CDW Corporation

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Thomas Gasparini

CDW Corporation (Formerly: Nasdaq: CDWC), headquartered in Vernon Hills, Illinois, is a private corporation that markets, resells, and distributes technology products and services to government, corporate, and educational customers in the United States and Canada.[1] On October 12th, 2007, a joint entity led by Madison Dearborn Partners, LLC and Providence Equity Partners Inc. acquired CDW Corporation. CDW is now a private company and shares of its stock are no longer traded on the Nasdaq exchange. 2

The Company is divided into three operating segments: CDW, which sells to SMBs (Small-Medium Businesses); CDW-G, which sells exclusively to the governments of the United States and Canada, educational institutions, and healthcare institutions; and Berbee, a segment resulting from the acquisition of Berbee Information Networks Corporation in October 2006.3 In Q207, the last public quarterly report before privitization, total Company revenue was $2.03 billion, a 24.4% increase YoY spurred in part by the Berbee acquisition and returns from heavy investment in sales force personnel. 60.9% of revenue came from the CDW corporate sector, 31.5% of revenue came from the CDW-G sector, and the remaining 7.6% of revenue came from Berbee. 4

Business Overview

The Company's main source of revenue in FY06 came from sales of computer hardware (defined as desktop/notebook computers, servers, and accessories), amounting to 26.2% of net revenue. Software sales accounted for 17.2%, data storage devices for 13.5%, printers for 11.2%, NetComm products for 11.5%, Video for 9.2%, and the rest for under 5%. In FY06, revenue sales in all product categories grew more than 5% YoY except for printers which declined .8% YoY. 5

Since CDW is a 'middle-man' distributor, all products purchased by the Company are from third parties. In FY06, 51% of products were purchased directly from the manufacturer, with Cisco, Hewlett-Packard, IBM, Lenovo, and Microsoft products comprising the substantial majority of purchases. The other 49% of products were purchased from other distributors, such as Tech Data and Ingram Micro.

Business Model

CDW's business model is one driven by sales through personalized account managers. Generally, margins are not increased and revenue growth is almost entirely a factor of new sales force additions. Historically, CDW has relied on its industry-relative financial strength, vendor relationships, speed of delivery, breadth of products, customizability, and high levels of customer service to gain market share on local or small value added resellers (VARs); however, several main competitors, including Dell, have begun intense direct-selling initiatives that compete directly with CDW.

Geographical Distribution

CDW currently operates in the United States and Canada only. It is projected that the IT market for hardware and software globally is ~$631 billion, of which CDW only exposes itself to 37% (US and Canada).

Major Clients

• Hewlett-Packard: accounts for ~28% of CDW revenues
• Lenovo: CDW is Lenovo's largest customer globally
• Acer: 3% US marketshare of notebooks; no direct selling initiatives, so most growth will go through distributors such as CDW
• Dell: Also one of CDW's top competitors as a result of recent direct sales initiatives

Divisions

• CDW
  • The corporate sector of CDW sells information technology products and services to small and medium businesses (SMB)
• CDW-G
  • The CDW-G sector of the Company sells the same products as the corporate sector, but focuses on government, and the educational sector.
• Berbee
  • Acquired by CDW in 2006 for ~$185 million, Berbee provides IT products and services to businesses and is the global market leader in delivering software for the Cisco telephony environment. 6

Market Share

CDW net income from sales comes ~95% from the United States, with the other ~5% coming from Canada. Although there has been discussion regarding international expansion, refining existing domestic operations poses less risk, mostly due to existing competition in international markets. Of the >$100 billion domestic IT product and service distribution market, CDW has approximately 5.5% North American market share. Due to its lack of international exposure, CDW has 0% market share outside of the United States and Canada. [7]

Forces and Risk Factors

Demand for Technology Products and Services

By far the most influential force in determining CDW's success is the demand for the technology . A drop in consumer demand, such as the market-wide drop since the sub-prime loan crisis in late 2007, or an increase in consumer demand, like that seen between 2003-2006, would directly impact net sales revenue. 8

Availability of Products from Vendors

Because CDW's business model revolves around highly integrated relationships with vendors and reliable availability of products, any termination of right-to-sell agreements with the vendor or the imposition of allocation limits by manufacturers would pose a risk to CDW's operating income. 8

Competition

As a key player in the IT product market, CDW faces growing competition from several different angles:

• National direct marketers (Eg: Insight Enterprises, PC Connection, PC Mall, Zones, etc.)
• Value-added Resellers (Eg: Tech Data, Ingram Micro, etc.)
• Manufacturers that sell directly to customers (Eg: Dell, Hewlett-Packard, Apple, etc.)
• Government resellers (Eg: GTSI, etc.)
• Software resellers (Eg: ASAP, Softchoice, etc.)
• Consumer electronic/office supply superstores (Eg: Best Buy, Circuit City, Office Depot, Office Max, Staples, etc.)
• Web resellers (Eg: Amazon.com, Buy.com, Newegg.com, etc.)
• Mass merchandisers (Eg: Wal-Mart, Costco, etc.)
• Managed service providers (Eg: IBM, Sungard, Vericenter, Verizon, AT&T, EDS, etc.) 8

Transportation

CDW, as a distributor, is dependent on delivery services such as DHL, Eagle, FedEx, UPS, etc., and as such, price changes by these services would adversely affect profit margins, especially if these higher prices could not be passed on to the consumer. 8

Inventory

Although CDW maintains relatively low inventory compared to competitors such as Tech Data and Ingram Micro, the threat of inventory exposure remains. Especially regarding an industry in which evolving technology constantly renders products obsolete, large inventories are quite risky. 8

History

Today's CDW Corporation was founded in 1984 by Michael Krasny in his basement as MPK Computing. In 1995, the Company was reincorporated in Illinois, and the name changed to Computer Discount Warehouse. Now known simply as CDW, the Company makes over $8 billion in revenue and is in the Fortune 500. 9

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References

1. CDW 2006 10-K, Item 1: Business, Page 3

2. http://www.cdwg.com/content/about/investor-relations.asp, CDW Investor Relations, About CDW

3. CDW 2006 10-K, Item 1: Business, Page 4

4. http://seekingalpha.com/article/42118-cdw-q2-2007-earnings-call-transcript CDW Q2 2007 Earnings Call Transcript

5. CDW 2006 10-K, Item 6: Selected Financial Data, Page 17

6. http://www.berbee.com/public/berbeesoftware/index.aspx

7. Hand, William, Andrew J. Neff, and Ted Chung. CDW Corporation - Peer Perform. Equity Research Department, Bear Stearns. 4

8. http://www.cdw.com/content/about/sec-filings/form-10k.asp CDW 2006 10-K, Item 1A: Risk Factors, Page 12]

9. http://www.cdw.com/webcontent/inside/history/historypg.asp, CDW History