Thomas E. Richards - CDW Corp. Sari L. Macrie - CDW Corp. Christine A. Leahy - CDW Corp. Collin B. Kebo - CDW Corp..

Amitesh Bajad - RBC Capital Markets LLC Matthew John Sheerin - Stifel, Nicolaus and Company Shannon S. Cross - Cross Research LLC Adam Tindle - Raymond James & Associates, Inc. Kathryn Lynn Huberty - Morgan Stanley & Co. LLC Keith Housum - Northcoast Research Partners LLC.

Good day, ladies and gentlemen, and welcome to the CDW Third Quarter Earnings Call. At this time, all participants are in a listen only mode. Later, there will be question-and-answer session and instructions will follow at that time. I would now like to turn the conference over to Tom Richards, Chairman and CEO. Sir, you may begin..

Thank you, Shannon. Good morning, everyone. Joining me on the call today are Collin Kebo, our Chief Financial Officer; Chris Leahy, our Chief Revenue Officer and soon to be Chief Executive Officer; and Sari Macrie, our Vice President, Investor Relations. I'll begin today's call with a brief overview of our results and the key drivers.

Chris will run you through our sales performance and then Collin will then take you through a more detailed review the financials. Then we'll go to your questions. But before we begin, Sari will present the company's Safe Harbor disclosure statement..

Thank you, Tom and good morning, everyone. Our third quarter earnings release was distributed this morning and is available in 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 earnings per share. Our non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules.

You will find reconciliation charts in the slides for today's webcast as well as in our press release and the Form 8-K we furnished to the SEC. Please note that all references to growth rates or dollar amount increases in our remarks today are versus the comparable period in 2017 unless otherwise indicated.

In addition, all references to growth rates for software, hardware and services today represent U.S. net sales only and do not include the results from CDW UK or Canada. Also note that all 2018 and 2017 net sales amounts are reported under accounting standard ASC 606.

The number of selling days were the same for both the third quarter and year-to-date in 2018 and 2017. All sales growth rate references during the call we will use average daily sales rate 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..

Corporate which serves customers with coworkers from roughly 250 and up; small business which asserts customers with roughly 20 to 250 coworkers, healthcare government and education. Inside each channel we have teams focused on specific customer end markets. For example in government we have federal and state and local teams. Each one of our U.S.

channels generated more than $1 billion in 2017. We also have our Canadian and UK operations which together delivered more than $1 billion in 2017 also. The beauty of our unique customer end markets is that they often act in a countercyclical way given the different macroeconomic and external factors that impact each. This quarter each of our five U.S.

sales channels as well as our UK and Canadian local markets results increased high-single digits or better. Within a couple of these channels customer end market performance was mix but overall growth was very strong, a testament to our balance. Chris is going to take you through how each of the customer end markets performed.

Chris?.

Thank you, Tom. Good morning, everyone. Our corporate team delivered a 10% increase in the quarter. Strong economic growth and full employment kept client devices front and center for Corporate customers. So while lapping last year's double-digit growth in client devices, this quarter client devices increased more than 20%.

This contributed to excellent high-teens transactional growth. Solutions increases in the mid-teens in two of our end markets were offset by softness in other end markets as they faced tough compares and overall Corporate solution sales were flat. Small Business delivered an 11% increase.

Customers in this space were very optimistic in the quarter about the economy and their business prospect and that certainly came through in their buying. In addition to customer enthusiasm, we also benefited from ongoing success aligning solutions resources and enhancing our focus in go-to-market approach.

So while we saw high-single digit growth in transactions, we were very pleased to see solutions grow nearly twice as fast, driven by meaningful increases in security, storage and servers. Public performance was strong across all three of our large customer channels. In total, up 11%. Transactions posted solid results with mid-single digit growth.

Solutions delivered excellent results, increasing high teens more than twice the rate of transactions. Our Government channel increased 8%. The state and local team delivered mid-teens growth driven by ongoing success executing against new and existing contracts as well as continuing to meet public safety needs.

Federal delivered a low-single digit increase. These are excellent results given the tough comparisons the team has faced throughout the year as a result of their success in 2017 meeting DoD demand for Win 10 devices and those comparisons are even larger in the fourth quarter.

The federal team drove excellent solutions performance this quarter delivering a mid-teens increase. In particular, we saw continued success from programs in place to drive integrated solutions like CANES, the Navy's floating cloud program and you solutions aligned with DoD goals to enhance cybersecurity and enhance combat readiness.

