Q1 2020 Earnings Call
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I'd now like to end the conference over to you speakers today, Britney Smith VP of Investor Relations and financial planning and analysis. Please go ahead.
Thank you good morning, everyone. Joining me remotely today to review, our fourth quarter financial results or Chris Leahy, Our Chief Executive Officer, and calling he though our chief financial Officer, our first quarter earnings release with distributed this morning and is available on our website investors got CDW dotcom along with supplemental.
Slide 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 is 1995, those statements are subject to risks and uncertainties that could cause actual results could differ materially.
Additional information concerning these risks and uncertainties is contained in the earnings release and form 8-K, we furnished to the FTC today and then it companies other filings with the FCC.
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 FCC rules, you'll find reconciliation charts in the slides for today's webcast.
And in our earnings release and form 8-K, we furnished to the FCC today.
Please note that all references to growth rates are dollar amount increases and I 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 result from CDW UK for Canada also.
There was one more selling day in the first quarter of 2020 as compared to 2019.
Replay of this webcast, we posted to our website later today.
I want to remind you that this conference call the property CDW and may not be recorded or rebroadcast without specific ran commissions on the company with that let me turn the call over to Chris.
Thank you Britney.
I first wanted to take a moment to share our respects from CDW to all who are suffering hardships or losses, we faced with cobot 19 health crisis and also do recognize the extraordinary sacrifices and contributions being made by so many we're devoting themselves deserving others.
I'll begin this morning with a high level overview first quarter results and drivers of performance I'll also discuss how we are addressing the corona virus pandemic and its impact on our co workers customers and operations and share some thoughts on the balance of 2020 colleagues will then take you through a more detailed look at our first quarter financial as well as our liquidity position and capital.
Allocation strategies.
We'll move quickly through our prepared remarks to ensure we have plenty of time for acumen I.
We had a very strong first quarter net sales were $4.4 billion, 9.2% above last year on an average daily sales basis adjusted for the impact of one more business day in the first quarter twentytwenty than 2019 and up 9.4% in constant currency.
Non-GAAP operating income was $304 million an increase of 5.8%. This includes a 29 million dollar increase in our credit loss reserve to reflect the macroeconomic environment due to cope with my team.
Non-GAAP net income per share was $1.38 cents up 11% on a reported basis and up 11.3% constant currency.
That's a quarter progressed in March we served a meaningful increase in customer demand.
CDW teams orchestrated solutions for clients devices accessories collaboration tools security and others from our broad portfolio to address our customers remote work in business continuity.
We experienced solid results across the U.S. business with all five U.S. channels growing high single digit and solid local performance from our international teams.
This growth came from both existing and new customers.
To address anticipated supply constraints, we leveraged our scale distribution centers extensive logistics capabilities strong vendor partner relationship and healthy balance sheet liquidity position fulfilling their customers and prospects urgent and critical eye TV.
We procure supply in key categories early and managed through longer industry lead times for our customers in the supply constrained environment.
Our net sales performance for the quarter was balanced with 9% growth for both U.S. hardware and software and 26% services group.
In March customer priorities quickly redirected to remote workforce enablement and were continuity driving strong transactional performance of almost 20%.
During this time customers de prioritized infrastructure and less urgent service projects, resulting in a low single digit year over year decline for solution.
Cloud customer spend than gross profit increased double digits, driven by strong growth in collaboration security and productivity workloads consistent with remote workforce enablement.
We generated strong double digit growth in product categories that enabled work from home and operations continuity plan and quit including client devices, both notebooks and desktops video collaboration tools configuration services and security.
Our team orchestrated a seamless combination of these products and services plus others from our broad portfolio to provide full solutions to our customers.
Clearly the team delivered strong performance I am proud of and grateful to work coworkers, who pure persevered for our customers.
Now looking more closely at our customer end markets performance, our corporate and small business teams, both delivered over 8% growth driven by double digit growth and transactional categories. As the team successfully developed work from home capabilities for our customers.
The government team increased sales almost 15% federal had another excellent quarter with sales up double digits, primarily driven by the census project.
The state and local team also delivered double digit growth driven by strong transactional and solutions performance, but unable to promote where capabilities and eat it crisis ready to readiness efforts.
Education increased 17% with strong double digit growth in both higher Ed in K 12.
Customers in both markets were focused on enabling remote learning capabilities.
Our health care team delivered 7% growth, primarily driven by transactional product categories to adapt to the new care delivery environment.
Other which represents or you can Canadian operations increased 3% on a reported basis UK was up low single digits in constant currency that was on top of four years of.
First quarter double digit growth.
So you take he has been instrumental in helping with the government's response to cobot 19, providing krisher technology to the new critical care field hospitals, as well as enabling remote where capabilities for customers.
Canada increased double digits also driven by remote work enablement and strong demand from healthcare and education customers.
Our first quarter operating and financial performance reflected the combined power of our balanced portfolio of customer end markets. Our full suite of solutions and services that can address even rapidly shifting customer priorities across the IP landscape and our ongoing success executing or three part strategy for growth.
I want to take a minute to review each of these for two reasons first because these are important drivers CDW is first quarter performance and seconds. They provide a framework to think about cws performance under various macroeconomic conditions.
As you know we have five U.S. sales channels, but each generated annual net sales of more than $1.5 billion in 2018.
Corporate small business government education and health care.
This scale enables us to further align sales teams into vertical customer end markets, including federal government state and local government K through 12 and higher education.
Dividing us insights into our customers objective and goals and positioning us as a trusted partner.
In addition, we have our UK and Canadian operations, which together delivered over 2 billion U.S. dollars of net sales in 2019.
The diversity of our customer end market service as well would macro or other external challenges impact various industries and businesses differently. This is especially relevant in the current environment.
