Q4 2020 CDW Corp Earnings Call
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Good morning, My name is free and I'll be your conference operator today.
At this time I would like to welcome everyone to be CDW fourth quarter 'twenty 'twenty earnings call. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
I would like to ask a question. During this time simply press Star then the number one on your telephone keypad if people like dual carrier question press. The pound key. Thank you I would now like to turn the conference over to Brittany Smith VP of IR at S. P. N E. You may begin.
Thank you good morning, everyone. Joining me remotely today to review our fourth quarter on full year financial results are Chris Leahy, Our Chief Executive Officer, and Collin Chemo, our Chief Financial Officer, Our fourth quarter earnings release was distributed this morning and is available on our website investor CDW Dotcom along.
With supplemental slides 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 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 and form 8-K, we furnished to the SEC today and in the company's other filings with the SEC.
GW 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 SEC rules, you'll find reconciliation charts in the slides.
For today's webcast on our earnings release and form 8-K, we furnished to the SEC each day.
Please note that all references to growth rates or dollar amount increases in our 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 results from CDW UK or Canada.
Also there was one fewer selling day in the fourth quarter of 2000, twenty's compared to 2019.
Replay of this webcast will be posted to our website later today.
I also want to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast without specific written permission from the company with that let me turn the call over to Chris.
Thank you Brittany I'll begin this morning, with an overview of fourth quarter and full year results and drivers of performance and share. Some thoughts on 2021, Collin will take you through a more detailed look at our financials capital allocation strategy and outlook, we'll move quickly through our prepared remarks to ensure we have plenty of time for questions.
Our fourth quarter and fiscal year results demonstrate the balance and strength of CDW business model and strategy for the fourth quarter net sales were 5 billion, 11% above last year on an average daily sales basis adjusted for the impact of one fewer business day in the fourth quarter of 2000, Twenty's on 2019 and up 10, 7%.
Constant currency.
Gross profit increased 13, 3% to $881 million.
Non-GAAP operating income was $376 million, an increase of 94, 9%.
And non-GAAP net income per share was $1 82016.
$16, 1% above last year on a reported basis and up 15, 8% in constant currency.
For the year net sales were $18 $5 billion up nearly half a billion dollars year over year or two 4% on a reported and constant currency basis.
Gross profit increased five 6% to $3 $2 billion non-GAAP operating income increased two 6% from $1 4 billion and non-GAAP net income per share increased 8% on a reported and constant currency basis to $6 59 net.
'twenty 'twenty was an extraordinary year I'm very proud of how the CDW can move quickly and smartly adapted to help our customers and partners during a challenging on the diversity of our solutions portfolio and customer end markets served as well in 2020, providing balance and driving our exceptional results.
During the year, our teams help customers across the full solution stack in the full lifecycle on client devices to cloud from designs managed services, we executed against our strategy and continue to invest in high growth solutions and services capabilities, including three acquisitions.
And W. A leading provider of cloud native service expertise and software development capabilities.
And excuse me, an a rating and southern Dakota solutions, it's expanding gross service margin.
Performance for our customer end markets varied.
Increased income and decrease in others, but all experienced change or disruption to their technology needs until their operations last year due to COVID-19.
Our value proposition resonated with customers, we combined our services and broad solutions portfolio with our extensive technical knowledge and logistical and distribution capabilities to deliver the best outcomes for our customers. This led to meaningful outperformance compared to the U S market, we emerged from 2020 stronger in.
Even more committed to executing our strategy.
Turning to the fourth quarter, we continued to help customers people remote enablement resource optimization cost reduction security hybrid cloud solutions and digital transformation.
Similar to the third quarter, some customers within solutions projects and started a new project performance for our most impacted customer end markets improved and trends for our more resilient customer end markets remained strong.
During the fourth quarter, we continued to leverage our distribution centers extensive logistics capabilities deep vendor partner relationships and strong balance sheet and liquidity position to navigate supply challenges and support our customers.
Particular for Chromebooks for K, 12 customers, where demand greatly outstripped supply.
Now, let's take a deeper look at fourth quarter customer end market performance.
Corporate declined 11% with similar levels of performance per transactions and solutions in total there was improvement versus the last few quarters.
Customer spend for corporate customers was not uniform some customers were doing well and investing in technology, whereas other customers those who are on challenged industries or geographies were impacted by spikes in Covid cases.
We're still cautious.
Small business declined mid single digits as notebooks returned to growth.
All business customers tend to be more nimble than corporate customers, which drove it.
Net versus the third quarter.
The government team increased net sales 30%.
Federal delivered another excellent quarter with net sales up strong double digits.
During the quarter our device as a service solution for the U S Census Bureau was mostly completed.
All devices were returned to us for decommissioning and he started the process to resell the clean units through third party re marketers.
Our team did an excellent job with this program. It was a multi year effort to develop and execute this large complex undertaking moving the nation. Once a decade population count on paper to digital for the first time, our services and logistical capabilities and multi vendor solutions set us apart from the competition.
Our unique and what we can deliver to our customers.
Outside of the census project with federal team continued to help civilian agencies will promote enablement and device refresh.
We also delivered on department of Defense projects that were awarded at the end of the third quarter.
The state and local team delivered strong double digit growth investments.
Investments continued to be a priority despite budget pressures.
Our team helped customers neighborhood, what capability and restart solutions projects.
Education increased an extraordinary 140% driven by some nominal growth in K 12.
K 12 customers continued to focus on equity and access and remote learning, which drove triple digit growth for notebook related to accessories related discoveries and solutions as customers turn to us for holistic capabilities.
Higher education increased low double digits as schools continue to help students with remote enablement and resumed net comp projects with a focus on creating connected communities to enhance the student experience.
Healthcare declined mid teens, a meaningful improvement compared to the third quarter customers continued to be cautious with their spend due to ongoing budget pressure focusing on key areas like remote enablement telehealth and support infrastructure.
Other which represents our UK and Canadian operations was flat on a reported basis.
UK net sales increased mid single digits in constant currency in Canada net sales decreased low double digits in constant currency.
