Q4 2020 Insight Enterprises Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the insight enterprises fourth quarter and full year 'twenty and 'twenty operating results conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
If you require any further assistance. Please press star zero and I would now like to hand, the conference over to MS. Glynis, Bryan Chief Financial Officer. Thank you. Please go ahead ma'am.
And Shelby.
From everyone and thank you for joining the insight Enterprises earnings conference call today, we will be discussing the company's operating results for the quarter and full year ended December 31, 2020, I'm Glynis, Bryan Chief Financial Officer of insight and joining me and Ken Landy, President and Chief Executive Officer. If you do not have a copy of the earnings release that.
And was posted this morning and filed with the Securities and Exchange Commission on form 8-K, you will find it on our website at insight Dot com under our Investor Relations section.
Todays call, including the question and answer period is being webcast line and can be accessed from the investor relations page or per website at insight dotcom and <unk>.
A copy of the conference call will be available approximately two hours after completion of the call and will remain on our website.
For a limited time this conference call and the associated webcast contain time sensitive information that is <unk>.
Right and only as of today and were 11 2021.
This call is the property of insight enterprises, and and retransmission redistribution or rebroadcast of this call and any form without the express written consent of insight enterprises is strictly prohibited and today.
This conference call, we will refer to non-GAAP financial measures as we discuss the fourth quarter and full year 2020 financial results.
And when referring to non-GAAP measures, we will force such measures and Jeff.
Yes.
Non-GAAP measures to be discussed in today's call.
Adjusted earnings from operations.
Adjusted earnings before interest taxes, depreciation and amortization and also referred to as adjusted EBITDA and adjusted diluted earnings per share and adjusted return on invested capital and you will find a reconciliation of these adjusted measures for actual GAAP results included in the press release and the accompanying price presentation issued earlier today.
Also please note that Olin and highlighted our constant currency all amounts and growth rates discussed are in U S dollar terms.
And finally, let me remind you about forward looking statements that will be made on today's call. All forward looking statements that are a major and this conference call are subject to risks and uncertainties that could cause our actual results to differ materially.
These risks are discussed in today's press release and in greater detail in our most recently filed periodic report and subsequent filings with the SEC.
I will now turn the call over to Kenneth and if Youre following along with the slide presentation. We will begin on slide four.
Ken and Hello, everyone and thank you for joining us today to discuss our fourth quarter and full year 2020 operating results. This past year was one of the most challenging these days with the company and society as a whole and the difficulties of the COVID-19, pandemic and important social justice issues deserving of our attention we have navigated our fair share of complex experience together.
And his insight and we did it while living our core values and hunger part and harmony.
And so our advisors and experts around the globe demonstrated by our warehouse and distribution center teammates, who tirelessly and greatly reported to work each day.
And to workers and other others had equipment and you needed to fight against COVID-19. We serve is further demonstrated as teammates across the company donated their time talent and finances and make a difference and the community through true.
Kristina face shields, so and as mass food donation deliveries and sanitizing sourcing and monetary donations to teammates and closes.
None of the more pleased with our teammates and credit display of culture and then.
Nevertheless, proud to be part of our insight family.
And the fourth quarter the demand environment continues to be challenged we'll be focused on ensuring our clients most precedent and TV, while helping many plans for the investments required to support the business as the economy recovers during the fourth quarter, we drove double digit growth and cloud and warranty solutions, which push gross margins to 15%.
And when combined with the positive effect of the acceleration of our PCM integration, including the cost synergies that helped us achieve adjusted earnings from operations growth of 12% year over year.
Specifically for the fourth quarter of 2020 consolidated net sales were $2 3 billion flat year over year. PCM results were included in our full fourth quarter 2019 results. The acquisition having closed on August 32019, gross margin expanded 30 basis points year over year to 15%, reflecting a higher mix of cloud and more.
And <unk> solutions adjusted earnings from operations were $92 million up 12% year over year and in the GAAP basis earnings from operations were up 24% compared to the same period last year.
Adjusted diluted earnings per share was $1 76 up 12% year over year, and and the GAAP basic and diluted earnings per share was $1 50 moving.
Moving on to slide five from.
And the full year 2020, we reported record net sales of $8 3 billion and increase of 8% over 2019, the benefit of including PCM and our results for the full year of 2020 was partially offset by the negative impact of COVID-19, and overall demand and certain supply chain challenges and the business during 2020.
Our team's focus on growing our services and solutions mix.
