pockets of supply dislocation continued in the quarter and we leveraged our distribution capabilities and strong vendor partner relationships to procure the IP products and solutions, our customers needed for remote enablement operations.
Continuity and resource optimization.
Gross profit for the quarter was $826 million an increase of 1.1%.
Gross margin was 17.4% of 80 basis points over last year.
The better than expected gross margin expansion was driven by product margin and mixing into netted down revenues, primarily software as a service, which more than offset mixing into public.
Turning to that today on slide 10, our non-GAAP EPS June a increased 0.7%. The increase was primarily driven by higher payroll costs from the acquisitions of actress NRG MW and COVID-19 expenses to safeguard and compensate frontline coworkers, partially offset by continued savings measure.
Including decrease travel and entertainment and hiring restrictions.
In September to ensure the alignment of our cost structure and resources to best position CDW for future growth, we reduced our workforce by approximately 2% our realignment measures to enable us to continue to evolve with customers most important priorities ensuring capacity in high demand areas to support future growth and to come.
Revenue investing in the business to emerge stronger from the crisis, we recorded a charge of $8.5 million, which you can see in the GAAP to non-GAAP reconciliation on slide 10.
Co worker count at the end of the quarter was 9980 down 68 from the second quarter, reflecting the realignment measures and restrictions on hiring and backfills, partially offset by gnw year over year coworker count increased to 137, primarily driven by the Astros Tonight Gnw acquisitions.
GAAP operating income was $318 million down 0.9%, our non-GAAP operating income, which better reflects operating performance was $386 million up 1.5% non-GAAP operating income margin was 8.1%.
Moving to slide 11 interest expense was $40 million down 5.1%. The decrease was primarily due to a lower LIBOR rate on the term loan.
Our GAAP effective tax rate shown on slide 12 was 22.7% for both the third quarter 2000, and 2019. This resulted in third quarter tax expense of $57 million compared to $59 million last year.
To get to our non-GAAP effective tax rate, we adjust taxes consistent with non-GAAP net income add backs, including excess tax benefits associated with equity based compensation, which is shown on slide 13 for the quarter. Our non-GAAP effective tax rate was 23.3% down 250 basis points versus last year's rate.
Rate decrease is primarily related to a one time impact of state tax refunds and reduced global intangible low tax income and nondeductible expenses due to recent IRS regulations.
As you can see on slide 14 third quarter weighted average diluted shares outstanding of 145 million GAAP net income per share was $1.33 down 2.6%. Our non-GAAP net income was $265 million in the quarter up 6.2% compared to last year non-GAAP net income per share was one dollar.
83 up 8% from last year.
Turning to year to date results on slide 15 through 20 revenue was $13.5 billion, an increase of 0.1%.
On a reported basis and down 0.4% on an average daily sales basis, as we had one extra selling day in the first quarter of 2020.
The extra selling day will reverse in Q4, when we have one fewer selling day compared to prior year.
On a constant currency average daily sales basis year to date consolidated net sales were down 0.3% from prior year.
Gross profit was $2.3 billion up 3% and gross profit margin was 17.2% up 40 basis points.
Operating income was $847 million in non-GAAP operating income was $1 billion of 0.2%.
Net income was $550 million and non-GAAP net income was $691 million up 2.6% non-GAAP net income per share was $4.77 up 5.2%.
Turning to the balance sheet on slide 21 as of September Thirtyth cash and cash equivalents were $1.25 billion and net debt was $2.7 billion.
Liquidity continues to be strong with cash plus revolver availability of approximately $2.2 billion.
Year to date free cash flow was $837 million as shown on slide 22. This is higher than normal seasonality and above last year's $590 million, primarily due to higher cash profit and lower investment in working capital this year.
A portion of that better than normal seasonality is working capital timing that we expect to reverse over the next few quarters.
