Good morning. My name is Jake, and I'll be your conference operator today. At this time, I would now like to welcome everyone to the CDW Second Quarter 2020 Earnings Call. All lines will be on mute throughout the duration of today's call. After the speakers’ remarks, there will be a question-and-answer period [Operator Instructions]. I would now like to turn the call over to your host, Brittany Smith, Vice President of IR and Financial Planning and Analysis. Ma'am, the floor is yours.

Thank you. Good morning, everyone. Joining me remotely today to review our second quarter financial results are Chris Leahy, our Chief Executive Officer; and Collin Kebo, our Chief Financial Officer. Our second quarter earnings release was distributed this morning, and is available on our website, investor.cdw.com, along with supplemental slides that you can use to follow along during the call. I’d like to remind you that certain comments made in this presentation are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. Those statements are subject to risks and uncertainties that could cause actual results to differ materially. Additional information concerning these risks and uncertainties is contained in the earnings release and Form 8-K we furnished to the SEC today, and in the company’s other filings with the SEC. CDW assumes no obligation to update the information presented during this webcast. Our presentation also includes certain non-GAAP financial measures, including non-GAAP operating income and non-GAAP earnings per share. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures, in accordance with SEC rules. You'll find reconciliation charts in the slides for today's webcast in our earnings release and Form 8-K 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 CDW UK or Canada. A replay this webcast will be posted to our website later today. I also want 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. With that, let me turn the call over to Chris.

Thank you, Brittany. I'll begin this morning with an overview of second quarter results and drivers of performance. I'll provide our perspectives on the current macro environment, its impact on our customers and market and how we are responding. Collin, will then take you through a more detailed look at our second quarter financials, as well as our liquidity position and capital allocation strategy. We'll move quickly through our prepared remarks to ensure we have plenty of time for questions. For the second quarter net sales were $4.4 billion, 5.7% below last year and down 5.3% in constant currency. Non-GAAP operating income was $338 million, a decrease of 5.6%. Non-GAAP net income per share was $1.56, 2.6% below last year on a reported basis and down 2.3% in constant currency. For the quarter net sales performance varied by month and by customer end market. As we shared on our last earnings call, we entered April with a healthy backlog of remote workforce enablement solution, which contributed to strong performance in April. As the quarter progressed, for some of our customer end markets projects were postponed and demand declined, as the economic toll of the crisis impacted customer spend. In other customer end markets, IT investment was prioritized and remained healthy. During the quarter, we helped customers across a spectrum of IT priorities, remote enablement, business and operations continuity and security remain top customer focus areas to manage remote environments at scale, and to prepare to work and learn from home in some capacity for longer. Customers also focus on initiatives to reduce cost, optimize resources, and leverage technology for better customer and employee experiences through digital transformation. CDW teams orchestrated turnkey solutions from our broad portfolio of clients' devices, accessories, collaboration tools, security, software and cloud offering to help customers…

Thank you, Chris. Good morning, everyone. I'm going to provide more detail on our second quarter results, liquidity position and capital allocation priorities. Turning to our second quarter P&L on Slide 9, consolidated net sales were $4.4 billion down 5.7% on a reported and average daily sales basis. In constant currency, consolidated net sales declined by 5.3%. On an average daily sales basis, sequential sales decreased 0.5% versus the first quarter. As expected, this was lower than historical seasonality due to the first quarter stronger than normal seasonality, and the ongoing impact of COVID-19. As Chris mentioned, our customer channels generally perform consistent with the demand and writings commentary shared on our last earnings call. April sales benefited from the carryover of strong demand in March, whereas May and June sales were impacted by lower demand in certain customer end markets. Pockets of supply dislocation continued in the quarter. And we leveraged our distribution capabilities and strong vendor partner relationships to procure the IT products and solutions our customers needed, for remote enablement, operations continuity and resource optimization. Gross profit for the quarter was $747 million, a decline of 3.4%. Gross margin was 17.1%, up 40 basis points over last year, driven by product margin and by the mix of netted down revenues primarily software as a service. Turning to SG&A on Slide 10, our non-GAAP SG&A decreased 1.5%. The decrease was primarily driven by lower sales payroll consistent with lower gross profit, reduced performance based compensation and cost savings measures including decreased travel and entertainment and ongoing productivity and efficiency efforts. The June 30, credit loss reserve balance decreased modestly versus the March 31, balance reflecting our customer collection experience in the quarter, a lower receivable balance at June quarter end and expectations for future collections. While we are…

Thank you. We have a question from Adam Tindle with Raymond James.