Helped improve gross margin by 90 basis points to 15, 6% a new record for the company cloud as a percentage of gross profit increased 20% compared to 18% and 2019. We also expanded into service gross profit 130 basis points year over year to 48% of consolidated gross profit our business generated 356 million.
And cash flow from operations for 2020, a record for the company.
On to slide six top line growth and gross margin expansion combined with continued expense discipline, including the acceleration of cost synergies related to the PCM acquisition drove adjusted earnings from operations up 14% and 2020 compared to 2019 on a GAAP basis earnings from operations increased 13%.
Adjusted diluted earnings per share for the full year 2020 was $6 19.
And an increase of 40% over 2019 results and represents another record for us and a GAAP basis diluted earnings per share for the full year 2020 was $4 87 and.
And increase of 10% over 2019.
Finally, adjusted EBITDA for the full year 2020 was $360 7 million compared to 322.002 million 19.
Next on slide seven as we look back to our business from a full year of 2020, we were proactive and our approach and we're pleased with all we accomplished under challenging circumstances and sustained debit and began the health and safety of our teammates as most important we prioritize their safety and wellbeing and ensure that they felt supported joined these uncertain times with COVID-19 forced.
The closure of most insight workplaces and March 2020, we completely enabled remote work for roughly 10000 teammates we completed the integration of PCM and 2020 retiring nine ERP systems into our SAP platform.
And then also accelerating some of our cost synergies, we are exiting the year with approximately $70 million and annualized run rate cost savings one full year ahead of our previously committed schedule.
Expertise across our solution areas allowed us to help clients adapt to the challenges presented by COVID-19, and this way we supplied hardware and other critical IP solutions, enabling work from home and other central functions, our digital innovation solution and created the connected platform detect and prevent solution to help our clients provide a work a safe work environment for.
Their employees and customers, we continue to modernize our online experience to creatively reach and growth strong client relationships through digital engagement and marketing.
And the second half of the year, we began to see cargo bookings recover and North America. The region with the highest mix of hardware and net sales. We also invested and our sales force to ensure we have key sales and technical talent and place to compete as the market continues to recover.
As a result of and well position to help our clients drive business outcomes, and a highly digital environment and <unk>.
Lucas on culture teammate benefits and leadership development continues to be acknowledged with several more key recognitions this year, including.
And number 296 added more than 750 on Forbes' world's best employers and over 70 unfortunate 100, best workplaces for diversity and inclusion and.
And number 62, and Forbes 2020 list of America's best employers for veterans.
Fast company recognized insight and we will change and ideas awards for social good and human rights campaign Foundation recognized insight for LGBTQ inclusive business practices and additions to the global and National and placements. We recognized recently as the best place to work and Chicago, Phoenix, Arizona, Australia, the United Kingdom, Italy and.
Leo.
Insight Canada was also recognized number three of the top funded solution providers Odisha.
Additionally for 2021 insight was recently recognized as an employer of choice by Fortune, placing number seven and the information and technology service industry on the list of Fortune's world's most admired companies. This was the first time receiving this prestigious award for insight.
Now on to slide eight.
As we've navigated the challenges of 2020, we continued to execute against our strategy to deliver solutions to our clients our efforts to deploy innovative solutions to the edge and recognized in the Forrester New wave for computer vision Consultancies published in Q4 2020 and.
And so I was named a strong performer by Forrester highlighting their expertise and building computer vision solutions that fit current hardware constraints and the internet of things platform to manage them.
With a global team of <unk> hundred digital innovation Engineers architects and technical consultants insight maintains the expertise to design and manage computer vision models deployed across mobile devices vehicles, and and studies with limited or no network connectivity.
And example of this innovation is our digital innovation team, we held from manufacturer of commercial generators identified production process issues as a result, and manufacture successfully reduced scrap and utilize labor savings and achieved significant ROI and.
We also leveraged our managed services to help our clients create better Workspaces and simplified device management. For example, our connected workforce team health and insurance company optimized and user support across 300 locations for income.
Turning to managed service desk and field support teams through insight decline improved cost control resolution times, which resulted in increased and user satisfaction.
Slide nine as we transition to 2021 and reinforced and our belief that the industry is resilient and the demand for it solutions will continue to evolve during economic downturns and recoveries across the markets, where we do business for 2021 industry analysts expect low to mid single digit growth across hardware software and services sales.