Moving to slide 23, the three month average cash conversion cycle was 16 days down one day from last year's third quarter, while cash collections were solid in the quarter DSO increased five days driven by the strength of netted down items, such as software as a service mixing into some larger public customers, who can take longer to pay and certain commercial.
So customers extending payments.
The PEO increased six days driven by the strengthened netted down items and mixing into vendors with extended payment terms.
In the quarter, we returned $54 million of cash to shareholders through dividends and did not repurchase any stock.
Turning to capital allocation priorities on slide 24, as Chris noted, we announced earlier today that the board of directors declared a quarterly cash dividend of 40 cents per share to be paid on December 10th to all shareholders of record as of the close of business on November 20 to this.
This represents a 5.3 increased over the current dividend.
We also announced that we will be resuming share repurchases this quarter, the dividend and share repurchase actions reflect our strong liquidity position net leverage below the target range and the free cash flow generation capability of the business. The decision to return capital to shareholders as consistent with our capital allocation priorities, which are first increase.
The dividend in line with non-GAAP net income the annual dividend of $1.60 is approximately 25% of trailing 12 month non-GAAP net income through September the.
The Q4 2020 dividend marks the seventh consecutive year of increases since our initial public offering in 2013 with the dividend growing at a compound annual growth rate of 38% from its initial level.
We will continue targeting a 25% payout ratio going forward growing the dividend in line with earnings.
Second ensure we have the right capital structure in place with a targeted net leverage ratio of 2.5 to three times. We ended the quarter at 1.8 times below the low end of the range.
Our third capital allocation priority is to supplement organic growth for strategic acquisitions, we closed on our gnw at the beginning of the third quarter and remain active in evaluating targets and we'll seek to be opportunistic in this environment any.
Any decision to deploy capital for acquisitions will be a function of our usual screens strategic rationale.
Operating and cultural fit and financial return for US as I previously mentioned, we are resuming our share repurchase program.
Going forward, we expect to move closer to our target net leverage range through a combination of organic investments M&A and or returning greater than 100% of free cash flow to shareholders as we always do and particularly in this uncertain environment, we'll closely monitor the macroeconomic environment, our liquidity working capital and leverage.
And adjust as needed.
Lastly on the topic of capital, we intend to continue capital expenditure investments in the business. We believe it's important to continue prudently investing in the capabilities that will allow us to better serve customers drive productivity and ultimately emerge from this crisis in a stronger competitive position.
We previously lived through our 2020 targets and will not be providing an updated financial outlook, but consistent with the last two quarters I wanted to provide insights into what we're seeing roughly one month into the fourth quarter from a demand supply and operating perspective.
On the demand side activity continues to be mixed across customer end markets in corporate October writings declined in line with the level of Q3, writing declines.
In small business October writings improved from Q3 levels and in public October writings were up year over year, driven by continued strength in education and government, partially offset by declines in healthcare.
While encouraging as Chris mentioned, we believe it's premature to extrapolate October writings over the balance of the quarter given the wildcard of COVID-19, the election stimulus and supply we expect commercial customers to continue to be cautious.
As I previously mentioned, we have one fewer selling day in the fourth quarter, which adversely impacts quarterly profit growth by approximately 200 basis points.
On the supply side, we continue to navigate through a fluid environment with pockets of dislocation extending lead times in certain categories notebook supply, particularly lower end devices such as Chromebooks. This type also freight challenges may develop as we get closer to the holidays.
On the operating front all distribution centers continue to be operational.
Finally, I want to provide an update on the device as a service solution to the US census Bureau, the contribution to third quarter net sales was in line with expectations that we had deployed all the devices into the field.
The contribution to incremental growth with less than preceding quarters. Since the majority of last year's revenue was recognized in the third quarter.
As Chris mentioned data collection for the U.S. census has ended and we are in the final phases of the project.
Devices are returning to us for decommissioning from a financial perspective. This year. We now expect the census to contribute up to approximately a 180 basis points of incremental net sales growth over 2019 on an absolute basis. We currently expect the census to contribute over 230 basis points of net sales in 2020.
