Q2 2020 CDW Corp Earnings Call
[music].
Good morning, My name is Jake and I'll be your conference operator today at this time I would now like to welcome everyone to the CDW second quarter Twentytwenty earnings call.
All lines will be on mute throughout the duration of today's call.
After the speaker's remarks, there will be a question and answer period.
At that time, if you have a question. Please press star one on your telephone keypad.
To withdraw your question simply press the pound sign.
Ill now like to turn the call over to our host Britney Smith, Vice President of IR and financial planning and analysis ma'am the floor is yours.
Thank you.
Hi, everyone. Joining me remotely today to review, our second quarter financial results, our credit rating, our Chief Executive Officer, and Cowen Chemo, our chief financial and.
Our second quarter earnings release, a distributed this morning and available on our website last year that tw dotcom, along with supplemental slide that you can you just a follow on during the call I'd like to remind you that turn comments made in his presentation are considered forward looking statements under the private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties that could cause actual results to differ materially.
Additional information concerning these risks and uncertainties is contained in the earnings release form 8-K refresh the FCC today and in the company's other filings with the FCC.
CDW assumes no obligation to update the information presented during this webcast.
Our presentation also include certain non-GAAP financial measures, including non-GAAP operating income all non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with sbcs and charge in the slides for today's webcast in our earnings release and form 8-K refresh the FCC today.
Please note that all references to growth rates are dollar amount increases on our remarks today are versus the comparable period in 2019, unless otherwise indicated.
In addition, all references to growth rates are hardware software and services today represent us net sales only and do not include the results from CDW UK or Canada.
Replay of this webcast, we posted to our website later today I also want to remind you that this conference call at the property at CW and May not be recorded or rebroadcast about specific written permission from the company.
With that let me turn the call over to Chris.
Thank you Brittany.
I'll begin this morning, with an overview second quarter results and drivers of performance I'll provide our perspectives on the current macro environment its impact on our customers end market and how we are responding Colleen will then take you through a more detailed look at our second quarter financial as well as our liquidity position and capital allocation strategy will move quickly through our prepared.
His remarks to ensure we have plenty of time for questions.
For the second quarter net sales were 4.8 dollars.
5.7% below last year and down 5.3% in constant currency.
Non-GAAP operating income was $338 million a decrease of 5.6%.
Non-GAAP net income per share was $1.56. Some 2.62, 0.6% below last year on a reported basis and down 2.3% in constant currency.
For the quarter net sales performance varied by month and by customer end market as we shared on our last earnings call. We entered April with a healthy backlog of remote workforce enablement solutions, which contributed to strong performance in April.
As the quarter progress for some of our customer end markets projects were postponed and demand declined at the economic told the crisis impacted customer said.
In other customer end market investment would prioritize and remain healthy.
During the quarter, we help customers across a spectrum of IP priorities remote enablement business in operations continuity and security remain top customer focus areas to manage remote environments at scale and to prepare to work and learn from home in some capacity for longer.
Customers also focused on initiative to reduce cost optimized resources and leverage technology for better customer and employee experiences through digital transformation.
CDW teams orchestrated turnkey solutions from our broad portfolio client devices accessories collaboration tool security software and cloud offering to help customers build these capabilities and achieve their goals.
At the ended the first quarter, we had strategic stocking physician key remote enablement categories to meet expected customer demand.
During the second quarter, we continue to leverage our distribution centers extensive logistics capabilities defender partner relationship with strong balance sheet and liquidity position to successfully navigate supply challenges.
We continue to procure supply in key remote enablement categories and managed through longer lead times for others.
Now, let's take a deeper look at customer end market performance.
Corporate in small business both declined double digits.
As you know these channels include our small and medium business customers. The unique nature of the cobot 19 crisis has posed greater challenges for some small and medium businesses.
Intra quarter net sales results decelerated each month as softer writings impacted subsequent month performance.
During the quarter corporate small business customers spend was prioritized on three areas first remote work enablement and new use cases, driving notebook in mobile device spend.
Second infrastructure supporting optimization, which resulted in strong growth in cloud offering in several software categories, including security network management and virtualization.
And third maximizing of past IP purchases and reduction in expenses through extended maintenance contracts in shorter commitments for you contracting licenses.
The government team increased net sales 24%.
Federal delivered another excellent quarter with net sales up almost 50%.
During the quarter our devices of service solution for the U.S. Census Bureau contributed meaningfully to our federal result.
Field operations to collect data from Nonresponders has started.
This solution will continue to be a meaningful contributor to federal net sales for the remainder of Twentytwenty.
Excluding census results federal was up healthy double digits.
Growth was driven by civilian projects and demonstrated the teams great work delivering cws value proposition to multiple agencies.
The team delivered strong transactional growth with almost 100% growth the notebooks and double digit growth in enterprise storage video collaboration hardware and security software.
The state and local team delivered low single digit growth driven by double digit transactional growth that enables were but were capabilities, including notebooks in collaboration hardware software to enhance security and optimize technology assets and investments to accelerate Egovernment initiative.
Education increased 13% with strong double digit growth in K through 12, and a mid single digit decline in higher Ed.
In K through 12 customers continued to focus on equity and access for students.
Okay to 12 growth was primarily driven by strong chromebook results as our team helped school districts prepare to start classes. Later this month or early next month in a variety of teaching format.
Higher Ed performance reflected the uncertainties universities and colleges are facing.
Spending on remote enablement, such as notebooks and collaboration tools with strong it was offset by delayed infrastructure projects due to budget concerns.
Healthcare declined low double digits with strong April results, followed by net sales declined in May and June as coded related response.
Efforts to priority and budget pressure intensified.
Our team continued to work closely with healthcare customers on expanded virtual care capabilities as healthcare delivery in the us fundamentally changes.
Other which represents our UK and Canadian operations decreased 8% on reported basis.