Hi, thanks. Good morning. Chris, I just wanted to start with a strategic question. I think about CDW's competitive advantage is at scale, we obviously saw strong cash flow in the quarter. And those things seem to be a major potential weapon in this environment, where the long tail of competitors in your fragmented industry are struggling. So, the question is how are you thinking about options to potentially play a little offense, while others are on defense? And maybe if you could specifically tie this into your goal to acquire new customers and update that on the quarter that would be helpful.

Sure. Good morning, Adam. Yes, we've accelerated. I think I mentioned this on the last call, we see this as an opportunity and we've accelerated our acquisition programs. If you look across the breadth of our competitive advantages, customers right now are looking for those who have the expertise to help, and I'll just say it very simply, figure it out. The world is moving very quickly. The mandate to evolve and transform from the digital perspective are moving quickly. The access to cash is not what it used to be. And so having a provider that has the scale can get the supply, has the relationship with the vendor partners, and equally has the spectrum of solutions and experts, who can help design and plan and move quickly to get from solution design and development to implementation has been very important, particularly for those customers that I mentioned, who are going on the offense, and who are accelerating their own strategies and digital needs. So, we are being aggressive in helping the customers that are in our base now. But we're equally being aggressive about finding customers, who are in need. The financial situation that we sit in the financial strength, the strength of our balance sheet has also been very important to customers, who want to ensure that they're working with an organization that is large and credible and is around for the long-term?

Okay. Thanks. And a as a follow-up maybe Collin. And I just had a question operationally. Operating profit dollar decline essentially match the revenue decline. So there was very little decremental detrimental margin here. I know the variable cost structure probably helps, but portions of the business were down significantly. So, maybe you could just touch on the performance in the quarter and how we can think about decremental margin moving forward?

Yes. Adam, there were -- if I understand your question, I think it was, why wasn't there more deleverage? There were a couple things that helped us in the quarter that I touched on in my prepared remarks. One was on the credit loss reserve. We ended up not booking any bad debt expense in the quarter. We just drew down against the reserve that we had previously established, and in fact, released a little bit of it just because of receivables balance had wound down. The second thing that happened in the quarter is we did true-up our performance based compensation accruals, based on full year estimates, and we took a half a year's benefit in the second quarter. So, I wouldn't expect those two things to continue as we move through the balance of the year.

Understood. Thank you very much.

Thank you. We have a question from Matt Cabral with Credit Suisse.

Thank you. Chris, you talked about the pace of decline and writing stabilizing so far in the third quarter. Just wondering, if you could spend a little bit more on that comment? And just how we should think about the timing lag between writing translating into shipment or revenue trends? And maybe more broadly, just hitting on the health of IT budget at this point as we're thinking about the balance of the year.

Hi, Matt. Sure. I'm pausing for a bit because, it's such a tapestry out there of customers. We have obviously diversified customer end markets. And even within the end markets very diversified customer base. So, if you take corporate for example, across industry across geography, and different areas are getting hit differently, so different geographies. You guys know oil and gas in the south suffering a little some of those customers. You've got tech in the West, not suffering as much. You've got the virus resurgence in some areas, and the concerns about retreating back to stay-at-home orders. So, there's a number of layers that various customers are dealing with. And what I would say is it's hard to paint a picture, a single picture of where IT budgets are going. That said, we are having robust conversations with all of our customers, those that are spending today and those who are planning tomorrow. So, how budgets work? It's really going to be a reflection on the economy in this health crisis, which we continue to believe is just unpredictable. There's not a lot of visibility there. That said and back to your writings question, we watch writings daily and weekly. And we've had a couple of weeks of stability, as I said. But it can also be a little bit volatile. So, we watch it very carefully, that will typically turn into revenue in the next 30 to 60 days is how we think about the impact of the timing. But what I would leave you with is, technology is the top of everybody's minds. And for those customers that are focused on just surviving, they've got rent to pay, they've got payroll to pay. They're not going to be paying for IT right now. But we are talking with those customers about what's to come in the next quarter and beyond.