Next the breadth of our offerings with over 100000 products services and solutions for more than 1000 vendor partners. We are well positioned to meet our customers total needs across the spectrum of IP and can pivot quickly to trends in customer demand.
And finally, our three part strategy for growth, which is first to acquire new customers and capture share second enhance our solutions capabilities and third expand or services capabilities.
[noise] each pillar is crucial to our ability to profitably assessed designed to deliver and manage the integrated technology solutions are customers want and need today and in the future.
Before I turn to our thoughts about the balance of the year I want to provide insights into our approach to managing cobot nike's impact on our business.
Two holistically manage our response in mid February we activated a cross functional response team led by Executive Committee members. The team leveraged our pre established crisis management protocols to ensure we responded as quickly as possible.
The team has three key principles safeguard the health and wellbeing of our coworkers served the mission driven needs of our customers and partners and support our communities.
One of the key actions, we took to maintain impacted the virus on our customers on our coworkers in our operations was to implement a global work from home order for office coworkers in mid March.
We have excellent IP infrastructure into courts are the transition to work from home with Swift and seamless.
We are monitoring developments closely developing plans accordingly, and we will be prepared for our returned to office at the appropriate time.
We are focused on or co worker safety and well being in the workplace to do that at our three distribution and configuration centers. We were operating under precautionary measures advised by public health authorities, including social distancing segmented shifts personal protective equipment enhance facility queries and temperature screening for anyone entering the facilities.
Currently all distribution and configuration centers are fully operational at the end of March to limit the virus spread after a few coworkers tested positive for Coca 19, we decided to close or Vernon Hills, Illinois distribution center for several days as you require shift the configuration centrica workers to felt isolate.
These actions did not have a material impact is the teams leveraged flexibility in our distribution and configuration capabilities, where possible our distribution center in Las Vegas, and filled customer orders and orders would drop shipped directly to customers and we're not shipping times modestly increased.
I regard, our exceptional coworkers and our unique culture to be a meaningful competitive advantage. Our team has responded to the current environment in exemplary ways.
One example is our internal gig marketplace created to match areas of our business, where demand has spiked with internal talent on temporary assignment.
Another example is the reallocating of our sales and technical resources to where they are great isn't will be going which we successfully did during the great recession, we will again be nimble by identifying and implementing ways to optimally utilized our highly skilled co workers.
In addition, inconsistent with our shrunk culture of giving CDW has and continues to contribute meaningfully to support the cobot 19 response efforts locally in the U.S. UK in Canada.
Now, let me turn to our Twentytwenty financial performance.
As a result of cobot 19, and the unknown duration in depth of its impact we withdrew or 2020 targets on April 16, as most all companies are doing.
The near term impacted cobot 19 on some customers, we serve could be meaningful with some end market impacted more significantly than others.
Consistent with prior experience, where commercial customers have reacted relatively quickly to economic conditions, we anticipate that demand will be in store for some of our small business and corporate customers.
We expect demand from our public customers to be relatively firmer led by resiliency in our federal channel due to the census project and the key priorities, we support including infrastructure upgrades and security enhancements to remain top priorities.
Demand will likely be mix for our other public channels with budget uncertainty for health care state and local and education customers. We continue to track stimulus supporting where possible help our customers navigate the various programs.
Regarding product categories, we expect customers to prioritize mission critical it spending and for some to push out longer term solutions projects, including infrastructure projects and service engaging.
In recent weeks, our focus has shifted to helping our customers managed their work from home environment at scale solutions that solution for that includes security network augmentation to accommodate new demand remote performance management virtual desktops and effective application management.
Longer term, we expect our customers and prospective customers to design and implement technology, driven <unk> strategies to not just survive, but to cry, we expect to see an acceleration in digital transformation cloud migration and only made issue strategies as companies invest to successfully compete in the future.
We believe that technology will be as or more essential to all sectors of our economy and will play an increasingly important role in the years ahead.
We intend to continue to help our customers navigate the complex IP landscape.
During or 35 year history, CDW had successful track record of evolving with customer needs and the ever evolving industry, we're committed to continuing to invest in our three part strategy, including the capabilities that will position us to best serve our customers optimize our productivity and enhance our competitive position.
As we do so we will keep a watchful eye on the impacted cobot 19, the macro environment and other unpredictable variables such as potential supply disruptions trade policies in the upcoming U.S. election.
CW will continue to do what we do best leverage our competitive advantages to help our customers address their IP priorities and achieve their strategic objective.
And our execute Arkon competition.
Well this is a particularly uncertain and challenging time for all I'm confident that CDW will continue to grow to new heights.
Now Collin, we'll share more details on our financial performance Cowen.
Thank you Chris good morning, everyone.
Going to provide more detail on our first quarter results and capital allocation priorities in the current environment.
Turning to our first quarter piano on slide nine consolidated net sales were $4.4 billion up 10.9% on a reported basis and 9.2% at an average daily sales basis as we had one additional selling day on a constant currency average daily sales basis consolidated net sales grew 9.4 for.
Right.
On an average daily sales basis sequential sales decreased 4.8% versus the fourth quarter of 2019, this was better than expected and historical seasonality as the quarter progress can be moved into March the impact of cobot 19 led to a meaningful increase in customer demand for client devices accessories color.
Aberration tool security and other solutions to keep customers operations running.
While there were pockets of supply dislocation as Chris mentioned, we leveraged our scale and distribution capabilities to help customers get access to the I.T. they needed for business continuity.
Some portion of the record monthly sales we achieved in March is likely attributable to a pull forward of future demand, but it's difficult to quantify at this point.
Gross profit for the quarter with $757 million, an increase of 12.6%.
Gross margin was 17.2% up 20 basis points over last year, driven by product margin and services, partially offset by netted down revenue stream not growing as fast if that sales.
