Good morning. My name is Nicole and I'll be your conference operator for today's call. At this time, I would like to welcome everyone to the CDW Third Quarter 2013 Earnings Conference Call. All lines have been placed in a listen-only mode to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions) At this time all participants are in a listen-only mode. I'd like to remind you that today's conference is being recorded. If you have any objections, please disconnect now. It is my pleasure to turn the call over to CDW's Chairman and Chief Executive Officer, Tom Richards. Mr. Richards, you may begin your conference.

Thanks, Nicole. Good morning everyone. It's a pleasure to be with you and to report CDW's third quarter results. Joining me in the room today are Ann Ziegler, our Chief Financial Officer; Chris Leahy, our General Counsel; and Sari Macrie, our VP, Investor Relations. I'll begin with a high level review of our performance and comment on strategic progress, Ann will take you through a more detailed review of the financials, and then we will go right to your questions. But before we begin, Sari will present the company's Safe Harbor disclosure statement.

Thank you, Tom. Good morning everyone. Our third quarter 2013 earnings release was distributed this morning and is available on our website along with supplemental slides that you can use to follow along with us during the call. I would 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 Form 8-K we furnished to the SEC today and in CDW's other filings with the SEC. We assume no obligation to update the information presented during this webcast. Our presentation includes certain non-GAAP financial measures. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You will find reconciliation charts in the slides for today's webcast, as well as in our press release, and the Form 8-K. Please note that all references to net sales today are provided in terms of average daily sales, as the third quarter of 2013 had one more selling day than the third quarter of 2012. All other growth rates or dollar amount increases in our remarks today are versus the comparable period in 2012. A replay of this webcast will be posted to our Investor Relations website, investor.cdw.com by this time tomorrow. I would like to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast without specific written permission from the company. And with that, let met turn the call back to Tom.

Thanks, Sari. I'm pleased to report that once again CDW delivered industry leading profitable growth with net sales growth of 7.5% and adjusted EBITDA growth of 5.6% within a challenging market, a market that experienced significant headwinds wins from the Federal government sequestration and related budget uncertainty, ongoing uncertainty in healthcare, and continued pricing pressure. Our ability to deliver above market profitable growth within this challenging market was the result of three key drivers; our balanced portfolio of sale channels, the breadth of our product and solution suite, and our ability to effectively manage expenses while continuing to invest for growth. Let me walk through each one of these and share some detail about how they contributed to our successful performance. First, our balanced portfolio of sales channels. As you know, we have five channels; medium/large business, small business, healthcare, government, and education each generating annual sales of more than $1 billion. Given the different macroeconomic and external factors that impact each of these unique end markets, our channels often act in a countercyclical way. For example, in last year's third quarter, sales within our Public segment grew significantly higher than sales in our Corporate segment. This quarter, the opposite occurred with corporate sales growth of 9.9%, nearly twice the public growth of 5.3%, and performance was balanced within segments as well. The power of our balanced portfolio was clearly evident. Let me walk you through the results for each of our five channels and you will get a feel for what I mean. The two main drivers of this quarter's performance were continued momentum in our medium and large business, which increased 12.2% with solid product performance pretty much across the board and education, which increased nearly 30%, driven by K-12 sales of both notebooks to support Common Core…

Thanks Tom. Good morning everyone. As Tom indicated, our third quarter financial results reflect the benefit of our balanced portfolio and our focus on execution. The results also reflect the projects we are making against our financial strategy to drive strong cash flow, delever our balance sheet, and deliver double-digit earnings growth. Let me begin with the P&L. As I discuss the results, I'm going to talk about both as reported and as adjusted. If you have access to the slide posted online it may be helpful for you to follow along. I am on Slide 7. Top line growth was excellent this quarter with net sales of $2.864 billion, 9.2% higher than last year on a reported basis and 7.5% higher than last year on a reported basis and 7.5% higher on an average daily sales basis given one additional selling day. Average daily sales grew to $44.8 million. On an ADS basis, sequential sales were up 3.1% versus Q2 2013, which is below normal historical seasonality but is in line with last year. Gross profit for the quarter increased 6% to $458.4 million. Gross margin continued under pressure down 50 basis points from last year's Q3 and 20 basis points sequentially to 16%. The decline was primarily due to the impact of lower product margin from growth in more transactional products. These negative impacts were somewhat offset by 100% gross margin revenues from commissions and net service contract revenues. By tightly managing expenses while we continue to invest as planned in the business we mitigated some of this pressure. Let's take a closer look. Reported SG&A, including advertising expense, was $365.5 million. As I indicated we would on our Q2 call, we booked $74.1 million of IPO related SG&A expenses in the third quarter. For those of you…

Thank you. (Operator Instructions) Our first question comes from line of Mark Moskowitz of JPMorgan. Your line is now open.

