CDW Corporation
Q2 2017 Earnings Call Transcript

Published: 3 Aug 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the CDW Corporation Q2 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. I would now like to turn the call over to Tom Richards. Please go ahead.

[Thomas E. Richards:]

Good morning, everybody. It's a pleasure to be with you today. Joining me in the room today are Ann Ziegler, our Chief Financial Officer; Chris Leahy, our newly minted Chief Revenue Officer; and Sari Macrie, our VP of Investor Relations. I'll begin today's call with a brief overview of our results and key drivers. Ann will take you through a more detailed results review of the financials. Then we'll go right to your questions. But before we begin, Sari will present the company's Safe Harbor disclosure statement.

[Sari L. Macrie:]

Thank you, Tom. Good morning, everyone. Our second quarter 2017 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 with us 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 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 net income 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 as well as in our press release and the 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 2016 unless otherwise indicated. In addition, all references to growth rates for hardware product, software and services today represent U.S. net sales only and do not include the results from our UK or Canadian operations. There were the same number of selling days in the second quarter and the first six months of 2017 compared to the comparable periods in 2016. All sales growth rate references during the call will use the average daily sales unless otherwise indicated. A replay of this webcast will be posted to our website by this time tomorrow. 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. And with that, let me turn the call back to Tom.

[Thomas E. Richards:]

Thanks, Sari. Following our strong first quarter, we delivered another quarter of excellent top line growth and solid profitability. Consolidated sales were $4 billion, up 9% versus last year. On a constant currency basis, sales increased by 10%. Gross profit increased 5% to $641 million. Adjusted EBITDA increased 5% to $315 million and non-GAAP net income per share increased to 10% to $1.03 per share. On a constant currency basis, non-GAAP EPS increased 11%. Results like this require rigor, discipline and process. We have been very deliberate about putting the systems, structure and resources in place to ensure we can continue to execute our strategy effectively. Two recent organizational changes are designed to ensure we maintain this discipline as we drive further growth. You may have noticed that I introduced Chris Leahy as our new Chief Revenue Officer. Creating a new executing role of Chief Revenue Officer accountable for all of our customer-facing channels is the first half these two actions. Chris, who most recently was our Senior Vice President, International and General Counsel, is taking on this new role reporting to me. As you may know, Chris helped lead the launch of our international strategy, including the acquisition of CDW UK. As evidenced again this quarter, our international business has continued to deliver strong results under Chris' leadership. As CRO, Chris will ensure we maintain a strong line of sight to customers, align resources and reinforce connection points between our sales and technical organization. So customers benefit from the deep technical capabilities we have built. I am delighted that Chris is taking on this new role. You will be hearing from Chris in future earnings calls. I'm also delighted that Chris Corley will be taking on an expanded role as we add responsibility for our international business to her current role leading the corporate business segment. Remember that one of the strategic drivers of our international acquisition and expansion is to better serve our U. S.-based multinationals from our corporate segment. Chris will build on the work already underway to create a one company experience to meet customer needs and drive profitable growth. She will also look to leverage our international capabilities to capture profitable growth opportunities outside the U.S. This quarter's results demonstrate the power of rigor and discipline. There were three key drivers of our performance. Our balanced portfolio of customer end markets, breadth of product offering and our variable cost structure. Let me walk through how each contributed to performance. This quarter's top line performance once again demonstrated the power of our balanced portfolio of end markets. We saw excellent top line performance across eight of our nine end markets, all up high single-digits or better. This strong performance more than offset a 7% decline in our healthcare business. Corporate, which represents sales to business customers with roughly 250 coworkers and above, increased 9%. Momentum that began in the first quarter continued to build with more projects moving from the back-burner to the front. Small business posted an 11% increase as customer confidence remained strong. Public increased 8% with double-digit increases across all customer end markets except healthcare. Government increased 19%, powered by new contracts in state and local, and ongoing success in meeting public safety needs as well as mid-teens growth in federal. Federal results include a little more than half of the client devices that had been delayed at the year end of 2016. We expect the remainder to ship in the third and fourth quarter. Education increased 11%, reflecting high teens growth in Higher Ed and high single-digit growth in K-12. Healthcare declined 7% as uncertainty regarding the fate of the Affordable Care Act, Medicaid funding and overall reimbursements weighed heavily on decision makers. Our other results, which reflect Canada and the UK combined, increased 9%. Both operations continue to show strong performance with Canada up high single-digits in Canadian dollars and UK up double-digits in local currency. Currency impacted both operations, reducing U.S. denominated growth by 50%. The second driver of results was our broad product and solutions suite. Our ability to meet the total technology needs, both transactional and integrated solutions of our customers, is one of the fundamental reasons for our consistent performance. This is a key point of differentiation for us in the marketplace. With over 100,000 products, services and solutions, from over 1,000 vendor partners, we remain well-positioned to meet our customers' total needs across the spectrum of IT. IT market trends were similar to those that we saw in the first quarter. We continue to see accelerated hardware growth with ongoing focus (08