The collection and decommissioning timing remain fluid. So we could see some net sales shift into the first quarter of 2021.
That concludes the financial summary, with that I'll ask Jacqueline to open it up for questions can we please ask each of you to limit your questions to one with a brief follow up thank you.
As a reminder to ask a question you will need to press star one on your telephone keypad.
To answer your question press, the pound or hash key your first question comes from Tim Yang from Citi. Your line is open.
Hi.
Hi, Thanks for taking my question in the past three years.
For Q4 gross margin was higher than Q3, what we think about Q4. This year I think of your mix should be better on a quarter over quarter basis, given the recovery.
So your gross margin should be better sequentially is that the right, which I think about your gross margin for Q4 this year.
Morning, Tim Thanks for joining the call, we're not going to provide guidance on the Q4 outlook I guess, what I was just sheer on your observation is that.
Historically Q3 has been a seasonally highest sales quarter driven by strength in education, and government, which tend to have lower gross margins. So I think what's happening historically is coming off of that seasonally high quarter, where we mixed into government and education you come off of that into Q4 and Thats why you would see in the gross margin ticked up the story.
The way I think given what's happening in the marketplace right now, particularly in education, all bets are off on normal seasonality. So I would just offer those thoughts.
Got you and then regarding your Q4 corporate and SMB Bison commentaries I think you mentioned the decline similar to last quarter, and then last quarter I think that the decline was with a roughly you mute.
The teams are year over year basis.
We have seen many supply chain companies mentioned, our projects are coming back.
I was wondering like why youre not seeing improvements in eurs in the corporate business does more just a conservative conservatism or is just like you are you will be the bid is not quite an improvement compared to last quarter. Thanks.
Hi, Tim It's Chris Good morning, and I would say that we saw a nice increase in our solutions project based business. We had mentioned on the last call.
Customers have continued to pause on moving forward. They were in planning stages, we did see more customers both in our corporate stays in small business stage space start to move forward on on infrastructure projects. For example in larger projects I would say on the corporate side, there is still caution and they're not quite as nimble as this.
While this business organizations generally have a lot more kind of gear accuracy and approvals to get through so that seems to be going a little slower, but certainly we are seeing some pick up in both of those segments.
Great. Thank you.
Your next question comes from Amit Daryanani from Evercore. Your line is open.
Good morning, and thanks for taking my question, please half two as well.
Just first to just clarify the writings discussion.
I think the way you guys characterize this is on the corporate side things are about stable idea about what they were in the June quarter. The September quarter. So far and then SMB study for the pace of declines aside to ease up I want to make sure I got that right and then any sense on how transactional versus solutions is trending from a writings basis so far.
Amit It's Chris Yes, you read that right you got that exactly right underwriting related described it but we're not we're not splitting out writings for solutions versus transaction.
Got it yes.
I guess, maybe I would ask you to to run that up if.
If you could talk about what percentage of gross profit dollars today in the September quarter. Our agency base are recurring in nature and as you think longer term, we will be really helpful to understand what is the growth rate looks looks like about gross profit dollar bucket versus the overall company and then what are the key components within the agency and we accrued revenue through the job.
Good morning, Ahmed, Yes, netted down items were approximately 30% of total gross profit dollars in the quarter.
Which is one of the higher numbers, we've seen and that really reflects the strong mix into cloud specifically software as a service that both Chris and I talked about in our prepared comments.
Included in that bucket.
His cloud.
Security software another another software offerings that net down.
Warrantees those would be the primary things that you would you'd see in that bucket.
In terms of.
How that trends over time, I think we would expect.
Customers tick.
Continue moving into cloud in two we expect strong demand for security software. So I think we would expect.
Solid growth.
In that bucket I think the wild card again in terms of where it goes it is what happens to the hardware part of the business.