Okay team delivered high single digit growth in constant currency with strong public sector demand driven by healthcare customers and more muted corporate customer demand.
Canada net sales decreased double digit in constant currency due to a higher mix of small business customers, who have been more impacted by curve in my team and pressure on the oil and gas industry in Alberta.
As you can see our second quarter performance was buried across customer end markets.
It's also drove very performance across our major product and services categories US hardware was down mid single digits. However, client devices grew almost 6%.
Software declined low double digits and services grew mid single digits.
Transactions declined low single digits on top of last year's mid teens growth.
Solutions declined low double digits as some customers de prioritized infrastructure and larger project engagements.
We delivered strong growth in our cloud offerings.
Customer spend increased double digits, driven by strong growth and analytics collaboration data storage and recovery compute and security.
We expect strong customer demand for cloud offerings to continue.
On July 1st we acquired IBG, NW, a leading provider of cloud native native services expertise and software development capabilities.
Hi, Gnw is a leader in digital velocity solutions, including advisory consulting and development services and has been a partner or tw since 2018.
Hi, Gnw presents an exciting growth opportunity for our business our customers our partners in our co workers.
It brings the right talent and strategic capabilities, we want to deliver to our customers.
We are pleased to welcome I Gnw is approximately 170 co workers to the CDW family.
This is a great example of our continued investment in our cloud capabilities.
M&A is an important part of our capital allocation strategy to expand CDW strategic capabilities. During our 35 plus year history DW has a successful track record of evolving with customer needs and the industry in part through acquisition.
Our second quarter operating and financial performance reflected the combined impact of our balanced portfolio customer end markets, our full suite of solutions and services across the IP landscape and our ongoing success executing our three part strategy for growth.
They are important drivers of our past and future performance.
Let me take a moment to review each.
First our balanced portfolio customer end markets.
You know, we have five U.S. sales channels, but each generate annual net sales of more than $1.5 billion in 2019.
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 pay through 12, and higher education, providing 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 us dollars of net sales in 2019.
The diversity of our customer end markets serves us well with macro or other external challenges impact various industry and customers differently.
This balance is especially relevant in the current environment.
Next our offerings, our broad and deep 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 and customer demand.
For example in response to the current environment customers have turned to us for return to work technology solutions beyond our traditional offerings, including enhanced video surveillance temperature scanners and device Sanitized solutions. We now offer a full suite of IP enabled solutions to meet the demands.
Our teams have product ties different solutions for our various customer end markets. This is a great example of our thought leadership and ability to pivot to growth opportunities.
And the final driver of our performance our three part strategy for growth, which is to first acquire new customers and cap capture share second to enhance our solutions capabilities and third expand our services capabilities.
Each pillar is crucial to our ability to profitably assessed design deliver and manage the integrated technology solutions, our customers want and need today and into future.
Today's environment doesn't impact our commitment to executing our strategy in fact, it strengthens our resolve so we will emerge stronger than ever.
Let me share a few examples of our strategy inaction and how we help customers this quarter.
Our financial services company turned to our team to mobilize employees to work from home only 30% of its workforce had work from home capability.
The customer delegated and emergency blanket purchase order for $3.5 million for our team have full responsibility to develop the right solutions across client devices remote access security and its datacenters.
We leveraged our longstanding relationships with the customer to get it right and with our vendor partners to get supply.
A large corporation was challenged with improving productivity for a terminal employees the customer needed to provide employees with additional equipment consistent with corporate standards, but did not have the system in place to identify which employees required equipment to place thousands of orders or to deliver the equipment to the employees homes.
The customer turned to us due to our robust ecommerce platform and extensive logistics capabilities.
Our team created a digital catalog that integrated CDW and the customers procurement system, making a complicated process simple.
Through this project, we expanded the partners and products, we sold to the customer.
Our team did such a great job that the customer canceling RFP midstream to award us another meaningful engagement.
Another example is a 5000 student school district in Ohio turned to us to create a complete remote learning environment for its students. Our teams help the district with client devices and develop the collaboration platform ports teachers and students in the cloud.
This is one of many examples from the quarter, where our teams helps customers with cloud cloud collaboration tools.
These examples also show how quickly solutions need to be implemented in this environment.
Customers turn to us for expertise thought leadership and a high level of customer service.
We want to service now engagement for a leading medical school after two weeks sales cycle less than half the typical cycle time because of our past experience with this customer and our ability to deliver in a compressed timeframe.
These examples highlights cws three part strategy for growth, including CDW at a trusted adviser and how it is crucial to achieving our customers objectives.
I now want to update you on our efforts to manage Cobra 19th impact on our business.
As I shared previously we had a cross functional response team in place.
The team has three key principles safeguard the health and wellbeing of our coworkers served the mission driven needs of our customers and support our community.
Our office co workers are still working from home, we have excellent capabilities in the culture of collaboration so per worker engagements and productivity up and strong.
We continue to evaluate when and how to return to the office and where and how our customers. We'll work our co workers will work in future.
All distribution and configuration centers, our operational and we maintain precautionary measures advised by public health authorities, including social distancing segmented chest personal protective equipment enhance facility cleaning and temperature scanners. These teams have done an exceptional job maintaining the high level of customer service.
Our known for while taking the necessary precautions.
During the quarter more of our sellers and technical specialists began to reengage in person with customers. We have taken corrective measures to keep fill worker safety settings as well.
Our teams have done a great job adapting to virtual channels to ensure we reach our customers and we continue to develop our co workers for example, our marketing and events transition from in person to virtual so customers can continue to learn from our technical experts also during the quarter, our sales and technical team completed over 20000.
Hours of training and earned over 400 certification almost double last year's activity.
Our marketing events and co worker services teams have done an excellent job adapting to that for environment. They demonstrate the strength in resiliency of our culture. A culture. We believe is important competitively to us.
Let's turn now to the balance of the year.