[Ann E. Ziegler:]

Thanks, Tom. Good morning, everyone. As Tom indicated, our second quarter financial results reflect the combined power of our balanced portfolio of channels, breadth of product offerings and variable cost structure. They also reflect the progress we are making against our long-term financial strategy to drive strong cash flow, deliver double-digit constant currency earnings per share growth and return cash to our shareholders. Turning to our P&L. If you have access to the slides posted online, it will be helpful to follow along. I am on slide 7. Consolidated net sales were $4 billion, 9% higher than last year on a reported and average daily sales basis. Average daily sales were $62.4 million. On a constant currency basis, consolidated net sales were 9.8% higher than last year. Currency impact was driven by both the British pound and Canadian to U.S. dollar translation, shaving roughly 80 basis points off of growth. Currency impact was 20 basis points lower than the first quarter. On an average daily sales basis, sequential sales were up 20.1% versus Q1 2017, which was higher than both last year and also our historical Q1 to Q2 increase. Gross profit for the quarter increased 5% to $641 million. Gross margin in the second quarter was 16.1%, 60 basis points lower than last year. The decline was driven by the impact of increased hardware sales and an ongoing competitive marketplace, which pressured our product margin. Low teens increases and 100% gross margin revenues, which include commissions, warranties and Software as a Service were not enough to offset our product margin decline. Turning to SG&A on slide 8, consolidated reported SG&A including advertising expense was roughly 6% higher than last year. Reported SG&A includes $11.5 million of equity-based compensation, $2 million of integration expenses and $4.5 million of other expenses, including payroll taxes on equity-based compensation. Our adjusted SG&A including advertising increased 5%, primarily driven by sales payroll growth and advertising. Coworker count was up roughly 75 year-over-year to just under 8,800. Our adjusted EBITDA for the quarter was $314.7 million, up 4.7%. This delivered an adjusted EBITDA margin of 7.9%, down 30 basis points from last year. Looking at the rest of the P&L on slide 9. Interest expense was $35.9 million, $1 million lower than last year's Q2 level. GAAP taxes were $55 million, which resulted in an effective tax rate of 27.9%. The reduction in effective tax rate primarily reflects excess tax benefits from the vesting of equity-based compensation. Tax benefits amplified operating income and GAAP net income was $141 million. Our non-GAAP net income, which better reflects our operating performance, was $163.2 million in the quarter, up 4.9% over last year. As you can see on Slide 10, non-GAAP net income reflects after-tax add backs that fall in four general buckets. The ongoing amortization of purchased intangibles, equity-based compensation and the related payroll taxes and excess tax benefits, acquisition and integration expenses and other non-recurring or infrequent income or expenses such as net loss on the extinguishment of debt. This quarter, our performance alignment grant or PAG vested. The PAG was a one-time equity grant made at the time of our IPO to coworkers up to senior manager. This vest created (21

[Operator:]

Our first question is from Matt Cabral with Goldman Sachs. Your line is now open.

[Thomas E. Richards:]

Morning, Matt.