Education increased 15%. K-12 had an excellent quarter, up nearly 20%. A portion of this growth reflected catch up from the second quarter. Recall K-12 performance was muted in the second quarter. This was in part due to delays in Chromebook shipments, which we expected to flush in both the third and fourth quarters.

Instead they all shipped in the third quarter resulting in nearly 30% growth in Chromebooks. A second driver of K-12 growth was networking, which increased high-single digits. You will recall that challenges with newly implemented systems delayed the issuance of E-rate funding letters in 2017.

This year funding was in line with typical seasonality coming through during the summer implementation season. The team also had continued success delivering innovative learning environment. Higher Education was flat, as sales cycles extended with customers evaluating multiple options including cloud-based solutions.

Healthcare increased 8% as customers continued to move past reimbursement uncertainty and executed plan. Solutions posted a high-teens increase driven by merger-related infrastructure consolidation and ongoing mobility needs. Our international teams continued to deliver excellent growth with combined sales up nearly 20% in U.S. dollars.

In local currency, UK was up double-digits and Canada was up high-single digits. These results demonstrate the team's continued excellent focus and execution. They also demonstrate the success of recent strategic investments made in both markets.

In Canada, investments made in adding technical coworkers helped drive solutions growth that was twice as fast as transactions. In the UK, investments made in building out a team focused on meeting UK central government needs delivered excellent growth with sales to the UK government more than doubling. In addition to strong local growth, U.S.

to UK referrals had another excellent quarter. Brexit does not appear to be impacting demand yet. While the outcome is uncertain, we are in the process of implementing contingency plans in the event that an agreement or an extension to negotiations is not in place by the mandated March 29, 2019 date.

All in all, the teams had an excellent quarter delivering profitable growth.

Tom?.

Clearly, this quarter's results demonstrate the power of the first driver of our performance; our balanced portfolio of customer end markets. It also demonstrates the power of the second driver of performance, our broad portfolio of more than 100,000 products and solutions from more than 1,000 leading and emerging partners.

This quarter, we had excellent balance across transactions and solutions with both increasing in line with total company growth. We also had balanced performance across hardware, software and services, all posting double-digit increases. Hardware growth of 10% was fueled by both transactions and solutions.

In transactions, we delivered another double-digit quarter of growth in client devices as well as high-single digit growth in video. This was our ninth consecutive quarter of double-digit growth in client devices, the longest refresh streak in recent history. On the hardware solutions side, NetComm increased mid-single digits.

While much of the growth was driven by E-rate, we also saw high-single digit or better growth in federal, state and local, Small Business and Healthcare. Data center results were excellent with double-digit growth in servers, driven by execution against programs, focused on modernization and enterprise storage, driven by new architectures.

New architectures are also driving software performance as it becomes a larger component of IT solutions. You clearly see that in our software performance this quarter with network management, virtualization and security coming in as our top three software growth categories. In total, software increased 11%.

Services increased 12%, led by field implementations, which was driven by several large projects as well as warranties attached to our client devices. The third driver of our performance this quarter is our ongoing execution of our three-part strategy. Our first strategy is to acquire new customers and capture share.

This is all about driving productivity and making it easier for our sellers to help customers. During the quarter we saw excellent results from a customer acquisition program we piloted in Corporate. Using data analytics and propensity modeling, we identified 1,400 targets in a specific geography with high opportunity to spend.

We then executed a focused marketing campaign anchored with targeted e-mails and engagement triggers, along with local media coverage. More than a quarter of the prospects targeted made at least one purchase. Together they spent more than $6 million in the third quarter.

Given its success, we are scaling the program to all of our Corporate end markets in 2018. We also executed campaigns to help our sellers drive increased share of wallet with existing customers. During the quarter, we had great results from a data center focused campaign.

Using our proprietary customer information coupled with data from a partner we identified more than 10,000 current customers that were ready for an upgrade and who were exposed to last day of service on their existing infrastructure.

We delivered the leads to our sellers and provided them with tools and support so that they could help their customers not only upgrade to the latest platforms but also refresh and modernize the underlying and supporting infrastructure. Our marketing campaign included digital media, targeted e-mails and a landing page on cdw.com.

We also provided sales enablement tools, including on-demand training and sales guides along with a playbook that outlined the campaign focus and objectives. More than $100 million of data center revenue was directly tied to the campaign in the quarter.

We can deliver results like this because of investments we have made in our second strategy which is to expand our capabilities to ensure we can meet our customer's evolving needs.

Many of these investments are technical resources who are experts in their field and deeply understand technologies and partner-specific functionality and product features.

