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. 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 of 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 start by reviewing our second quarter results and the factors driving our performance. I'll share our views on the current macro environment, its effects on our customers and market, and our responses. Collin will then provide a more detailed examination of our second quarter financials, liquidity position, and capital allocation strategy. We will move through our prepared remarks quickly to ensure ample time for questions. In the second quarter, net sales totaled $4.4 billion, down 5.7% from last year and down 5.3% in constant currency. Our non-GAAP operating income was $338 million, reflecting a 5.6% decrease. The non-GAAP net income per share was $1.56, which is 2.6% lower than last year on a reported basis and down 2.3% in constant currency. Net sales performance during the quarter varied by month and by customer end market. As mentioned in our last earnings call, we started April with a strong backlog of remote workforce enablement solutions, which significantly contributed to our performance that month. However, as the quarter progressed, some customer end markets experienced postponed projects and a decline in demand due to the economic impact of the crisis on customer spending. In contrast, other markets maintained healthy IT investments. Throughout the quarter, we assisted customers with various IT needs, with remote enablement, business continuity, and security remaining top priorities for managing remote operations effectively. Customers were also focused on initiatives to cut costs, optimize resources, and enhance customer and employee experiences through digital transformation. Our teams delivered comprehensive solutions from our wide range of products, including devices, accessories, collaboration tools, security, software, and cloud offerings, to help customers meet their goals. We entered the second quarter with strong stocking positions in key remote enablement categories to address expected customer demand. We utilized our distribution centers' extensive logistics capabilities, deep vendor relationships, and solid liquidity to navigate supply challenges effectively, continuing to procure supplies in key remote enablement categories while managing longer lead times for others. Now, let’s examine the performance by customer end market. Both the corporate and small business sectors saw double-digit declines. These channels primarily include our small and medium business customers. The unique challenges posed by the COVID-19 crisis have hit small and medium businesses particularly hard. Monthly net sales results within the quarter progressively slowed as demand softened. Customer spending in these sectors focused mainly on three areas: remote work enablement, leading to increased spending on notebooks and mobile devices; infrastructure support and optimization, resulting in strong growth in cloud offerings and several software categories; and maximizing existing IT purchases while minimizing expenses through extended maintenance contracts and shorter commitments on new licenses. The government segment experienced a 24% increase in net sales, with federal sales nearly reaching a 50% increase. Our devices as a service solution for the U.S. Census Bureau contributed significantly to our federal results, and the data collection from non-responders has commenced. This solution is expected to remain a key contributor to federal net sales throughout the year. Even excluding the Census results, federal sales showed strong double-digit growth, driven by civilian projects marking a successful delivery of our value proposition to various agencies. Our team achieved nearly 100% growth in notebooks, alongside double-digit gains in enterprise storage, video, collaboration, hardware, and security software. The state and local government team reported modest growth, highlighting double-digit transaction growth that facilitated remote work capacities, such as notebooks and collaboration tools, enhancing security and optimizing technology assets for e-government initiatives. Education sales rose 13%, primarily fueled by strong growth in K-12 despite a slight decrease in higher education spending. K-12 customers maintained a focus on equity and student access, with growth in this sector being largely driven by strong Chromebook sales as we assisted school districts in preparing for diverse teaching formats. Higher education, however, reflected the ongoing uncertainties that institutions face, with strong IT spending for remote enablement tempered by delays in infrastructure projects due to budgeting issues. The healthcare sector experienced a low double-digit decline. Although April results were strong, we saw reductions in May and June as COVID-related responses took precedence and budget pressures heightened. Our team continues to partner closely with healthcare customers to expand virtual care capabilities, which have become vital in the evolving landscape of U.S. healthcare delivery. Other operations, representing our UK and Canadian sectors, saw an 8% decline overall. The UK team delivered solid growth in constant currency driven by high public sector demand, while Canadian sales fell in double digits due to a higher concentration of small businesses affected by COVID-19 and challenges within the oil and gas industry in Alberta. Our second quarter performance varied across customer segments and showcased diverse outcomes in our main product and service categories. U.S. hardware sales were down mid-single digits, while client devices grew nearly 6%. Software declined moderately, yet services increased by mid-single digits. Transaction volumes dipped slightly following last year's significant growth. Solutions saw a low double-digit decline as some clients deprioritized larger infrastructure projects. We achieved robust growth in our cloud offerings, with spending increasing by double digits, driven by gains in analytics, collaboration, data storage and recovery, compute, and security. We anticipate continued strong customer demand for our cloud services. On July 1, we acquired IGNW, a prominent provider of cloud-native services and software development, complementing our capabilities in digital velocity solutions. This acquisition presents a notable growth opportunity for our organization, customers, partners, and team members, as IGNW brings essential talent and strategic capabilities to enhance our offerings. We welcome IGNW's approximately 170 employees to CDW. This is a prime example of our ongoing commitment to strengthen our cloud capabilities and position ourselves for future growth through strategic investments and acquisitions. Throughout our 35-year history, we have successfully adapted to evolving customer needs in the IT sector, in part through acquisitions. Our second quarter operating and financial results reflect our balanced customer end market portfolio, comprehensive solutions and services across the IT landscape, and our success in implementing our three-part growth strategy effectively. These are key drivers of our historical and future performance. I want to take a moment to elaborate on each. Firstly, our customer end