[Matthew Cabral:]

Good morning, Tom. Thank you. You touched on this a little bit in your prepared remarks. But given the acceleration you've seen, just wondering if you could talk a little bit about the sentiment you're hearing from your commercial customers and if you're starting to see some of those expansionary projects that you've talked about in the past come online yet?

[Thomas E. Richards:]

The short answer is yes. As I alluded to, we started to see kind of the continuation of the momentum, Matt, we saw in the first quarter relative to, not only client devices but solutions growth and you saw that reflected in our performance. Those are the more longer tail projects that take a little more time. So we are continuing to see momentum in corporate.

[Matthew Cabral:]

Got it. And then just as a follow-up, on the step down in gross margins, was there a conscious change in strategy that you guys made this quarter or was that just more of a function of what the market gave you across the hardware and the competition that you called out previously?

[Thomas E. Richards:]

No, Matt, it wasn't. It's amazingly consistent with the last time we had a strong client refresh, if you look back I think it was in 2014, it's the same phenomenon when you have customers going through strong refresh. Those products typically have lower margins. And so when you get that kind of exponential growth, it tends to just put the pressure on. So it was just a function of what customers want to be doing at this particular time.

[Matthew Cabral:]

Thank you.

[Thomas E. Richards:]

Okay.

[Operator:]

Our next question is from Amit Daryanani with RBC Capital Markets. Your line is now open.

[Amit Daryanani:]

Thanks a lot. I guess just to continue on that hardware discussion. Notebook and mobile devices, I think Tom you said, were up high teens from what I recall. You had it very difficult compared to the June quarter on a year-over-year basis at least. So what's really driving this and comfort that (34

[Thomas E. Richards:]

Good morning, Amit. Yeah, it was. It's funny we just talked about that this morning. It's amazing that we had that kind of growth rate on top of, not that strong but pretty strong in quarter last year. I would say a couple of different things. One is, it's about the refresh cycle time. If you think about it, 2014 was Windows XP expiration timeframe that drove a lot of refresh. We are now three or four years into it. So it's about the cycle. The second behavior we're seeing is – a little bit of an interesting perspective is that some customers are moving ahead with Win 10, As we've talked about, I think the word I've used is a general breeze that continued. But we also have some customers who are kind of loading up on 7, so to speak. And so I think those two things. I think the third thing is – and this is amazing performance by the K-12 team. If you look at their comp last year and specially client devices, the fact that they were able to continue to grow and Chromebooks continue to be a strong driver, those things kind of drove that part of the client refresh. And at this point, Amit, it looks like it's going to continue through the better part of the year. One more thing, the other thing driving it was those big federal client orders that didn't get booked or shipped at the end of last year are kind of coming to the system now.

[Amit Daryanani:]

Got it. That's really helpful. And if I can just really follow-up. You guys have had this renewed focus or new found focus I'd say on the small business, the 90 to 250 employees or so, and you spend a lot of time and the analysts have been talking about this. Double-digit growth this quarter, how should we think about the potential for you to, I guess, sustain the growth here today? I imagine you actually have much lower market share in this market versus the broader TAM that you guys go after.

[Thomas E. Richards:]

Look, I would say it's not much lower market share. I think the opportunity is great though. I agree with you that's why we made the move. I don't know that I'm going to get into giving guidance on small business. But I will tell you, we're excited about the – like anything else, when you focus on something and it gives you ability to get up every day and think about nothing else other than what small business customers want, and the first half of this year, we saw a lot of client refresh. And we're starting to see momentum in the solutions business. I mean, we feel really good about the decision and the return on that investment as they start to customize the solutions that they deliver to small business, we would expect to continue strong performance.

[Amit Daryanani:]

Perfect. That's it for me and congrats on the quarter, guys.

[Ann E. Ziegler:]

Thanks.

[Thomas E. Richards:]

Hey, thanks, Amit.

[Operator:]

Our next question is from Jayson Noland with Baird. Your line is now open.

[Thomas E. Richards:]

Good morning, Jayson.