The campaign I just referenced was supported by experts, we have across all of our areas in the data center traditional storage, server, power and cooling, new architectures like hyper-converged Infrastructure, software defined data center, cloud and Flash. These experts are clearly driving results.

Emerging architectures represented nearly 30% of total storage revenues this quarter. A meaningful part of those revenues came from Flash storage solutions where we saw double-digit growth in customer spend.

Flash was an integral part in a large data center refresh and modernization solution we implemented in the third quarter for a privately-owned food processing company, a long-standing customer with very small IT staff. Their infrastructure was aging and needed more performance and capacity.

Production workloads were already offsite in one of our data centers but the backup copies still resided on site and their virtualization environment was about to go off support.

We developed a full-scale upgrade and modernization plan including all Flash, which replaced their hybrid solution and added a second array, so they have operational recovery of their Tier 0 and Tier 1 systems.

We refreshed their backup with a secondary off-site copy and provided a new compute environment and we updated their virtualization environment. In the third quarter, work on this project totaled just over $1 million. This included $800,000 in hardware $175,000 in software and $75,000 in services.

That leads to our third strategy which is to enhance our services capabilities. Capabilities that enabled us to help a global athletic apparel company transform their customer experience. To do that they first needed to upgrade their old and unstable wireless in-store environment.

The customer was looking for a comprehensive end-to-end solution to ensure they had reliable availability and 24/7 monitoring. We provided a complete solution encompassing network and security wrapped with our own professional and managed services. The total contract value of this solution is roughly $10 million with $4 million in services.

The services are being delivered over a 36-month contract term with more than $300,000 of services provided in the quarter. One of the most important ways we enhance our ability to provide services and solutions is by adding customer-facing coworkers.

You saw the impact of our investment in our customer-facing coworkers and our solutions performance this quarter which increased nearly 10%. What isn't totally captured in the numbers are performance of solutions that are netted down like cloud, which once again delivered excellent double-digit increases in customer spend.

Our top three fastest-growing cloud workloads for the quarter included data analytics, productivity and security. We continue to thoughtfully invest in customer-facing coworkers and ended the quarter up roughly with 125 since the beginning of the year.

This is in line with our plans for the full year which is to come in between 125 and 150 plus or minus 10%. As we always do, we will monitor the market and adjust as appropriate. And that leads me to our expectations for growth for the year. Given year-to-date market performance, we have increased our view of the 2018 U.S.

IT market growth and now look for market growth a tick above 4.25%, which is 50 basis points above our previous view. To-date, we aren't seeing any significant impacts from tariffs, shortages or Brexit, but are mindful that we have two months left in the quarter.

Balancing those factors with our strong performance to-date, we've also increased our expectations for exceeding market growth and now look for outperformance to be a tick above 425 basis points, also 50 basis points above our prior view.

I hope you can tell from my comments that this quarter's performance reinforced our confidence that we have a winning strategy in place, a strategy that serves us well when confronted with macro, partner or channel specific challenges, a strategy that positions us for strong growth in the future.

And most importantly, a strategy that leverages our competitive advantages and flexible business model to deliver both excellent profitability and strong cash flows.

This confidence has led our board to approve a 40% increase in our annual cash dividend and we are on track to achieve our capital allocation priority of delivering a dividend payout of 30% of free cash flow by year-end 2019. I know many of you may be wondering what we expect for 2019. We are in the middle of our planning process.

Chris and Collin will provide the 2019 outlook on our year-end conference call. With that let me turn it over to Collin, who will share more detail on our financial performance.

Collin?.

Thanks, Tom. Good morning, everyone. We delivered another quarter of strong results consistent with our long-term financial strategy to drive strong cash flow, deliver sustained profitable growth and return cash to shareholders. Before I get started, I'd like to remind you that all financial information I will review reflects the adoption of ASC 606.

So it is an apples-to-apples comparison for 2017 and 2018. Turning to our P&L on slide eight. Consolidated net sales were $4.4 billion or 11.2% higher than last year on a reported and average daily sales basis. In constant currency, consolidated net sales grew 11.4%.

During the quarter we saw currency impact reverse moving from a tailwind of 60 basis points in Q2 to a headwind of 20 basis points. The impact was primarily driven by unfavorable translation of the Canadian to U.S. dollar. Sequential average daily sales growth was 6%, roughly three times our historical Q2 to Q3 average.