Turning to our FG and H on Slide 10, our non-GAAP asked you to increased 17.6%. The increase was primarily driven by a 29 million dollar increase in our credit loss reserve to reflect the macroeconomic environment. As a result of the impact Cobot 19, as Gionee also reflects higher payroll costs consistent with her.
Hi, or coworker, count and higher gross profit as well, it's roughly $2 million of incremental cobot 19 expenses, primarily to save Carter coworkers.
Coworker Count of 10104 was up 670 co workers from March 2019, with approximately 100 of the year over year increase from the after this acquisition and the remaining from organic coworker investments roughly 60% of the 600 somebody coworkers added year over year arent customer facing roles.
As you know we have a variable cost structure given that sales commissions are paid on a percentage of gross profit and growth in coworker count as one of our biggest investments we have implemented hiring restrictions on our letting attrition run for a while it's we closely monitor the macroeconomic and demand environment.
GAAP operating income was $246 million up 7.4%, our non-GAAP operating income, which better reflects operating performance was $304 million an increase of 5.8% non-GAAP operating income margin was 6.9%.
Moving to slide 11 interest expense was $38 million for both the first quarter of 2020 and 2019.
Our GAAP effective tax rate shown on slide 12 was 20.7% the quarter up 50 basis points compared to last year. This resulted in first quarter tax expense of $44 million.
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, which is shown on slide 13 for the quarter or non-GAAP effective tax rate with 25.9% up 10 basis points versus last year's rate.
As you can see on slide 14, with first quarter weighted average diluted shares outstanding of 145 million GAAP net income per share was $1.16 up 13.1%. Our non-GAAP net income was $200 million in the quarter up 7.9% over last year non-GAAP net income per share was $1.38.
Up 11% from last year, the increase in the credit loss reserve equates to approximately 15 cents per share.
Turning to the balance sheet on slide 15 liquidity is a clear priority in the current environment.
As of March 30, Onest cash and cash equivalents were $214 million and net debt was $3.3 billion, our cash plus revolver availability was $1.2 billion subsequent to quarter end, we bolstered our liquidity position by issuing $600 million of senior unsecured notes at a coupon.
480% for general corporate purposes.
Additional measures to enhance liquidity include suspending share repurchases and implementing various cost savings initiatives.
Free cash flow for the quarter was $116 million as shown on slide 16. This is lower than normal seasonality in below last years $303 million for several reasons, one because sales growth was backend loaded in the quarter. The receivables associated with those sales are sitting on the March 31st balance sheet to we Miss.
Right out of vendors with extended payment terms and three we leveraged our scale and distribution centers to increase investment in inventory to better support customers in a supply constraint environment.
Moving to slide 17, the three month average cash conversion cycle was 20 days up three days from last year's first quarter. The balance sheet dynamics. I. Just described are somewhat moderated when you look at three month average working capital metrics because of how sales phasing played out the quarter.
Looking ahead, our working capital metrics could be impacted as we strategically invest in inventory or due to pressure on receivable collections as customers are impacted by the macroeconomic environment one of our greatest assets as our long term customer relationships and we know what's important to be there for customers during challenging times like we were during.
The great recession, we will continue to balance managing customers working capital needs, while appropriately managing risk.
For the quarter, we deployed $195 million of cash to shareholders, which included $54 million of dividends at $141 million of share repurchases at an average price of approximately $123 per share.
Turning to capital allocation on slide 18, as I mentioned earlier, we are focused on liquidity and have reassessed other uses of capital within that context.
Our priorities our first continue to pay the dividend today, we announced a quarterly cash dividend of 38 cents per common share, reflecting CDW strong liquidity position and confidence in the cash flow generation capability of the business, we expect to evaluate any changes in the dividend in the fourth quarter of this year consistent with historical timing.
Future dividends will be subject to board approval.
Second ensure we have the right capital structure in place we remain comfortable with the current target net leverage ratio of 2.5 to three times for several reasons. One we have no debt maturities in 2020, and just $57 million due in 2021.
To the weighted average interest rate on the debt portfolio was 3.9% pro forma for the 600 million dollar notes issued in April so cash interest is manageable and three our debt capital structure is covenant light.
We ended the quarter with net leverage at 2.2 times slightly below the low end of our target range and flat for year end 2019.
Our third capital allocation priority is to supplement organic growth with strategic acquisitions, a challenging economic environment could present attractive M&A opportunities. So we remain active in evaluating targets 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 noted previously we suspended our share repurchase program to enhance liquidity with first quarter buybacks of 1.1 million shares we have already offset expected dilution associated with stock compensation for this year.
The decision on went to resume stock buybacks will 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 light model historically running around half a point of sales are slightly more we believe it's important to continue prudently investing in the capabilities that will allow us to better serve customers drive productivity and ultimate.
Emerged from this crisis in a stronger competitive position.
Well, we have withdrawn 2020 targets and will not be providing an updated financial outlook I do want to provide insights into what we're seeing roughly five weeks into the quarter.
On the demand side customer activity has been mixed we entered April with a healthy backlog of remote workforce enablement solutions, which contributed to solid shipment growth in April.
However writings in corporate and small business were down double digits year over year, which will weigh on shipments going forward. This is consistent with past experience, where we've seen commercial customers react sooner to macroeconomic conditions.
On the other hand public sector writings were up year over year, reflecting strength in government in K 12, and more muted demand in higher education and health care.
Our international businesses are generally seeing similar trends with their customers you may recall that both the UK in Canada, I have a lower mix of sales to public sector sector customers done the U.S.
On the supply side, we continue to navigate through a fluid environment with pockets of dislocation extending lead times in certain categories. We're in constant contact with our vendor partners, whose manufacturing operations are generally back up and running.