Got it. And then, I think I heard in the prepared remarks solutions are down double digits. Just wondering if you dig a little bit more into the categories underneath there, and talk about where you're seeing the biggest headwinds. I guess I'm curious, your perspective on how much is just near-term projects being deferred versus maybe customers starting to reevaluate their broader on-premise footprint as cloud adoption is starting to pick-up a little bit?

Yes, that's a fair question. I think, at a high level, Matt, what we've seen is a real refocus on the urgency of remote work, optimizing employees working remotely, really bolstering those capabilities over the last couple of quarters. At the same time, we absolutely are seeing acceleration in discussions towards cloud and moving towards the cloud. In terms of on-prem, we've said and we'll say it again, that we believe that there's going to be a hybrid world out there. It continues to be a hybrid world. And we're having those kinds of conversations with our customers. So, assessing options for cloud, what to migrate, how to migrate, what cloud vendors to choose. The good news is we've got the ability to help our customers through cloud deployments, and then manage once they're up and running. But we still think there's going to be a lot of on-prem opportunity going forward. It's going to be more of a multi cloud hybrid cloud situation.

Thank you.

Thank you, sir. Our next question comes from Amit Daryanani with Evercore.

Thanks a lot. Good morning guys. I have just two questions as well. First off maybe on the gross margin performance, it was fairly impressive given the discussion we just had on solutions and the frontline devices did well. So could you maybe walk through kind of what drove the gross margin upside year-over-year, if it's sustainable as we go forward?

Sure. Amit, I can start on that one. Product margin held up pretty well, and we did get some benefit from mixing into software as a service. On the product margin within there, I would say in a supply constrained environment in particular categories, the margins can be a little bit firmer. And then within products, there's mix. So, for example, desktops happened to be weak in the quarter, they tend to be lower margin. So, within that product, we did see some lower margin. I think in terms of the outlook, as always difficult to predict because there are a lot of moving factors. I did say in my prepared comments that I do think that we will mix more into public as we move into the back-half of the year. Q3 is typically a seasonally strong quarter for both government and education. And given what's happening in education today, I would expect it to be quite strong. And then, where we do see a little bit more firmness on the commercial side of the business tends to be in the larger, better capitalized customers, which tend to have a little thinner margin. So, we were pleased with margin performance in the quarter, just cautious as we think about it over the back-half of the year.

Got it. That's helpful. And then, I was hoping to get your perspective on client devices of PCs, I guess, as you go into the back-half of the year, I think, you guys mentioned it was up 6% in June, if I'm not mistaken. And of the industry data centers suggest that this may remain somewhat stronger for a couple of more quarters. So, I'd just love to understand how you guys think about the segment in the back-half? And if you were indeed able to meet all the demand within client devices for the June quarter.

Yes. So Amit, the client device obviously was very strong and we did take strategic inventory position, so that we were able to meet demand as we moved through the first and the second quarter. Look, as we said before, pre-COVID we thought we were kind of in the late innings around PC refresh and the Win10 upgrade. And so that will continue. So, if we think about going forward, certainly work from home, we think will be a trend [Indiscernible]. It will be -- we think, fundamentally how people work in the office and at home will be a lasting and durable change. How people learn from home will be a durable change, and those will be opportunities for client. And we've got devices that were out there past three, four years ago now, 2017, where there might be refresh opportunities there. Obviously, the economic environment and employment would have an impact on that. But we've always said, we've expected moderated growth. And I think that we're looking at the same way going forward. I'm sorry, Collin, did you want to add something?

Yes, the only thing I was going to add is, and I think you know this. When you look at industry data points, you just need to make sure you're comparing apples to apples at what point in the supply chain you're measuring. So, I think some of those industry sources are OEM shipments into the channel and distributors and retailers and others like that. So, there's a little bit of the lag in that. Obviously, we saw very strong growth in client devices in the first quarter and in April as we shift against our backlog. So some of these shipments you're seeing are effectively replenishing lower levels of inventory further downstream in the supply chain that had been pretty well depleted.

Perfect. That’s really a fair point. Sorry, go ahead.

Yes. Amit, I was just going to say, in the supply chain, we are seeing some delays, particularly in the lower end Chromebook space. So that will make its way through the supply chain over the next few months. But that's happening as well.