Gross profit for the quarter increased 11.1% to $714 million. Gross margin in the third quarter was 16.3%, flat over last year. Gross margin was positively impacted by product margin improvement. This was offset by year-over-year net sales growth outpacing the year-over-year growth in partner funding. Turning to SG&A on slide nine.

Our adjusted SG&A including advertising increased 12.5% compared to last year. Adjusted SG&A grew faster than sales as a result of performance-based compensation consisted of higher attainment against goals and strategic investments funded by tax reform. Coworker count was up roughly 215 since the third quarter of 2017 to 8,937.

Adjusted EBITDA for the quarter was $355 million, an increase of 9.3% compared to the prior year quarter. This resulted in an adjusted EBITDA margin of 8.1%. Looking at the rest of the P&L on slide 10. Interest expense in the quarter was $37 million compared to $38 million in the prior year quarter.

The decrease was primarily due to lower inter-quarter borrowings on the revolver. As you can see on slide nine (sic) [slide 11] (21:46), our effective tax rate for the quarter was 23% compared to an effective tax rate of 38% last year.

The reduction in effective tax rate primarily reflects the year-over-year impact of lower federal tax rate and higher excess tax benefits from equity-based compensation. Moving to slide 12. On a GAAP basis, we earned $184 million of net income, an increase of $54 million or 42% compared to the third quarter of 2017.

Applying our non-GAAP effective tax rate to our non-GAAP pre-tax income resulted in non-GAAP net income of $218 million in the quarter, up 29% over the prior year quarter. To get to our non-GAAP effective tax rate, we adjust taxes consistent with non-GAAP add-backs including excess tax benefits associated with equity-based compensation.

For the quarter, our non-GAAP effective tax rate was 27%, down 10 percentage points compared to last year's 37% rate, primarily due to the lower federal tax rate. Slide 13 shows how you can derive our non-GAAP net income.

As you can see on slide 14 with third quarter weighted average diluted shares outstanding of 154 million, we delivered $1.20 of net income per share and $1.42 of non-GAAP net income per share, up 31% over the prior year quarter. Currency headwinds were a 20 basis point drag on third quarter EPS growth.

Turning to year-to-date results on slides 15 through 18. Revenue was $12.2 billion, an increase of 9.8% on a reported and average daily sales basis. On a constant-currency basis, consolidated net sales in the first nine months of 2018 were 9.3% higher than the prior year. Year-to-date gross profit was $2 billion, up 9.6%.

Gross profit margin was 16.5% which was down three basis points for the first nine months of 2017. Adjusted EBITDA was $979 million or 10% above last year. Year-to-date net income was $484 million while non-GAAP net income was $594 million, 31% above the first nine months of 2017. Non-GAAP net income per share was $3.85, up 35% from last year.

Turning to our balance sheet on slide 19. As of September 30, we had $255 million of cash and cash equivalents and net debt of $3 billion. Our cash plus revolver availability was $1.4 billion. Net debt to trailing 12-month adjusted EBITDA was 2.3 times, slightly below the low end of our target range of 2.5 to 3.0 times.

Our current weighted average effective interest rate on outstanding debt is 4.2%, flat compared to last year. We are well positioned to mitigate the rising interest rate environment given our interest rate caps in place on our term loan, which includes 1.5% caps to hedge 2018 and 2.375% caps to hedge 2019 and 2020.

With the caps in place, roughly 96% of our outstanding debt is either fixed rate or hedged. As you can see on slide 20, we maintained strong rolling three month working capital metrics during the quarter.

For the quarter, our three-month average cash conversion cycle was 18 days, down approximately one day from last year's third quarter and at the low end of our annual target range of high-teens to low 20s.

Year-over-year, our cash conversion improved as days in inventory decreased as a result of leveraging our supplier relationships and days payable increased due to mixing into vendors with extended terms. Year-to-date, free cash flow was $459 million compared to $339 million in the first nine months of 2017.

The year-over-year change in free cash flow primarily reflects higher cash profits and favorable timing. On slide 21, you see our four capital allocation priorities in order of precedence. First, increase dividends annually.

To guide these increases, in November 2014, we set a target to achieve a dividend payout of 30% of free cash flow over five years. For this quarter, we will pay a dividend of $0.295 per share on December 10 to shareholders of record as of November 26.

This represents a 40% increase and is underpinned by our financial strategy of generating strong free cash flow and delivering shareholder value. This year's 40% increase was larger than last year because our 30% target is now applied against a higher free cash flow rule of thumb, which we increased to reflect tax performance (26:10).