Yes, thank you. Good morning and nice execution in a tough environment.

Thanks Mark.

My first question for you Tom, I was just kind of curious if you could talk a little more about the healthcare vertical, you talked about 2014 returning to growth. Can you talk about what you're seeing in terms of your sales funnel that gives you that confidence? And then, my follow-up question for Ann is around the near-term guidance. Historically CDW in the fourth quarter, the quarter-on-quarter revenue growth is typically around a decline of 2% to 4%. Just given you commentary around the government, do you expect the model to stay around that seasonal down 2% to 4% or could it be worse this time around? Thank you.

Okay. So thanks Mark. So, a little bit about healthcare. First of all, what are causing the headwinds, just kind of -- we continue to see institutions, if I can just say it that way struggling to look at multiple priorities in their business and dealing with kind of the lack of clarity on funding as they kind of get used to sequestration, the impacts of Medicare/Medicaid reimbursement, the implementation of ACA. So you kind of have multiple things at one time all descending if you will on the healthcare segment and hospitals in particular.

Okay. Mark, this is Ann. The fourth quarter is always a little bit of a wildcard for us because we're not sure how much corporate budget flush is going to come through in the fourth quarter. I think what you referenced is down 2% to 4% sequentially, which is in line with what we typically see. It could be a little bit worse than that this year but we're not expecting it to be materially outside those bounds.

Thank you. Our next question comes from line of Ben Reitzes of Barclays. Your line is now open.

Wanted to talk about two subjects. Education was much better than expected, and I was just wondering about the sustainability of that in the phase of the weak Federal, what do you expect for that to be as an offset in the future, what's the sustainability of the growth rates there? And if you could also highlight the drivers once again, it sounded like wireless infrastructure was a big part of the pop, usually the third quarter is a big quarter for that, but I'm not sure about the sustainability and just a lot more color about education? Thanks a lot.

Okay. So Ben, hey, this is Tom. Thank you. I just want to make sure, the questions about the product performance were in relationship to education, correct?

Yes.

Okay, good. So if you looked at what happened in education, clearly the big driver was K-12. Clearly, it was institutions or schools working to prepare to deal with the Core Curriculum implementation and testing. Now, we saw a significant opportunity in the quarter to help school districts prepare for that. We took advantage of that opportunity. And well, you're right the general harvest season or selling season is typical the third quarter. We do continue -- we do expect them to continue to have growth, not properly in the neighborhood of what they had in the third quarter, in the fourth quarter. But as you accurately pointed out, the deployment of that technology then begets opportunities for other technology, whether it's helping manage that, build out the infrastructure, or build out wireless. So we believe that for at least the foreseeable future in the near-term, we'll continue to have good growth in K-12, but it would be unrealistic to expect them to repeat what they did in the heavy buying season third quarter for the next couple of quarters.

And then, do you guys just mind clarifying what Federal is as a percent of total? And what your expectations are for the fourth quarter just so we understand what that exactly is given this unique environment we're in where we don't know what's going on? And -- so we're not confused in three months, but maybe give us a little clarity there if you can?

Yeah. There is so much in that question. But let me start with, it's about 10% of our business. And I wish I add the kind of clear volumes to demystify the impact. But suffice to just say, if you kind of just think through this sequential event, you have in the third quarter -- we did see the -- a flush, but it started much later than we might normally see. We might normally start high selling activity in August, that didn't happen in September, right. And so that last end of the quarter flush was there but not as material as it normally is. Then you put on top of that the shutdown for the 16 days in October and then the federal government try to ramp back up after the shutdown. So when we say look, we think there's going to be an impact on the fourth quarter in federal, I would be -- look it just wouldn't be right for me to try to forecast what that's going to look like because we don't know how quickly they will ramp back up again. And then, look we all know that we -- the story is not over. We have some new discussions in the first part of next year and you're not really sure how that's going impact it. So we are operating in uncharted waters. I -- what I feel good about is, that when I talk to our sellers in the federal market they're continuing to gauge in discussions. But a lot of the question comes back to; we're not sure when we'll have the authority, what's the authority is going to look like, what's the new budget as far as continual resolution is going to impact our authority to spend. So it's a wildcard for all of us, Ben, unfortunately.