<unk> for both markets was driven by strong education demand to enable remote learning and healthcare spending to address the pandemic with softer corporate performance.
In the U K there was some pull on our customer demand on before the announcement of the agreement with the EU as customers prepared for a potential exit.
Over the last several weeks the UK team has executed against its well planned Brexit mitigation strategy and has done a great job, helping customers navigate through the complexity of the new agreement.
Our fourth quarter performance benefited from the diversity of our customer base and our deep and broad product portfolio. We continue to meet the critical demands of our customers across all categories.
Hardware was up strong double digits, driven by excellent notebook growth in particular for our public segment customers leading to over 30% client device growth.
While thoughtfully flat software gross profit increased mid teens, reflecting continued mix into software as a service services grew low double digits driven by device decommission services for the census project and configuration services.
Services are fundamental to our go to market approach and a key enabler of our value proposition.
Transactions increased strong double digits solutions declined low single digits with some customers continued to refer infrastructure and larger project engagements.
The team delivered excellent growth in our cloud practice cloud customer spend increased strong double digits across all customer end markets driven by robust growth in collaborations infrastructure as a service security and productivity, we expect strong customer demand for cloud solutions to continue.
Let me also share a little more color on our security practice, given its importance to our customers and cyber threats are constantly emerging and evolving and increasing <unk>.
Security customer spend grew strong double digits as customers improve their security framework to respond to increasing threats.
Last year customer spent $2 billion with us on security.
Our fourth quarter and full year operating and financial performance reflected the combined impact of our balanced portfolio of customer end markets, our full suite of solutions and services across the IP landscape and our ongoing success executing our three part strategy. They are important drivers of our cash and our future performance.
The diversity of our customer end markets served us well when macro or other external challenges impact various industries and customers differently, our extensive products services and solutions portfolio positions us to meet our customers' total needs.
Across the spectrum of IP and can pivot quickly to trends and customer demands.
As I shared the balance of our customer end markets and our offerings are especially relevant in current environment.
And the final driver of our performance our three part strategy for growth is first to acquire new customers and capture share second enhance our solutions capabilities and third expand our services capabilities each.
Each pillar is crucial to our ability to profitably by design orchestrate and manage integrated technology solutions, our customers want and need today and in the future.
Let me share a few examples of our strategy in action and how we've helped customers last quarter.
Our small business team helped to born in the cloud financial Technology company add more agility and flexibility to its operations and technology stack by becoming multi cloud the.
The customer initially came towards even requesting help to implemented backup solution for its existing public cloud provider. After a review by our digital velocity team our team on cover the need for the customer to become multi club with additional capabilities and redundancies on.
Can you help the customer build a secure second public cloud environment and address additional needs, including application development functionality and consumption management.
Our team has established CDW as a trusted partner with extensive extensive cloud capabilities to help with research evaluation procurement implementation and management.
Customers are increasingly adopting cloud, but are also finding a growing need to become multi cloud.
CDW is cloud expertise and cloud management platform across multiple public clouds are a differentiator in the marketplace.
Let me share another story healthcare sector to address Covid healthcare customers have turned to CDW to provide care in new settings, and in new ways and independent nonprofit healthcare provider in the U S northeast need our guidance to enable remote COVID-19 testing and vaccine distribution in numerous outdoor locations.
CDW account manager engaged one of our networking specialists to develop a solution that would deliver the required performance and scale quickly.
The solution has since been rolled out to all locations in the next work with the customer on the site wireless connectivity further leveraging our technical resources and strengthening the relationship.
Our team save the customer time, and energy and provide a great service as a forward thinking partner for the customer control.
The pandemic has created new issues, requiring creative solutions, and leading customers to rely on us more than ever as an extension of their team.
This is the value that CDW brings to our customers, we pair our broad solutions portfolio with our deep technical expertise to deliver the full outcome the customer's cookies.
Finally, the digital divide has created significant learning challenges around the world. Our teams have worked closely with education customers in the U S and the UK and in Canada to tackle this challenge.
In the UK are working with the London grid for learning a charitable trust dedicated to the advancement of education to provide technology for hundreds of schools across the country.
Last quarter, our team developed and provisions.
Turn key solution comprised of client devices accessories software and services, leveraging our strong logistical and distribution capabilities and deep vendor relationships.
There has been tight collaboration with our clients vendor partner to provide the best possible device availability for the customer due to the current global Chromebooks Baidu strength, our distribution center in the UK has done a tremendous job to deliver over 100000 units to date hundreds of schools.
<unk> is uniquely positioned to deliver for our customers and our vendor partners. This is a great example of our critical role.
These examples highlight CDW three part strategy for growth and demonstrates the success of investments in cloud, our strong relationships with customers and vendors and the importance of our competitive advantages I am proud of the way our team continues to deliver.
Let me briefly update you now on our Covid response efforts.
Since the beginning of depend on if we are following three key principles first to safeguard the health and wellbeing of our coworkers.
Served a mission driven needs of our customers and third support our community.
I am proud of how the team has managed the impact of COVID-19 on our business teams at our distribution and configuration centers sedan standing job maintaining the high level of customer service. We are known for while adhering to new protocols that safeguard the health and wellbeing of our coworkers who come to work every day.
We've also taken deliberate actions to foster collaboration and coworker engagement and to maintain connectivity and productivity.
Dirt and bolster our culture, even while we are different.
Actions include leveraging new tools, and learning and development opportunities expanded health and wellbeing programs.
Increased content from our business resource groups and compensation investment to recognize the team's tremendous effort and performance.
Now, let me share some thoughts on 2021.
The near term global housing net macroeconomic environment is still uncertain our.
Our current outlook is for the U S market to return to growth in growth between two and a half and 3%.
As you know, we hold ourselves accountable for growing faster than the market and we expect our top line in 2021 to grow 200 to 300 basis points faster than the market in cash concurrently.
There are many wildcards, though including COVID-19 government restrictions on vaccine rollout policies, and then moving the administration, including stimulus programs and tax changes and supply constraints in particular for chromebooks.