Second, ensure we have the right capital structure in place. We have set a target to generally maintain net debt to adjusted EBITDA leverage in the range of 2.5 to 3.0 times. We are comfortable being temporarily above or below this range, but continue to believe this target is appropriate to manage our business over the long term.

Third, supplement organic growth with strategic acquisitions. And fourth, return excess cash after dividends and M&A to shareholders via share repurchases. During the quarter, we repurchased roughly 648,000 shares for $56 million at an average cost of $86.61 per share.

For the full year, we continue to expect to return more than 3.75% of sales to shareholders in the form of dividends and share repurchases. You may recall, 3.75% to 4.25% of sales is our post-tax reform free cash flow rule of thumb, and we expect to be near the low end of the range this year because of 2017's over-delivery.

Year-to-date, through October 30, we have repurchased roughly 4.1 million shares for $326 million, at an average cost of $78.89. And distributed – or committed to distribute, including today's dividend announcement, approximately $140 million in dividends. Our capital allocation priority support our 2018 targets, which you see on slide 22.

As Tom mentioned, we now expect full-year U.S. IT market growth and CDW's premium to be a tick above 4.25% on a constant-currency basis. We continue to look for currency to contribute roughly 30 basis points to annual sales growth, assuming year-to-go exchange rates of $1.30 to the British pound and $0.75 to the Canadian dollar.

Given year-to-date exchange rates, this implies currency headwinds of roughly 40 basis points in the fourth quarter of 2018.

In light of our performance in the first nine months and year-to-go expectations, we expect to exceed our previous 2018 non-GAAP EPS growth target in constant currency, and now look for non-GAAP EPS growth to be just over 30%, which we define as 31% to 32%. We expect currency to have a similar impact on EPS growth as sales growth.

While there has not been a change to our tax reform funded investment plans, we now expect our adjusted EBITDA margin to come in roughly 5 basis points or so below the high end of our high 7%s to 8% annual target range. This reflects our year-to-date net sales and adjusted EBITDA performance.

Let me provide you with a few additional comments for those modeling the rest of our 2018 financials. I'm on slide 23. For the full year, we look for top line over performance of a tick above 425 basis points above the market.

We continue to expect a currency tailwind of 30 basis points, which implies a meaningful swing year-over-year from a tailwind to a headwind in the fourth quarter. We expect quarterly depreciation and amortization to continue at roughly $67 million per quarter, $47 million of which is for purchased intangibles.

Annual book interest expense is now expected to be just above $150 million. We also continue to look for annual equity compensation to be roughly $5 million lower than 2017. We continue to expect to be near the low end of our full year non-GAAP effective tax rate range of 26% to 27%.

Excess tax benefits will impact our GAAP tax rate in Q4, but are excluded from the non-GAAP effective tax rate. As I mentioned, our annual non-GAAP EPS growth target is now just above 30% in constant currency in the 31% to 32% range, and is now expected to grow between 350 basis points and 400 basis points faster than non-GAAP net income.

Finally, a few notes for those of you modeling cash flows. I'm on slide 24. First, we expect our capital expenditures to be roughly 0.5% of net sales on an annual basis. We also expect to deliver a cash conversion cycle within our target range of high-teens to low 20s.

For the full year, we now expect a cash tax rate in the 25% to 26% range to be applied to pre-tax book income before acquisition-related intangibles amortization which is approximately $47 million per quarter.

In addition, with the reduction in our tax rate, we expect to pay approximately $13 million in 2018 for tax related to the cancellation of debt income we incurred in 2009. 2018 is the final year of payments.

As previously discussed, we continue to expect annual free cash flow to come in at the low end of our tax reform enhanced rule of thumb run rate between 3.75% to 4.25% of net sales.

This reflects 2017's over delivery of 50 basis points above our pre-tax reform rule of thumb due to timing and assumes we manage inventory in the ordinary course during the fourth quarter of 2018. That concludes the financial summary. With that let's go ahead and open it up for questions.

Can we please ask each of you to limit your questions to one with a brief follow-up. Operator, please provide the instructions for asking a question. Thank you..

Thank you. Our first question comes from Amit Daryanani with RBC. Your line is open..

Good morning, Amit..

Amit your line is open. Please check your mute button..

Hi. This is Amitesh for Amit Daryanani. Thanks for taking our question..

Good morning..

So based on the 2018 target of like roughly 9%, December quarter, as per our math, is probably like sequential decline in 8% to 9% which is above the seasonality, which is like 4% to 5%.

So what is the challenge here? Is it the comps or are there any other headwinds there?.