[Jayson A. Noland:]

Okay. Hey, Tom. I wanted to start with UK at double-digits in local. That's surprising. Some others have called out softness there. It sounds like a marketing campaign helped you guys. But maybe if you could talk about your success there a little bit.

[Thomas E. Richards:]

Yeah, look, I think it's a combination of factors. One, clearly, the investment we've made in leveraging the orchestration campaign and telling the story about the capabilities of CDW certainly paid dividends. I think the second thing is, you have now UK being part of the CDW family for better part of a year-and-a-half or two years. So some of the programmatic approaches we take to focusing, sell our productivity, some of the programs you heard me allude to on category penetration and account acquisition, a lot of those things contributed to the performance. And the last thing is, as I tried to call out, the combination of both referrals increasing from US nationals and the success of the international sales team inside of UK selling capabilities outside of UK, all of those kind of came to a confluence, if you will, and produced that kind of performance in the quarter.

[Jayson A. Noland:]

Okay. And that makes sense. And then a follow-up on the hardware side, storage down with strength in converged and then server up seems surprising, anything to call out there specifically on server and can that continue?

[Thomas E. Richards:]

I'm sorry, Jayson, I didn't hear the very last part.

[Jayson A. Noland:]

Can the strength in server continue going forward?

[Thomas E. Richards:]

Well, look, we have some things that give some optimism. You've got the new processor that's coming online at the end of the year. I think there is some anticipation for that, especially in a couple of segments like our financial vertical. So that gives you some excitement there. And hyperconverged and converged in general to me just makes so much sense for customers relative to giving them the density, and yet at the same time, giving them the on-prem control that some of them want for certain workload. So I think I would be shocked if we don't continue to see the hyperconverged and converged infrastructure grow. I would be surprised if Infrastructure as a Service doesn't continue to grow. And I think, what I'll call the traditional server business, it'd be hard because it's been somewhat, I'll use my favorite economic term, lumpy, where we have some strong quarters, where we make some meaningful sales. I think you should expect to kind of continue with that kind of performance in light of what's going on with hyperconverged.

[Jayson A. Noland:]

Thanks, Tom. Congrats on the quarter.

[Thomas E. Richards:]

All right. Thanks, Jay.

[Operator:]

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

[Thomas E. Richards:]

Good morning, Matt.

[Matthew John Sheerin:]

Yes, good morning, Tom, and everyone. Just a couple of follow-ups from the previous questions. Just one on the seasonality for the rest of the year and sort of call that out where that typical first half, second half is a little bit different given the strength that you've seen in the first couple of quarters. But specifically, on government, and you talked, Tom, about the strength that you saw, some push out from last year into this year. What's the expectations for seasonality in the federal government for the next quarter?

[Thomas E. Richards:]

I would say it feels normal at this point. We won't have the overhang, that'd be the wrong word, the supported growth from the client devices as strong as we've had as we move through the year. But our federal guys are not saying anything unusual about the normal buying cycles of the federal government, which typically for us ends up being a pretty strong third quarter. But we have seen some things happen lately in the last couple of years, where as you sell more solutions, they tend to spill over into later quarters. Now, Ann, if there's anything else you want to add?.

[Ann E. Ziegler:]

Yeah, Matt, my commentary was government had a very strong second quarter. So we won't necessarily see the normal sequential growth. Not that Q3 won't be a normal-ish Q3, but if you're looking at sequential growth, that's what my comments were really pointing out. So very strong growth in our international U.K. business as well as government. So that's what I was say, would likely impact that said 48/52 balance that we typically see and I said roughly 50 basis points.

[Matthew John Sheerin:]

Got it. And just on the UK strength there. At your Analyst Day, you called out the fact that you're expanding your fiscal footprint into mainland Europe in several countries now, I believe. How much of that growth is being driven by that and what's the opportunity to grow beyond the UK?