market portfolio is diverse. We serve five sales channels in the U.S., each generating over $1.5 billion in annual net sales. These include corporate, small business, government, education, and healthcare. This scale facilitates our alignment of sales teams with vertical markets, enabling us to understand our customers better and establish ourselves as a trusted partner. Additionally, our UK and Canadian operations together produced over $2 billion in net sales in 2019. The diversity of our customer segments enables us to withstand macro or external challenges that affect different industries differently, which is particularly relevant given current circumstances. Secondly, our broad array of offerings comprises over 100,000 products, services, and solutions from more than 1,000 vendor partners, positioning us to meet the full spectrum of customer IT needs and adapt swiftly to changing demand trends. For instance, in response to current conditions, we have expanded beyond traditional offerings to include return-to-work technologies, such as enhanced video surveillance, temperature scanners, and device sanitizing solutions. Our teams have developed tailored solutions for our various customer segments, showcasing our thought leadership and agility in capitalizing on growth opportunities. The final driver of our performance is our three-part growth strategy, which focuses on acquiring new customers, enhancing our solution capabilities, and expanding our service capabilities. Each aspect is vital to our ability to effectively assess, design, deliver, and manage the integrated technology solutions that our customers seek to meet their present and future needs. The current landscape strengthens our commitment to executing this strategy as we aim to emerge from these challenges in a stronger position. Allow me to illustrate a few examples of our strategy in action and how we assisted customers this quarter. A financial services firm approached us to enable its employees to work remotely. Initially, only 30% of its workforce had the capability to do so. The firm placed an emergency blanket purchase order for $3.5 million, entrusting us with the responsibility of developing suitable solutions across client devices, remote access, security, and data centers. Leveraging our long-standing relationship with the client, we executed the project successfully with our vendor partners to ensure timely supply. Another large corporation sought to boost productivity for its remote workforce. They needed to provide additional IT equipment per corporate standards but lacked the necessary systems to identify which employees required equipment and manage orders efficiently. They turned to us again because of our robust e-commerce platform and logistical capacity. Our team integrated a digital catalog with the customer’s e-procurement system, simplifying a complex process. Consequently, we deepened our partnership with the customer, canceling a midstream RFP for a significant new engagement. Additionally, a school district in Ohio with 5,000 students enlisted our assistance in creating a comprehensive remote learning environment, including client devices and a collaborative platform for teachers and students in the cloud. These scenarios showcase our capability to respond rapidly with effective solutions in this environment, with customers looking to us for expertise, innovative solutions, and exemplary service. We successfully secured a ServiceNow engagement for a leading medical school after only a two-week sales cycle, which is less than half of the typical time frame, owing to our strong previous relationship with the customer and our ability to deliver swiftly under pressure. These examples underscore our three-part growth strategy, showcasing CDW as a trusted advisor and emphasizing the critical role of IT in helping customers achieve their goals. I would now like to update you on our ongoing efforts to manage the impact of COVID-19 on our operations. We have established a cross-functional response team with three guiding principles: protecting the health and well-being of our employees, addressing the essential needs of our customers, and supporting our communities. Our remote workforce continues to thrive, maintaining high levels of collaboration and productivity. We are actively assessing when and how to return to office work, keeping in mind our customers' future work settings as well. Our distribution and configuration centers remain fully operational, adhering to safety protocols as advised by public health authorities, including social distancing, staggered shifts, personal protective equipment, thorough facility cleaning, and temperature checks. Our teams have effectively maintained our high standards of customer service while implementing these necessary precautions. During the quarter, our sales and technical teams began to engage more with customers in person, with proactive safety measures in place. We have adapted well to virtual engagement channels to maintain customer connections while continuing to develop our personnel. For instance, our marketing initiatives transitioned from physical events to virtual formats, allowing customers to benefit from insights from our technical specialists. Our sales and technical teams completed over 20,000 hours of training, amassing over 400 certifications, nearly double last year’s figures. The adaptability of our marketing, events, and employee services teams highlights the strength of our culture, which we believe provides us with a competitive edge. As we look ahead, the economic outlook remains uncertain due to the unpredictable nature of COVID-19. As a result, we are not issuing targets for 2020. We are closely monitoring the immediate effects of COVID-19 on our customer segments. Early indicators for Q3 suggest that sales declines have stabilized in our most affected markets, with more resilient segments maintaining positive trends. However, we caution against declaring this a definitive trend as weekly performance can fluctuate. Customers are currently at various stages in response to the macro environment; some are focused on remote enablement and operational continuity, while others are investing in digital transformation initiatives, including cloud migration and automation strategies. Our team is capable of assisting across all phases, positioning us as trusted partners to help customers effectively allocate their resources and tackle challenging issues. We believe technology will become increasingly essential across all economic sectors in the years to come. We have confidence in our strategy and commitment to aiding customers in navigating the complex IT landscape and embracing new technology. We plan to continue investing in our growth strategy to enhance our capabilities for serving customers, optimizing our productivity, and strengthening our competitive stance. We will remain vigilant regarding the effects of COVID-19, the broader macro environment, and other unpredictable factors affecting our operations. CDW will continue to leverage our competitive strengths to support our customers in addressing their IT priorities and achieving their strategic goals while outpacing our rivals. Now, Collin will provide further details on our financial performance.