The economic outlook for the foreseeable future remains uncertain as the duration and severity at Cobot 19 are unknown and also uneven therefore, we are not providing twentytwenty targets.
We continue to watch closely the near term impact it's over 19 on our customer end markets.
For Q3 today, writing the rate of decline has stabilized for our most impacted customer end market and trends for more resilient customer and market continue.
While encouraging we believe it's premature to call. This a trend as weekly writing do fluctuate.
Customers are in various phases of responding to the macro environment. Some customers remain focused on remote enablement and operational continuity others are moving forward with organizational efficiency and optimization and other customers are investing behind digital transformation, including cloud migration and on automation strategies.
Our teams can help with all phases, and we'll continue to be trusted partners, who our customers to help them smartly deploy their IP resources, we solve some of their toughest challenges.
We believe that technology will be more essential to all sectors in the economy will play an increasingly important role in the years ahead.
We have confidence that we have the right strategy in place.
We will help our customers navigate the complex IP landscape and adopt new technology.
We are committed to investing in our three part growth strategy, including the capabilities that will position us to best serve our customers optimize our productivity and enhance our competitive position.
We will also keep a watchful eye on the impact to build a 19 the macro environment in other for unpredictable variables such as potential supply disruptions trade policies and upcoming U.S. elections.
CDW will continue to do what we do best leverage our competitive advantages to help our customers address their IP priorities and achieve the strategic objectives.
And our execute our competition.
Now Colin will share some more details on our financial performance power.
Thank you Chris Good morning, everyone Im going to provide more detail on our second quarter results liquidity position and capital allocation priorities.
Turning to our second quarter PNM on slide nine consolidated net sales were $4.4 billion down 5.7% on a reported and average daily sales basis in constant currency consolidated net sales declined by 5.3%.
On an average daily sales basis sequential sales decreased 0.5% versus the first quarter as expected. This was lower than historical seasonality due to the first quarter stronger than normal seasonality and the ongoing impact to cope with 19 as Chris mentioned, our customer channels generally perform.
Consistent with the demand in writings commentary shared on our last earnings call.
April sales benefited from the carry over a strong demands in March whereas may and June sales were impacted by lower demand in certain customer end markets.
Pockets of supply dislocation continued in the quarter and we leveraged our distribution capabilities and strong vendor partner relationships to procure the IP products and solutions, our customers needed for remote enablement operations continuity and resource optimization.
Gross profit for the quarter with $747 million a decline of 3.4% gross margin was 17.1% up 40 basis points over last year, driven by product margin and by the mix of netted down revenues, primarily software as a service.
Turning to SGN, a on slide 10, our non-GAAP best Junaid decreased 1.5%. The decrease was primarily driven by lower sales payroll consistent with lower gross profit.
Reduced performance based compensation and cost savings measures, including decreased travel and entertainment and ongoing productivity and efficiency efforts.
At June Thirtyth credit loss reserve balance decreased modestly versus the March 31st balance, reflecting our customer collection experience in the quarter on lower receivable balance at June quarter end and expectations for future collections. While we're generally pleased with second quarters bad debt experience, we recognize that much economic.
Uncertainty exists and remain cautious on year to go credit loss expectations.
These expense reductions were partially offset by approximately $7 million of cobot 19 expenses, primarily to safeguard and compensate frontline co workers as we always do we're closely monitoring our cost structure relative to the demand environment.
[noise] coworker count at the end of the second quarter was 10048 down 56 from the first quarter, reflecting restrictions on hiring and Backfilling attrition that we put in place in April year over year Coworker Count increased 265 with approximately 120 of the increase from mattress acquisition last fall and the re.
Meaning from organic coworker investments, our recently completed acquisition of our Gnw adds approximately 170 coworkers most of whom our customer facing technical coworkers.
GAAP operating income was $283 million down 5.6%, our non-GAAP operating income, which better reflects operating performance was $338 million down 5.6%.
Non-GAAP operating income margin was 7.7% moving to slide 11 interest expense was $40 million down 1.8% the incremental interest from the 600 million dollar notes issued in April was offset by savings from a lower lied more rate on the term loan.
Our GAAP effective tax rate shown on slide 12 was 22.9% in the quarter compared to 24.7% last year. This resulted in second quarter tax expense of $56 million compared to $65 million last year, the rate decreases primarily related to higher excess tax benefits on.
Equity based compensation in 2020.
To get to our non-GAAP effective tax rate, we adjust taxes consistent with non-GAAP net income add backs, including excess tax benefits associated with equity based compensation, which is shown on slide 13 for the quarter. Our non-GAAP effective tax rate was 24.9% down 70 basis points versus last year's rate.
As you can see slide 14, with second quarter weighted average diluted shares outstanding of 144 million GAAP net income per share was $1.31 down 1.1%. Our non-GAAP net income was $225 million in the quarter down 5.2% compared to last year non-GAAP net income per share.
It was $1.56 down 2.6% from last.
Turning to first half results on slide 15 through 20 revenue was $8.8 billion, an increase of 1.9% on a reported basis and 1.1% on an average daily sales basis as we had one extra selling days in the first half from 20 to 20, the extra selling day will reverse in Q4, when we have one.
Fewer selling day compared to prior year on a constant currency average daily sales basis first half consolidated net sales for 1.5% higher than the prior year.
Gross profit was 100 I'm sorry, gross profit was $1.5 billion up 4% and gross profit margin was 17.2% up 40 basis points.
Non-GAAP operating income was $642 million for the first half of 2020 down 0.5% net income was $357 million and non-GAAP net income was $425 million up 0.5%.
Non-GAAP net income per share was $2, a 94 cents up 3.4%.
Turning to the balance sheet on slide 21 liquidity continues to be a top priority in the current environment as of June Thirtyth cash and cash equivalents were $958 million and net debt was $2.9 billion, our cash plus revolver availability was roughly $2 billion.