[Thomas E. Richards:]

Yeah, well, as you heard, we've had significant growth outside of the UK. And Matt, we haven't really opened any new offices. It was really a function of the existing facilities we have in place, the kind of hub-and-spoke strategy that they have. And it really has just been leveraging, if you will, the international strategy that I alluded to, the orchestration campaign that drove the increased results and the dedicated international sales team, I think, has a lot to do with, like anything else, with us. When we focus on something, we tend to get a return on our investment from a performance standpoint. I would say it was more that than we didn't open up any new offices.

[Matthew John Sheerin:]

Got it. Okay. Thanks a lot.

[Thomas E. Richards:]

All right. Thanks, Matt.

[Operator:]

Our next question is from Shannon Cross with Cross Research. Your line is now open.

[Thomas E. Richards:]

Good morning, Shannon.

[Shannon S. Cross:]

Good morning. I'm curious, with dollars shifting to client and the conversations you're having with your customers, where are they shifting away from? I know there are sort of puts and takes and ebbs-and-flows in this business, but I'm curious as to sort of where clients are maybe deemphasizing or if it's just, at this point, they realize they have to spend on everything?

[Thomas E. Richards:]

Okay. I don't know that there's a generalization I can make, Shannon, because it does seem to depend on the customer. And if we hadn't had such strong solutions growth, we had a nice solutions quarter at 6%, you could say there was a substitution effect. I don't believe that's the case. I believe it's more of coming to grips with the fact that there's a refresh required on the client devices. We also saw, maybe not as evident in my comments, kind of a strong refresh in the NetComm business. And I think both of those are driven primarily by cycle wishes. It's refresh time. And I don't know, if you look across the board, we really didn't have any product category other than printing, which continues to be an ongoing challenge. Everyone else had really nice growth. So I don't think I saw a substitutionary effect.

[Shannon S. Cross:]

Okay. No, that's great. And then can you talk a bit about what customers are saying on security these days and how that's playing into your solutions business and some of the growth you're seeing?

[Thomas E. Richards:]

Yeah, can't (45

[Shannon S. Cross:]

Is there any difference between enterprise and small business within the security discussions or are the small business customers really starting to understand the threats at this point?

[Thomas E. Richards:]

I would say, the only difference is probably the complexity of the solution if you think about just the general nature of the business. But I would say, we have the same kind of interest level – the question even comes up, for example, when somebody's doing a refresh cycle on client devices, right. Where they're now saying, hey, I want to make sure I'm cognizant of the security capability built into the device. I'm not sure we heard that three or four years ago.

[Shannon S. Cross:]

Great. Thank you very much.

[Thomas E. Richards:]

All right. Thanks, Shannon.

[Operator:]

Our next question is from Sherri Scribner with Deutsche Bank. Your line is now open.

[Sherri A. Scribner:]

Hi, thanks. Tom, I was hoping you could provide a little more color on the strength in the server market. I know we talked about it in an earlier question, but you guys significantly outperformed the rest of the server market. And I think most people have been talking about some issues in server demand related to higher bill of material costs. Can you maybe comment on what's helping you outperform the traditional market? And then related to that, talking about component costs, you mentioned it a little bit, but are you guys being impacted at all by higher commodity costs, at least in terms of being able to get product or have you had any issues with that? Thanks.

[Thomas E. Richards:]

Okay. Let me go back to the first one on server. I think one of the reasons, Sherri, is, and we've watched this now, I would say it feels like for the last two or three years, the cyclical nature of the server market with all of the other things that are kind of going on around it, whether it's looking at virtualization. We had a strong virtualization quarter. Looking at Infrastructure as a Service, we had a strong Infrastructure as a Service quarter. Looking at hyperconverged, we had it strong... So I think what you see is people looking at their landscape and saying, look, there are going to be times when I'm going to decide to extend my on-prem server capability because it doesn't make sense to make a change at this point. And what I see, and this is more something that's true in our corporate space, is that doesn't happen every quarter. It's not like every quarter somebody's thinking about doing that, which is why I think you see – if you look at us, even over the last two years, it's been up mid single-digits, down low single-digits, up single-digits. So I wouldn't kind of over-index on the performance this quarter. We're thrilled. Having said that, we have put a lot of resources on focusing on the data center. And I think one of the benefits when you focus on that is you get some improved performance like we saw this quarter. Now, I think that's first part. Second part, obviously, we did see some cost of goods changes in the quarter. And ironically, in some places, we saw cost of goods increases. We also saw cost of goods decreases. Some of that is a function of our scale, some of it is a function of supply shortages, but I think the point I was trying to reinforce is on the whole and on the average, didn't have a meaningful impact on us in the quarter.