Thank you. Our next question comes from the line of Bill Shope of Goldman Sachs. Your line is now open.

I have a question on federal as well. Is it fair to say that the hit from the federal weakness is probably the largest individual headwind to gross margin as we closeout the year? And given that it's such a wildcard, as we head into next year assuming we may not get a major rebound here, can you talk about some of the mitigating efforts you can put in place to counter specifically the gross margin pressure? I understand you have plenty of flexibility on the OpEx side, but if you could talk more on the specifically managing the gross margin line that would be helpful.

So it was a meaningful part of the gross margin compression because you don't have the ability to sell some of the solution products that have higher margins. And so that clearly has an impact on margin going forward. I think one of the things I hope this quarter demonstrates to people is our ability to reallocate resources and reallocate focus and look at other areas of the business where we can have growth. One of the things we're really excited about is our success in selling cloud-based solutions. As you know, that's really margin rich part of the business for us albeit small but growing. I think the other thing is our service business continues to grow and we're excited about kind of what's happening with that part of the business. That's another opportunity for us to kind of offset that. And then the third would be -- one of the exciting things about the strategy that we've been deploying and in particular take a look at K-12. If you think about some of those downstream products if things play out the way we would like there will be solutions that will sit on the backend of that strategy, which all have higher margins. So those are just kind of maybe two or three ideas, Bill, that we've kind of got in our -- on our radar screen as far as offsetting any potential pressure from federal.

So I guess just a follow-up on your cloud solutions commentary. We get a lot of questions on that. I mean, how is that trending relative to your expectations and when do you think this starts to actually become more material as you said it high margin but still pretty small?

Yes. Well, it's exceeding -- look, I would tell you that it's exceeding our expectations, but that for a $10 billion business it's going to be a while until it becomes material. I think the thing that this isn't so much a financial answer as a strategic answer is the thing I'm excited about is the number of engagements we're having with customers, the number of times we're selling cloud solutions whether they're SaaS based solutions, hybrid solutions or even private cloud. We don't count private cloud because it's too hard to differentiate where private cloud fits. That's actually in our normal business and we would see those kind of sales in our server and storage.

Thank you. Our next comes from the line of Brian Alexander of Raymond James. Your line is now open.

I know you're not providing formal guidance for next year, Tom and Ann, but do you think gross margin can get back to your targeted level in the next few quarters of 16.5%? And if you don't think that, do you think you can still achieve your targeted adjusted EBITDA margin goal with lower gross margin but continued expense controls, are you saying that that's still uncertain for next year?

Well, Brian, so first, we don't give a gross margin target. So, I'll assume your question was like what we've been performing at. And clearly as we talk about our strategy one of the reasons we're so focused on expanding our solutions and service capability is so we have the kind of flexibility to offset pressures in the marketplace. And as far as, I think we continue to demonstrate the ability to deliver the adjusted EBITDA targets that we put out there for people. That's one of benefits of the breadth and the balance and scale tied to this business. We will continue to do that. But I would tell you if you look at this quarter and you really want to get underneath gross margin there were a lot of things going on. You had obviously the federal and healthcare kind of tsunami hitting at one time and you had our success in some of the more transactional product. You don't expect that all of those perfect storm things to happen in the future but we also can't predict, Brian, as you know what's going to happen in the competitive marketplace and how aggressive players will be in order to get some top line revenue growth. So it's a, as you know, a combination of factors. But we do feel confident and feel like we're demonstrated that we're going to continue to deliver on that adjusted EBITDA target we've given you.

Okay, just a quick follow-up. I guess typically when pricing pressure intensifies like it has here in the last couple of quarters; you're able to turn to your vendors to mitigate that impact. And I'm just wondering if you found any change in the vendor community's willingness to step in and support your growth initiatives at all?

No. The BAC partners have been great. And I think in part because of their confidence in CDW's ability to execute for them.

Thank you. Our next comes from the line of Chris Whitmore of Deutsche Bank. Your line is now open.

Tom, I wanted to follow up on that last question with respect to pricing. From a quarter ago it sounded like most of the pricing pressure was in the notebook side or the PC side, mobility side. Is it fair to say that that pricing has expanded into other product areas like server, storage, networking, et cetera or is it still relatively confined to the client side?