Year to date free cash flow was $468 million as shown on slide 22.
This is higher than normal seasonality and above last years $407 million, primarily due to tax payment timing last year, we made cash tax payments on April 15th in June 15th and this year. The comparable payments were made on July 15th after the end of the second quarter.
Moving to slide 23, the three month average cash conversion cycle was 25 days up nine days from last year's second quarter, while cash collections were solid in the quarter Dsos increased seven days as we mix it into some larger public customers, who can take longer to pay and we have seen certain commercial customers extending pain.
Thanks.
I O increased four days as we continue to invest in inventory to help our customers manage their IP projects with greater certainty of product availability.
One of our greatest assets as our long term customer relationships and we know it's important to be there for customers during challenging times like we were during the great recession, we will continue to balance managing customers working capital needs, while appropriately managing risk.
In the quarter, we returned $54 million of cash to shareholders through dividends and did not repurchase any stock.
Turning to capital allocation on slide 24, as I mentioned earlier, we remain focused on liquidity in our capital priorities remain the same as last quarter. Our priorities. Our first continued 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.
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 in just $57 million due in 2021 to the weighted average interest rate on the debt portfolio is 3.6.
6%, so cash interest is manageable and three our debt capital structure as covenant light we ended the quarter with net leverage at two times below the low end of our target range.
Our third capital allocation priority is to supplement organic growth with strategic acquisitions, the acquisition of RG MW, which closed after quarter end is a good example of this I gnw is not expected to have a material impact on CDW 2020, net sales and non-GAAP earnings per share.
We remain active evaluating targets and we will seek to be opportunistic in this environment any decision to deploy capital for acquisitions will be a function of our usual screens strategic rationale operating and cultural fit and financial return all within the context of liquidity at that point in time share repurchase program remains suspend.
The to enhance liquidity the decision on when to resume stock buybacks continues to depend on several considerations, including the macroeconomic environment liquidity in 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 allow us to better serve customers drive productivity.
The stronger competitive position.
We previously but through our 2020 targets.
Oh outlook, but consistent with last quarter I want to provide insights into what we're seeing roughly one month.
Supply and operating perspective.
On the demand side activity continues to be mix.
In corporate and small business looking back to the second quarter for a moment the year over year decline in writings peaked at over time from a channel.
Cost.
Sequentially preliminary July sales are down double digits in both channels July writings are down year over year with the decline.
So it may or June while encouraging as Chris mentioned, we believe it's premature to call. This a trend as we run.
Our things have been volatile and we've moved to the recent increase in cobot nine locations.
In public preliminary June July sales and July writings are up year over year, driven by continued strength in K 12, and parts of government, partially offset by healthcare where both.
Continued to be down.
Our enough.
International businesses are generally seeing.
We expect to continue.
Add some headwind to gross margin in the back half of the year.
On the supply.
For fluid environment with pockets of dislocation extending lead times in certain categories notebooks supply, particularly lower end devices such as Chromebooks is tight we're also experiencing extended lead times in certain networking.
In contact with our vendor partners, whose manufacturing operations are generally back up and running.
Free challenges have moderated, but we're still seeing some pricing surcharges in price increases on certain products, which we are generally passing along to customers.
Well distribution centers continue to be operate.
Funnel.
Finally, I want to provide an update on the devices a service solution to the U.S. census Bureau, the contribution to second quarter net sales was inline with expectations.
The devices into the field.
Remains fluid and we could see some.
Quarters. The team has done an outstanding job managing through a challenge.
Liver its mission from a financial perspective. This year, we now expect for sensors to contribute up to approximately 160 basis points of incremental net sales growth over 2019 on an absolute basis. We currently.
100 basis points of net sales in 2020.
We will continue to provide updates on the census, as we progressed through the second half of 2020.
So summary, with that I'll ask Jake.
Please ask each of you to limit your questions to one with a brief follow up thank you.
Yes.
Thank you.
We have a question from Adam Tindle with Raymond James.
Hi, Thanks, Good morning, Chris I, just wanted to start with a strategic question I think about CDW is competitive advantages of scale. We obviously saw strong cash flow in the quarter and those things seem to be a major potential weapon in this environment, where the long killer competitors in your fragmented industry are struggling. So the question is how are you thinking about.
Options to potentially play a little offense, while others are on defense and maybe if you could specifically tie this into your go to acquire new customers and update that on the quarter that would be helpful.
Sure Good morning, Adam.
Yeah. We are we've accelerated I think I mentioned this in the last call. We see this is an opportunity and we've accelerated our acquisition programs.
If you look across.
The breadth of our competitive advantage as customers right now are looking for those who have the expertise to help and I'll just say at very simply figure it out.
The World is moving very quickly the mandates to evolve and transform from the digital perspective are moving quickly.
What it used to date and so having a provider that has the scale can get to supply has their relationship with vendor partners and equally has this spectrum of solutions and experts who can help designed in plan and move.
Then design and development to implementation has been very important particularly for those customers that I mentioned, who are going on the often.
And you are accelerating their their own strategies and digital needs. So we are we are being aggressive in helping the customers that are in our base now that we're equally being aggressive about finding customers who are need EDA financial situation that we said in the financial strength the strength of our.
Balance sheet.
Has also been very important to customers, who want to ensure that they're working with an organization that is large and credible and it is around for the long term.
Okay. Thank them as a follow up maybe call underway and I just had a question operationally.
Operating profit dollar declines essentially matched the revenue decline. So there was very little decremental margins here I know the variable cost structure, probably helps but portions of the business are down significantly. So then you could just touch on the performance in the quarter and how we can think about decremental margin moving forward.
Yes, Adam direct their work.
If I understand your question I think it was why wasn't there are more de leverage there were there were a couple of things that helped us in the quarter that I touched on in my prepared remarks, one was on the credit loss reserve.
