Hello, everyone, and welcome to the CDW Third Quarter 2021 Earnings Call. My name is Bethany, and I'll be coordinating this call for you day. If you would like to register a question at Q&A, you can do so by pressing [Operator Instructions] on your telephone keypad. If you change your mind, you can press [Operator Instructions. I will now hand the call over to your host, Kevin White, Director of Investor Relations. Kevin, over to you.

Thank you, Bethany. Good morning, everyone. Joining me today to review our third quarter results are Chris Leahy, President and Chief Executive Officer, and Al Miralles, Chief Financial Officer. Our third quarter earnings release was distributed this morning and is available on our website, investor. cdw.com, along with supplemental slides that you can use to follow along during the call. I 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 earnings release and the Form 8-K we furnished to the SEC today and in Company's other filings with the SEC. CDW assumes no obligation to update the information presented during the webcast. Our presentation also includes certain non-GAAP financial measures, including non-GAAP operating income, non-GAAP operating income margin, non-GAAP net income, and non-GAAP earnings per share. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You'll find reconciliation charts in the slides for today's webcast and in our earnings release 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 comparable period in 2020 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. Replay of this webcast will be posted to our website later today. I also want to remind you that the conference call is 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, Kevin, and good morning, everyone. I'll begin today with an overview of third quarter results and drivers of performance. Al will take you then through a more detailed look at our financials, as well as our capital allocation strategy and outlook. We'll move quickly through our prepared remarks as we always try to do to ensure we have plenty of time for questions. But before I get started, I do want to pause for a moment to honor the life and legacy of our former CEO, Tom Richards, who passed away last week after a valiant fight with cancer. I suspect most of you on this call have likely met Tom in-person. I'm certain that everyone on this call has been impacted by Tom. He was a fierce competitor and equally a kind human being. Tom had a lot of what we like to call it CDW Tomism. Simple ways of getting to the essence of something in a way that it stuck. One of my personal favorites is when Tom used to say, At CDW, we take what we do seriously, but we don't take ourselves too seriously. That's the essence of who we are. That is our CDW culture. Captured those simply and amplified those strongly, by Tom Richards. Tom also had an unexpected way of signing off on our earnings calls, usually with a right comment about an upcoming holiday, like Halloween or Mother's Day, or even Valentine's Day. As a result, we always ended these calls on a high note and with a chuckle. Tom knew his audience well. In honor of Tom, I'd like to kick off this earnings call with the tagline he penned on every communication to a co-worker. Tom always signed off with "you make a difference. " Literally injecting…

Thanks, Chris, and good morning, everyone. I will start my prepared remarks with more detail on the third quarter, move to capital allocation priorities and then finish up with the 2021 outlook. Turning to our third quarter P&L on slide 8, consolidated net sales were $5.3 billion, up 11.4% on a reported and an average daily sales basis. On a constant currency average daily sales basis, consolidated net sales grew 10.7% Net sales and channels most impacted by COVID-19 last year, corporate, small business, and international continue to rebound. Posting strong double-digit growth in the quarter and delivering sales above 2019 levels. This quarter's growth also benefited from strong double-digit performance in healthcare, but was tempered by a slowdown in education and declining government. On the supply side, overall backlog increased several $100 million in the quarter and continues to be elevated year-over-year. The team did a great job leveraging CDW 's competitive advantages so the backlog did not increase even more. Gross profit for the quarter was $915 million, an increase of 10.8% on a reported basis. Gross margin was 17.3%, down approximately 10 basis points versus last year. This is primarily driven by lower product margin, partially offset by an increase in the mix of net service contract revenue, primarily in softwares and service, in addition to strong professional and managed services performance. Turning to SG&A on slide 9, non-GAAP SG&A increased 9.2%. increases primarily driven by payroll costs, including sales compensation, which moves with gross profit growth, and performance-based compensation, consistent with higher attainment against financial goals. Finally, it reflects investments in the business, including increased co-worker counts, focused on execution of our strategy. Co-worker count at the end of the third quarter was 11,098, up 432 from the second quarter, and 1118 over prior year. The…

Thank you. If you would like to register a question, [Operator Instructions] The first question comes from Adam Tindle at Raymond James. Adam your line is open.