And the first quarter, we're seeing and hardware bookings in North America improved by mid single digits year over year compared to the first quarter of 2020. This positive data point and supported by elevated backlog coming into 2021 and could lead to above average season results from the first quarter compared to the fourth quarter of 2020.
We are well positioned to help our clients solve the complex challenges, we believe that the strategic investments debate and the go to market solution areas over the last several years as well as investments and our solutions and technical talent and 2020 position us well to execute our business goals and the new year.
As a reminder, our solution areas are first connected workforce, we help organizations keep their employees connected productive and secure with professional and managed services and maximize return on investments and free up internal resources, we help our clients work smarter.
Second cloud and data center transformation, we hope this is modernized and secure critical platforms to transform my team through and.
And services from architecture through management, we hope leveraged direct platforms to increase agility and support innovation.
Third digital innovation, we help customers navigate their digital transformation journey and to and to approve clients and business performance and data customers and the cover new revenue streams, we help our clients and have a smarter.
Our supply chain optimization competency is the foundation of our solution areas to ensure we are providing our clients with the critical products and services that will help and managed today and transform for the future.
On slide 10.
As we move forward into 2021, and we remain committed to our long term priorities, which include continuing to innovate and order to capture market share and high growth areas, such as the cloud and the intelligent edge.
Developing and deliver solutions to drive better business outcomes for our clients.
Spending and scaling our business with strategic clients and end markets and lastly, continuing to optimize client experience and our execution through relentless focus on operational excellence.
We believe that and by investing and our operating segments organized around these three long term priorities, we will deliver.
Our key our five year key imperatives for value for our shareholders clients partners and teammates.
As a reminder, these goals are from faster than the market at an 8% to 10% CAGR.
Extend EBIT margin to five to five 5%.
Optimize return on invested capital to a range of 19% to 21%.
And increased services gross profit as a percentage of total GP between 50% and 52%.
To support our go to market strategy globally, we had strong operational platform that includes scalable it systems and processes robust digital marketing capabilities and a culture of continuous business process transformation and automation and 2021, we plan to continue to invest in this critical layers with the goal to deliver a great client experience, while also optimizing our infrastructure.
And to scale with future growth.
We continue to make meaningful progress as a company as we successfully transformed our business from and it reseller to a well respected intelligent technology solution provider with deep expertise across multiple technology areas and our clients value most and we have a single United Global leadership team integrated and scalable it systems and operations.
Our highly engaged workforce and a clearly defined go to market framework around our solution areas. We believe we are well positioned to compete in the marketplace and win as we head into 2021 and beyond I'll now hand, the call back over to Glynis.
Ken and Dave.
Recessionary environment of 2020, where clients are focused on controlling cash bearing kathryn.
Particularly from hardware infrastructure products.
Focused on selling services and solutions, which helped drive gross margins up 90 basis points year over year, we reduced our operating cost can be current demand and accelerated exploration and PCM and disadvantage to drive adjusted earnings from operations of.
14% per year.
And to complement our strong earnings growth our business generated record level of cash flow from operations.
We have the majority of our $1 $2 billion debt facility available to fund future growth, while earnings and volumes are down versus our original expectations due to COVID-19.
It's showing our cash flow performance analytics and none of our performance ahead of our expectations with adjusted return on invested capital of 13%.
And the performance demonstrates the resilience from a business model and the cash management and Kevin Sterling.
And.
Moving on from North America on Slide four on Slide 12 fourth quarter net sales per $1 8 billion.
Down 1% year to year due to decreased and hardware and services.
Despite higher bookings going into the fourth quarter last year, we did not realize on the top growth from the top line for hardware and <unk>.
Can you supply and balances across the channel and also current requirement this shift from 'twenty to 'twenty one.
And as a result, we exited the year with elevated backlog and we.
Personal care and that.
And of 2021.
Gross profit and North America for the fourth quarter was up 1% year over year, driven by 10% increase and services gross profit.
These results and strong year over year growth and warranty and cloud solutions, which also growth gross margins up 20 basis points year over year selling.
Selling and administrative expenses decreased alright.
And year over year and adjusted earnings from operations grew 13% year over year to $78 million.
Moving on to the full year on slide 13, net sales in North America.
Good 10% year over year.
Benefit from including a full year 2020 is partially offset by the impact the impact of COVID-19.
Humira, particularly hardware and I'll share.
Challenges.
Gross profit and onto macro growth, 17% year, and you have much faster than sales due.