We ended up not booking any bad debt expense in the quarter. We just true dawn against the reserve that we had previously established and in fact released a little bit of it just because the receivable balance had bottomed down.
The second thing that happened in the quarter is we did true up our performance based compensation accruals.
Based on full year estimates and we took a half years benefit in the second quarter.
So I wouldn't expect those two things to continue as we move.
Through the balance of the year.
Understood. Thank you very much.
Thank you you have a question from Matt Cabral with credit Suisse.
Thank you, Chris you talked about the pace a decline in writing stabilizing so far in the third quarter, just wonder if you could expand a little bit more on that comment and just how we should think about the timing lag between writing is translating a day shipment or revenue trends and maybe more broadly just hitting on the health of IP budgets at this point as we're thinking about that.
The year.
Hi, Matt Yeah.
Sure I I'm on pausing for debt because you know, it's such a tapestry out there of customers. We have a obviously diversify customer end market can either within the end markets very diversified customer base. If you take Corp. For example across industry across geography and.
You know different areas are getting hit differently, so different geography that oil and gas in the south.
Suffering a little some of those customers you've got tech in west not suffering as much you've got the the virus resurgence in some areas and that you know the concerns about retreating back to stay at home orders. So there is there's a number of layers that various customers or dealing with and what I would say is it's hard to.
You paint a picture a single picture of where IP budgets are going that said.
We are having robust conversations all of our customers those that are set spending today and those who are planning tomorrow. So.
How how budgets work is really going to be reflection on.
The economy in the health crisis, which we continue to believe it's just yes unpredictable there's not a lot of visibility there that said it back to your right. You are writings question. If we we watch writings daily and weekly and we've had a couple of weeks.
Stability as I said.
But it can also be a little bit volatile. So we watch it very carefully that will typically turn into revenue in that next 30.
30 to 60 days is how we think about the impact in the timing.
But not what I would leave you with his and.
Technology is the top of everybody's mind and for those customers that are focused on.
You just.
Just surviving they've got rent to pay that payroll to pay.
They're not going to be paying for IP right now, but we are talking with those customers about what's to come in the next quarter and beyond.
Got it and then I think I heard in the prepared remarks solutions are down double digits. Just wondering if you dig a little bit more to the categories underneath there and talk about where you're seeing the biggest headwinds I guess I'm curious your perspective on how much is just near term projects being deferred versus maybe customers starting to reevaluate.
They are broader on premise footprint is as cloud adoption starting to pick up a little bit.
Yeah, that's a fair question I think.
At a high level.
And that what we've seen is a real refocus on.
The urgency of remote work optimizing.
Employees working remotely.
Really bolstering those capabilities over the last couple of quarters at the same time, we absolutely are seeing acceleration.
And just specialty towards cloud and moving towards the cloud.
In terms of on Prem.
What we've said it will say it again that we believe that there's going to be a hybrid world out there and continue to be a hybrid world and.
We are having those kinds of conversations with our customers. So assessing options for cloud what to migrate how that might create what cloud vendors to choose you know the big news is we've got the ability to help our customers through cloud deployment.
And then manage once they are up and running but we still we still think isn't really a lot of on prem opportunity going forward, it's going to be more of a multi cloud hybrid hybrid cloud situation.
Thank you.
Thank you Sir our next question comes from amid dorion with Evercore.
Okay.
Yes.
Thanks, a lot good morning, guys I guess I've two questions as well are you for self maybe on the gross margin performance. It was fairly impressive given the discussion we just haven't solutions and the fact line devices as well.
Could you, maybe maybe walk through kind of what drove the gross margin upside year over year, if it's sustainable as we go forward.
Sure I'll comment I can start on that line.
You know product margin held up pretty well and we did get some benefit from mixing into software as a service on the product margin within their.
I would say in a supply constrained environment in particular categories. The margins can be a little bit firmer and then within product. There's mix. So for example, desktops happened to be weaken the quarter. They tend to be lower March margin. So within that product we did.
To see some lower margin.
I think it in terms of the outlook.
As always difficult to predict because there are a lot of moving factors I did say in my prepared comments that I do think that we will mix more into public as we move into the back half of the year Q3 is typically a seasonally strong quarter for both government and education and given what's happening in education today.
Hi.
I would expect it to be quite strong and then you know where we do see a little bit more.
Firmness on the commercial side of the business tends to be in the larger better capitalized customers.
Which you know tend to have a little thinner margins. So we were pleased with margin performance in the corner.
Cautious as we think about it over the back half year.
Got it that's helpful and then.
Hoping to get your perspective on the applying devices are Pcs I guess as you go into the back half of the.
I can you just mentioned was up 6% in June if I am I mistaken.
Most of the industry data. So does that suggest that this may remain somewhat stronger or for a couple of more quarters.
Slipped on this on how you guys think about the segment in the back half and if you were in being able to meet all the demand would imply devices for the June quarter.
Yeah.
Okay.
Okay.
Oh, sorry, Chris Yeah, So yeah Ahmed.
The client device, obviously was very strong and we did take strategics.
Inventory position, so that we were able to meet demand as we move through the first and the second quarter.
Look as you said before.
Pre recall that we thought we were kind of in the late innings.
Around PC refresh in the EMEA.
When can upgrade and so.
That will continue we think about going forward certainly work from home, we think will be a trend that sticks it will be in reading fundamentally.
How would how how people worked in the office and at home will be a lasting and durable change how people learn from home will be a durable change in those will be opportunities for our core client and we've got devices that were out there last three four years ago now in 2017, where there might be refresh opportunities there obviously the economic.
Environmental employment would have an impact on that.
What we've always said, we've expected moderated growth and I think that we've looked at the same way going forward I'm, sorry, calling did you want to add something.
Yes. It is the only thing I was going to add his comment and I think you know this when you look at industry data points, you just need to make sure you're comparing apples to apples at what point in the supply chain, you're measuring so I think some of those industries should sources, our OEM shipments into the channel and distributors and retailers.