Obviously, that's been a little bit more challenged in the coated environment in the preceding three years that was very strong so I think.
Exactly where that mix goes is probably more a function of how hardware gross profit trends over the next couple of quarters and years.
Perfect. Thank you.
Thanks.
Your next question comes from Adam Tindle from Raymond James Your line is open.
Okay. Thanks, Good morning, Chris I, just wanted to start on the decision to resume share repurchases and how we should read into that.
Still have over $2 billion liquidity, you're well below your optimal leverage levels.
In previous discussions before Covidien, not precluding yourself from a larger size acquisition a billion plus until that acquisition. So if the question would be wondering if you could maybe share your latest thoughts on the M&A landscape and how thats evolved.
Yes, yes, sure Adam well like the decision.
Decision to.
To restart our buyback is a real reflection on both our confidence in our strategy and performance views going forward. In addition, obviously to our.
Strong free cash flow and liquidity position on M&A in particular.
I'll repeat what I've said over the last few quarters. We are actively looking to invest prudently to supplement high growth technology areas, you've seen us do a couple of acquisitions recently.
In service now capabilities and cloud native capabilities, both of which has been taking up have been taken up very well by our sales organization and really solidifying our advisor position with our customers. Those are the types of acquisitions, we'll continue to look at and to look at I.
I would tell you Adam that there that the market itself feels a little.
More bleak.
Organizations are out.
Open to discussion now more than I'd say, they were a couple of months ago.
But as you know our you know our lenses, we look for those that fit our capability there strategic capabilities, our culture and operating model and then ultimately make financial sense.
Okay. That's helpful. And then maybe just as a follow up I wanted to ask on Opex I think I have it right that you previously talked about letting attrition run its course.
It looks like demand is kind of turned the corner a little bit on EBITDA margin with very healthy in the quarter. So I was just wanted some more color on why reduced the workforce I know, it's not a significant number in another itself, but a little bit unusual.
Unusual for CDW to do that so maybe more color to expectations for future growth change.
Good luck.
We undertake that thank you.
Yes, and integrate question and you're right those are hard decisions for CDW. In particular is just the second time in our history that we produce the workforce.
Thank you by about 2%, but really this was all about ensuring alignment of our cost structure and resources to best position us for the future. So we really need to ensure we've got the resources to continue to evolve with customers in their most important priorities. We wanted to make sure that there is capacity in the high demand areas to support the.
Future growth and continue investing in those more emerging areas. So while we have cutback.
Cutbacks in position. We also are hiring in those areas that we think or.
Critical to our future growth.
That's helpful. Thank you.
Your next question comes from Matt Cabrall's from Credit Suisse. Your line is open.
Yes, Thank you and Chris you mentioned a lot of moving pieces out there from a macro standpoint, your prepared remarks, and clearly spent a year that's below trend from an active spending point of view.
I guess just thinking about looking forward curious if you think customers are sitting now at this point with a meaningful amount of pent up demand as we had been actually answered maybe help turn things around or if there's a risk that this more sluggish demand environment continues as we start getting into next year.
Yeah. Good morning, as you look I think.
If it's possible to have both I would say, yes to both to both.
Why do I say that because I think until I think until this medical problems resolved, it's going to have to be very difficult to have a clear through trajectory the economic environment and that has an impact obviously on uncertainty and actions that our customers are taking so just murky and that Murphy. This may.
It's very difficult to predict I, certainly think that we have two things we have pent up demand and we have customers who are frankly pricing advantage. If you are buying technology and implementing technology at a higher pace to price their advantage, but as far as pent up demand I think the real question becomes when our customers.
Ladies.
When are they feeling comfortable enough to excuse me to make larger investments and I, just think thats incredibly difficult to predict what we're doing is staying close to the customers you've heard us talk about the complete spectrum of IP that we're providing and we're just making sure that they get what they need when they need it better than anyone else in the industry can you do it.