Okay. Thank you, and good morning. Chris, I wanted to start on Sirius to see if you had some early feedback from customers now that the announcement has been out and specifically wondering if those Sirius enterprise customers are perhaps willing to breach the conversation on utilizing CDW's transactional portfolio that Sirius didn't have? And conversely, the CDW mid-market customers more interested in Sirius' services portfolio? So a qualitative view from the customer perspective on potential revenue synergies in this deal.

Good morning, Adam. Thanks for the question. And you know, we're in a little bit of a quiet period here as we go through the various regulatory approvals. That said, one of the areas that we focused very quickly was feedback, and I would just tell you, it's been really, really positive on both fronts. So our customers at CDW are delighted about the acquisition, and really looking forward to the combined entity and the capabilities that they helped bolster CDW, given their reputation in the market and the quality of their services and the reciprocal is true as well. I talked to Joe Martin late in the day of the announcement, and he had made his way through a lot of customers as had their front-line sellers, and it was for the most part all positive. So again, we think that -- I said the word before, a home-run deal and we're going to make it work really well, and our customers seem to be excited, our partners equally are thrilled. It 's exactly what they were looking for us to do and they are thrilled.

Right. And I think that aspect of home-run deal has some investors wondering a little bit more on Sirius recent performance. The purchase price was very attractive, all cash in nature, and there's some skepticism on what's been going on with the business in 2021. I know you gave us color based on 2020, but maybe you could help to spell any of that concern by talking about what you've seen out of Sirius ' performance in 2021?

Well, you know, look, they're doing just fine and there are customers like us in areas like Federal, which we talked about today, or enterprise customers. And as you know, that can be a lumpy business. So when we did our diligence and looked at the pipeline and the types of programs they're running with customers they were having a similar impact that we were having with regard to our larger customers. Some things being delayed, some things being planned yet not -- not yet rolled out necessarily, particularly in terms of delays in going back to the office, etc. But I would tell you that we feel very confident, Adam, in the health of the business, in the prospects of the business in the pipeline for the business and in the opportunities for Sirius and CDW, the combined entity.

Very helpful. Thank you very much.

Thanks, Adam.

The next question comes from Shannon Cross at Cross Research. Shannon, your line is open.

Thank you very much. I wanted to take a bit more into backlog composition, if you're seeing any order cancellations or how it -- how it developed over the quarter, maybe linearity just to get an idea of how sustainable and sticky do you think the backlog will be?

Yeah. Good morning Shannon. This is Al. So a couple of things that I would note. So going in in the quarter, we maybe would have expected that there would be a bit of a kind of a modest view of backlog. I'd say overall for the quarter was a bit more than modest. And let's call it, in terms of just all characteristics, similar to Q2. A couple of variants or components that maybe looked a little different, and I think Chris touched on this in your prepared remarks, is that we saw a bit more of an effect from a solutions perspective and that would have included notably Netcom and storage. Notwithstanding that similar to Q2. And look, I would just note the -- all things considered, the team did an exceptional job navigating through that and delivering on the results.

Okay, so you -- but you don't -- you're not seeing double orders? You're not worried about any kind of loss of backlog?

We are not. I would just note the look. I think there's component in the backlog that there's likely some pull-forward, right? It's been a tenuous environment and so there are customers that I think probably have a perspective that knowing that this doesn't have an clear end date. [Indiscernible] maybe get in front of some of their projects, and so there's probably component that's pulled forward. We're not feeling the effects, or seeing the effects of either double bookings.

Okay. Thank you. And then just a quick question on -- Chris, maybe, how are you thinking about inflation? And clearly you can pass through higher product costs. But I just sort of in general, as you go through your budgeting and planning for 2022, you know, are you thinking more transitory or are you sort of planning for some of these cost increases to be here for the long term. Thank you.