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, 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's stronger than normal seasonality and the ongoing impact of COVID-19. As Chris mentioned, our customer channels generally performed 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. In terms of SG&A, 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 generally pleased with second quarter's bad debt experience, we recognized that much economic uncertainty exists and remain cautious on year-to-go credit loss expectations. These expense reductions were partially offset by approximately $7 million of COVID-19 expenses, primarily to safeguard and compensate frontline co-workers. As we always do, we are closely monitoring our cost structure relative to the demand environment. Co-worker count at the end of the second quarter was 10,048, down 56 from the first quarter, reflecting restrictions on hiring and backfilling attrition that we put in place in April. Year-over-year co-worker count increased 265, with approximately 120 of the increase from the Atheros acquisition last fall, and the remaining from organic co-worker investments. Our recently completed acquisition of IGNW adds approximately 170 co-workers, most of whom are customer-facing technical co-workers. GAAP operating income was $283 million down 5.6%. Our non-GAAP operating income, which better reflects operating performance was $338 million down 5.6%. Non-GAAP operating income margin was 7.7%. Moving on to interest expense, it was $40 million, down 1.8%. The incremental interest from the $600 million notes issued in April was offset by savings from a lower LIBOR rate on the term loan. Our GAAP effective tax rate was 22.9% in the quarter, compared to 24.7% last year. This resulted in second quarter tax expense of $56 million compared to $65 million last year. The rate decrease is primarily related to higher excess tax benefits and equity-based compensation in 2020. To get to our non-GAAP effective tax rate, we adjust taxes consistent with non-GAAP net income add backs, including excess tax benefits associated with equity-based compensation.For the quarter our non-GAAP effective tax rate was 24.9%, down 70 basis points versus last year's rate. As you can see, with second quarter weighted average diluted shares outstanding of $144 million, GAAP net income per share was $1.31 down 1.1%. Our non-GAAP net income was $225 million in the quarter, down 5.2% compared to last year. Non-GAAP net income per share was $1.56 down 2.6% from last year. Turning to first-half results, revenue was $8.8 billion, an increase of 1.9% on a reported basis and 1.1% on an average daily sales basis, as we had one extra selling day in the first half of 2020. The extra selling day will reverse in Q4 when we have one fewer selling day compared to the prior year. On a constant currency average daily sales basis, first-half consolidated net sales were 1.5% higher than the prior year. Gross profit was $1.5 billion up 4% and gross profit margin was 17.2% up 40 basis points. Non-GAAP operating income was $642 million for the first half of 2020, down 0.5%. Net income was $357 million and non-GAAP net income was $425 million, up 0.5%. Moving to the balance sheet, liquidity continues to be a top priority in the current environment. As of June 30, cash and cash equivalents were $958 million and net debt was $2.9 billion. Our cash plus revolver availability was roughly $2 billion. Year-to-date, free cash flow was $468 million, as shown on Slide 22. This is higher than normal seasonality and above last year's $407 million, primarily due to tax payment timing. Last year, we made cash tax payments on April 15 and June 15. And this year, the comparable payments were made on July 15, after the end of the second quarter. Turning to the three-month average cash conversion cycle, it is 25 days, up nine days from last year's second quarter. While cash collections were solid in the quarter, day's sales outstanding (DSO) increased seven days as we mixed into some larger public customers who can take longer to pay, and we have seen certain commercial customers extending payments. Days inventory outstanding (DIO) increased four days, as we continue to invest in inventory to help our customers manage their IT projects with greater certainty of product availability. One of our greatest assets is our long-term customer relationships, and we know it's important to be there for customers during challenging times, like we were during the great recession. We will continue to balance managing customer’s working capital needs while appropriately managing risk. In the quarter we returned $54 million of cash to shareholders through dividends and did not repurchase any stock. Turning to capital allocation, as I mentioned earlier, we remain focused on liquidity and our capital priorities remain the same as last quarter. Our priorities are, first, continue to pay the dividend. Today, we announced a quarterly cash dividend of $0.38 per common share, reflecting CDW’s