We are encouraged about our Q1 performance to date and how our teams are executing but we're also cautious about the macro environment.
Even though uncertainty continues our confidence in the prospects of the business has never been higher and we believe that technology will be more central to all sectors of the economy and will play an increasingly important role in the years ahead.
Last year, we went through a rigorous strategic planning process everything every three years and we are now accelerating investment and execution against it.
We have confidence that we have the right strategy to best serve our customers and partners to enhance our competitive position and to deliver sustainable profitable growth.
This confidence has led our board of directors to increase our share repurchase authorization by $125 billion.
Our role as a trusted strategic partner to our customers and customers is more important now than ever we will continue to do what we do that leverage our competitive advantages to help our customers address their it priorities and achieve their strategic objectives.
And of course out execute the competition now Collin will share more details on our financial performance Collin.
Thank you Chris Good morning, everyone I'm going to provide more detail on our fourth quarter and full year results capital allocation priorities and initial thoughts on 2021.
Turning to our fourth quarter P&L on slide nine consolidated net sales were $5 billion up nine 2% on a reported basis and at.
11% on an average daily sales basis, as we had one less selling day.
On a constant currency average daily sales basis consolidated net sales grew 10, 7%.
On an average daily sales basis sequential sales increased seven 6% versus the third quarter. This was higher than historical seasonality of our mid single digit decline primarily due to how COVID-19 is impacting our channels differently.
During this uncertain time seasonality has been and is expected to continue to be different than historical experience.
Customer channels generally performed consistent with the demand writings commentary shared on our last earnings call other than K through 12, where demand was even stronger than expected pockets of supply constraints continued in the quarter, primarily for lower end client devices, such as chromebooks, our team did a great job navigating the fluid environment and leveraged our.
<unk> capabilities and strong vendor partner relationships to procure a healthy share of supply for customers.
Gross profit for the quarter was $881 million, an increase of 13, 3% gross margin was 17, 8% up 70 basis points over last year. The gross margin expansion was driven by product margin and mixing into netted down revenues primarily software as a service.
Turning to SG&A on slide 10, non-GAAP SG&A increased 15, 9%. The increase was primarily driven by higher payroll costs due to higher gross profit and compensation investments in our coworkers to recognize and reward their tremendous efforts and performance in 2020.
The acquisition of IGN W and ongoing investment in Amtrust, and COVID-19 expenses to safeguard and compensate frontline coworkers, partially offset by continued cost savings measures, including decreased travel and entertainment.
Coworker count at the end of the fourth quarter was 9982 up two from the third quarter year over year co worker count increased to 86, driven by an increase of approximately 150 customer facing co workers, including RG NW.
Partially offset by a decrease in non customer facing coworker count.
GAAP operating income was $332 million up 17, 1% non-GAAP operating income, which better reflects operating performance was $376 million up nine 9% non-GAAP operating income margin was seven 6%.
Moving to slide 11 interest expense was $37 million down two 9%. The decrease was primarily due to a lower LIBOR rate and savings from the August refinancing.
Our GAAP effective tax rate shown on slide 12 was 19, 2%. This resulted in fourth quarter tax expense of $57 million compared to $50 million last year.
Net to our non-GAAP effective tax rate, we adjust taxes consistent with non-GAAP net income add backs as shown on slide 13 for the quarter. Our non-GAAP effective tax rate was 22, 2% down 150 basis points versus last year's rate, primarily due to tax benefits associated with new regulations for global intangible low taxed income.
And non deductible expenses, partially offset by lower tax credits.
As you can see on slide 14, with fourth quarter weighted average diluted shares outstanding of 145 million GAAP net income per share was $1 65 up 29, 6%. Our non-GAAP net income was $264 million on the quarter up 15% non-GAAP net income per share was $1 82 up 16 one.
<unk> percent from last year.
Turning to our full year results on slides 15 through 20 revenue was $18 $5 billion, an increase of two 4% gross profit was $3 $2 billion up five 6% gross profit margin was 17, 4% up 50 basis points, driven by product margin and mixing into netted down revenue.
Primarily software as a service before.
Before moving down the rest of the P&L I want to take a moment to put 2020 sales and gross profit in context, we have consistently highlighted the power of our diverse portfolio and customer end markets, we pivot to where the growth is leveraging our competitive advantages to better serve customers and gained share in 2020, we estimate the U S market declined low single.
Digits call it down 2% CDW net sales grew 440 basis points faster than gross profit grew 760 basis points faster than the 2% market decline.
Census contributed 170 basis points of year over year net sales growth, excluding the census, CDW still delivered meaningful net sales and gross profit growth in excess of market.
During the 2009 recession, our net sales premium narrowed as customers paused on hardware purchases and gross profit margin compressed due to product margin pressure on the competitive environment in 2020, our portfolio performed differently, partially because of the unique dynamics of the pandemic, but also because of the progress we've made building out the solution.
And services capabilities, our customers failure.
For example, while U S software and services collectively totaled 18% of U S. Net sales in 2020 day accounted for approximately 40% of U S gross profit.
Returning to the full year P&L operating income was $1 2 billion and non-GAAP operating income was $1 4 billion up two 6% our non-GAAP effective tax rate was 24% down 120 basis points versus last year's rate. The decrease in the effective tax rate is primarily due to new record.
<unk> for global intangible low taxed income in non deductible expenses that are not expected to contribute as much of a benefit to the tax rate in 2021.
Net income was $789 million on non-GAAP net income was $954 million up five 8% non-GAAP net income non-GAAP net income per share was $6 59 up 8%.
Turning to the balance sheet on slide 21 at December 31 on cash and cash equivalents were $1 $4 billion on net debt was $2 5 billion.
Liquidity further strengthened with cash plus revolver availability of approximately $2 $5 billion.
Full year free cash flow was $1 2 billion as shown on slide 22. This equates to six 7% of sales well above our historical free cash flow rule of thumb of 375% to $4 two 5% a portion of the outperformance was driven by timing or one time items, including mixing into vendors with.
The extended payment terms for sensus deferred payroll in U K tax payments on the timing of collections from some large customers.