Perfect. Thank you.

Thank you. We have a question from Katy Huberty with Morgan Stanley.

Thank you. Good morning. I appreciate you're not providing guidance for the year. But do you expect the same business model mechanics to play out in terms of growing 200 to 300 basis points faster than the market? Our survey work points to maybe 4% to 5% declines for the year. Is that also the ballpark of what you see in the data? And then I have a follow-up?

Yes. Katy, I’ll start. I think what we see is there a variety of data points around GDP and IT growth. What I would say is we do expect ourselves -- we do hold ourselves accountable to outgrow the market by a meaningful amount. As you know, typically when we have a more robust environment and we are selling more hardware, which we recognize at the topline, that's when we tend to outgrow by the 200 to 300, sometimes higher basis points. When it's in an environment that's more like the one we're in recessionary and customers are doing things like extending the useful life of their assets, with warranties that net down and other things that are netted down, we will continue to outpace the market, but typically it's by a slightly lower margin, 100 to 200, 250 basis points.

Do you have a view as -- do you survey your customers and have a view as to what you think the IT spending decline will look like this year?

We don't have a collective view that we're sharing. There are so many data points out there that are so desperate. I mean there's such a wide variation that we're listening to our customers and just taking every opportunity to help serve them and grow our business where we can, and support our customers so that they can grow coming out of this recession.

Okay. That makes sense. And then just one other clarification. When you referenced some early stability in writings in July, when you say stable, is that -- do you mean flat year-on-year? Or you mean the rate of decline is stable from what you saw in the June quarter or the month of June?

Just to clarify, I think what I was trying to do in my comments was particularly the commercial side of the business in corporate and small business give an indication of the peak decline we saw in the second quarter. So in May or June, those writings declined over 20% in both corporate and small business. What we're seeing in the month of July is that they are not as negative as those peak declines we saw earlier. So, it's a relative to what we had been seeing in the business statement.

Okay. That's very helpful. Thank you.

Thank you. We have a question from Ruplu Bhattacharya with Bank of America.

Hi. Thank you for taking my questions. Chris, I just wanted to clarify, are the trends that you're seeing in corporate and small business customers -- is that playing out as you had expected 90 days ago? Or are the trends better or worse than you expected? And any change to your outlook for the next couple of quarters?

Good morning, Ruplu. Thanks for the question. And I would say the trends are playing out, as we expected and as we shared with you. You remember last recession 2009, we talked through what we saw there. And it was a faster reaction by our small and medium sized businesses. In particular, they reacted more quickly to the economic downturn. And that is what we saw here. Now we have, as I mentioned, a diversified customer base even within small and corporate. And so, even within that, we saw some of the customers in certain industries, hospitality and things like that, who were suffering a little more, others who were actually being very aggressive in their strategies. The other thing is when you think about, as I mentioned, the uniqueness of what we're going through with the virus, and the fits and starts if you will, in different geographies, that's also tending to have an impact on our customers. But all of that said, I'd say that the trends played out as we expected. Look, small business channels are going to be impacted by economics, and they're going to focus on what they need to do to survive first and then invest for the future. So, what I'd say is it's really affirms our business diversification strategy, and provide optimism and the competence of our business model. If you think about what we were able to deliver, our free cash flow through the year is at $470 million. We've paid our dividend. We're continuing to invest in the evolution of CDW going forward. We've got other customer segments that are going very strong, given the demand in the market. And I'm really proud of how the team is managing through this.

Okay. Thanks for all the details on that, Chris. I appreciate it. One question for you Collin, how should we think about SG&A as a percentage of sales going forward? Right now, you mentioned you've got reduced performance based comp and travel is less and you've enacted cost savings measures. But as lockdowns get relaxed, how should we think about SG&A? Can you hold the line? Or should we expect OpEx to trend upwards? Thank you.

Yes. I mean, we're not going to provide a specific guide on SG&A. As you know, we do have a variable cost structure. So there are elements of it, variable sales compensation that will move with our gross profit. And then we have put hiring restrictions in place and continue to let attrition run, so that'll add a little bit of variability. And then we've taken other cost savings measures. And the other point I would make Ruplu is, we are not managing to a short-term SG&A target here, as I think we've been communicating pretty consistently. We do think that this is an opportunity to invest and get stronger in this. And so, we're going to take a balanced approach and that we are going to continue to invest both in CapEx and OpEx. But having said all that, we are mindful of the demand environment, and we’ll take a balanced approach and ensure we have an appropriate cost structure.