Well, I think if you think about – there's a couple of things. One is, I think I'll start by saying, we feel good about the fourth quarter. I think part of the challenge for us is how good the third quarter was. And if you talk about what happened we had a number of events that kind of simultaneously improved the performance in the third quarter.

So first was, think about that K-12 Chromebooks that didn't get out in the second quarter. We expected them to get out in the third and fourth quarter and they all got out in the third quarter.

Then there was, what I'll call, the return to norm of the E-rate process, which last year had a tendency to drag out because it took a while for the funding letters to get done. This year it was efficient and on time, and all of that got done in the third quarter.

And then I think to your point, the last thing that we think about is just the federal sales organization and you heard Chris alluded to the comps they've been fighting. I mean, those three things kind of explain why they might appear to be bigger than normal deceleration but I'll take it if it comes on the heels of such a strong third quarter..

Perfect. I guess, if you could just have a follow-up on that Tom or Collin. If I look at your overall leverage today, it's below this 2.5 to 3.0 times target that you guys have talked about.

And given the strong free cash flow generation you guys would expect for the next several quarters, do you think that leverage is going to keep going below the target ranges? Or do we just have to think that buybacks perhaps could be ahead of what the total free cash flow generation is? Just walk through the free cash flow generation, how you use it, given the fact you're below your leverage targets right now.

And then best of luck in your future Tom..

I'll say thank you and then I'll let Collin answer the question..

Thank you, Tom. Yeah. as I said in my prepared comments, we continue to believe 2.5 to 3.0 times is the right leverage ratio. When we thought about the plan for 2018, we built it assuming the first quarter and the fourth quarter would be our strong free cash flow quarters.

And when you look at history, third quarter, fourth quarter timing can be a little volatile and what we saw was more of that free cash flow show up in the third quarter than we had originally planned. So I think of that as just timing versus the fourth quarter.

I would expect us to – as we cycle through the fourth quarter and follow our capital allocation plans and free cash flow timing normalizes that we would be closer to that lower end of the range over time..

Perfect. Thanks..

Okay..

Thank you. Our next question comes from Matt Sheerin with Stifel. Your line is open..

Good morning Matt..

Thank you. Good morning, Tom and everyone. Just a question regarding your comments on the PC refresh cycle which, as you pointed out, has been strong for a few quarters now.

And there's also talk about that (35:23) because with Microsoft dropping support for Windows 7 in early 2020 and this conversion to Windows 10, what are your thoughts on that? Are you having conversations with customers about that? Do you think there's more legs to this cycle here?.

Yeah, Matt. There's a lot I think that we need to think about when it comes to the continuation of the PC refresh. I mean there are all kinds of discussions going on with customers. And as you can imagine, they run the gamut of gee, I'd like to stay on Windows 7.

How do I do that? Can I accomplish that? Is there a possibility of buying ahead? Is there a possibility of buying Win 10 devices and then doing the downgrade? Then you have the notion of just, what's going on with the chips and should I be acquiring more inventory? I'm speaking as a customer. So I think it gets hard. We continue to feel very good.

If you think about what's going on. You have full employment in the economy. That type of environment has driven what we believe is the continuation of a really strong refresh cycle in our Corporate segment, as customers need to have the technology to support the full employment environment. So I think, we would expect the refresh to continue.

Maybe not at these incredible growth rates that we've experienced, but I would also say Matt, you got to step back and say, there's a lot going on over the next couple of quarters that could kind of move that one way or the other..

Fair enough. And then on tariffs. It doesn't sound like you're seeing much impact there. There does seem to be concern, particularly with networking products which could be subject to 25% tariffs in January.

Again, there are you seeing any desire or conversations with customers about pulling in some inventory or product in advance of that?.

Well, there are discussions as you point out. Everybody is talking about it. I think in some cases, people have already increased their purchasing. I believe we saw some of that in the third quarter. I can't prove that.

But I don't believe we're having what I would call a mass trend of people – I wish we were kind of – mass trend of people saying, can we acquire NetComm equipment in the fourth quarter? I don't believe we've seen that in mass yet..

Okay. All right, thanks a lot..

All right. Thanks, Matt..

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

Thank you very much.

My first question is just can we dig a bit more into your expectations of increased market growth and then obviously, CDW outperforming that in terms of what specific areas you're looking at whether its geographic or within some of the products in terms of what's really sort of outperforming and what you think is going to do well in the next few quarters? Thank you..