We expect a favorable timing to reverse over the next few quarters.
Moving to slide 23, the three month average cash conversion cycle over 17 days down one day from last year's fourth quarter, DSO and Dio over unchanged from last year, while <unk> increased by one day. The increase in <unk> was primarily driven by mixing into vendors with extended payment terms.
As previously mentioned, we resumed our share buyback program in the fourth quarter repurchasing $200 million of stock for full year 2020, we returned $561 million to shareholders, including $220 million of dividends and $341 million of share repurchases at an average price of approximately 100.
$29 per share.
Turning to capital allocation priorities on slide 24, given our strong liquidity position our priorities remain the same.
<unk> increased the dividend in line with non-GAAP net income to guide. These increases we will target the dividend debt approximately 25% of non-GAAP net income and to grow in line with earnings going forward.
Second ensure we have the right capital structure in place with a targeted net leverage ratio of two five to three times. We ended the year at one seven times, our third capital allocation priority is to supplement organic growth with strategic acquisitions in the fourth quarter. We acquired two small service now solution practices to build on the success from our 2019.
<unk> acquisition of Amtrust, we remained active evaluating targets and fourth return excess cash after dividends and M&A to shareholders through share repurchases.
Going forward, we expect to move closer to our target net leverage ratio of two five to three times through a combination of organic investments M&A and cash return to shareholders. We expect to return at least $1 $2 billion to shareholders on 2021, including approximately $1 billion for share repurchases with the balance.
From dividends at the end of December we had $338 million remaining on our current share repurchase authorization.
As Chris mentioned, our board of directors authorized a $1 billion to $5 billion increase to the share repurchase program in support of our capital allocation priorities of course, as we always do we will closely monitor the macroeconomic environment liquidity M&A activity leverage and adjust as needed.
Moving to the outlook for 2021 on slide 25, the current environment continues to be highly uncertain, making it challenging to forecast expectations for market growth with a high degree of confidence. Therefore, we are providing a base case for 2021 19 market growth and how we expect CDW business to perform in that environment.
Our base case assumes U S. It market growth between two 5% to 3%, we expect CDW net sales to grow 200 to 300 basis points faster than market currency is expected to be a tailwind of approximately 50 basis points for the full year, assuming exchange rates of $1 36 to the British pound and <unk>.
<unk> nine for the Canadian dollar.
In terms of performance by segment for the year, there continues to be uncertainty among customers across end markets, but here's some drivers to consider.
On the commercial side of the business corporate and small business customers tend to respond quicker to the macroeconomic environment.
That last year Q1 was the strongest quarter than Q2 experienced the steepest decline with quarterly declines moderating thereafter, we expect the timing and slope of a rebound in 2021 to be closely tied to customer confidence, which will be a function of the macroeconomic environment and success containing the virus moving to public.
We expect continued success supporting department of defense and civilian agencies. However, government is not expected to fully make up the loss of the census project.
Which contributed a total of approximately 230 basis points of net sales to CDW in 2020.
Education growth is expected to be strong earlier in the year with sales above historical seasonality and then decelerate throughout the year due to overlap some of the unusual seasonality experienced in 2020.
Chromebooks supply continues to be a wildcard.
Healthcare overlaps are tougher in the first half as customer demand spiked at the beginning of the pandemic and then comparisons ease in the second half the timing and slope of a rebound in 2021 is linked to budget clarity, which we expect to be a function of success containing the virus and potential stimulus support.
Finally, our international businesses are more weighted to corporate customers. So the pace of recovery will be driven by the macro environments in the UK and Canada.
Moving down the P&L, assuming it market growth of two 5% to 3%, we expect non-GAAP operating income margin to be in the mid 7% range and non-GAAP earnings per share growth to be in the mid to high single digits call. It six 5% to 7% on a constant currency basis.
This reflects the following below the operating line assumptions, one a modest decline in interest expense to the mid to high $1 42 on non-GAAP effective tax rate at the low end of our typical 25, 5% to 26, 5% range assuming current tax rates. The low end of the range is approximately 150 basis points.
It's higher than 2000, twenty's, 24% rate, creating a headwind of over 200 basis points on earnings per share growth.
<unk> contribution from share repurchases with non-GAAP earnings per share growing approximately 200 basis points faster than non-GAAP net income.
Currency is expected to contribute approximately 40 basis points to reported earnings per share growth additional modeling thoughts for annual depreciation and amortization can be found on page 26.
Turning to the first quarter historically, the Q4 to Q1 sequential decline on an average daily sales basis has average down approximately 7%. We expect this year's first quarter sequential decline to be down high single digits more than historical seasonality, primarily due to sensus and Mississippi Department of education.
On a year over year average daily sales basis. This equates to mid single digit growth, reflecting continued education and government strength, improving commercial trends, partially offset by the overlap of the March 2020 work from home surge, we expect first quarter constant currency non-GAAP earnings per share growth to be a couple of hundred basis points higher than the.
Full year EPS outlook as we overlap last year's increase on the credit loss reserve partially.
Set by having one fewer selling day, which adversely impacts quarterly profit growth by approximately 200 basis points. This is timing and we will recoup the day in the fourth quarter.
January segment trends are generally in line with my commentary on first quarter expectations.
Additional modeling thoughts on that on.
The components of cash flow can be found on slide 27, our long term free cash flow rule of thumb remains unchanged at three and three quarters to 4.25% of net sales assuming current tax rates given.
Given the timing impacts that contributed to 2020 significant over delivery, we expect 2021 free cash flow to be at or slightly below the low end of the range. We expect capex to run approximately 75% to 80 basis points as a percentage of net sales slightly higher than the historical 50 basis points rule of thumb. We believe now is the time to.
The accelerated investment in digital transformation in our own business, enabling us to fortify our competitive position and make CDW the trusted partner of choice for customers and vendor partners.
As we always do we will provide updated views on the macro environment and our business on future earnings calls that concludes the financial summary, with that I'll ask free 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.
Okay.
Our first question comes from Katy Huberty with Morgan Stanley.