Others like that so theres, a little bit of the lag in that obviously, we saw very strong growth in client devices.
Through the in the first quarter end in in April as we back first as we shipped against our backlog. So some of these shipments you're seeing are effectively replenishing lower levels of inventory further downstream in the CHMP supply chain that had been pretty well depleted.
Perfect no absolutely a fairpoint that sorry go ahead.
Yeah, I mean, I was just going to say, we you know into supply chain, we are seasoned delays, particularly in the lower end chromebooks space.
So that will make its way through the supply chain over the next few months, but that is that.
Thats happening as well.
Perfect. Thank you.
Thank you we have a question from Katy Huberty with Morgan Stanley.
Thank you good morning, I appreciate you're not providing guidance for the year, but do you expect the same business model mechanics to play out in terms of growing two to 300 basis points faster than the market. Our survey work point said, maybe 4% to 5% declines for the year is is that also the bulk.
Part of what you see in the data then as a follow up.
Yeah, and Kt I'll start.
No I think what we he is there or a variety of data points around GDP and I key growth what I would say as we do expect ourselves we do hold ourselves accountable to outgrow the market by a meaningful amount.
As as you know typically when we had a more robust environments and we are selling more hardware, which we recognize that the top line. That's when we tend to outgrow by the two to 300, sometimes higher basis points when it's in an environment that's more.
Like the one ran recessionary and customers are doing things like extending the useful life of their assets with warranties that net down a and other games that are netted down we will continue to outpace the market that typically its via a slightly lower margin one to 200 250 basis points.
You have a view as you survey your customers and have a view as to what you think the ITC spending decline will look like this year.
We don't have a collective view that we're sharing era. So many data points out there that are.
So desperate I mean, there's there's there's such a wide variation that we're listening to our customers and just taking every opportunity helped served them and and grow our business, where we can and support our customers. So that they can grow coming out of this recession.
Okay that makes sense and then just one other clarification when you when you referenced some early stability in writings in in July.
When you say stable is that do you mean flat year on year or you mean the rate of decline as stable from what you saw.
In the June quarter, or the or the month of June.
Yes, good rate is it.
Sorry, sorry, just just just to clarify I think what I was trying to doing my comment was pretty good on the commercial side of the business and in a per Britain small business given indication of the I caught the peak decline we saw in the second quarter. So in in May or June those writings.
Declined over 20% in both.
Corporate and small business, what we're seeing in the month of July is that they are not as negative as those peak declines we saw Saar earlier, so it's a relative to what we had been seeing in that in the business statement.
That's very helpful. Thank you.
Thank you may have a question Ruplu, Victoria with Bank of America.
Hi, Thank you for taking my questions.
Chris I just wanted to clarify our the trends that you're seeing in corporate and small business customers is that playing out as you had expected 90 days ago or are the trends better or worse than you expected and any change to your outlook for the next couple of quarters.
Good morning replay.
Thanks for the question and I would say the trends are playing out as we expected in as we shared with you you remember last the last recession 2009, we talk through what we saw there and it was a faster reaction by our small and medium sized businesses in particular, they react more quickly to the economic downturn and that is what we thought here.
No no we have as I mentioned, a diversified customer base, even within small and corporates and so even within that we saw some of the customers in certain industries.
Hospitality and things like that who are suffering a little more others were actually being very aggressive in their strategies.
The other thing is when you think about as I mentioned.
The uniqueness of what we're going through with this and with the virus and the fits and starts if you will and different geography. That's also attending had an impact on our customers.
But all of that said I'd say that the trend played out as we expected.
Look you know.
Small business channels are going to be impacted by economics, and and they're going to focus on what they need to be to survive first and then and then invest for the future. So yeah. What I'd say is it's really affirms our differences diversification strategy and provide optimism in the competence of our business model.
You think about what we were able to deliver our free cash flow through the year is at 470 million, we paid our dividend, we're continuing to invest in the evolution of CW going forward.
We've got other customer segments that are going very strong given the demand in the market and I'm really proud of how the team is managing through that.
Okay. Thanks for all the details on that Chris appreciate it.
One question for you call and how should we think about as Ginny as a percent of sales going forward right. Now you mentioned you could reduce performance based comp and travel is less than youve enacted cost savings measures, but as lockdowns. Good relaxed how should we think about issue and they can you hold in line or should we expect opex or trend upward. Thank you.
[laughter], Yeah, I mean, we're not going to provide a specific guide on SGN a as you know we do have a variable cost structure. So there are elements of it.
Variable sales compensation that that will move with our gross profit and then we have put hiring restrictions in place and continue to let attrition Ron so that'll add a little bit of variability in that we've taken other cost savings.
Measures.
And the other point I would make group Lou is you know we are not managing to a short term SGN a target here as I think we've been communicating pretty consistently we do think that this is an opportunity to invest and gets stronger in essence. So we're going to take a balanced approach and that we are.
We're going to continue to invest both in Capex.
And our Opex, but having said all that we are mindful of the demand environment and we'll take a balanced approach and ensure we have an appropriate cost structure.
Okay. Thanks for all the details and congrats on the quarter.
Thank you.
Thank you.
Thank you we have a question from Shannon Cross with Cross research.
Thank you very much for taking my question my.
My first is just regarding what you're seeing in terms of extended maintenance sorta contract terms can you give us some perspective on how the magnitude of this and maybe if you go back to other times when the.
About how this compares none of the follow up thank you.
Okay.
Yeah, I mean, we are seeing customers, particularly those who are looking to save cash move into shorter duration.
Maintenance contract.
Acts as opposed to going to you know those that are paying on.
For software a number of seats and things like that looking at true ups.
I it's difficult.
To and.
And then I think back in 2009, we saw similar behavior and then when we.
Well.