But it's hard for me to predict.
The future given the murky nature that current outlook.
Got it and then looking by vertical education was clearly the standout in the quarter wondering if you could talk a little bit more about just what you're seeing there and how sustainable you think those tailwinds are just particularly relative to the ability to actually get enough supply to meet demand going forward.
Yes, it's a great question. The supply has been it has been an issue, but weve been doing very well with our suppliers to get more than our fair share to help health education institutions. You disappoint is unfortunately, we cant get the supply to the schools at the very sort of the school year, but we have been moving a very large amount of products through our configuration center.
And now to the school I think what you're going to see Matt is demand in Q3, we'll continue to see Q4 because of the supply chain constraints because of the carryover in Q3, we might see a little bit flow into next year, but it feels like that that this is really a 2020 pull forward. If you will a lot of work of organization.
And then looking at equity and access needed plans that they are making over a couple of year period and this feels like it literally got pulled into 2020 this year.
Now that that that Avnet I would tell you that there will be opportunities, obviously going forward around things like collaboration and other areas to fortify.
The remote work requirements as we think forward.
Got it thanks for that color.
Your next question comes from Rutu kind of Sharia seats from Bank of America. Your line is open hi.
Hi, Thanks for taking my questions and congrats on the quarter.
Just wanted to ask a high level question first as we see new restrictions on moton measures in Europe.
Can you just give us your thoughts on that.
Also how many what percent of your workforce is now working from home and do you think CDW isn't is in a better position to.
Haendel, if theres a resurgence in covidien in loans.
Good morning revenue. Thank you.
Good to hear from you, yes, I think that we have to be cautious and all the locations, where we start to see more restrictions and lock down and for a couple of reasons and for a couple of segments I think here in the UK as you know we have some government stimulus money that is rolling off.
And that is tending to have an impact that we're seeing and add.
Add to that lock down and the economic commercial impact that has a we do worry about that that said, we still have customers as I said before who are.
Who are digitally advanced and really pressing irrigate antigen, absolutely moving forward with some larger projects.
And.
Across the U.S. I would also say that cautiously as you look over the last week or so and the trajectory of an uptick in cases is worrisome as dumb as different states potentially are moving backwards in their restrictions and locked down so.
As I said I'm still encouraged by the team and the execution in the performance of this team.
But I'm highly cautious about the guidance factors that we can't impact as far as work from home.
The team settled and this is it.
This is the performance oriented organization M&A, everybody went home, we got ourselves set up and we are off to the races.
I give our co worker services and sales leadership, a huge kudos for figuring out very quickly creative ways to drive productivity connectivity and human touch both across our sales organizations and with our customers and they've been doing just great.
Great. Thanks for that and I appreciate all the color there.
Chris I wanted to ask you also on the device as a service project how that the census project is coming to an end what's the plan for those devices and can you use them in some other.
Program and how do you see the device as a service business growing over over the next couple of years. Thank you.
Good morning Ruplu.
Take that one yeah. So we are winding up the sites as a service offering to the census, those devices are coming back to CDW for decommissioning and what we will do that as turnaround and resell. Those two are re marketer and we have plans in place to go and execute against that.
In terms of.
Device as a service as an offering I think that will continue to be an opportunity for CDW clearly, we have competitive advantages and our ability to bundle integrated solutions across multiple vendors integrating services as well as our logistics capabilities and I think.
What we are doing for the state of Mississippi Department of Education is just another flavor of our ability to deliver that value to customers and.
In a world where.
Being able to work productively remotely from anywhere is becoming increasingly important I think thats going to.
Being an important part of our growth drivers going forward.
Okay. Thanks for all the details and congrats on the quarter.
So your next question comes from Shannon Cross from Cross Research. Your line is open.
Thank you very much and good morning, I'm wondering about the customer demand for staff and specifically are actually just netted down revenue in general.
How much of that red.
Revenue is coming from sort of applications versus utilization of the cloud for data storage and processing.