Thank you good morning.
Do you think the supply constraints on chromebooks.
Package the December quarter or in other words, how much better would you have done in December and then when do you expect the supply constraints to loosen up this year.
Hi, good morning.
We did carry a higher backlog than normal out of the fourth quarter into the first quarter.
In terms of when we expect.
Supply conditions to get better.
Obviously very difficult and fluid to call with any precision, but our expectation would be.
Through the course of the first half of the year, we would see supply on the chromebook side of the business begin to return to normal.
Okay, Great and then just as a follow up.
Netted down revenue increases and drive gross margins higher how should we think about the flow through to the operating margin line does sales commission fully offset that gross margin expansion or should we see some scale benefits and potential operating margin expansion over time.
Yes.
You're right there is a little bit of a give back on the sales top line because we pay on gross profit dollars.
I do.
<unk> <unk> from a secular perspective, our expectation is consistent with yours that we would expect netted down items in software and services to grow faster than the balance of the business.
I think we're just a little careful on trying to understand where we are in the cycle and weather.
A hardware refresh refresh is coming and.
If it is coming how strong it could be so I think that's something to keep in mind as you think about that netted down mix and the impact. It has on gross margin going forward at least over the next several quarters I think the other thing to think through on the on the margin and then the flow through to NGL Oi margin is we did benefit from.
Really an exceptional product margin in 2020, and I think some of that was due to the unique dynamics of the supply environment as well as the premium that customers were placing on on speed and so I think that's just also another thing to keep in mind as we think about gross margin going forward.
Again, I think those are probably more secular or cyclical and secular.
But something to think about.
That's helpful color congrats on the quarter.
Thank you.
Next question please.
On the <unk> with Bank of America.
Hi, Thanks for taking my questions Chris.
Chris Youre guiding fiscal 'twenty, one for another year of two to 300 basis points outperformance versus the USA market and thats. Despite the year on year to 100 odd basis points headwind from the census project.
Given all the uncertainty that you've talked about.
Maybe first can you just give us your thoughts on what are some of the opportunities you have what is giving you confidence to guide for the full year that two to 300 basis point outperformance and what.
In that vein what can the federal are there other opportunities to offset that.
Net headwind from Sensus, So just your thoughts on what's driving your confidence on the full year.
Sure. Thanks, Chris.
Thanks for being on the call Yeah, we always hold ourselves accountable for outperforming the market. So on a relative basis, we always expect ourselves to do better and when you think about the combination of our competitive advantages you saw them play really.
And one of the hardest on periods in history in 2020, So we are confident that debt.
The advantages that we bring to the market.
All position us and allow us to continue to outperform our peers to where our customers need us and grow faster than the market.
And I think about headwinds and tailwind going into 2020 certainly.
Think about remote work and remote everything and that has certainly been driving growth in 2020 and should continue to do so in 2021 that we've got some very significant comparative you all know because of the first quarter of last year because of the timing of the education at the end of this past year incentive but it will still.
We continue to be a trend we believe everyone will not be going straight back to work and we think.
It'll be worked from everywhere kind of situation.
We also believe that this digital acceleration is going to continue and so our strength across the full stack and when I say full stack and cloud services software and hardware.
He is very well with our customers because customers are always full stack and they are looking for a full solution.
Think about combined multi vendor multi.
Component solutions that you guys used day, a great partner for them and we can take them from the very front end of advising and designing to building implementing integrating orchestrating and managing and I will tell you <unk> debt at 2020 has really propelled customers to look for that value added one stop shop trusted.
Provider that can do the full spectrum.
The whole lifecycle, so we're very confident in our ability to deliver for our customers.
On the federal side I think you asked about specifically.
Defense and civilian.
We expect to continue to.
To maintain pretty strong look on the commercial side on <unk>.
<unk> business and corporate.
Collin said.
Indeed in the slope of any recovery is tied to confidence which is tied to the macro which is tied to the virus and to all tied together. So that's very hard to predict but.
But we've been staying close to our customers during 2020 that we feel absolutely confident that we will be well positioned to help them on their way up into capture growth as they're growing.
On the government side stimulus is another wildcard out there and under the New administration that we see some stronger stimulus that should also help to support on the education healthcare and state and local side.
Okay. Thanks for the details there Chris that makes sense.
Just for my follow up.
In the U K, given the resurgence of COVID-19.
Have you seen any impact to your operations.
And you talked about M&A on the call.
Can you just give us your thoughts on on any geographic to geographic expansion possibility in 2021.
Yes sure.
UK I'll tell you I mentioned that we saw a little bit of buy ahead as people as our customers were anticipating possibly a hard Brexit and we saw some benefit in the fourth quarter, but the good news is reported as you remember we put the mitigation strategy in place with our Netherlands entity, and we've really been helping customers.
Utilize that entity in the EU, so while we've gone back into lockdown It does feel like.
It feels like customers are used to working that way and are still are still buying in the areas where they have like remote.
Work on.
Optimizing remote work et cetera, So we haven't seen a significant impact any different than we would have been in 2020, and we are managing managing is really quite well at this point in terms of M&A, Yes look we never we never really pinpoint where we are going to be what we're going to be doing but you know we're focused on geographic expansion.
As well as expanding our capabilities our technology capabilities.
So we continue to look we continue to be very accurate I doubt there is a deal out there that doesn't get to CDW.
Good day, but.
We also have our screens that we need to adhere to maturity.
Cultural and operating match that financial match and a strategic match.
We will continue to look and we're excited about this we did this year that continue to grow our cloud native and service now capabilities and frankly, we're seeing the real benefit from those in terms of traction with our sales organization and deeper connections with our with our customers because we're really at the front end of that supply chain. If you will.
<unk> them to devise solutions and then fulfilling so it hasn't been.
Positive winters for CDW on our customers.
Okay. Congrats on the strong results.
Thank you.
Your next question is from Rob <unk> with Evercore.
Thanks for taking my questions are not congratulate really good print here.
I guess two for me as well.
First off when.