Okay. Thanks for all the details and congrats on the quarter.

Thank you.

Thank you.

Thank you. We have a question from Shannon Cross with Cross Research.

Thank you very much for taking my question. My first is just regarding what you’re seeing in terms of extended maintenance sort of contract terms? Can you give us some perspective on how the magnitude of this. And maybe if you can go back to other times when the economy has been under pressure, if you kind of talk about how this compares. And then I have a follow-up. Thank you.

Yes. We are seeing customers, particularly those who are looking to save cash move into shorter duration maintenance contracts, as opposed to going to multi-years, those that are paying on for software a number of seats and things like that, looking at true-ups and things like that. It’s difficult to compare to previous times, Shannon. I think back in 2009, we saw a similar behavior and then when we experienced a bit of a slowdown in the ’15 ’16 period, we saw customer sweating assets at that point in time. Maybe a little bit more pronounced today than it was back in ’15 ’16, but I think that’s logical just given the severity of the crisis relative to the slowdown we saw back then.

Shannon, I would just add that our managed services capabilities are more robust now. And so, these conversations with customers in terms of service contracts and potentially shortening them have also led to some robust conversations about managed services and some wins for us in managed services as a result of those conversations.

Great. Thank you. And then, how do we think about education budgets? I'm just trying to understand, obviously all of these school districts are now -- well, not all, but a lot of school districts are going to hybrid model, clearly there are a lot of kids out there who don’t have access to Chromebooks or who’re just getting access now. So, I'm wondering what you’re hearing from the school districts in terms of the state of their budgets? And then also how are you thinking about -- and I know there’s a lot of talk regarding the magnitude of the stimulus bill when and if it ever gets decided. But how quickly does sort of federal funding tend to run through? I'm just trying to get an idea of what we might see in the next year months frankly. Thank you.

Yes. Shannon, on the education side K-12 in particular, they are accessing funding and we’re helping them with that. So funds are flowing. And they are really all hands on deck, trying to get devices into the hands of students. And so, there’s a lot of activity there regarding client devices, remote enablement as well as what we call kind of broadcasting from the school. It’s very complicated and we had a highly seasoned sales organization that works with the schools. But the breadth of the solutions that we’re looking for are fulsome as I mentioned in my remarks, all the way from thermal scanning and sanitation stations to dividers and carts and things that CDW can just help them provide, so that they have kind of turnkey solutions. But there is strong demand to get the kids in the classroom environment, whether virtual or hybrid as quickly as possible. So, there’s a lot of pressure there and they are accessing funds. In higher ed, we’re seeing some falls on the budget side. Obviously, they've got concerns around various revenue streams. And the solutions provided in the business there in terms of on campus robust network support, et cetera has been falling a little bit. But we are starting to see a pick up when it comes to remote enablement and devices and would expect that to continue as the school gets sorted out, coming into this September-October timeframe. In terms of the timing of funds flowing through, I don’t have a particular timeframe that I would know how to share, But I would say, they’re moving a little faster than I would have expected in some areas. And again, our teams are really excited, figuring out where they’re going to flow, how they’re going to flow and how to make sure you write up the order so that the funds can apply. But they are flowing, and I would expect the same would happen with any new build that we see that makes it true.

Thank you. We have a question from Ted Starck-King with William Blair.

Hey, thanks for taking my questions. I want to follow-up on one of the earlier questions on new clients. Can you talk about sales productivity and the ability to win new clients in this environment? And then maybe also around kind of a customer retention rates, both historically and what you're seeing today?