Yeah, I understand. And we'll share more with our -- about our planning next year as we think about it. Look, it feels like the perspective out there is maybe a little worse than transitory. And so we will just keep our eye on the economy and how this could impact in particular different segments of our business. For example, when you think about small business, they are really doing a terrific job right now, but we're keeping a very close eye on that segment of the market to understand how the economy might be impacting them, where their optimism is, their ability to hire, etc. So as we always do, we'll keep an eye on it. It feels a little worse than transitory but again, we think that technology is an A1 priority, and our customers will continue to invest in technology if in fact, it becomes a little more extent that we think they'll keep the priority there. And look, if we can keep the economy coming out of the pandemic with the momentum we seem to be building and positive nature in the economy, we're feeling pretty good.

Thank you.

The next question comes from Ruplu Bhattacharya of [Indiscernible].

Hi, thanks for taking my questions. Chris, I wanted to ask about the education market. In 3Q '20, 4Q '20, you had two billion dollar quarters. And again, this year in June and September, you've again had two billion quarters. So there's a year-on-year headwind from the Mississippi Department of Education project that you had in December and your headwinds, you've had from a stronger year-ago quarter.

Good morning Rupplu and thanks for reminding the team of the great performance, they will appreciate that. Look, you know, we called this out earlier in the year and I mentioned it again, in our prepared -- my prepared remarks. But it's really been unseasonal and we expected to see the first half of this year be quite [Indiscernible] we're lapping a big back half of the year, that we would expect to still continue to see, I'll call it solid performance, and it's a bit unseasonal because it's the end of the year. But if we need to [Indiscernible] in our view, and it's going to be -- it'll be difficult to overcome the level of growth that we saw last year. That said Rupplu, if the stimulus funding, for example the emergency connectivity [Indiscernible] is yet another source of funds for education institutions to be able to fortify their classrooms since hybrid environment. The one thing with that funding is schools are able to use it for orders that are placed that we're working our way through. What of that money relates to orders that have been placed? We're confident that there is a large portion that are additive to the base. And again, the team, as they always do, has done a phenomenal job helping our k-12 customers work through that funding. So as you've heard me say before, I feel very confident in education over the long term. It is a growth area. The education market has inflection points and we have always been ahead of those inflection points. Whether it's how the classroom itself changes, whether it's going to hybrid, whatever those are, we are usually there and I'll tell you, Amplified IT, which we just added is taking us to yet another [Indiscernible] level with their cloud-enabled capabilities and their IT developed technology that they offer for classrooms. So I'll pass you [Indiscernible] here, but the team is doing very well, a long-term growth area.

Thanks for all the details there, Chris. Maybe for my follow-up, if I can ask Al about operating margins. So you had another good quarter, another quarter of above 8% operating margin and you're guiding, and an increase for the full-year to high 7s. If we just look at core CDW and not consider Sirius right now, which is accretive to the Company. But if we just look at core CDW, do you think that having a high 7s operating margin is a sustainable level going forward, what are the puts and takes that we need to keep in mind?

Yes. Sure. And thanks for the question, Rupplu. So I think you just hit it at the end there. Look, there are -- there are lots of puts and takes in any given quarter, and I will just start, if you just put aside the supply chain environment, right? Mix does really matter. So if we think about components, what's transactional, what solutional from a mix perspective that matters, channel mix matters, all those things have an impact, I'll say to start on your gross margin and obviously then the kinda, the dropdown from an operating margin perspective. So let's just keep that in mind. And again, kind of supply chain will matter as well. In the case of this particular quarter and maybe as an example. So there -- in terms of mix there, that is a little bit less public mix from a channel perspective. And then you have got -- you've got transactional solution [Indiscernible]. And then very notably Rupplu, I will just note the fact that your 100% gross margin items will have an impact in this quarter. Our 100% gross margin items grew faster than our net sales. So that's going to have an impact as well. And so again, all of that steeped in focus on gross margin. Then finally, if we walk that down operating margin, it 's been just a matter of the -- at what pace are -- is our non-GAAP [Indiscernible] SG&A spend happening. In the case of this quarter, I would say our non-GAAP SG&A spend lagged some of that growth in gross profit, and so we dropped more to the operating margin for the quarter. And when you look to our outlook relative to what that operating margin was for this quarter, we're up and it's going to balance this back up to a high 7s on the operating margin. As you look forward, look, I think you've got a good sense for this strategy and the movement in where we're going longer-term in terms of mixing into services and mixing in on a 100% gross margin. But all those mix components will manner as we go forward.