Great is a challenge, resulting in pricing surcharges and price increases on certain products.
On the operating front, both distribution centers in the U.S. continued to be fully operational since the brief closure of our Vernon Hills, Illinois distribution center at the end of March.
Finally, I want to provide an update on the device as a service solution to the U.S. census Bureau, the contribution to first quarter sales was generally in line with expectations in March The census Bureau temporarily suspended field data collection activities and steps are being taken to reactivate field offices next month.
In April the census Bureau announced it was seeking statutory relief from Congress for an additional 120 days, which would extend the window for field data collection and self response to October 30 Onest.
The delay is expected to shift a modest amount of net sales from Q4, two Q4 from Q2.
Finally, we are working with the census Bureau to help meet the customers objective of making up last time due to covert 19, CDW expects to provide additional devices, enabling the census to have more workers in the field as a result of these changes we now expect a sense. This project to contribute up to approximately 140 basis.
Points of incremental sales growth in 2020.
The rollout schedule, it's fluid so we could see revenue shift from 2020 into 2021, we will continue to provide updates on the census, as we progress through 2020.
That concludes the financial summary, with that I'll ask Livia 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 ladies and gentleman asked your line is to ask a question you will need to press the star agenda. One key on you touched on telecom.
Sure withdraw your question. Please press the pound key.
Please send line on the composite Jenny roster.
And our first question coming from the line up I need to young Evercore. Your line is open.
Good morning, guys. Thanks, taking my question I guess new to start off with.
Called and of course, I was hoping you could spend if you look we've just comparing how CDW perform to the Oyo nine recession and one of the sort of the puts and takes one competitor to what's going on right now maybe kind of laid that out there will be helpful. And then just after the second question was little upfront.
How does the share gain network to work with CDW in the environment like this.
Is it easier our customers more willing to engage with new lenders or is that something that happens in all posco workforce or sexual thank you.
Okay, Hi, good morning, it's Chris and I'll start and then Tomlinson.
And add in.
Should we think after the 2009 recession first of all I would say as we all know.
No no two downturns are the same and with respect to where we sit today.
You know, we can't tell with any level of certainty what's going to happen. This is that essence, the health crisis in the the economic issues, our derivative, but if we look back to 2000.
Eight nine.
It can be in permanent so if we look at the segments corporate in small business. They did tend to react more quickly as Collins suggested in his script.
To the to the downturn and if you look at our Investor deck, you can see that the corporate was down.
22% in small business declined 18 to significantly the public sector channels. As we've mentioned were more resilient and we saw growth and government and education healthcare was a little clot.
But I would think about coming out of the recession, we saw corporate small business in health care grow quite nicely.
And if you think about similarities the their business model that we have the resiliency of that business model, our ability to stick with our customers into offer them a wide swath of products, particularly coming out of the recession remained strong as I think about today.
We already had stronger financial position than we were in 2008, nine and I remember on it a meeting interest obligations. The nine when we were at 10 times debt leverage which with our peak today, we have obviously, a strong balance sheet and we had more opt opportunistic.
Outlook I would also say that technology today is become much more essential to our customer strategy hard stop there has been increasing complexity the breadth of our portfolio. What we sell our evolution has grown and so today, we're better positioned than ever to help our customers through this through this downturn, but the lack of visibility.
We all have still makes it difficult to predict with any level of certainty.
Alan.
Yeah, Chris I don't know that I have much more to add to that was a pretty thorough review I mean as you think about the various channels as we've said corporate small business reacted sooner.
GDP bottomed I think in the fourth quarter of 2008.
And then improved sequentially it was still down a bit year over year over the next couple of quarters. We saw corporate small business you know react very swiftly in the first quarter Evault nine so that first quarter decline more than the full year and then the rates have declined improved as we as we move throughout the year, but as Chris said look every rig.
Session like this is different.
So not much more to add to other than that.
Yeah, I'll make some I'd I'd add one more thing and I'll come back to your second question is when you think about the complexion of our of our resources and remember we said over 3000.
Technology today, and we're really very well positioned to support customer is and where they're headed as we think about what might accelerate coming out of this.
At this current deterioration you know we've got physical distance digital is now mandatory is a prerequisite for market survival, frankly, and we're very well positioned to help our customers with that but on your second question on taking market share. We did acquire a healthy dose of new customers, we had product to offer that and we could get it to them quickly. So we feel.
We feel confident that we were able to take share in this environment.
Thank you very much for the quick answers appreciate it.
Sure.
Our next question coming from the line of non Cabal with credit Suisse still on smelting.
Yeah. Thank you very much just given the magnitude of uncertainty that's out there right. Now can you just talk a little bit about how you're thinking about managing the expense base versus the desire to maintain investment then just how we should think about the flexibility invest DNA this time around compared to prior downturns.
Okay.
Hi, Matt, Matt its Chris and I'll start and then color you can add in.
Listen you know we have a nationally variable cost structure and just as it did in 2008 nine we benefit from that as we go through downturns like this I would say that we've been proactive and prudence.
We consider manage our business prudently I'm part of what we need to do every day, but the team has been at this in a very granular level on a daily basis.
Watching a couple of things obviously demand, we're very focused on sales trends by channel gross profit that we're seeing and NGL lie and were managing that and looking you got more closely than we ever had obviously from a liquidity position Collin. This team has been very.
Granular around our cash collections and other things that impact our liquidity. So I would say number one we've been very proactive and very detail oriented and making changes and moves quickly as opposed to waiting.
As Colin mentioned in his prepared remarks, I think we've already done things like that change events and other expenses that we can do we do have a performance excellence team. We've talked about this before it's called reinvent to reinvest and they have they've actually contributed meaningfully over the past few years to our results.