strong liquidity position and confidence in the cash flow generation capability of the business. Second, ensure we have the right capital structure in place. We remained comfortable with the current target net leverage ratio of 2.5 to 3 times for several reasons. One, we have no debt maturities in 2020 and just $57 million due in 2021. Two, the weighted average interest rate on the debt portfolio was 3.6%, so cash interest is manageable. And three, our debt capital structure is covenant-like. We ended the quarter with net leverage at 2 times below the low end of our target range. Our third capital allocation priority is to supplement organic growth with strategic acquisitions. The acquisition of IGNW which closed after quarter-end is a good example of this. IGNW is not expected to have a material impact on CDW's 2020 net sales and non-GAAP earnings per share. We remain actively evaluating targets and will seek to be opportunistic in this environment. Any decision to deploy capital for acquisitions will be a function of our usual screens, strategic rationale, operating and cultural fit and financial return, all within the context of liquidity at that point in time. Fourth, as I previously noted our share repurchase program remains suspended to enhance liquidity. The decision on when to resume stock buybacks continues to depend on several considerations, including the macroeconomic environment, liquidity and working capital, leverage and other potential uses of cash, such as M&A. Lastly on the topic of capital, we intend to continue capital expenditure investments in the business. We have a CapEx-like model, historically running around half a point of sales or slightly more. We believe it's important to continue prudently investing in the capabilities that allow us to better serve customers, drive productivity, and ultimately emerge from this crisis in a stronger competitive position. We previously withdrew our 2020 targets and will not be providing an updated financial outlook, but consistent with last quarter, I want to provide insights into what we're seeing roughly one month into the third quarter from a demand, supply and operating perspective. On the demand side, activity continues to be mixed across customer end markets. In corporate and small business, looking back to the second quarter for a moment, the year-over-year decline in writings peaked at over 20% in May or June depending on the channel. Consequently, preliminary July sales are down double-digits in both channels. July writings are down year-over-year with the declines less negative than the peak levels of May or June. While encouraging, as Chris mentioned, we believe it's premature to call this a trend as weekly writings have been volatile, and we expect commercial customers will be sensitive to the recent increase in COVID-19 cases and the potential economic implications. In public, preliminary July sales and July writings are up year-over-year, driven by continued strength in K-12 and parts of government, partially offset by healthcare where both preliminary sales and writings continue to be down. Our international businesses are generally seeing similar customer trends to last quarter. We expect to continue to mix into public channels, which could add some headwind to gross margin in the back half of the year. On the supply side, we continue to navigate through a fluid environment with pockets of dislocation extending lead times in certain categories. Notebook supply, particularly lower end devices such as Chromebooks is tight. We are also experiencing extended lead times in certain networking and server products. We are in constant contact with our vendor partners, whose manufacturing operations are generally back up and running. Free challenges have moderated, but we are still seeing some pricing surcharges and price increases on certain products, which we are generally passing along to customers. On the operating front, all distribution centers continue to be operational. Finally, I want to provide an update on the devices of service solution to the U.S. Census Bureau. The contribution to second quarter net sales was in line with expectations. We have now deployed all of the devices into the field. The period for which the devices will be used remains fluid, and we could see some net sales shift among the next three quarters. The team has done an outstanding job managing through a challenging environment to help the Census Bureau deliver its mission. From a financial perspective this year, we now expect the Census to contribute up to approximately 160 basis points of incremental net sales growth over 2019. On an absolute basis, we currently expect the Census to contribute over 200 basis points of net sales in 2020. We will continue to provide updates on the Census as we progress through the second half of 2020. That concludes the financial summary. With that, I'll ask Jake to open it up for questions. Can we please ask each of you to limit your questions to one with a brief follow-up? Thank you.