I'm, just trying to figure out where our customers are and in their cloud progression and one other follow up thank you.
Yes.
Yes sure Shannon.
I guess, let me start where customers are in your cloud progression and I would say that it's the full spectrum.
We don't break out application versus consumption usage in those numbers, but I would just tell you that we have customers that are across the full spectrum small.
Small customers fully on cloud high consumption.
Medium and large customers, who youre dealing with heavily.
Heavily cloud oriented applications, but on Prem legacy applications that are working the cloud and we're working with them in terms of modernizing your data center infrastructure to create one more one cloud environment. If you will between their public on Prem private.
And and on Penn legacy work. So it's really hard I think to stay beer customers stand because they're on quite a spectrum, but what I can say is they are all moving to to some form of.
Cloud environment, and when I say cloud environment I don't we landed in the cloud. The has the cloud is not a place and it's more an operating system. It is that it's a pattern at a place in it it delivers an experience not a destination. So what we see ourselves involved in is that planning and design.
Accelerated by this.
This accelerated digital environment.
To determine what best cloud environment works for a customer taking into consideration not just the benefits of our cloud like environment agility flexibility scalability, but also the cost issues and the legacy technology that they have to deal with so I'm sorry, that's a long winded answer.
But we are selling the spectrum, we're helping customers with spectrum and our comprehensive suite of capabilities allows us to do that.
Wherever customer is on their cloud journey.
Okay. Thank you and then.
Maybe on a segment basis can you talk about why.
Where customers are versus like new projects versus continuing to work on remote enablement and continuity I know you mentioned with education, you think it's going to kind of wind that by the end of this year and are at least hopefully can be done pretty much by then but SMB and maybe enterprise are you seeing.
Customer still really focused on just making sure their employees have end devices and connectivity or do you feel like thats kind of done and now people are moving back to our prior investments or or or new opportunities. Thank you.
Yes, and then if there is it's a mix across segments. If you look at corporate for example, we had seen the.
Work from home moderate a bit in what I mean by that is the the notebook devices in the rush to get everything working from home.
Respect in that segment towards the ample we're going to have to see what work in the future looks like and when and how customers start going back to the office and when they make those decisions.
You'd expect it tick up then in terms of things that help optimize either the work from home or the work the office now.
For the the hybrid that hybrid.
That they land, but but it has moderated a bit in the corporate say small business. We continued to see strength at work from home now that could be some part because small businesses.
We're a little later to get there.
Their devices and then maybe the larger businesses.
So it's really it's really different across segments healthcare really rush to the front end. They were obviously a high priority from an allocation perspective for us and others and so that's moderated in the healthcare space as well.
So we're really seeing education K through 12 higher Ed as the primary drivers of continuing work from home.
As what was said or I would say the government space as well as been continuing to be fairly robust in work from home support.
Thank you.
Your next question comes from Katy Huberty from Morgan Stanley. Your line is open.
Thank you good morning, Colin as we think about the sense as project wrapping up over the next quarter and one less selling day is it possible that the revenue decline doesn't improve in the fourth quarter or or do the improved SMB writings.
Create a tailwind that we continue to see.
A lesser decline trajectory like what you saw in the third quarter.
Yes, Katy we are not going to give a specific guide on.
Fourth quarter sales, so what I would say is we do have one fewer day.
We report sales on an average daily sales basis, so that would normalize for that the 200 basis points is really a comment about the impact that has on the bottom half of the P analysis, we get a little bit of de leverage year over year.
As it relates to the census.
I would expect the census to provide.
The solid contribution to the fourth quarter or is it is going to provide a benefit again as we look at last year's overlap most of that was in the third quarter. So it will contribute incrementally.
Year over year, and then I think as it relates to the comments on writing we are back to the wild cards, and I think particularly on the commercial side of the business, how those customers choose to react to the election, and what impact the virus and potential additional shutdowns.