Okay. Thanks for all the details. Appreciate it.

The next question on the line comes from Jim Suva at Citi group. Jim, your line is open.

Thank you. Probably a question for [Indiscernible] Chris, but when we think about stimulus, you know, the timing of it, the political nature of it is a little bit hard to pinpoint. But then when we layer in the supply chain challenges and deal with schools, and local governments, and smaller size governments and municipalities who may not be as tech savvy as the Fortune 50 or 500. Can you talk a little bit about the visibility? Are they starting to place smart orders or starting to say, hey, if this gets approved and if we get this amount, here's what I want because it seems like with the long lead times, if they say they want to implement something in the summer for education, we're getting to a point of window where you won't be able to procure the items so you need talk.

There's many different segments so let me start. I think where -- you were going there. Yeah, It's complicated, right. We've got the supply ecosystem that is -- it has some impact to it right now so we're trying to manage through all of that. Here's what I'd say about K-through-12. You know, we have a lot of experience understanding funding, stimulus funding, and other types of funding for educational institutions. So we sit side-by-side with our customers to make sure they understand both where the dollars can be used, for what products in particular, or for what outcomes, because sometimes it's outcome-based? And what the deadlines are, and what those deadlines mean? Do you have to have the product in-house, do you have to have the product order placed? So there's a lot of navigating that's going on, and I feel highly confident that the team is doing a phenomenal job with our customers and that our K-12 customers are not going to lose out on any funding. That's really clear. in the state and local space where we've got stimulus funding coming down. It's been a bit complicated because the funding packages, there were 3 of them as we've talked about before, the CARES Act package, for example, had a deadline at the end of this coming year, that was for March of last year. The end of last year, it was -- there was nothing for state and locals in the stimulus package. And then this March, there was a hefty amount. But as we all know when it comes to state and local, it's about budget cycles and it's about funding deadline. So the spending that's taken place in 2021, is primarily from the CARES package with a deadline this year. What we're seeing now is -- I don't want to call it slowing down, but I'm going to say a moderating and planning, and state and local governments now have that funding where they don't have to spend it till the end of 2024. And so they are now looking at a multiyear approach. Pretty unusual, this multiyear approach but that's what they're doing. And we're helping them with it, there's a lot of complexity. It's very solutions based in my view in terms of what customers are trying to do, but we don't really expect that to meaningfully come to fruition until early next year. But there's just a lot of tentacles and they're all different based on the stimulus package, and on the actual market that we're talking to. But again, I would just reiterate that this is something we do. It's frankly a core capability like working with partners. It's a core capability to understand in the federal, state and local, education, healthcare spaces where the funding is, what it means, what the deadlines are, and how to use it and then to basically walk our customers through it. But I know that was a long answer. I hope it was helpful.

That was exactly where I was looking for. Thank you so much.

You're welcome.

The next question on the line comes from Katy Huberty at Morgan Stanley. Katy, your line is open.

[Indiscernible] backlog commentary. Can you talk about the gap between net sales growth and orders or writing growth in 3Q and maybe how that compared to the second quarter? Then I have a follow-up.

Sure. Hi, Katie. Good morning. This is Al. Look, we won't quote the exact delta there, but I think it's safe to say that we continue to see strong written demand and that continues to show up and that's part of what bolsters our confidence. Certainly shipments have lagged that. And again, I'll go back to my comment. I would say the mix looks like second quarter did, and that would be consistent across products with the one caveat. That, as we mentioned, Solutions was a little bit stronger, a little worse than it was in Q2.

Okay. Thank you. And then maybe a follow-up for you. The ending cash balance of $245 million is lower than your typical buffer. Can you just talk about your term to rebuild that buffer and also defund the Sirius acquisition? Thank you.