And I think about this calendar 'twenty, one revenue guidance for 5% to 6% give or take.
Love to understand how does that stack up between transactional and solutions, what does that skew it looked like and then extra I guess on how do you do on Pcs and that narrative for 'twenty one.
Yes, good morning.
Really interesting rather I'm, sorry, it's really interesting.
I would tell you that 2021.
Almost a harder year too.
Determined what sits underneath that at market rate of growth.
There's a wide dispersion.
Forecast out there across various technology and what I would tell you.
I don't think anybody really knows precisely what we plan to do is what we do best we can pivot where our customers need us and.
Whether that be in the client hardware refresh area, whether it be.
In building out cloud capabilities, we're able to go in either direction and we're just staying very close to our customers working with them literally day by day week by week.
And and supporting them and your technology, certainly technology is more essential than ever.
We don't see any of that trend slowing down frankly, we might see some things prolonged as a result of the.
<unk> been making that the vaccine don't go as we all hope.
But at the end of the day.
It's a mix and it's really quite hard to tell I know thats not a great answer to the question on flex quite comprises but Gary Martino given the unprecedented uncertainty that we still have I think sometimes I think people sales in some ways. We've come through 2020 and now we're in 2021.
Sunrise Gory ahead, and I think we really have to be cautious and conscious of where we sit in the vaccine rollout new screens coming up and we just have to be very methodical in listening to our customers and taking care of them, which were very good at day one.
That's absolutely fair and then I guess on the cloud spend Chris you talked a few times about that business being up double digits.
So do you expect this to continue.
The shift to cloud driving new customers to CDW, but haven't engaged with you before and they need help to get to the cloud or is it more existing customers that are just migrating from on to off premise in that latter scenario, how does that play out through your P&L or is that a good thing for CDW as revenue and profitability or profit neutral impact.
Yeah on the first question on it I'd say Bose, we are we certainly lean more heavily into penetrating current customers thinking of it but we are bringing in new customers with our cloud capabilities and our digital velocity and service now practices in particular again as I mentioned earlier, they're really at the front end.
That discussion advisory and Thats, where were able to bring a great deal.
On value to the customer and the planning, particularly in a world where things are changing so quickly.
<unk> plans that had been expected and in place.
Four or $5 12 months ago are moving.
We're very we're very well positioned to help them with that so it closed customers new and existing.
And we do expect to continue to see growth there I would note debt on the you asked about existing customers and migrating to the cloud one of the interesting things that I know you're aware of but it's not just migrating to the cloud but it also.
Some customers, who are your cloud and becoming multi cloud multi public cloud other customers who are.
Had some public cloud capabilities, but they need to mirror that on Prem.
Hold on a cloud the cloud environment, the whole ecosystem that our teams are able to support customers with now again, which is a real advantage because it's bringing the customer the best for the customer and not just on.
Some narrow.
Product net product category that we sell in.
In terms of the impact on the P&L.
I think Collin P jump in here.
Good morning, Amit.
I mean, because most of it gets netted down it obviously has the lift on.
Gross margin and operating margin.
Look at it on.
Gross profit divided by what the customer is actually spending I would say cloud is very much like our entire portfolio. There are some things on it that our higher margin security would be a good example of that a lot of it is delivered via the cloud and there are other things that are more commodity.
Like in terms of cloud offerings and would have lower margin. So.
In terms of the absolute amount of profit, it's really a function of how margin rich that particular offering is which is typically rooted in value from the customer perceived value from the customer as well as then the services that we can wrap around it another value we can bring by consumption.
Perfect. Thank you very much.
The next question is from Adam Tindle with Raymond James.
Good morning, Chris you alluded to the strategic planning process and accelerating investments alongside that as I look at the fiscal 'twenty one.
Early outline.
Operating margin is going to be flattish year over year Capex is going to be above the rule of thumb. So just hoping we could get a little bit more color on the nature of these implied investments and how we can think about gauging success on our expected return on over time.
Sure Good morning, Adam let.
Let me step back on the strategic process. We do this every three years and our overarching strategy Hasnt changed as I mentioned in my prepared remarks, I would say what we do is we really honed where were focusing our energy and investments to evolve the business.
Technology evolves.
<unk>.
Where we're focusing now on those areas in strategic services and solutions that our customers need as you heard me mentioned full stack is a way that we go to market.
Investments in the capabilities across that full stack, such as cloud solutions cloud services.
Software solutions and services in particular security and then obviously our hardware.
Think about a couple of recent acquisitions scalar and IGN net W. Excellent examples of that strategy in action.
Invested in cloud and debt out capabilities and service now capabilities and those are the areas that customers are needing.
Meeting.
Advisors and the other area that you can think about that we're investing in is our talent and digital in particular, so our technology our own technology and are we kind of put the mirror on ourselves and made some decisions about what we need as an organization and we're investing on technical capabilities, but also on the digital.
Tools that we've talked about in the past for sellers I think you've heard us talk about demand we have a number of other tools on the pipeline that that allow our sellers and our and our digital platform. Our ecommerce platform to work for our customer in a really integrated seamless intelligent way and Thats, what we are.
That's what we're going for and then obviously, we're also reviewing our operating model as we always do but even with more cash do I would say now to really remove the things that we that our inefficiencies and improve where we can and then re imagined.
Critical elements for a digital World and then and then reinvest back into the business of investing in technology also that investing in talent, we talked last quarter about a reduction in our workforce, but a reduction was also too.
To open up capacity for those rules and capabilities.
And we have been investing people Dan technology.
Technology people and digital is where you see the investment as well as capabilities behind it it's high growth.
Areas.
Okay. It makes sense and maybe just as a follow up for calling on more near term you talked about how seasonality is expected to continue to be different than historical for the next few quarters and modeling has gotten tougher for us.
You've historically talked about on first half second half split of 40 to 52 is there any <unk> that we could maybe think about 2021 in those terms.
Okay.
Yes, Adam.
We elected not to provide thoughts on that just given the highly uncertain environment.
On both on the demand on the supply side frankly, I mean, some of my comments in the prepared remarks were slope of recovery tied to the economy and by risk, which I think is inherently uncertain on the supply environment on certain so.