And they are laser focused on our operating modeling and.
Ensuring that we are being as efficient and effective as we possibly can so as we go through this frankly, what we're doing is we're managing the business, but we aren't being shy about really finding places to improve from an operational perspective the business. So that we can continue to.
Invest as we move forward and some of that might be.
Not moving some resources, we are working on that we've got resources that actually can flex across the business. That's part of the beauty of the type of sellers and technical folks that we have in terms of their experience and their capability and our training programs, which are such an engine for us. So we're also moving resources on the right opportunities.
Colin Yep.
Yes, I'd just add again, Matt you know, we have a variable cost structure sales compensation paid on gross profit as our biggest expense and our biggest investment isn't people cost and so letting attrition run add some variability to the cost structure. Obviously, we've taken a look at.
Other parts of the cost structure travel you've done some things like that that don't make sense in this environment as Chris mentioned.
Ongoing product productivity and efficiency as a part of the culture and we've dialed that up and we'll continue to be disciplined in managing costs and we'll make adjustments based on market conditions in the demand and.
The demand environment as we go down the road here, but we are going to prudently invest in the business. So that we do emerge from this crisis and a stronger competitive position.
Got it and then.
In the prepared remarks, you talked about supply constraints a few times you just talk about one availability of product looks like across your business right now and going forward, just how you're thinking about managing inventory given that the lack of visibility versus the potential for any future disruption the supply chain.
Yes sure.
You know I wouldn't say I think we use the word fluid or dynamic it's choppy out there.
We are running it heavy on inventory just because we felt it made sense to carry additional days of safety safety stock.
We provide preorders to some of our customers and they get a lot of benefit out of that so we're we're doing that to try to.
Mitigate some of the choppiness in the market.
I would say.
Surprisingly theres a lot of demand for notebooks. So.
That's where we have taken some of our inventory positions.
As well is.
Within the Chromebook market, obviously, given the the strain that this is placed on our education systems.
And then I would say you know we've seen lead times pick up in some other categories on a solution side of the business in servers, it's not I would say disrupted per se, but just.
Extended lead times, and then I did comment a little did about.
Are we have seen some price increases and that's primarily due to just increased freight costs that are OEM vendor partners are incurring in the passing along if some of those so those costs. So we have seen some price increases in.
In client devices as well as within servers.
Thank you.
Our next question coming from Atlanta, Adam to know Lipman Raymond James Your line is open.
Okay. Thanks, and good morning, Chris I just wanted to start there are questions around the structural changes to the competitive landscape. Obviously, there's a number of client crocker maintenance because the hurdle going up because she's had a very good at attractive financing terms to help those clients, but [noise] industry recoup very fragmented cooper's them small printers that will.
Our visibility so could you just touched on how you see the competitive landscape changing or Chris on both what structural.
Yeah, Matt I want to make sure I understand your question, you're talking about customers, you're talking about others within the channel that our competitors for CDW.
Other competitors in the channel to CDW and whether this leads to basically more industry consolidation.
Over time as as you potentially gainshare to this.
Yeah, Yeah. Thanks for the question I think look when there is a downturn at any time that is severe you know it exposes weaknesses across any industry and not like not unlike other industries I think we'll we'll see that certainly in our industry and as we said we'll continue to.
Keep our eye on an opportunistic M&A and I wouldn't say that we would [laughter] you've heard me say that before I wouldn't say that we're focused on a roll up but we certainly are focused on our M&A that fits our various lenses that you know well on its strategic operational cultural fit makes financial sense.
We had a turn that lends off and we will continue to look.
Okay, and just as a follow up calling on the Super permanent aren't that offering part of that you talked about helping our clients. Just if you could double click on what you mean by that it would seem to be a bridge to help maybe on payment terms. So when our kept the revolver for that and also the systems and processes through or putting in place to control risk because we do so thanks.
Yeah sure. Thanks, Adam.
You know I think in terms of the 600 million just in this kind of environment given the uncertainty in with a wide range of outcomes out there and very difficult to probably the probability assess where those outcomes are gonna be we just felt it was prudent to go and get excess liquidity and I think.
Thank you know most companies in corporate America that have the ability to do so I went ahead and did that we were able to get it at an attractive rate. It born in eight so you know we viewed it as a relatively inexpensive insurance in case you know these outcomes.
You know go to a more bearish place, but in the event, we don't need the insurance.
It's relatively keep chat cheap capital that we can deploy offensively.
In terms of Oh.
So what we would do with that we.
Our mindful of the pressure that that's out there for customers. So I think you know in terms of investing it in working capital I talked a fair amount about potentially using some of that within inventory and to help.
Smoothed out some of the disruption that's out there and.
That would competitively advantaged CDW as well as help our customers get access to the I.T. they need sooner rather than later.
From a receivables perspective, obviously, our customers are under pressure and they're managing their own liquidity on circumstances and.
Looking at their cost structures and things like that one of the things that CDW does we orchestrate financing solutions for our customers. So obviously, our OEM vendor partners and others make financing available until we've been very active in making those solutions available to our customers in that.
Obviously helps both the customer but also.
Helps us manage our DSO risk.
There are certain situations, where customers are under pressure and.
We'll deal with those on a case by case basis.
In terms of how we're managing.
Risk we.
Did a pretty thorough review of the portfolio in terms of credit limits, and where we had exposures to various industries and customers and adjusted credit risk appropriately again.
Managing or are balancing somebody's longstanding customer relationships, we have while still protecting the balance sheet and ensuring we had an appropriate risk profile in place and obviously again like every other company in corporate America. We are very closely hopefully monitoring our daily cash collections and.
Understanding where our risks might be emerging in the portfolio and then adjusting credit limits accordingly.
Very helpful. Thanks.
Yep.