And you saw higher mix of cloud and warranty sales, which are reported net and benefited from taking PCM and our results and full.
Yeah.
Gross margin increased 90 basis points to a new annual record of 15, 4%.
Expense control and continued acceleration allowed us to grow net projected earnings from operations, 16%.
Mark and the fifth consecutive year of double digit earnings growth Channel North America business.
Moving on from an NAV slide 14, net sales in the fourth quarter declined 5% and constant currency.
Gross profit also declined 3% and constant currency.
And then sales primarily due to an increase and higher margin services net sales.
Adjusted earnings from operations was $11 million up 1% and constant currency.
And our full year 2020, R&D and business reported net sales and $4 $6 billion up 1% year over year and constant currency.
Congress and southwest and public sector clients across region was partially offset by continued migration to cloud solutions.
Gross profit grew 2% and constant currency faster than sales, including a higher mix of cloud and services sales.
And as earnings from operations increased 12% year over year and constant currency to $46 million.
Brexit negotiations rats, and December and the new training cooperation agreement between the EU and the U K came into effect on December 31, 2000 trained under.
Under the new arrangement and general position as at Paris, and other competing and Cascade <unk>.
Be applied to <unk> and <unk>.
And the EU.
We do not believe Brexit has impacted our results materially per day.
We believe our EMEA business is healthy and well positioned to serve clients across the U K and mainland Europe with our existing local presence and supply chain model. We have operated on the industry and for some time.
Moving on to APAC on Slide 16, net sales of $45 million and gross profit of $12 million from the fourth quarter increased 24% and 16%.
And respectively year over year, and 92 to higher sales across all categories and regions.
This led to adjusted earnings from operations of $3 million and the quarter.
The full year on slide 17, and.
Constant currency net sales and our iPad business declined 4%.
2019, the decline was primarily driven by decreases and hardware and software, partially offset by a $14 per year over year increase and insight delivered professional services.
And the team is disciplined and managing discretionary spend and as a result adjusted earnings from operations for the full year was $13 million up 17% and constant currency.
Before I go on to tax and the cash flow I'd like to provide some color on how our strategy is impacting our business mix and profitability.
And as Ken noted earlier, a key imperative to deliver long term value or Chris.
Chris sales faster than the market.
And EBITDA margin optimize return on invested capital and increased services gross profit as a percentage of total gross profit.
And 2020 net meaningful capex towards each calls reporting top line growth of 8%, including the full year of ownership and PCM.
And expanded adjusted EBITDA margin by 20 basis points.
Due to stronger gross margin and acceleration of our PCM integration plans.
<unk> delivered adjusted ROIC, 13% head of our expectations with and strong cash flow generation more than offsetting effects and lower earnings.
And then expected due to the recession.
And finally in 2020.
Our services grew 17% year over year and product sales, which drove our services gross profit as a percentage of our consolidated GP up 130 basis points to 48%.
As a result, our San Francisco and Thats. The primary driver for gross margin expansion year over year, two and new annual record of 15, 6%.
Moving on to our tax rate.
The tax rate for 2020 was 24, 4%.
Share to 24, 7% and 2019, the net decrease and our tax rate was a result of.
Tax benefits made available by the cares Act and 2020.
Other offsetting items related to and state income taxes and tax credit.
Rounding out our cash flow performance on slide 18, our operations generated $366 million of cash and 2020 compared to $128 million and 2019 as we have highlighted previously our cash cycle is imparted, meaning we're paying our partners and short term and we received payments from our.
And.
This allows us to drive low cash from net sales declined sequentially. We experienced this dynamic in 2020, which along with our disciplined cash management practices have helped drive our cash flow generation of the $356 million for this year slightly above the top line range, we provided and our third quarter outlook.
We expect cash flow from <unk> will normalize in 2021, as our business growth and as we see mix shifts to more hardware.
For the full year of 2021, we expect cash flow from operations will be between $200 million to $250 million.
And the fourth quarter, our cash conversion cycle was 30 days down eight 8% year over year, the decrease and our cash conversion cycle and year on year benefitted from the following items.
<unk> of our infringements and active facilities, including effectively current negotiated extended payment terms.
Disciplined investments and our inventory and improved 18 performance of our accounts receivable as we deploy insight collection practices to the PCM business.
During 2020, Bcl two buildings, one and the fourth quarter for net proceeds of $14 million and another in the fourth quarter.
For net proceeds of $26 million.