Okay.
At this point no perspective on that obviously, when we get on the call next quarter, we can provide more thoughts on that.
Okay understood. Thank you.
Your next question is from Michael Brown with credit Suisse.
Yes. Thank you.
Wanted to dig into more of the on premise hardware side of the business. Just curious if you could give a little bit more color on what youre seeing across categories like server storage net com and just how we should think about that business on the potential for some refresh activity heading into 2021.
Yes, good morning, Matt.
Yes, I'll go back to the comments I made earlier, which is it.
It's hard to know the timing and slope on when you might see server storage in particular pick up for example on the corporate space, we think about.
Timing around when customers are really getting back to the office, which probably won't be to the second half of the year.
We are seeing some pickup in areas like higher Ed as example, where they are really focused on a connected community today really extending what the connected campus looks like.
But until we start to see I think our strength and recovery, which of course is related to the virus.
We're pretty cautious.
Round around on Prem solutions, we also have obviously been able to get into locations.
We still haven't been able to get into too many locations to help our customers. There. So I would just say look.
But with your specialty coming it's hard to know when in 2021 will be on that will be.
Got it and then on the commercial side of the business. So just like in the fourth quarter, an improvement on the trajectory in small business a little bit more of a modest uptick in corporate just wondering if you can compare and contrast, a little bit what you're seeing across those two customer types and how we should think about the pace of recovery, particularly.
For corporate as we had a total 21.
Yes, Matt.
We've said that before small businesses that tend to be more nimble instead of at the beginning of 2021 2020 excuse me. They basically are down more quickly and they come back up more quickly. So I think that's just the nature of small businesses on the corporate side, it's really referencing is kind of multiple layers on mosaic and its the same as we are really seeing the same thing.
It depends by geography, it depends by industry, even individual customers within segments winners and losers. So to speak so it's really a mix across geo industry and individual customers I will say that we did see some budget flush at the end of the year, which felt like a good thing.
But again until until we see the macroeconomic uncertainties subside and we see more customer confidence which of course is driven by the success of <unk>.
Stemming the virus I think we're still going to be a little cautious on corporate on the other hand look win win win do normalize we would expect corporate and small business similar to what we saw on 2000 and I intend to continue.
It really pick up again, and we'll be well prepared to help them do that.
Thank you.
The next question is from Tim Yang with Citi.
Hi, Thanks for taking my questions I have a question on corporate and small business recovery is well Chris on slide six you showed that your sub sector recover kato's financial crisis, and I think it took probably one and half to two years for corporate and small business to be back to pre crisis level for 2021 Ricky.
<unk> do you expect corporate small business to recover faster was slower the financial crisis, we might have more stimulus package, but also they are covered us entities.
Yes. These are great questions I wish I had I wish I had a better crystal ball to answer then it's just hard to say that the unique dynamics of this downturn and the pandemic have really I think made it harder to predict and I think less comparable to what we saw in 2000 and China intent and.
<unk>.
Collin said in his prepared remarks.
The speed and the slope of the recovery is really in every way related to the success containing the virus. So if we can get that under control and making cash.
The uncertainty in the macroeconomic environment and I think we'll see it recover more quickly and maybe with a very healthy slope given the importance of technology.
If we don't see that I think we're going to see more muted.
Year to growth over a longer period of time, certainly the stimulus is yet another wildcard, which can help in the areas that we've mentioned education state and local et cetera, and can of course help get back to that positive momentum building with the consumer which ultimately impacts.
But I do think the dynamics of.
This environment in the pandemic make it incredibly difficult to predict timing and flow again.
The beautiful thing is the diversity of our end markets allows us to make sure that we are where the growth is and able to support our customers.
They need it better than anyone.
Got it Thats very helpful. You mentioned K 12 demand strength in your application sector Q4 performance was much better than normal seasonality can you just talk about how sustainable that demand is and how should we think about the full year growth for the sector.
Yes, well I would say a couple of things did on page 12 determine important to understand that what was happening here was.
A great focus on equity and assets for students and student success and therefore.
On full schools were looking to get full.
<unk> holistic outcomes.
Solution to their schools with a lot of speed and not a lot of providers could do that because they needed to get in the hands of the students quite quickly and so when you look at the tremendous success. Our team had in K 12 is because of the capabilities that they're able to bring together and literally get turnkey solutions to the school.
In a timely fashion and it's because of the relationships, we have with our vendors to make sure we're getting healthy proportion of the supply out there, which was really constrained. So I would say a couple of things number one the timing the seasonality was different because it's a great urgency schools have number two our execution was just extraordinary.
Say that loud and clear because the team did an extraordinary job we have some backlog going into the first quarter of next year, which will certainly benefit us in the first quarter and then one would expect that going into the back half of next year, we will get back to more normal seasonality in K 12, but it's a confluence of both the demand and our.
<unk> in an unbelievable execution magazine.
Very helpful context.
Thanks, Tim I, just wanted to add a little bit more color on.
Q4, and build on Chris's comments, I mean, we did see it.
Extraordinary demand I think everybody knows we benefited from a census, but we also had that really large.
Offering with Mississippi Department of Education that Chris talked about on previous earnings calls.
Just to Dimensionalize the magnitude of those two offerings.
If you excluded those from Q4 results, we would've grown our average daily sales in the neighborhood of about 6% to 7% range. So even excluding those two big deals we still had a meaningful contribution from from the education part of the market.
Great. Thank you so much.
Your next question is from Shannon Cross with Cross research.
Hi, This is patrik Jackson on for Shannon I wanted to ask what Youre seeing some sort of a day.
Year from healthcare customers budgets continue to shift customers focus on security and software spend while also considering timelines for investment in virtual care solutions as there seems to be heightened demand for new offerings as you referenced and then work with the nonprofit healthcare provider quick.
Quick follow up.
Yes, I agree with everything you said theyre not to repeat it I would say what we.
We're pleased with.
With the improvement in healthcare in this past quarter and continuing to be encouraged by.