Hi. Ted. Yes. On acquisition and new clients, we haven't really shared specific information about numbers of acquisition and penetration rate. But I would say that it has not been relatively harder, because we are remote. Because we've moved all of our marketing, for example, to digital channels. So, we're reaching more customers and we're reaching more people within customers, and taking the opportunity to follow-up. So, we've, retooled how we put together acquisition programs to be as effective as possible. Our sellers are really quite amazing in their ability to connect with people and develop relationships, virtually. And as I did mention, we do have sellers who are now more out in the field with customers as well. But I've been really pleased with how they've been able to transition and the aggressiveness or the assertiveness and the success with our acquisition programs right now. And the second question, Ted, was around retention. Yes, we don't -- that's not a number that we share. But I would say that the customer satisfaction in this current environment has been really quite high, what we measure from the satisfaction perspective.

Yes. Ted, I would just add, I mean, it's difficult in this environment, particularly for the most challenged customers who are looking to preserve liquidity, they're pulling back. So, they may not be spending period versus not spending with CDW. I think in an environment like this, consistent with our remarks, we are staying in front of our customers, even those that may not be spending. And I think if there's wallet to be had, we're getting our fair share of that.

Okay, great. And then just a quick follow-up question. So, on that note, are you guys flexing some of your financing offerings for customers? And how would that kind of make its way through the P&L? Thanks.

Yes. When you say the note, you mean the notes we issued in April, those were for general corporate purposes to enhance our liquidity as well as to make sure we have sufficient working capital to support our customers. I would say one act area that we're very active in is working with our customers and helping them understand the variety of vendor partner financing programs that are out there. And that's where we start and many of our OEMs have been quite aggressive in terms of providing attractive financing, and we are seeing a pretty material uptake on that from our customers. So, the nice thing about that is, it doesn't flow through our financials. As I mentioned, there are some instances though, where we are investing in inventory for customers, or have seen terms pick up a bit and that's where you would see it in our working capital.

Okay, great. Thank you.

Thank you. We have a question from Matt Sheerin with Stifel.

Yes. Thanks. Good morning. I just wanted to ask just about, again about the public sector, specifically the state and local government, which has been I know, a strong, fast growing market for you. What are the trends you're seeing there? And are there concerns about budget cuts just due to lower revenue and lower state taxes?

Hi, Matt. Yes, there are concerns. Certainly, we talked about that in the last call budget concerns. But again, we are finding that in the state and local area. Budgets are being prioritized against IT initiatives, both work from home and also that various projects, government e-projects that are in flight. The hope and expectation is we will see in a stimulus package some sort of relief for state and local governments. And again, we hope that governments figure out where to get that. But they are struggling a bit now, but continuing to spend on the IT needs that's been prioritized and essential for their workforce and for their mission.

Okay, thanks. And relative to the healthcare space, which had been a market that turned around for you. I know last year you saw some positive trends, and obviously budget shifts there has impacted demand near-term. But in terms of conversations you're having with customers in that sector, do you still expect those investments towards digital transformation to still occur at some point?

I do, Matt. Look, healthcare literally caused the global pandemic virus, and protected all of us and has been protecting all of us. But, they've been forced to see revenue generating businesses or at least diminish them. And I'm confident, given the demographic trends and changes that have already taken place regarding loosening regulations and accelerating digital transformation, that it will result in a strong recovery and long-term growth in the healthcare end market. And we are having extensive conversations with our healthcare systems around virtual care, across all spectrums. You've got telehealth and telemedicine, virtual rounding, you've got remote patient monitoring and then you've got enhanced patient monitoring in places like the ICU. And all of those require slightly different sorts of solutions. And we are building those out for some customers already. But I do see that as a long-term positive trend.

Thank you.

Thank you. We have a question from Keith Housum with Northcoast Research.

Good morning, guys. Thanks for taking the question. In terms of the overall capital strategy right now in terms of M&A. How does M&A fall in terms of your priority of this thing? Are you seeing an opportunity for some add-ons that can perhaps benefit the future?

Well, we just -- I'll start and Collin, you can jump in if you like. Yes, we just did an acquisition of IGNW, and that's made of cloud services provider. That's a great example of investing our capital behind our strategy of developing the solutions and services that our customers need now and in the future. So, we absolutely will continue to look at potential targets. And we're very active in inbounds, we're very active in outbound. And this organization IGNW like Aptris is a partner that CDW had worked with some time. So, we got to know them very well. We got to know the people and the quality and the culture and their capabilities. So, we will continue to look in the market for opportunistic acquisitions.