Sure. So first on the Sirius acquisition, I think we mentioned on the previous call, we have committed financing in place. So we expect that we are going to finance the acquisitions fully. From a cash balance perspective, I think Katy, if you compare it to where we were at the end of the year and maybe a year ago, certainly we would look lower. And a couple of things there. 1. We had debt refinancing or financing, I should say, in 2021. So that bolstered that cash position. And then notably for 2021, we've used a fair amount of cash for the existing acquisitions we've had, as well as share repurchases. So I think the combination of where we sit from a cash balance and our revolver availability perspective, we feel quite good with where we stand. And then we feel quite good about our ability to create and generate free cash flow in 2022.

That's great. Thank you.

The next question comes from Matthew Sheerin, Stifel. Matthew please go ahead.

Yes. Thanks and good morning. Chris I wanted to ask about the strong cloud growth that you're seeing, particularly infrastructure as a service. And I'm wondering if some of that is positively impacted by the fact that customers maybe moving or accelerating towards the cloud because of the product in -- and infrastructure, you know, on - prem product shortages. Are you seeing any of that in terms of customers saying maybe now is the time to move because we don't want to wait?

Yeah Matt. Great question. We've been asking ourselves that as well and talking to customers about it, given the kind of pervasive and persistent nature of the supply chain and the fact that It continues to extend. I would say -- I would characterize it this way, customers are rethinking and considering accelerating some movements to cloud and potentially re - architecting some of their solutions and more -- in a public cloud like environment versus, for example, on prem cloud. But what I wouldn't -- what I wouldn't characterize it as is just a wholesale shift. Customers are still very strategic in how they think about both flexibility obviously and scalability but also cost. And if you combine all of those things together, they're still looking for the absolute best solution and therefore, not just doing the wholesale shift. So I guess the answer would be, we are having this conversations. We're seeing some decisions made around accelerating to public cloud, but I wouldn't say that it's [Indiscernible] and wholesale, if that helps.

I got it. Okay. Thanks for that. And then on the PC shortages, particularly on the commercial side. What are your thoughts there in terms of the PC cycle? Are you seeing any early signs of adoption of Win 10, and do you see that as a driver going forward?

Well, look, I wouldn't say that, I've seen necessarily early adoption just yet, but as is always the case, there will be early adopters and there will be later adopters. And they will be our customers, so we'll help them through that. You all are familiar with the end of life for Win 10 and then the timing for Win 11 around the 2024, 20-25 time period. So it will be a driver, it's not been a driver yet. I think PCs generally, you've heard me say, I continue to believe in PC s. I think that we have more PC density now we're going to see sort of replacement cycles of PCs for a couple of reasons. Wear and tear, but also the technology improves at a faster pace and client devices are more and more important to the productivity of the people using them. You also have used cases that are expanding. And the hybrid work model obviously is really driving PCs. And so we will -- we feel good about PC growth and win 11 will certainly be a driver of that at some point over probably a couple of year period.

Okay. Thanks a lot.

And the next question comes from Samik Chatterjee at JPMorgan. Samik, your line is open.

Great. Thank you. Chris, I just wanted to start off and go back to your comments. You mentioned this a couple of times now about monitoring the SMB segment for economic activity just given the increase in cases, etc. and you mentioned you haven't seen any sizable impact yet. But is there something more on a regional basis when you look at -- across the U.S. or maybe in some international markets on a more regional, specific places you're seeing any changes in activity from your customers where maybe there is a stronger correlation to how cases are trending. Any insights on that, and I have a follow-up, please.

Yeah, sure. Here's what I would say about the current environment. We're watching it, as is everybody, and we're cautious about it. And we put it in the category of wildcard because I don't know that anybody knows what's going to happen, but we all also know there has been more momentum around that vaccination availability at lower ages, antivirals, the rate of vaccine, particularly when we think of our location [Indiscernible]. We're thinking and investing for getting back to a robust environment and economy, and we're thinking forward. So I think a little bit unlike going into last year's winter months where there -- the cautiousness I would say was on a really high level. We're just feeling customers saying, we've got to invest. And so until early next year or work from [Indiscernible] that is I would say ubiquitous. So we -- in 2020, we talked about the uneven [Indiscernible] certain industries, etc. I just feel like the tone has really changed to the platform of "We got to get back. We got to get back. We got to build for the future. " So that's what we're seeing.