We have Barbara <unk>.
At December 31, 2020, and closed on the sale of all of these facilities and January 2021, and net proceeds of $27 million.
Total net proceeds from sales of all the DSW and $67 million.
Capex for the full year was $24 million.
Primarily.
Allergy investments.
We invested $6 million to acquire additional consulting company in France and <unk>.
February of 2019, and lastly, the $25 million to repurchase shares of our common stock and the first quarter of 2020.
At the end of the year, we had a cash balance of $128 million of which $112 million with residential growth subsidiaries and this compares to a cash balance at the end of 2019 at $150 million.
We had $349 million of debt outstanding at the end of the year down from a total debt from total debt of $859 million and 2019 and we have.
Essentially paid down the debt incurred to acquire PCM significantly ahead of schedule.
On slide 19, we're exiting the year with a leverage position at just over one times debt to cash flow, our EBITDA, which is well within our level of comfort.
Under our ABL agreement, our primary compliance covenant is a fixed charge coverage ratio, which includes 12 months trailing EBITDA coverage over our capital expenditures and taxes and cash interest as of December 31 per at just under five times against the minimum requirement of one times and we are confident we can.
Support our capital requirements and liquidity needs.
Moving on to slide Slide 20, as a reminder, we took actions in 2020 to help preserve our profitability during the pandemic, while positioning our business to emerge healthy and competitive and market conditions improve specifically.
Reduced discretionary spending across the business and certain variable expenses and were not incurred in 2020 due to COVID-19 related impacts and our financial results such as sales Rep Commission dot net of cost travel.
We right sized our operational delivery platforms the line with volume trends from 2020.
As we grow as we grow as we work to grow faster than the market and 2020 line, we will continue to be aligned against each organization.
We accelerated our existing PCM integration and Andrew.
Back office sales and surface, which position us to exit the year with run rate savings of $70 million. One year ahead of our standard timeline.
And as market conditions improve and 'twenty 'twenty, one we expect it to increase and the discretionary and expense and variable expenses come back into the business.
In addition, we continue to and we continue to invest and our sales and technical resources and 2021 to support business growth.
As a result, we currently expect SG&A, excluding amortization expense will be approximately 11, 7% of net sales and 2021.
Our balance sheet is healthy we have excess capital sufficient to support our growth and the IP as the market recovers. We believe the steps. We took in 2020 will help us and margin a good position to compete and 2020 line I'll now turn the call back to Ken to review, our 2021 outlook Ken. Thank you Glynis, we're pleased with our team's resilience and 2020 and believe we are.
Business is poised to recover strongly across each of the markets and which we compete.
With respect to our 2021 outlook, we expect to deliver net sales growth between four and 8%. We also expect adjusted diluted earnings per share for the full year of 2021 to be between $6 60, and $6 80.
This outlook assumes interest expense between 25, and $28 million and effective tax rate of 25% to 26% for the full year of 2021.
Capital expenditures of $75 million to $85 million, including approximately $60 million per the buildout of our new corporate headquarters and and average share count for the full year of approximately 36 million shares.
And this outlook excludes acquisition related intangibles amortization expense and approximately $32 million and noncash convertible debt discount and issuance costs reported as part of interest expense of approximately $12 million and assumes no acquisition related or severance and restructuring expenses.
Just with your model and we have posted a schedule and our website on the Investor Relations page that shows the expected amortization expense and non cash convertible debt discount and issuance costs by quarter for 2021.
Thank you again for joining us today, one and once again, thank our teammates across the world for everything they do for insight, including resiliency of our culture displayed this past year by the daily actions months reported such an incredible team that concludes my comments I will now open up your line for your questions.
As a reminder, if you'd like to ask a question you may do so by pressing Star then the number one on your telephone keypad again that is star one if you would like to ask a question.
Your first question is from Matt Sheerin of Stifel.
Yes, Thank you and good morning, everyone.
My first question, Ken and just regarding your commentary about hardware.
Hardware and about some lift and.
Backlog and bookings there.
And when we when you talk about hardware.
And you about continued strength and client devices or are you also seeing and increase in bookings for infrastructure.
Sure and on Prem projects and.
And just.
Part of that question could you talk about any seasonal trends it sounds like <unk> got backlog going into Q1, and so should we assume that.
Could be better than seasonal start to the year.
Yes. Good question net thanks drew.
As far as the hardware, we are seeing net across certainly devices.