Yes. Good morning. Shannon, it's Tom. I'd say a couple of things. One, it's almost, all of the above would be probably the way to start. If you think about the quarter we just experienced and the balance of execution, not only across the segments but also across the products and solutions suite.

In some ways, this is the quarter you dream about because you've got all of your segments having meaningful growth for the most part and you've got balance across all the different products and solutions; hardware, software and services. Now predicting that into the future is always a little bit of a challenge.

But when we looked back over what we had accomplished to this point and assessed CDW's overall performance compared to where the market had grown, we thought it was appropriate to take up not only the market growth from what we had shared with you before, but also our outperformance.

And like I said, while we're only one month into the fourth quarter and there's a number of wildcards that are sitting out there that could impact the quarter we've been thrilled with the momentum in the business..

It reminds me a lot of Microsoft's quarter in that there's very few things to pick at. So I just wonder how long it continues.

I guess, my second question is just then looking again, sort of, going back to your leverage ratio and how you're below it, thoughts on acquisitions – expansion from that standpoint in terms of use of cash?.

Yeah. I think we've – I don't think, as you heard Collin talk about why the leverage ratio was a little below our range. We don't think of it as that's a reason for us to go out and be aggressively looking for acquisitions.

We think about acquisitions in a strategic perspective and I think I've mentioned on a number of calls, we continue to look for those opportunities that are out in the marketplace that seem to meet our strategy and have the right kind of financial picture.

So I wouldn't connect the dot there that the cash flow that you saw would motivate that at this point in time.

Collin, you want to add anything?.

The only thing I would add on to that is we have said that if we were to do something on the M&A front we would use that as an opportunity to add some leverage and move more within the target range..

Great. Thank you. And Tom, good luck on the golf course and enjoy your era sleeping in. I'm sure that probably doesn't happen very much right now..

Those are two things that are high on the list Shannon. Thank you..

Thank you. Our next question comes from Adam Tindle with Raymond James. Your line is open..

Good morning, Adam..

Thanks. Good morning. I just wanted to start just kind of building off the strategic question, and if I could ask this to Chris. On one hand you've had success with obviously the UK expansion, and one could say you could copy and paste that model elsewhere.

On the other hand, it looks like you might have an opportunity to pursue more solutions-oriented business and further expand outside of hardware.

Can you just talk about the decision process and very best opportunity for inorganic expansion would be in your mind?.

I think, Adam I'd start with where we serve, which is across the entire portfolio and what the customers need in each end market.

So for example, if you take Canada, Canada was more highly transaction-oriented market and customers were talking with us more about their needs in the solutions space and we've made some significant investments in our resources out there, our technical resources, our go-to-market approach, et cetera.

And have expanded the mix in that market quite heavily over the past couple of years. In the U.S., I would say it's the same thing.

So, if you look across Corporate as an example and the solutions that we're selling within different end markets and the performance within those end markets, it can be while there are similarities in terms of what customers are looking for advice about, what we're actually selling can be different.

And so we tend to focus at the micro-level first with the customers and their needs and then build-out very specific plans around those..

Okay. That's helpful. And maybe if I could just ask one demand related question, I don't know if Tom wants to answer this one. But upstream in the supply chain, obviously, we're hearing the chip companies citing slowness, downstream trends are more mixed, but obviously very strong revenue growth from CDW here today.

I'm sure we'll get the question if this is the peak, especially with the sequential growth implied in Q4.

So I'm hoping that you can maybe break apart some of the moving parts to Q3 and would we be seeing seasonal trends in Q4 ex the Chromebook outperformance and other things like that? Or are you implying that Q4 is actually going to be below seasonal ex those things? Thanks..

Well, I think the other thing that I mentioned in there Adam was the comps that we have in federal, which were pretty meaningful in the third quarter and will continue to be so in the fourth quarter.

Because if you remember, last year we had the, what I'll call, the tail end of the Win 10 DoD flush, which was just amazing when you look back at the amount of product that moved through the system. So I think that sits on top of the growth that we talked to about what was going on in the third quarter.

And the other thing is in fairness to the guys in the UK, we continue to say that the percentage of increase on their comps is incredible. And look up to this point they've done a pretty meaningful job. But you have to kind of be realistic about looking at those two scenarios and their implication. The demand in the marketplace feels good.

And yes, I think you're right. You've got, well, what's the impact of the chip short is going to be. And one of the things that CDW has been able to do, it's part of our competitive advantage is because of our scale and our warehousing capability is to be very aggressive in acquiring inventory for our customers.

That doesn't necessarily mean you can eliminate the total effect of a chip shortage, but it does mean you can mitigate a fair size of it. So we feel pretty good about that going into the fourth quarter..