Next question coming from the line a little too much higher yields from Bank of America. Your line is Shelton hi, Thank you for taking my questions.
For the first question I'd like to ask how many of your co workers are currently still working from home and how did that impact your ability to close deals in the first quarter or maybe if you can just help us quantified the impact of covert 19 onboard the topline and operating profit line in calendar one queue. Thank you.
Yeah. Good morning, Riddler, it's Chris on the co workers, we have north of 80% of our co workers are now work from home and the others are in our distribution centers configuration centers and onsite engineers and if you security folks are also on site. So it's a fairly large portion of our workforce.
And I'll give kudos to our technology team and all of those individuals because the move to work from home was Swift and seamless our IP infrastructure is ready to go and it was almost theory, how few hiccups, we had on that Monday morning.
My view on their productivity as it's been incredibly strong and in many ways you might have heard this from other companies. This is driving even higher levels of productivity in some areas and greater connection between our own workforce and with our customers has been really quite interesting to see in terms of dimensionalizing impact from completed.
19 on the numbers I just think that's that's almost impossible to do as we mentioned we know we saw the surge in March because of work from home and remote work needs and that there were some pull forward redirection of investment into that first quarter, but to quantify it.
Just seems impossible to do.
Okay. Okay. Thanks for that Chris and just as a as a quick follow up as we stand a as you sit here today can you comment on the business mix, you're seeing between client devices.
And netted down items and how do you see that impacting margins. Thanks.
Yeah, I mean as we.
Commented in the prepared remarks, ruplu client devices very strong in the quarter.
And particularly as we exited the quarter and also in my prepared comments I talked about how we had a pretty healthy backlog than that we carried into April that contributed to solid shipment growth you can assume that.
A lot of that was in the client device category.
In terms of 100% gross margin items, they did not grow as fast as the rest of the business in the first quarter I think that was.
Largely driven by the focus on.
Client devices and video and accessories and all the other things that you would need to enable work from home and learn from home and things like that.
I think it remains to be seeing what's going to happen as we go forward in terms of.
How some of those 100% gross margin items perform.
You know it's logical that.
Those things that are cloud would see.
Strong growth on a go forward basis in previous environments, when things have slowed down we have seen customer sweat assets and.
You can see warranties and software assurance and things like that.
Pickup as well, but I think we'll need to see what happens over the next few quarters here before.
I would want to make a more definitive call on what happens with that portion of the business.
Okay. Thanks for all the details appreciate it.
Our next question coming from Atlanta, Katy Huberty with Morgan Stanley. Your line is open.
Thank you good morning, a clarification and then it.
Question first when you referenced that double digit declines in late March and April for the corporate sector with data revenue comment or that leaves new bookings that won't impact never appointed results for for several months and then one of the clearance trends can you talk about this in your prepared remarks is.
An acceleration adoption of public cloud can you just talk about what you're doing to enable the salesforce or expand that the portfolio that services to capture more value from that chest. Thank you.
Kitty up what I'll take the first one and maybe.
Chris will take the second just to clarify my comment.
When I was talking about what we were seeing those were comments a really for the first five weeks of the second quarter, So primarily April and.
When I said shipments.
We saw solid growth or as a result of the backlog you can think of that as equivalent to a revenue when we talk about writings or booking and thats, what I referred to as being down double digits in corporate and small business.
Those at some point turn into future shipments or invoices. So that's more of a leading indicator hopefully that clarifies. It for that I think that's when I figured I wanted to make sure yes, Okay, and then I think.
Yeah.
I'll take your your question Katie.
Good morning on cloud as you know we've been building our capabilities around cloud and hybrid multi cloud work environment now for years and when we think about cloud generally.
Yes, I think about adding even more complexity to the choices that our customers need to make and you add the uncertainty of the world that we're in today, there's even another layer of complexity.
Even simple cloud choices like the video and called solutions that are that we all are using now creates complexity for the ITC staff is they've got to enable co workers to you that consistently and.
Hi performance levels et cetera. So this plays very well into our value proposition. We have as you know I think.
We have over 250 cloud offerings on our line card and we're essentially.
Value prop is where vendor in technology and consumption agnostic. So we can play that trusted advisor role where organizations as their sorting through what their strategies ought to be and frankly, when we talk to customers now the questions because they're moving so quickly is help us figure. This out what should we do how should we do it we're having those types of questions around the staffing.
Design more frequently than ever before so you think about professional services managed services for public and hybrid cloud those are areas that we had been investing and we'll continue to invest in so we can help our customers as best they are options where to migrate how to evaluate how to integrate.
How to support the deployment and then how to manage a cloud workloads. So I would say the full spectrum from assessed design integrate and manage across a month multi cloud world.
Thank you.
Your next question coming from the line of matching Nolan with William Blair. Your line is open.
Hi, Steve talked about kind of reallocating sales and technical resources and maybe this builds on the previous question a little bit, but obviously some of that is probably been done to meet the surge in demand in March and April that you saw that can you take a little bit more of a medium term outlook on that.
Where the strategic changes coming into play as you think about you know the coming quarters and then after the year.
Yeah, Maggie so in connection with the resources, yet you think about it a couple different ways. One as you think I think about our sales organization and where demand is and how we can help generate demand and also help customers facilitate through stimulus packages and things like that to some of the more resilient end markets where ensuring.
We've got the sales organizations well aligned from a resource perspective, there from a technology perspective.
We've been building capabilities across the full spectrum of solution and certainly focused on then most pressing solutions right now we talked about network augmentation things like that.
We are building our cloud capabilities, our automation capabilities. After this was a great example, I'll then acquisition that brought us extremely strong capabilities in a cornerstone Nike software application and.