Yes. In terms of prioritization, liquidity is our top priority, but we have $2 billion of it. So, we feel really good about where we are. The dividend is a priority. We just declared that. And again, given the cash flow generation capability of the business, feel good about that. We're below our target leverage, sitting at 2 times. So our next priority is M&A. And so, if we find the right opportunity at the right price, we'll take the opportunity to enhance our competitive position in this environment.

Great. I appreciate that. And then just turning over to the public sector, obviously, that's an area that usually declines in the fourth quarter. But my understanding, especially in the Chromebook area, there's a significant delay in [indiscernible] the market. Based on that combined with approach to going hybrid schooling that a lot of businesses are taking. Is there an expectation that public will actually have a good rest second-half of the year, including the fourth quarter?

I mean, we're not going to -- in normal times, we wouldn't guide by channel, and certainly in the current environment, we're not going to. I think you can tell from our comments on the second quarter and writings and comments about where we think the mid-business is going to mix into the second-half of the year, that the demand is more resilient on the public side, particularly federal government education. You did call out Chromebooks. We are keeping an eye on that. Supply is tight there, given the extraordinary demand. And that's a little bit of a wild card that we've see in the third or fourth quarter. But given the breadth of our vendor partners and our scale, we think we'll be able to manage that as well as anyone. Not that there may not be disruption, but in terms of customers looking for supply, we think CDW can help them given our multi vendors. We're also having conversations with customers around alternative processors and things like that. So we're doing what we can to get creative, to get supply for our customers to help them through the Chromebook shortage.

Great. Thank you.

We have a question from Paul Coster with JPMorgan.

Hi, this is Paul Chung on for Coster. Thanks for squeezing me in. So just to drill in on your SMB segment. Can you kind of give us a sense for the overall health of these customers? Are you seeing more sales kind of postponed or cancelled? And are most customers kind of paying on time as well? And, any verticals or regions you want to call out that you're seeing a little bit more signs of life?

Well, yes.

Yes, I mean, in terms of writings, I think the commentary we provided on writings for small business gives you a good overview of the demand environment. Obviously, within that you have industries that are relatively stronger, and those are a little bit more challenged. And even within industries, you have some winners and losers. On the cash collections front, I would say we were generally pleased with the pace of cash collections from our commercial customers, including our small business customers. We do have a long tail of small customers that we're keeping an eye on that portion of the credit portfolio. But, overall, I would say the collections held up reasonably well in the quarter.

Thanks. And then just to follow-up on free cash. Very nice performance there kind of despite softer topline and higher CapEx levels. It looks like you had a bit of working cap benefit in the quarter. Can you just talk about the puts and takes on operating cash? And how we should think about trends heading into the second-half, even despite the tough macro? Also on CapEx levels, I assume that level comes down in the second-half? Thank you.

Yes. In terms of working capital, I think one of the dynamics you would expect to see is when the business shrinks that we would liquidate some working capital, and you did see that dynamic play out in the quarter. That was partially offset though, by seeing the cash conversion cycle tick up a bit. I think the other thing to keep in mind as you think about free cash flow, we did get some timing favorability in terms of cash taxes. We didn't make a payment in the second quarter and historically, it's one of our biggest quarterly payments, and that reversed a little bit. In terms of CapEx, you're right, it is a little bit heavier, front end loaded this year. You might recall that some of the Census devices that we procure for our device as a service offering or running through CapEx. With all of those devices out in the field, now we are virtually done with additional capital expenditures for the Census. So, those are some things to think about and the puts and takes of free cash flow and working capital.

Thank you so much.

Thank you.

Thank you. I'll now turn the call back over to Chris Leahy.

Okay. Thank you. I'd like to take a moment to acknowledge the many continued challenges due to COVID-19, and to recognize the extraordinary sacrifices and contributions being made by so many who are devoting themselves to serving others. I also want to recognize the remarkable dedication of our co-workers around the globe, and their extraordinary commitment to serving our customers, our partners and all CDW stakeholders. They continuously impressed me, and reaffirm my conviction that we will emerge stronger from this. Thank you. And thank you to our customers for the privilege and the opportunity to serve you during these times. To our investors and analysts participating in this call, we appreciate you and your continued interest in and support of CDW. Collin and I look forward to talking with you again next quarter.

Thank you everyone for joining. That now concludes the presentation. You may now disconnect.