As well as infrastructure and the storage servers networking as well so I'd say, it's a pretty balanced as far as the bookings increase that we're seeing.
And as we did mentioned of course, we did commit to the quarter with elevated backlog much due to of course shortages that were existing and it couldnt be fully supported and the at the end of Q4. So thats certainly is leading to some uplift. Although there are some still continued constraints and the market from a supply chain point of view that we're navigating through Q1 as well.
And.
Okay.
Thank you.
Just one second day. So we do expect that Q1 seasonally will be stronger than Q4, we're not seeing that Q1 is going to be stronger and Q1 of last year.
To be clear.
Alright.
Okay.
You mean in terms of year on year growth.
Flattish, Okay very helpful. Okay great.
And then just on the infrastructure side Ken.
And others.
Some of your competitors and distributors are talking about still really not seeing a lot of visibility in terms of.
Our company is coming back and doing the bigger projects because of.
Shutdowns and that sort of thing.
Are you getting any visibility that that should improve through the year or is it still early to tell.
It's still early to tell medical we are.
We are certainly believers that it will recover towards the second half of the year for sure.
And what drives that of course, when we look at.
These cycles that occur and our business, but you can put these projects off forever and what has become clear through the pandemic is that all companies are becoming digital there isn't any company that we talked to that isn't talking about becoming more digital and in order to become more digital it's not just the software solution and you've also done and make sure that you modernize your infrastructure.
Whether that be on premise or and the cloud environment. So so thats, where we see a lot of these these projects come into the year.
And to the forefront as many clients of course last year first focus was completely addressed and how do we support from a collaboration point of view our people working from anywhere.
And that's still going on but Thats certainly.
Much more mature than it was a year ago. So I think now that companies are starting to look at their environments and understand how they're going to compete effectively going forward and and.
And again at the top of the list is how do we become more digital.
Okay. Thank you and just my last question regarding the model and.
You gave us.
And the SG&A percentage for the year at 11 seven.
So it looks like backing into gross margin it looks like gross margin could be up again this year and.
Be a little surprising given that the mix.
Are you a little bit more towards hardware or are you continuing to see strong growth and services.
Matt we would anticipate that gross margin could be flat year over year, specifically to your point about seeing higher hardware growth in 2021 that we saw in 2020.
So flat year on year, Okay, alright, thank you.
Your next question is from Adam Tindle of Raymond James.
Okay. Thanks, and good morning, I just wanted to start on the 2021 guidance of 4% and 8% year over year growth and what are the assumptions embedded in this for devices and particular youre lapping a very strong year for the category I'm. Just wondering if you think that can still grow embedded in that 4% to 8% assumption and if possible.
Could you quantify that backlog and maybe how much it contributes to that to give us some confidence and those numbers.
Yes, and so overall.
As far as the forecast of the 48% growth. So how we look at it basically debt I think in general most economists are viewing that the GDP growth will be anywhere from 3% to 4% again dependent book region, they're talking about it and that range will be.
We typically see of course, and these cycles is that <unk> growth, 2% to 3% faster than the GDP growth. So that's how we.
Come to the conclusions of the growth that we should certainly start to see and regards to devices certainly.
And when you look at our makeup of our business.
Percentage of being hardware.
RSP and software and services, so and the hardware category of that 60% devices to certainly the largest segment is not the only segment of course, there's a lot of infrastructure spend in that.
But on the specifically and the device front I do believe theres growth and devices coming and all the sort of OEM partners that we talked to I think they feel the same way and there is certainly a lot of constraints you are hearing about and the marketplace and I think what's driving that of course is debt.
As you saw that the notebook category increased pretty significantly last year. This company went away from sort of the balance of 55% and desktop 45 per cent. The notebook now youre seeing 80, 80% plus fee and notebooks and.
And of course come with a significantly higher ASP.
And they also have significantly higher refresh rates. So I think what we're also seeing is that as we talk to our OEM partners as debt.
Is that many clients of course are looking at saying where they might have.
Got it and notebook asset maybe four years, they are starting to improve that and shortened that cycle.
Especially as is a little bit more wear and tear and these devices and it was before so that's sort of gives us that.
The reason for optimism around certainly devices. The other thing that you'll always see is the fact that the channel is always seem to do better and devices than the overall market does.
And it's always proven out so we certainly track that data. So we do believe that there will be.
And devices won't be as substantial as it was last year, but it will be a contributor to that growth model.