Okay. Thank you..

Thanks, Adam..

Thank you. Our first question comes from Katy Huberty with Morgan Stanley. Your line is open..

Good morning, Katy..

Good morning. Thanks for the questions. I'm intrigued by the analytics campaign that you trialed in the Corporate segment this quarter.

So just wondering if you can talk about whether that's something you think can extend to other segments over time and if you've been able to quantify what that could do for the business in terms of productivity or overall revenue upside over the long-term..

The answer to – I think the first answer is yes. We are excited about extending it to other parts of the business. And as you heard me saying in the formal part of it, we're going to extend it to all of Corporate next year.

I think it's a natural to think about Small Business as another place where you'd have that kind of benefit but we were obviously very pleased. I'm probably not going to tell you what I think the potential would be for CDW.

Although it's going to be fun to tell it and then have Chris have to deliver it, but I think I'll just pass on that and say we're very, very pleased that we think we've got a winning formula there..

Okay. Thanks.

And then as memory prices come down, particularly in NAND, are you seeing that flow through to storage prices and any impact on demand? Or are vendors and yourselves sort of keeping that margin and is that part of why the product margins came up in the quarter?.

No. Okay, let me start with the last one. I don't think that was the reason you saw increased product margins for us. I think more of that was the balance you saw in the business and our success of selling just solutions in mass which, as you know, tend to have higher margins and tends to bring up the product margin.

I wouldn't say there is kind of a uniform response as far as the memory pricing driving demand in storage.

I just think quite honestly, Katy, it's just the digitization of everything is driving storage demand and customers are in search of expanding capacity and we're just in the right place at the right time with the right number of solutions to take advantage of that..

Okay. Thanks for that. Tom, good luck in retirement..

Thanks, Katie..

Thank you. Our next question comes from Keith Housum with Northcoast Research. Your line is open..

Good morning, everybody. Thanks for the opportunity to ask question. You guys – obviously tariffs are top of mind for everybody here.

Can you guys help us understand like what part of the portfolio or the product portfolio that you guys sell both solutions as well as products are going to be subject to the 25% tariffs assuming they stay in existence here the first of the year.

And then the ability for you guys, I guess, to pass on increased costs, what's your thought process there as well?.

Well, so even in the first part of the tariff trilogy so to speak, we have been able to pass along those costs not literally but for the most part to customers because we operate in a cost plus environment. Again here, although you're always gated by competitive response but so far we've been able to do that.

I think in the back half, you're going to see products if in fact it goes in like desktops and I think NetComm are a couple that people who have talked about pretty frequently that that could be impacted if the next shoe drops so to speak on the tariff.

But again we'll approach it the same way as far as passing along costs to customers, again pending market conditions..

Would you say that the majority of your business though is going to be subject to the tariffs? Or is it less than half?.

I wouldn't say it's the majority that's for sure. And like I said, for those products that started to get touched in whenever it was, September or October, that's already kind of in the system so to speak. So I don't think you're going to see the majority of our business get impacted at this point based on what we know today..

Okay, great. Maybe just changing gears then slightly here.

In terms of your sales offices (49:56) across the U.S., can you just remind us if there is any major metropolitan areas you guys are not in yet or I guess underpenetrated in your eyes?.

No. I think we're pretty much everywhere we would like to be. That doesn't mean that we don't continue.

When you hear me talking about adding customer-facing coworkers that is an indication of our recognition that there's increased opportunity in the marketplace, increased demand that we think we can take advantage of and that's – those gets spread across the U.S. geographically.

They're actually more allocated by those vertical market segments that you hear us talk about..

Great. Thank you..

Thank you. And I'm showing no further questions at this time. I would like to turn the call over to Tom Richards for closing remarks..

Okay. Look before we – before I close, just a few comments, I think, of appreciation for those who are on the call. For the CDW customers that are on the call, thank you for the opportunity to serve you. For the CDW coworkers that I know listen to these calls, thank you for taking such great care of our customers.

For our shareholders, thank you for trusting us with your investment, and to the analysts who covered us, thank you for your coverage, your questions. They've helped us tell a pretty amazing story, and you have made us better.

And finally, for you parents on the call as tonight is Halloween, I'm inspired by your willingness to protect your children's health by eating their candy, each Halloween night. I hope you are also as inspired to be in the gym tomorrow morning. Thanks everybody..

Ladies and gentlemen, this concludes today's conference. Thanks for your participation and have a wonderful day..