I would say there's no perfect answer on that, Chris. I'll tell you what I'd say. Pricing pressure had existed across all of the categories but you got to kind of keep trying to pull out the federal healthcare implication on things when you're looking at it. And I would say that it's been pretty consistent to your point across several quarters now. We see it more heavily in our transaction products than we do in our solutions products but I don't think that's a surprise.

And a follow-up, I wanted to ask about the PC strength, the double-digit growth in PCs. What's behind that and how do you view the XP expiration in early 2014 is impacting your business? Do you think that's pulling some demand and driving some upgrade activity ahead of that Microsoft ending support for XP? And if so, how does that shape your view for 2014? Thanks a lot.

All right, Chris. So now let me say I got all those. So one was what's driving PC, two is do we see the XP expiration driving the PC growth, is that kind of -- did I get it?

Yes, yes, basically. Is that driving demand today and then what happens after Microsoft stops supporting XP next year?

Okay. Well, let me take the first one. We did see certain applications like you heard me talk about K-12 and that being a big, big driver of what's going on in the PC and mobility marketplace. I would tell you that while I think people are planning to deal with the XP expiration and moving to 7 at this point mostly, I don't know that I would consider it a big driver of our performance at this point. Now I hope it becomes a big driver going forward as we think into the early part of the next year because people are clearly going to plan for what happens when that support declines a little bit. And so I don't want to get too far into 2014 and projecting that but I think your instincts are right that you would expect to see some movement because of that.

Thank you. Our next comes from the line of Katy Huberty of Morgan Stanley. Your line is now open.

Did you see any spillover effects of the federal government headlines on the MedLar business; grew double-digits but did not accelerate on an easier comp? And within MedLar were there any product categories that accelerated or decelerated?

Yes, so first one, Katy. We didn't see what I would call material, I mean, clearly if you're a business and you happen to be geographically in Washington there was some impact there but I think it would be a stretch to call it material. And I would say if you look at our success across product categories inside of MedLar it was pretty much across the board. It was spread from transaction all the way through solutions. So I don't know that I would kind of callout a particular product category.

And as a follow-up, I think Dell has been an agitator on price. Now that they have gone private, do you think that can help the pricing environment moving into 2014?

Katy, I don't -- we don't comment on particular competitors but I will say what I said last time. It all depends on the investment thesis. And so I don't know enough to predict that. I can't really tell you how this is going to play out unfortunately.

Thank you. Our next comes from the line of Jayson Noland of Robert Baird. Your line is now open.

May be a clarification first on gross margin. Tom and Ann, you mentioned pricing pressure a couple of times but how much of this is also a function of mix given the double-digit growth in PCs?

Yes, it is a result both of pressure and of mix. The transaction business accelerated in the quarter to deal with the PC strength and so you see that in the mix on gross margins.

And then a question on cloud. You mentioned a large deal and this business is small but meaningful growth I guess. There's some unique income statement dynamics here but curious how these large deals are structured? What do they look like? How many years, how many different aspects of your portfolio are included in something like that?

Well, Jason, it depends on the deal. I hate to sound opaque, but it depends on what are the components of a deal. For example, in this case you have managed services aspect of it, infrastructure as a service, which tends to get built out a multiyear kind of annuity monthly revenue stream. You also have a part of it some of the hardware acquisition that went into upgrading the datacenter. So when you say is there a generic kind of trend I think it's really hard especially, and you guys have heard me say this, I believe hybrid solutions are going to continue to be the dominant part of cloud-based implementations as people look at what their capital investments have been, how they manage end of life, how they manage technological obsolescence. And so you're going to get everything from pure SaaS through SaaS plus IaaS through managed services and it's just really hard to say a, what's a single perspective truthfully.

Our next comes from the line of Bhavan Suri of William Blair. Your line is now open.

Hey Tom, hey Ann. Just a couple of quick questions. One to follow-up on the previous question. If you look at that large deal and you've got components of services obviously, hardware and software sales and then the managed services part of it. Could you just give us some color of how the gross margins vary between those various pieces? The overall gross margin obviously appears to be better, but on the managed services side it feels like the gross margins could be a little worse compared to the other piece of that mix?

Now I would say that when you're looking at managed services and some of the pure SaaS solutions, those are obviously going to be stronger margins. And then you might see if it were just a pure hardware type solution. So the instincts that you see or may be a better way to say it is, the results you see in kind of looking at our overall business where you have richer margins in services, richer margins in software solutions, richer margins in integrated solutions, will carry forward as you execute hybrid solutions for customers.