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 as a follow-up maybe Collin. And I just had a question operationally. Operating profit dollar decline essentially matches the revenue decline. So there was very little decremental 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. If I understand your question correctly, you are asking why there wasn't more deleverage. There were a couple of factors that contributed to our performance this quarter, which I mentioned in my remarks. One was regarding the credit loss reserve. We did not book any bad debt expense this quarter; instead, we drew down from the reserve we had previously set up and actually released a little since the receivables balance declined. The second factor was that we adjusted our performance-based compensation accruals based on full year estimates, taking a half-year benefit in the second quarter. I wouldn’t anticipate these two factors to persist as we progress through the rest of the year.

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 budgets 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 diverse customer end markets. And even within the end markets, a very diversified customer base. So, if you take corporate for example, across industry across geography, 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. We have a question 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 it's 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 positions, 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 that will be 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 devices. 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.

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

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, distributors and retailers and others. So, there's a little bit of a 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. 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 begin. We observe various data points regarding GDP and IT growth. I want to emphasize that we hold ourselves accountable to significantly outpace the market. Typically, in a stronger environment where we sell more hardware that reflects on the top line, we tend to exceed the market by 200 to 300 basis points, or sometimes even more. However, in the current recessionary environment, where customers are extending the life of their assets and making adjustments like reducing warranties, we will still outpace the market, although by a somewhat smaller margin of 100 to 250 basis points.

Do you have an opinion on your customer surveys regarding the expected decline in IT spending for this year?

We don't have a collective view that we're sharing. There are so many data points out there that are so disparate. 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. Just one other clarification. When you mentioned some early stability in writings in July, when you say stable, do you mean flat year-on-year? Or does it mean that the rate of decline is stable compared to what you observed 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 playing out as you had expected 90 days ago? Or are the trends better or worse than you expected? And is there 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 affirming our business diversification strategy, and provide optimism and the confidence 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 customers 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.

Thank you. I'm curious about education budgets. Many school districts are shifting to a hybrid model, and there are still many students without access to Chromebooks or who are just starting to gain access. What are you hearing from school districts about their budget situations? Additionally, with discussions around the potential stimulus bill ongoing, how quickly does federal funding typically get utilized? I'm trying to gauge what we might expect in the coming months. 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. Regarding acquisitions and new clients, we haven't disclosed specific numbers or penetration rates. However, it hasn't been significantly harder due to our shift to remote operations. We've transitioned all our marketing to digital channels, which has allowed us to reach more customers and engage with more individuals within those companies, giving us the chance to follow up. We've revamped our acquisition programs to maximize effectiveness. Our sales team has excelled in building relationships virtually, and I'm pleased with their transition to also meeting with customers in person. They have shown great assertiveness and success with our acquisition initiatives. As for retention, we don't share that figure, but I can say that customer satisfaction has been quite high based on our current measures.

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 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?

I’ll begin, and Collin can add if he wishes. We recently acquired IGNW, a cloud services provider, which exemplifies our strategy of investing in the solutions and services that our customers currently require and will need in the future. We will actively continue searching for potential acquisition targets, engaging both inbound and outbound efforts. Our relationship with IGNW developed over time as CDW had previously partnered with them, allowing us to familiarize ourselves with their team, culture, and capabilities. Thus, we will keep exploring the market for strategic 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 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 of the year, including the fourth quarter?

We typically don't provide guidance by channel, and especially not in the current environment. From our comments regarding the second quarter and our outlook for the mid-business in the second half of the year, it seems demand is more robust on the public side, especially in federal government education. You mentioned Chromebooks, and we're monitoring that situation closely. Supply is constrained due to high demand, and that could present challenges in the third or fourth quarter. However, given the variety of our vendor partners and our scale, we believe we can manage those challenges effectively. While there may be some disruptions, we expect CDW to assist customers in securing supply through our multi-vendor capabilities. We're also discussing alternative processors and other solutions with our customers. We're doing everything we can to creatively address the Chromebook shortage and support our customers.

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 canceled? 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. Collin?

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 capital 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 are 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.

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 impress 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.