As on on their spending plans as we come into the end of the year.
Okay. Thank you and then.
Just on third quarter margins, you mentioned that product margins were better in the quarter. In addition to the mix shift to netted down revenue.
Can you just talk about what what drove the better product margins is that a mix shift away from client and starting to see some growth again in some of the infrastructure areas like servers and computers.
Yes, Katy I would say it was a combination of things there was some mix within product. So for example, desktops were pretty soft as notebook has become the form factor of choice desktops tend to have low margins. So that helped the product margin a little bit.
I would say that.
This pandemic and economic shock is a little bit unique compared to other recessions or slowdowns that we've been through I think one thing. That's different is you have supply demand imbalance occurring at the same time and so that supply imbalance I think is provided.
A bit of cushion on on the margin.
Then I think that the second thing that's unique is just how.
Important technology used to being a part of the solution here and customers focused on.
Getting things done with partners They trust and that can manifest itself in speed level of service logistics capabilities, but I think what we're seeing is customers just wanted on the onetime quickly and they want it done right and maybe we're not going to go through another round of bids through the procurement department or whatever it is in that.
That has played into.
I think some of the product margin durability that we saw in what you might think would be a period of.
Compression on the on the product margin.
That's great very helpful. Thank you.
Your next question comes from Matthew Sheerin from Stifel. Your line is open.
Hi, guys. Thanks, and good morning, Chris in your commentary you mentioned, some customer engagements, including some new customer wins due to your capabilities can you just talk about the competitive environment are you seeing an acceleration of new customer wins.
To that end due to the fact that that customers need more help.
Yes, good morning, Matt I won't repeat everything that calendar said, but that.
When I think about what customers feel today.
Yeah.
Technology is more critical technology is more complex.
And they need a comprehensive solutions to the issues. They are trying to fall and so with that with a value chain.
Trusted partner like CDW.
They are more inclined to start leaning into tw versus for example, local local bar. So what we're seeing out there as well as the competitive environment certainly from a pricing perspective, the value that CDW brings to bear to customers and become more important I mentioned are de risking their investments they want to ensure.
That they are getting the full suite, our comprehensive suite of advice.
Because of the complexity of choice that they're facing and the stakes are high the dedicate technology right and get it to work for them. So they value that tw brings is resonating very well in this environment, we are seeing new customers and winning new customers and growing those customers frankly pretty quickly and we're also seeing vendors.
Moved quicker move to vendor consolidation that's always been at.
Valued brought to customers, but it's that's picked up significantly in the environment that we're in across all of our segments frankly.
Okay. Thanks for that and then I just wanted to ask again on the client devices.
Secondly, on the commercial side, where you talked about it being down.
We did have some commentary about trends, you're seeing but I just wanted to see if you are seeing basically that that upgrade cycle, we saw last year and obviously.
Crept into this year due to the work from home or you are seeing signs that that's sort of ending and you're going to be taste facing some tough year over year comps over the next couple of quarters on the client device side.
Yeah, Matt what I'd say is look we've got when we were coming into this year. We thought we were in the late innings of.
Client device refreshing growth has moderated now what picked it picked up early this year work from home obviously learned from home, we're seeing new use cases in the digital world think of retail.
Retail organizations et cetera, and certainly we might start to see some more pickup in refresh on the 2017 period, yes, you're right. The overlaps that we're facing from the growth of last year.
And that pull forward at the beginning of this year any and if.
Vacation et cetera, as I said and then you layer on that just the economic.
Tired meant employment, it's hard to say what to expect going into next year.
You know that said work from home does have a lot of required.
To make it work effectively so we continue to help customers even in the med Lar space with their security needs for example, with their collaboration needs with there.
Productivity suites that they're working through so even if we don't see notebooks as robust right now it's the whole solution work from home solution, including the accessories and the services in the collaboration et cetera.
Got it thanks a lot.