Scalar is another Great example, a doubling the size of our business up in Canada through strategic acquisition of organization that has premier cloud capabilities. Both professional services all the way through to manage capabilities and we continue to.
Add those in the U.S. as well you might be familiar we introduced our ample or CDW amplified services last year and one key focal area a pillar of those services is around multiple multi cloud environment. So we'll continue to focus there. The other area that you know I think we all believe is going to be it.
Accelerating is helping customers with their digital needs digital now is a matter of survival. In addition to competitive advantages we hear it across the board even retail fasted organization to us.
A real accelerated approach to judge digital Art Technology organization has solutions architectures Wells engineers, who can support in the design and deployment of digital strategies and so we'll expect to see more and more of that I think over the next few months those might not come to fruition, perhaps until later in the year, but certainly we are.
Having those conversations now.
Thanks, and then as we think about and some of the segments. Obviously as stated it's very difficult to see where demand is going to come from in terms as at the client base, but if we think about the segments in the context as youre growth strategy in particular picking up market.
Share and is there a strategic change there, particularly maybe around small business, which is something that was starting to get traction and obviously will change in this environment and then would be interested to hear what you're hearing from clients in higher Ed and education in general as well.
Hi, good in some of the dynamics going on in that segment at the moment.
Yeah, Okay. So let me try and take those in order in terms of strategic shift.
The way I think about it is our overall strategy and the value proposition it value proposition to our customers.
It stays the same in terms of diversified portfolio, then markets a breadth of product and services that we offer to meet the customers need now in the future in terms of new segments potentially or within segments. We also sub segment and sub Verticalization is a is a focus of how we.
We serve our partners and our customers more effectively and so certainly coming out of this this environment I couldn't I could envision some additional sub segmentation or markets that we serve in a different way were more concentrated way on the small business side, we've been investing in our ecommerce capabilities over.
Over the last several years when we started the small business as a standalone unit.
Two and half years ago, and we've been seeing great results and I would expect in this environment in in the future that digital will play a continuing bigger role in small business, but just to hit well with respect to the rest of our segments I expect to see you know kind of the human and digital combination.
The very strong.
Within education on the K through 12 side, we've seen strength there.
And as you know there's a educate the educators are focused on access in equity there's a large proportion of students across the world and across the U.S. gives me that do not have access to endpoint devices client devices.
Andrew or the Internet and there's quite a focus on ensuring as E. Learning is expected to continue that those devices get into their hands and so we're helping tried sport that on the hiring side, we saw spreads in first quarter as we said.
But equally we think that budget I'll call. It budget concerns as we go into the latter half as the year in a couple of the segments.
Good way on demand and we'll have to see how that plays out.
Thanks, so much.
Our next question coming from the line of Shannon Cross with Cross Research. Your line is open.
Thank you very much I was wondering.
Calling you talked a bit about what you've seen in the past five weeks and I was wondering if you could talk a bit more mentioned stimulus or maybe Chris you did during your your conversation.
I'm just curious if you've seen any near term changes in discussions as some of the dollars has started to hit the small businesses as well as some of the states are starting to open up so that's almost sort of maybe a change in conversation in the last couple of weeks in another follow up thank you.
Yeah, I think it's difficult.
To say Shannon.
How those stimulus dollars had changed the tone of the conversation and just the past few weeks because it has been moving so quickly.
I think those are part of longer term conversations with our customers and some of the resources, we bring to bear in helping them understand how those stimulus dollars are ultimately going to flow from care. So for example in education I think Theres 13 billion 30 billion roughly split split.
Between higher Ed in K 12 in it follows.
Pell Grant funding and title, one and things like that and helping our end user customers understand how those funds might be make the made available to them and ensuring that you know.
They have their best opportunity to go hadn't accessed under also been modifications made to E rate and timing changes and again, just helping our customers understand though so I would say it's unlikely that it has factored into the trends that I referenced in April I think it's more of a go forward opportunity.
Okay. Thank you and then I was curious and in the discussions with some of your customers. One obviously priority shift it during the quarter to more work from home and just business continuity.
The longer term projects that you had.
Sort of in place have those been canceled pushed out have any customers started to revisit.
A timeline for some of those I'm, just again trying to get into the mindset of of your customer base. Thank you.
Yeah, Yeah Shannon. Thanks for that question you know all as they all of the above I would say and it is such a I'll call. It as diverse experienced depending on the industry just depending on the customer we have not seen a large portion of customers cancel projects. That's the number one thing we have seen.
For customers, who have just diverted their resources and their attention to the more urgent needs and they're still focused on urgent needs in terms of optimizing the work from home or about working situations that there and there's a lot of focus on that right now, but equally we have seen some customers who are coming back we've got some larger.
Larger digital transformation projects at customers Im actually accelerated and we're working with them across the board because as I said before it's a matter of obviously survival, but also competitive advantage coming out of this.
So it's quite a wide range and I'm not sure. There's a there's there's much that we can pull out of that way a trend. We are just staying close to our customers and ensuring that.
That we that we keep the projects going forward that can but very few have cancel channel.
Great. Thank you very much.
Okay.
Our next question coming from the line out that shared with Stifel. Your line is helping.
Yes, thanks, good morning, and thanks for all your.
Candid answer so far I'm just a one quick follow up for me regarding your comments on the census project and federal it sounds like a trends in federal continue to be normal in terms of seasonal demand the only change being called in your your discussion about does some of.
Census projects get pushed out from Q2 Q4, so could you give us some more color on that can from that.
Yeah, Matt.
You know as book, Chris Christian I said, we expect federal to hold up a relatively well from a bunch of perspective, and the time change I referenced was.
Primarily due to the devices being in the field longer which is spreading the revenue over a longer period of time.
Largely from Q2 into Q4.
Okay, and just I'm actually one more follow up just regarding the surgeon in demand.