First quarter performance so far.
Wildcard with healthcare is.
His budget.
And more than any of the segments I think tied to the virus and successfully containing it.
It impacts the healthcare segment long term certainly there is opportunity in vital and in virtual care and all the components are that on 2021 seem to be a bit of a wildcard year with healthcare because of the pandemic and they are really just fluctuate back and forth between the urgent care.
Options in elective care, you know their revenue streams et cetera. So we'll just have to see how it plays out in 2021, but the areas that you've identified yet for areas that theyre focused on.
Okay. Thank you and then you also referenced customer spent $2 billion with the company on security during 2020.
Wanted to ask where you are seeing security investments, primarily being targeted and do you expect security spend to grow faster than the total market in 2021. Thank you.
Yes, sure security is across the force back, though from the hybrid infrastructure all the way out to the digital experience.
Point devices that we're seeing it across the full stack on.
Hardware and software in particular.
We certainly provide some services wraps around those but it's across the full stack right now given the remote enablement.
I'm going on there is I would say.
Increased focus on endpoint devices.
<unk>.
All things endpoint security, but that's not that's not to diminish the.
The security focus on me before full data center as well.
Thank you Tony.
Your next question is from Matt Sheerin with Stifel.
Yes, thanks, and good morning, Chris.
Chris I wanted to ask.
Turning to your comments about about work from home.
Working in working from everywhere as you put it.
Obviously, we've seen a very strong first wave of investments, but we're hearing from other solution providers about a potential second wave as customers go back.
Upgrade.
The hardware, but also infrastructure as you said endpoints and then also security are you, having those conversations with customers yet and are you working with customers and see that as an opportunity.
Yeah, Hi, Matt.
Yes, we are and again I would say there are different flavors of what customers are doing we have a healthy dose of customers who are on some of those like CDW knots.
Not so much waiting and seeing the planning in a very flexible adaptable.
<unk> type kind of way, so they're not clear on whether they're going back.
At the end of the year, whether they are going to go back 50% et cetera.
What I'm, saying is it debt.
We've got customers some who are you back on the office, maybe 20% of our customers and we've obviously, helping them set up in the office et cetera, but others are still planning for what their workforce ought to look like I mean, I'm sure you hear the types of things that companies are saying they need to be in person for now on collaboration.
Innovation acculturation needs as a company to saying we need to be in the office for that so we're helping on the white spaces.
That are most suitable for that instant back customers decide 80% of their workforce can work from anywhere we are absolutely in the firm with talking with them about what the blueprint for that looks like in terms of 80% many were 20% in the house or alternatively kind of.
On a different kind of office environment, where everybody is coming into the office at different times for different types of work I mean, it's a really interesting time right now because I don't well, although there's a lot of talk about where that could settle out the hard work really begin planning and what that looks like and how you create efficiency and productivity work force and we're right in the growth of that and I think.
We are going to see a number of flavors frankly, but we will be able we are helping customers with all kinds of flavors.
Okay. Thanks for that and I wanted to ask another question.
On client devices, I know you talked about the double digit strength across most of your end markets last year, we've seen a strong PC upgrade cycle for going on three years now.
How should we be thinking about.
That number this year, particularly both on the corporate side and in the public sector.
Yes, I think look with client devices look we have some headwinds and some tailwind certainly going into 2021.
You named one of them.
<unk> is.
It's something that might be on our side, we've talked about devices that were from 2017 2018 also the need for more devices, depending on where organizations end up in terms of long term remotes.
And bolstering node and refreshing those at some point extending those new use cases, we've been talking about this for quite a long time. This company, they're evolving their business model think retailers for example on content.
Contact less purchasing.
New use cases will be a tailwind for for client devices and again thinking about what comes in from the stimulus package that will be really interesting to see how our state and local education healthcare organizations can take advantage of it.
Look for CDW, we've got some big overlap we talked about that will have to overcome and we will have to keep an eye on the economy and employment.
Look there are again there are winners out there who are hiring and investing heavily in technology.
<unk>.
And that that is a positive also for client devices.
Okay, Great and just a quick follow up regarding the comment about the security software.
Really $2 billion in customer spending is that a gross number or net it down.
That the growth number that customer spend so that the customer spend with us.
And that's really what you recognize because of the net debt down right.
No no no no no.
The gross is what customers are spending with us we're recognizing fewer dollars on that in revenue because a lot of that is getting that are down because of software assurance.
Software as a service.
Exactly okay, great. Thanks, a lot.
Your next question.
Yes.
Hasan with Northcoast research.
Hi, This is trevor filling in for Keith.
How broad where the supply chain constraints across the portfolio, where chromebooks day only products affected or were there others.
Chromebooks, where the primary area of constraints, we did see some tightness in some of the other lower end.
No books.
And continue to see I would say pockets of dislocation on clock collaboration on hardware webcams and things like that but I would say those things are.
Gradually getting better.
Chromebooks by Barbara the biggest source of.
Constraints.
Okay. Thanks, and a quick follow up would you say the supply chain issues during the quarter got better or got worse as the quarter progressed.
It's I would say that's a difficult question to answer because.
We were chasing a moving target and what I mean by that is I think we were pleasantly surprised.
By your ability to procure supply and Chromebooks. We were also pleasantly surprised by the amount of demand.
No.
On an absolute basis, I think the supply was a little bit better, but it still came in short of what demand was because demand was just so much greater than expected.
Okay, great. Thanks, a lot and congrats on the quarter.
Thank you.
Okay.
At this time there are no questions I would now like to hand, the call back over to Chris Leahy, President and CEO.
Thank you Ann.
Thank you all I want to recognize before we head off the tremendous.
And then the dedication of our coworkers around the globe and their extraordinary commitment to serving our customers our partners and all of these stakeholders.
And thank you to our customers for the privilege and opportunity to serve you and thank you to our investors and analysts participating in this call. We appreciate you and your continued interest in and support of CDW, Collin and I look forward to talking with you again next quarter.
Sure.
This concludes today's conference you may now disconnect.
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Okay.
Yes.
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