Your next question comes from Keith Housum from Northcoast Research Your line is open.
Good morning, guys. They want to explore the supply constraints challenges in the quarter I think is well known to the challenges getting the chromebooks and the door, but pressing for other commentary did you see that easing at all during the end of the quarter and then are there other areas. Other technologies that you see having also some supply constraints that can help out in the fourth quarter.
Hey, good morning, Keith, Yes, I think the.
The constraints within chromebooks are well documented.
I don't know that I would say it east as we exited the quarter I think.
It it's going to be tight for a while here now obviously our.
Our scale and the fact that we work with multiple Oems will hopefully help us manage through that and get at least our fair share as Chris has talked about earlier.
In terms of notebooks in general I would say again high demand.
And we're just seeing longer lead times than normal. We we are hearing about component shortages for things that go into chromebooks and notebooks things like panels.
In terms of other parts of the market I would say on the solutions side of the business.
The supply environment is maybe a little bit better than it was a quarter or two ago.
Yeah.
Other areas, where we see pockets of dislocation or delays would be.
Other remote work mission critical categories like collaboration hardware headsets and webcams.
Gotcha.
Is it possible quantify I guess, what supply shortages, perhaps costing business the third quarter.
Oh boy it would be really difficult to put a number on that I mean, I could say our backlog is up meaningfully in the notebook category over where it's.
Running where its run historically.
Great. Thank you.
Since your last question comes from Paul Coster from Jpmorgan. Your line is open.
Yes, thanks for taking my question.
I'm wondering Chris if you could just elaborate a little boom soon to Susan.
We will understand whether and when Paul but I'm wondering if the how is this part of the uncertainties will given the.
Seems to be accelerating strong of a change in digitalization. So how many of your customers to still unsure what to invest in.
Change to the processing, some sort of infrastructure Paragon.
Yeah, that's a great question I think.
Here's how I would answer it they're projects that many customers had in Q.
They're rethinking what those look like now infrastructure projects for example in particular the good news is we've got the capability to sit down and work through that design with them and in last quarter's earnings call I mentioned that it ticked up into what we were starting to sit down and help customers design for a new world every customer understands that.
For the county.
Technology, and the need to get it right and how different it is today than it was literally just 12 months ago.
The acceleration of digital not a new trend, but an acceleration. So we see that as an opportunity to help our customers get the other side a bit stronger than ever.
Yes, we have lots of customers, who are just wondering what to do how to do it and making sure that they are they are optimizing for their future is that the consistent drumbeat with customer certainly surviving through this pandemic, but absolutely the notion of competitive advantage and how do we come out the other side.
Better and faster and leaner and more agile as what we're talk is what we are talking to them about.
Got you and one quick follow up for cooling.
Can you sort of close to 400 revenue headwinds associated with.
The missing down in fact to the cloud revenue.
Contracts.
Hello.
Yes.
But what I would say is.
We have historically seen netted down items growing faster.
Full revenue items. So you know in normal periods of time, but I would say it that impact has a couple of hundred basis points impact so.
A little bit more than than that given.
Given the acceleration of it.
Okay. Thanks very much.
Yes.
There are no further questions I will turn the call back over to Christine Leahy CEO. Please go ahead.
Thank you Jaclyn.
I'd like to take a moment to acknowledge the continued challenges due to the COVID-19 pandemic I want to recognize the remarkable dedication of all of our co workers around the globe and their extraordinary commitment to serving our customers our partners and all of our CDW stakeholders. They continuously impressed me and reaffirmed my conviction that we will emerge.
Longer from that.
Thank you and thank you to our customers for the privilege and opportunity to serve you.
To our investors and analysts participating in this call. We appreciate you and your continued interest in and support of CDW, Colin and I look forward to talking with you again next quarter. Thank.
Take care.
Ladies and gentlemen, and this concludes today's conference call. Thank you for your participation you may now disconnect.
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And.
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Matt.