Experienced a a bit of a slowdown in the 15 16 period, we saw a customer sweating assets at that point in time.
Maybe a little bit more pronounced.
But I think that's logical you know just given the severity of the crisis realm.
Shannon.
I would just.
We get bad Daddys or more robust now and so these conversations with customers.
In terms of service contracts in potentially shortening them.
Yeah conversations about managed services in some wins for us in managed services as a result of the conversations.
Great. Thank you and then how do we think about education budgets and I'm just trying to understand.
Obviously, all of the school districts and outlaw not all but a lot of school districts are going to hybrid model. Clearly there are a lot of kids out there who don't have access to chromebooks are.
So I'm wondering what you're hearing from the school districts in terms of.
As you know the state of their budgets and then also how are you thinking about nine no and magnitude of the stimulus bill when if when and if it ever gets.
Decided but how quickly.
Does sort of federal funding.
Mike in the next few corporate next year.
Months' frankly, thank you.
Yeah, Shannon on the on the education side K through 12 in particular, they are accessing funding and we're helping them with that so funds are flowing and they are really all hands on Dec trying to get devices into the hands of students a and so there's there's a lot of activity there.
Regarding.
A client devices remote enable manager as well as what we call kind of broadcasting from the school, it's very complicated and we had a highly seasoned sales organization that works with the school, but the breadth of the solutions that there were looking for a full.
And as I mentioned in my remarks, and in sanitation stations to dividers.
It could just help them provide to that they have kind of turnkey solutions, but there is strong demand to get they get the kids, but you know in in the classroom environment, where their virtual or hybrid as quickly as possible. So there's a lot of pressure there and they are accessing fun in higher Ed we were seeing some pause.
Hi, John.
The budget side, you know obviously, they've got a concerns around variant that solutions side of the business. There in terms of on campus a robust network.
Owing a little bit, but we are starting to see a pickup when it comes to remote enablement and devices and we'd expect that to continue as that you know the the school gets sorted out coming into this September October timeframe in terms of the timing of funds flowing through.
I I don't have a particular timeframe that I that I would know how to share, but I, but I would say there, they're moving a little faster than I would've expected in some areas and again our teams are really quite good at figuring out where they're going to flow, how they're going to flow and how to make sure you write up the order so that the fund can apply.
But they are flowing and I would expect the same what happened with that with any new build that we see it makes it tougher.
Great. Thank you.
Thank you we have a question from Ted start King.
William Blair.
Hey, Thanks for taking my questions I wanted to follow up on one of the earlier questions on a new clients can you talk about sales productivity and ability to win new clients. This environment.
Then maybe also around.
Both historically, what you're seeing today.
Hi, Ted Yeah on the on acquisitions.
And new client, we haven't really haven't shared specific information about numbers of acquisition and penetration rate, but I would say.
That is it has not been relatively harder because we are a remote yeah because weve. He moved all of our marketing for example to digital channel. So we're reaching more customers and we're reaching more people within customers and taking the opportunity to follow up so we yeah.
Hey, retooled, how we put together acquisition programs to be as effective as possible. Our sellers are really quite amazing and your ability to connect with people actually a and as I did mention.
The U.S. sellers, who are now more out in the field with customers as well.
But I didn't really pleased with how they've been able to transition and the and the aggressiveness. The assertiveness in the success with our acquisition programs right now.
And the second question Ted I was a lot of retention yeah. We don't that's not a number that we share a but.
But I would say that the customer satisfaction in this current environment has been really quite high what we measure from a satisfaction perspective.
You said I'd just add I mean, it's difficult in this environment, particularly for the most challenged customers who are looking to preserve liquidity, they're pulling back so.
They may not be spending period versus not spending with CDW I think in an environment like this consistent with our remarks, we are staying in front of our customers, even those that may not be spending and.
I I think if theres wallet to be had were getting our fair share of that.
Okay, Great and then just a quick follow up question. So on that note are you guys flexing familiar financing offerings for customers and what would that how would that kind of make its way through the piano.
[music].
Yeah, I mean, if when you say the no you mean the notes we issued in April those were for general corporate purposes.
To enhance our liquidity as well as you know to make sure we have sufficient liquid working capital to support our customers I would say one area that we're very active in is working with our customers and helping them understand a variety of vendor partner financing programs that are out there and that's why.
Are we start in many of our Oems have been quite aggressive in terms of providing attractive financing and we are seeing a pretty material uptake on that from our customers. So the nice thing about that is it doesn't flow through our financials.
As I mentioned there are some instances, though you know where we are.
Investing in inventory for customers or have seen terms tick up a bit and that's.
Are you wouldn't see it and in our working capital.
Okay, great. Thank you.
Thank you we have a question for Matt Sheerin with Stifel.
Yes. Thanks, Good morning, I just wanted to ask I'm just about.
Again about the public sector, specifically the state and local government, which has been I know a strong.
Fast growing market for you.
What are the trends you're seeing there and are there are concerns about budget cuts just due to lower revenue and lower state taxes.
Hi, Hi, Matt.
Yeah. There are concerned certainly we talked about that in the last call budget budget concerns.
But again, we are finding that in the state and local area budgets are being prioritized against Ikea initiatives. Both work from home and also that you know various projects government projects that are in flight.
You know the hope and expectation is we will see in in a a in a stimulus package. Some some some sort of relief for state and local governments and again will help the government's figure out where where to get that but they are they are struggling a bit now, but continuing to spend on on the he needed as that's been prioritizing essential.
Are there for their workforce and toward their mission.
Okay, Thanks, and and relative to the health care space, which had been a market that that turned around for you I know last year and you saw some positive trends and obviously budget shifts there has impacted demand near term, but in terms of conversations you're having with.
Customers in that sector. It do you still expect those investments towards digital transformation to till it still occur at some point.
Oh, I do Matt Yeah look healthcare literally caught the global pandemic virus and Ah yes.