Okay. And then the software business has been kind of one of the underperformers of the business now for a little while, any sense -- and if we might see an uptick on that and sort of what the pipeline might indicate there?

Yes, I -- when I look at it there's a lot going on in software obviously. And again, you got to look at this quarter and pullout what was the federal government impact on software. If you take that's a big segment to take growth out of that is one think I would like you to keep in mind when you think about our software performance. The second is, as you begin to implement more and more cloud-based solutions you're going to see some kind of short-term pressure until the annuity stream builds up, but you see gross margin enrichment, if I can say it that way, that's playing out in software kind of as we go forward.

Thank you. Our next question comes from the line of Rich Kugele of Needham & Company. Your line is now open. Rich Kugele - Needham & Company: I just wanted to focus my question on one particular area that's share gains and the opportunity of share gains. And Tom, in your experience, do you think that when there is pent-up demand situations such as what we have with this unique government shutdown situation that tends to lead to greater opportunities for you given the breadth of your products and any thoughts?

Interesting. My instinct would say, if not so much it leads to expand it, because the opportunity is there almost independent of when the customers pull the string on buying. It does make there to be variability within quarters. But I don't know that I think I would take the leap that says, when it's pent-up you get more of your fair share when it eventually flushes. I think I'll be uncomfortable making that statement. What I'm comfortable in saying is, the underlying thesis that says, our reach, our scale, and our breadth of capabilities does give us a significant opportunity to leverage and get share gain in the marketplace.

Our next question comes from Matt Sheerin of Stifel. Your line is now open.

Tom, I'm hoping you can provide more color on the small business market where sales have been sluggish for you for a few quarters now. Can you see any signs of light there, do we need a particular technology catalyst or is that more macro related? And related to that, do you see any cloud activity in that space yet?

All right. So Matt, let me make sure I get these one at a time. So the first one is, I think in my formal comments I alluded to the fact that we did see some slight improvement this quarter. Stemming declines, we have seen for three quarters. And while one quarter is not a trend make, we're encouraged by what we're seeing performance wise in the small business group. Some of that was some initiatives we took on inside of the business to improve our alignment and our go to market strategy. Some of it was -- and I'm talking about some of the performance declines that you alluded to. Some of it was a particular partner who took away an opportunity to sell that market that was in our base and when it was taken away you had to earn on it without being in your portfolio so to speak. We feel like we've gotten through most of that. Although on the macro level, I think there is still kind of a mix signal coming out of small business consumers. And remember for us small business really is small. It's organizations that have less than a 100 coworkers that's not a definition that is ubiquitous. So -- and I think what we're seeing in that space is -- look they're dealing with a lot. They're dealing with healthcare cost and understanding that. They're dealing with a volatile kind of economic climate. And while we're seeing some signs of encouragement, I feel good about our go to market model when there is an uptick and confidence in spending we're going to be there to capture the opportunity.

And as a follow-up your comments on the software vendor moving to a cloud-base model was pretty interesting. Have you seen other vendors move to that model and do you expect that going forward and how does that change internally your structure?

I think everybody if they're focused on the end-user market and what customers are looking for are introducing cloud-based solutions. Now everybody is doing it a little differently which is somewhat of a challenge. But I would say in this case it was probably one of the most direct movement and so that's what I was trying to call out there. But everybody that's in the world of software is developing cloud-based solution to help customers make decisions doing CapEx and OpEx. And fortunately, for us we have been investing and focusing and building out capabilities so that we can actually help customers think through what their options are and build up limitation. And the last thing is, look as you go to -- again, the SaaS part of cloud tends to be subscription based, monthly -- kind of monthly revenue based, annuity stream base, and that will be a little different than just selling straight up box software.

(Operator Instructions) I'm showing no further questions at this time. I like to turn the call back over to management for any further remarks.

Okay. Look everybody thank you again for your interest this morning. Thank you for your questions. And we appreciate you taking the time this morning to hear about a quarter that we're obviously pretty proud of. When I told you in the third quarter call that I thought the federal government was a wildcard, I didn't really realize how much of a wildcard that could be. But I'm obviously extremely proud of this team's ability to kind of deal with exogenous factors in the marketplace and still deliver and execute across our business. So again, thank you for today. And as always, if we can help your companies with their IT needs we would love to talk to you. See you next quarter. Thank you.

Ladies and gentlemen, thank you for listening in today's conference. This does conclude today's program. You may all disconnect. Have a great day everyone.