[Sherri A. Scribner:]

Okay. Great. Thanks.

[Thomas E. Richards:]

Thank you.

[Operator:]

Our next question is from Mark Moskowitz with Barclays. Your line is now open.

[Thomas E. Richards:]

Hey, Mark.

[Mark Moskowitz:]

Yes, thank you. Good morning. I was calling to see if you can talk a little more about the executive appointments in terms of Chris and Chris. What those mean longer-term in terms of – is this more about the need to grow beyond the existing customer base from a land-and-grab expansion perspective in terms of having to really carve out new customer generation from here? Does that mean it's getting harder? And the follow-up will be, does that mean there could be more acquisitions down the road?

[Thomas E. Richards:]

Okay. Okay. So let me take the first one. It isn't about like new challenges in the marketplace, like it's harder to acquire customers. It was really something that I've been thinking about for almost 18 months. And then, part of it is, I have this kind of personal philosophy that, as a business gets bigger, the way you make sure you execute is you manage smaller. And that means you constantly look at making sure you have more people with eyes and ears to listen to what's going on with sellers, listen to what's going on with customers and then leverage that across the organization. So it really is more just about that approach and philosophy. Look, these results aren't the kind of results that say, oh my gosh, we're trying to solve some kind of problem as much as I just want to make sure we're staying a couple steps ahead. And we're constantly listening and focusing on the front line. That was really what drove the first Chris appointment. And the second Chris appointment was driven by the driver of doing international in the first place was our corporate marketplace. And we've made great progress now in kind of working on the one message platform and you heard the results. So that appointed was, it feels like the right time now to put those two together and expect them to take off. What was the second part? Oh, do we expect increase or do we expect to do M&A? I think, Mark, I'll answer the same way I did at the Investor Day. That is, we think M&A will continue to be part of our future. It'll be looking for specific strategic opportunities versus some kind of general rollup. We think there are some technologies out there where it may be to our advantage to acquire rather than try to build based on speed to market.

[Mark Moskowitz:]

Thank you.

[Thomas E. Richards:]

All right. Thanks, Mark.

[Operator:]

Our next question is from Adam Tindle with Raymond James. Your line is now open.

[Thomas E. Richards:]

Morning, Adam.

[Adam Tindle:]

Good morning. Thank you. Tom, you mention an ongoing competitive marketplace in the press release. I don't recall seeing that much in the past. Could you give maybe give us more clarity on this comment? And does this tie into some of the management changes that you've been making?

[Thomas E. Richards:]

Has nothing do with the management changes. And we've felt like – I think I talked about this, Adam, in the past is that, when you're still – look, GDP as much as it feels a little better now, I don't know what the latest forecast is, like 2.7% or 2.9%, it's still, on the whole and on the average, it's still a relatively slow growth environment. I think when that happens, people compete hard. And so that doesn't feel like it's changed at all. I think the only difference this quarter is, you had this kind of rapid growth of client devices coupled with what has become kind of the normal course so to speak. And this marketplace, which is hyper competitive and you got to grind.

[Adam Tindle:]

Okay. And I know margin compression was a bit of a sticking point in the quarter. But it looks like both revenue and gross profit dollars per employee improved on a year-over-year basis again in this quarter. Can you maybe talk about what's driving that, and if possible, how this is tracking CDW UK since I know that was suppressing metrics a bit last year?