Protect all of US he has been protecting all of us, but yeah. There have been forced to see revenue generating businesses or at least diminished on and I'm confident you know given a demographic trends and changes that have already taken place regarding listening regulations and accelerating digital transformation.
That it will it will result in a strong recovery in long term growth in the healthcare a end market and we are having extensive conversations with our health care systems around virtual care across all spectrum, you've got tele health and Tele medicine virtual rounding you've got remote patient monitoring and then you've got a you know enhance.
Sure monitoring in places like you guys to you and all of those require.
Slightly different sorts of solutions and we are you know we out we are building those out for some customers already but I do see that is a long term positive trends.
Thank you.
Thank you we have a question from Keith Housum with Northcoast research.
Good morning, guys. Thanks for taking the questions in terms of like the overall capitals in the strategy right now in terms of M&A. How does M&A volumes are for your priority. This thing when are you seeing an opportunity for them out on second perhaps but as of the future.
Well, we just I'll start in college and you can jump in if youd like yeah. We just did a a an acquisition of IDN data you and that's a native cloud services provider. That's a great example, and oh than investing our capital behind our strategy of developing that the solutions and services that our customers need now.
And in the future. So we absolutely will continue to look at potential targets and we're very active in inbounds, we're very active and outbound.
Organization I Gnw like actress is a partner that that these have you had worked with us on time. So we got to know them very well, we got to know the people in the quality and the culture and their capability. So we will continue to look a in the market for for opportunistic.
Acquisition.
Yeah, I believe in terms of product in terms of prioritization liquidity is our top priority, but we have 2 billion of it. So we feel really good about where we are.
The dividend is a priority, we just declared that and again given the cash flow generation capability of the business feel good about that were below our target leverage sitting at two times. So our next priority is M&A and so if we find the right opportunity at the right price.
We'll take the opportunity to enhance our competitive position in this environment.
Great I appreciate that just tailored to the the public sector. Obviously, that's a area it usually declines in the fourth quarter, but my understanding, especially in the chromebook, Gary There's a significant delay and gave us the markets based on that combined with the approach to go on hybrid schooling right laws, taking is there an expectation that public will actually.
Have a good the rest second half a year and clean the fourth quarter.
What we're I mean, we're not going to win in normal times, we wouldn't guide by channel in certainly in the in the current environment, we're not going to I think you can tell from our comments on.
The second quarter and writings and comments about where we think the mid business is going to mix into the second half of the year that you know the demand is more resilient on the public side, particularly federal government education, you did call out Chromebooks, we are keeping an eye on that supply is.
Tight there given the extraordinary demand and that's a little bit of a wild card that we see in the third or fourth quarter, but you know given the breadth of our vendor partners and our scale, we think we'll be able to manage that as well as anyone not that there may not be disruption, but.
You know in terms of customers looking for supply, we think CDW can help them given our multi vendors. We're also having conversations with customers around alternative processors and things like that so we're doing what we can to get creative.
To get supply for our customers to help them through the chromebook shortage.
Great. Thank you.
We have a question from Paul Coster with JP Morgan.
Hi, This is Paul Cheng on for costs are thanks for squeezing me in so just to drilling on your SMB segment can you kind of give us a sense for you know the overall health of these customers are you seeing more sales kind of postponed or canceled.
And our most customers kind of paying on time, as well and any verticals or regions you want to call out they are seeing a little bit more signs of life.
Well yeah.
[laughter], Yeah, I mean, it seemed like it in terms of in terms of writings I mean, I think that the commentary we provided on writings for small business gives you the.
A good overview of the demand environment, obviously within that.
You have industries that are relatively stronger and those are a little bit more challenge and even within industries you have some winners and losers.
On the.
Cash collections front I would say, we we're generally pleased with the pace of cash collections from our commercial customers, including our small business customers.
We do have a long tail of of small customers that were keeping an eye on that portion of the credit portfolio, but overall I would say that collections held up reasonably well in the quarter.
Thanks, and then just to follow up on free cash very nice performance. There kind of you know despite softer topline and higher capex levels looks like you had you know a bit of working cap benefit in the quarters.
Can you just talking about the puts and takes on operating cash and how we should think about trends heading into the second half.
Even despite the tough macro I'm also a capex levels are soon that level comes down and in the second half. Thank you.
Yeah, I mean in terms of working capital.
One of the dynamics you would expect to see is when the business shrinks that we would liquidate some working capital and you did see that dynamic play out in the quarter.
You know that was partially offset though by seeing the cash conversion cycle.
Tick up a bit I think the other thing to keep in mind as you think about free cash flow, we did get some timing favorability.
In terms of cash taxes, we didnt make a payment in the second quarter and historically, it's one of our biggest quarterly payments and that reversed a little bit in terms of capex, you're right. It is a little bit heavier up front end loaded. This year you might recall that some of the sensus devices that we procure referred to.
Devices the service offering are running through Capex.
With all of those devices out in the field now we are virtually done with.
Additional capital expenditures for the census, so those are some things to think about on the puts and takes of free cash from working capital.
Thank you so much.
Thank you.
Thank you.
Now I'll turn the call back over to Chris Lee.
Okay.
Thank you I I'd like to take a moment you acknowledge that many continued challenges due to hold at 19 into recognized the extraordinary sacrifices and contributions being made by so many for devoting themselves to serving others.
I also want to recognize the remarkable dedication of our co workers around the globe and their extraordinary commitment to serving our customers our partners and all CDW stakeholders. They continuously impressed me and reaffirmed my conviction that we will emerge stronger from the.
Thank you.
And thank you to our customers for the privilege and the opportunity to serve you during the time.
Our to our investors and analysts participating in this call. We appreciate you and your continued interest in in support of CDW, calling when I look forward to toppled with you again next quarter.
Thank you everyone for joining that now concludes the presentation you may now disconnect.
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