Near term demand you're seeing for work at home solutions.
No that that's what it slow trend that we've seen over the last couple of years as is.
Technology as a service where theres a leasing components are you see any acceleration in that as customers look at their own capital.
Requirements and their own balance sheets, and perhaps look to that as a service model.
Yeah, Matt I would say I mean in terms of the most recent surge.
The objective with speed and getting it deployed rapidly so most of that transacted in a traditional way I think as we go forward and customers are wrestling with their own budget challenges I think we could see that that option enter.
Into the discussion more than it has historically, but in terms of the recent surge if it was primarily transacted.
In a traditional purchase model got it okay. Thanks a lot.
Our next question coming from July now, Paul Coster with JP Morgan Your line is helping.
A quick follow up question I'm work for home issued our minds.
You have this demand drone you into at home sort of shipments at home installations at home, making some sort of the decline technology.
[laughter] has is that good business to be Jim and is it sort of yielding any sort of value added opportunities of any materiality.
Yeah, It's Chris it has in some ways because of the urgency of getting the devices, where they needed to be and Ah CDW team did a really great job of moving shipments due to an example, when you've got a shipment for 10000 devices that goes to one location and those tend to.
Doesn't devices now need to go to 10000 locations are 5000 locations, that's not easy to do and a and the organization did a great job being flexible and responsive there in terms of continuing to support yes. We are we are adding additional hardware software and support services. These work from home and remote requirements, but.
Generally where those are being managed centrally through the I T group of the organization. So it feels like it's more just a dispersed workforce. It you will manage centrally and that's something that we are highly capable of doing.
Got it and then Colin you mentioned that you sense as the pull forward for work from home cool so since suits as the current so just wondering at what point.
You will know whether or not is real pull forward and this is sort of post fight. So they don't because it doesn't really matter, but when do you think you'll know and how do you think you'll know.
Yes. Good question, Paul I'm I'm, not convinced we're ever really going to know because I think the wildcard here is how much is pull forward of something that was going to be purchased any way versus Watson incremental use case, meaning that companies are.
Correct.
Government agencies never intended for these co workers are students are teachers to have had mobile devices that effectively a shift from there I T budget.
Two.
Used case that they didn't know that they were going to need and I think it'll be nearly impossible to ultimately parse that out.
Yes, okay. Thank you.
Yes.
Our next question coming from the line of skied, how soon would not cost research. Your line is open.
Good morning Christmas help me in front of the color in terms of the ability to access credit facilities. Historically, how important is that Ben to the CDW sales process and I guess as we look at the potential that some customers may not know any visitors on site for the next several months. How are you guys looking that for the next summer months and conducted impact on sales.
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Hi, Keith Yeah. Great question. Thank you are there are a couple of different levels. There. Let me just start first with the service engineers and then move into the sales organization.
Service Engineers, we've broken immediately into several components, what could be done remotely and what needed to be done on site and then provided them with the protective equipment and peace of mind that they could go on site with customers and they have been doing that and do not very effectively but we did break that into pieces and remote access.
Can get us very far in some of the work we've had to do for work from home regarding our sellers I you know I'll come back to the comments I mentioned earlier certainly in person connections and meetings at the office and relationship building lives has always been important to any relationships sales organization, but.
The.
I don't want to call a surprising but it's been a really I really positive discovery for me in any event is the incredible way that our sales organization the same connected with our with our customers.
Yes, so almost more deeply that in person. So I think what we're going to start to see is.
Flexible ways of working you know our hybrid world will probably become our work force hybrid world and they'll all be what they need to do to make the connections and served the customers and ensure that we can have learning sessions and white boarding sessions that our eyes effect as possible and some of that might go back to kind of the way it was prior to this.
But I also think we're going to see some significant changes the other thing I would say the our sales organization as you know there's a legacy inside organization that goes back a long way and so the teams have been built with resources wrapped around them that have in many cases, then rob remotely access so it's not a new thing for our sellers and our sale.
Our solution architects and engineers to be on collaborative tools actually helping to solve solution.
So I hope that answers. The question I think we'll see a little bit of a new world going forward and I feel like 15 has already been affected and will take the learnings and continue to drive even greater and deeper relationships with their customers.
Okay. I appreciate that then Colin just a follow up to the commentary regarding 29 million credit reserve I guess, how does that compare to I guess the average quarter and then are you already starting to see some credit deterioration or is this anticipation or what you expect to see later in the quarter in the rest of year.
Yeah Keith.
Like the last one for US I think it's too soon to see any credit any material credit deterioration I think its and in anticipation of.
What we expect to come down the road.
When you look at our balance sheet, you'll see that at March 31st the reserve was approximately $35 billion, which is a little bit more than 1% of our outstanding customer receivable balance historically that balance has been much lower.
If you look at where it was at year end during a year ago period, it's been running around $7 million to $8 million. Previously. So we used a variety of data points to estimate the reserve we looked at historical information what our experience was back in 2008 2009.
Our current conditions and again.
Estimates of what we think could be coming.
Great I appreciate it thank you yes.
I'm not showing any further questions at this time I would like just turn the call back over to Chris Lee for closing remarks.
Thank you. Thank you all for staying on a little longer with us.
Including today's call I want to one more recognized remarketed 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 reaffirmed my conviction that we will enjoy better days ahead, I'm, so proud and grateful to be part of the scheme. So thank you to that.
Team and thank you to our customers and our partners for the privilege an opportunity to serve you during these times and to our investors and analysts for participating in this call. We appreciate you and your continuing interest in in support of CDW, Collin and I look forward to talking with you again next quarter until then stay healthy stay safe and be well. Thank you.
Ladies and gentlemen teleconference for today. Thank you for your participation you may now disconnect good day.
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