[Thomas E. Richards:]

Yeah, I would say two things. I don't really know that margin was a sticking point in the quarter. It was just a function of us mixing into client devices. I mean, like I said, if you look back at 2014, Ann and I were doing this the other day, it looks remarkably similar when we have this big client refresh cycle. The second point though I think is a point that we've made, I think, consistently since the IPO, in our business model, the thing we really concentrated on is adjusted EBITDA, and that is a percent of sales. Because it is really that part of the business that is the variable compensation structure. So, when you think about what happens, like in this quarter and you have transactional business growing at 10% (54

[Adam Tindle:]

Okay. Just maybe to clarify on, I just mean, in the sense that we were kind of all as the Street expecting higher gross margins or maybe some of that's on us, so just to clarify, I know 3Q typically declines sequentially due to federal mix? Might this be different this year given the starting point is bit lower than we thought?

[Thomas E. Richards:]

Yeah, I don't know that I could get – I mean, the thought of it's going to depend on how much the client refresh continues. At the end of the day, what I would say is don't over think this one. There is just a strong client refresh and we're going to help customers with that. We're not going to walk away from that maybe because clients may not have a strong a margin as solutions. Because over the long run, when we help clients with these kind of problems, they don't forget that.

[Adam Tindle:]

Thank you.

[Thomas E. Richards:]

Yeah.

[Operator:]

Our next question is from Keith Housum with Northcoast Research. Your line is now open.

[Thomas E. Richards:]

Good morning, Keith.

[Keith Housum:]

Good morning. Thanks for taking my question. Appreciate it. Just wanted to (55

[Thomas E. Richards:]

Keith, if I could answer that question, I don't know what I'd do next in life. But I would say this, and this was confirmed, we actually have a board member who's in the healthcare industry. Ironically, his description of what people are experiencing was very similar to what we have been telling you, which is the lack of clarity, especially for the major hospitals. Makes it hard because they're not sure about how they're going to reimbursed. We're not sure on how you're going to be reimbursed. You're going to be cautious on spending. And that whole scenario just continues to play out. And I don't know that I have the skills to forecast what's going to happen in Washington and how it's going to impact healthcare. I just know that it's amazingly consistent across our healthcare customers. And the story we hear relative to what it means to how they run their business. I would take that's the one thing that I think keeps coming home. The IT spend or the IT issues are a direct derivative of the overall management of the healthcare institution and facility. And so it gets impacted just like everything else. And I think that's what we're hearing time and time and time again.

[Keith Housum:]

Okay. Great. Changing gears, when you slightly hear the product shortages, it sounds like two quarters in a row where the shortages have been out there but you guys made it with a, not get impacted by that. As you guys exited the quarter, was there any increase or decrease, concerns regarding shortages for the rest of the year?

[Thomas E. Richards:]

Well, yeah. Look, we're always concerned whether there are shortages. I'm hopeful we can continue to take advantage of our scale and buying behavior to mitigate those. But I don't know that I would guarantee that to anybody.

[Keith Housum:]

Okay. Thank you.

[Thomas E. Richards:]

Okay. Thank you.

[Operator:]

And our next question is from Katy Huberty with Morgan Stanley. Your line is now open.

[Thomas E. Richards:]

Good morning, Katy.

[Kathryn Lynn Huberty:]

Hello. Thank you. Good morning. Have you changed your outlook for back half market growth after the strong second quarter? And when you think about the 350 basis point to 400 basis points outperformance, is that mostly flowing through your performance in 2Q or do you think you'll outperform by that much in the back half? Thanks.

[Thomas E. Richards:]

So I'll let Ann.

[Ann E. Ziegler:]

Yeah, so Katy, earlier in the year, we thought market growth was going to be a bit above 2% (58

[Kathryn Lynn Huberty:]

Thank you.

[Operator:]

And I'm showing no further questions. I would now like to turn the call back over to Tom Richards for any further remarks.

[Thomas E. Richards:]

Okay. Thanks, everybody, as always for your time and your attentiveness and your questions. You've heard me say this before. I find your questions very helpful in making sure we're thinking about the right things. So thank you. And I just want to squelch a rumor. It's not true that you have to be named Chris to advance here at CDW. So I want to make sure my team hears that. Okay. Thanks, everybody. Have a great summer. See you offline.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect. Everyone, have a good day.