Okay. A quick follow-up for that. I think you're indicating that the operating margin 3Q doesn't repeat in 4Q any incremental spend coming through. How much of [Indiscernible] mentioned some of the catch-up on SG&A versus [Indiscernible] what you outlined as is the right time to spend, and I'm just trying to think of what portion of that incremental spend should I be annualizing for the next year? Thank you.

So look, in fourth-quarter, we'll get more guidance with respect to what that looks like for 2022 and reflective of our combination with Sirius, right? So but let me focus my comments on fourth quarter. I would say the non-GAAP SG&A spend is just an unevenness or a timing effect of that spend. in Q3. That probably lagged a bit in Q4. We'd expect that to pick up. There's probably a component there, as we think about the Sirius combination, we're thinking more broadly about what that combination looks like, and how does that ultimately impact our investment spend. That being said, we're going to continue forward in Q4 with the efforts that we've been focused on, notably our own digital transformation, as well as to continue invest in the high-growth Solutions and Services areas.

Okay. Thank you.

Welcome.

The final question comes from Keith Housum of Northcoast Research. Keith, your line is open.

Thank you. Good morning, guys. Hey, Chris, I'm just kind of thinking here through the investments that companies make -- are making in technology based on the supply chain insurers that they are, is there a willingness of your customers to move to another solutions that are hardware solution that can be fulfilled by the end of the year? Because the thinking is, a lot of these companies have IT budgets they want to spend anyways. So there's always a project wish that they want to do. Are people willing to convert to other projects in order to spend that money? Or are they holding onto the products available?

Yeah. Good morning, a great question and I think it really depends frequently on the customer set. Small businesses have always been more nimble and less tied to particular requirements, and we have seen success there. And I think in my prepared remarks, supply chain constraints didn't impact them as much as in corporate because we could help them find alternatives. When you really don't want to shift off of them, it creates more work, frankly, within the organization. What we've [Indiscernible] We have worked with our customers to get in-line earlier. So a lot of customers are -- have been working very hard [Indiscernible] you typically would in hope s that they will get the product by year end. All that said, anywhere that there are I'll say mission less than mission-critical, by technologies that we can help them find alternatives. Whether it's a brand, whether it is the Cloud, whether it's something else that they can be using, you can bet we're doing it. But you're absolutely right, there's going to be a lot of pressure as we go into the back end of the year to get that product out. And we expect we'll be able to help them do it.

Got you. There is a follow-up here. In terms of the shortages that you're experiencing, are you finding that those shortages over this quarter, I guess sort of previous solution sets or is it really kind of game of whack-a-mole where it gets fixed in one area but a new [Indiscernible]?

Well, here's -- I said this before, you get this kind of supply chain ecosystem. And so you've got -- you have capacity, you got components, you got logistics, you got labor, you've got all of this impacting the ability to get product. And it has kind of shifted through the course of the year. What we've had on the transactional side, notebook and video and monitors and things like that, that have been constrained. Chromebook have started to ease up a little. That's planning a good 13 months ago to get -- get to that point by the OEM. What we saw [Indiscernible] this year in the past quarter and a little before was solutions product now being more constrained. And we mentioned Netcom in particular and storage in particular. So that is a problem when things are moving around, particularly when what customers need are comprehensive and holistic solutions, not just piece [Indiscernible]. So whack-a-mole is a good word for -- or a good term for it.

Great. Thank you.

We have no further questions registered on the lines. We'll hand the call back to Chris Leahy to conclude the call.

Bethany, Thank you. I want to recognize the incredible dedication of our co-workers around the globe and [Indiscernible] all of CDW stakeholders. And thank you to our customers for the privilege and opportunity to serve you. And to our investors and analysts [Indiscernible] attending this call, we appreciate you and your continued interest in and support of CDW, and we look forward to talking with you again next quarter. Have a good day.

This concludes today's conference call. Thank you for joining. You may now disconnect your lines.