Okay, and then any way to maybe help us with the backlog how much that represents a 4% to 8% or how much it isn't.
Yes, we wouldn't get that granular on that.
Adam, but certainly as I said it is certainly a contributor and we're seeing positive indications of that and as you know, there's tremendous backlog and areas like chrome and so forth debt.
And we're going to probably be constrained through second quarter.
Understood and just a clarification Ken I think you were talking about Q1, you were saying in your prepared remarks, I believe seeing above seasonal and I thought I heard you say up mid single digits.
And in terms of Q1, but then and responsive to Matt's question and I think Glenn has talked about Q1 be flat year over year. So maybe just help me what did you say up mid single digits in your prepared remarks are kept at it correctly.
You got it right.
And bookings.
It's what I indicated in Q1, we were seeing booking rates year over year at this juncture in the quarter improve and net.
Mid single digit range.
And that will translate to be seasonal improvement from Q4 and flattish to last year's Q1, which of course as you know, it's a pretty strong quarter with COVID-19 coming from seat.
Yes, yes makes sense thats helpful and.
Last one from me cash flow is.
And a continued bright spot where total leverage is now getting to around one times. The balance sheet is healthy. Thank you talked about 200 million more of operating cash flow coming.
With that as a backdrop, maybe just revisit the capital allocation priorities does it make sense to look for another PCM size acquisition at this point.
Yes, we will certainly always continue to look on the M&A front.
And Thats.
And that's been a key part of our strategy that will continue to do that.
At this stage, but certainly.
Moving to the focus on debt Paydown and continued to focus on the best Inorganically and the business, which which we're doing now and we started to do and the back half of last year to invest in sales and client facing resources from both.
Sales point of view and technical point of view, So that's certainly been a priority for us.
And you'll see that a little bit and the SG&A increase as well and then of course, we will look at always returning.
Now with respect to shareholders. So those continue to be our priority.
Very helpful. Thanks, Ken.
Your next question is from Paul Coster of Jpmorgan.
Alright. Thanks. This is Paul Chung on for Coster. Thanks for taking my question. So.
Great performance on free cash this year.
When you say kind of normalization and some improvement and Dsos, maybe your cable has come down a bit this year and then as we think about the seasonality of cash flow should we expect that very large cash inflow and QQ and usage and in the second half kind of like 2020.
Yes.
And we wouldn't anticipate a change and the seasonality around the cash flow because that's driven by the business and a seasonal demand from business, so that would make that assumption and Paul.
Okay.
And then just on the guidance the sales outlook and spread is a little bit larger than usual, so I assume you're kind of baking in some from COVID-19 uncertainty but.
What are some of the indicators you need to see to hit the top and.
That range and then.
Guidance kind of assumes second half acceleration of the vaccine gets more widely distributed.
Yes, and I think you've got it right there Paul and regards to the second half certainly I think everybody's indicated net will be stronger due to the fact that the vaccine is gaining momentum certainly across the U S and and other countries. So.
That looks pretty optimistic that there is certainly still.
Vaccine variants out there that are and question and concerning so that that might sort of meet the lower end of what we're growth guidelines are.
But when you look at what occurred back in 2009 during the last sort of big decline that we saw and the economy and in it.
The rebound was substantial and 2000 2010, and it rebounded and the high teens sort of run rate. So if we get anything like that I think the.
And the 8% I think is very very doable.
That's sort of how we came up with the model and so I think youre correct and in this sort of why there is a wider range.
Okay and then.
Lastly.
Follow up on the free cash flow.
And your guidance for sales is up.
Margins are expected to be flat.
Spending flat so why wouldn't your free cash flow would be up.
This year I know you have some capex spend on the HQ, but if you adjust for that why could it be.
Slightly up.
And I know you expect some normalization, but what was kind of driving some of that is just help us help us partly because of the return to growth.
Currently as we as we grow.
Because we have that converting cash flow cycle as we start to grow the entities and more cash as we go into that growth cycle.
So that's the primary driver and as you saw in Q4.
Had no debt, we have no debt under our ABL at the end of Q3 and going into Q4, we had $140 million of debt outstanding on our ABL. So thats also a use of cash debt.
But that was also driving growth and some of the backhaul magazine that will flow through the business going into 2020 going into the first half of 2021.
Okay. That's helpful. Thank you very much.
Your next question is from Anthony <unk> of Sidoti and co LLC.
Yes. Good morning, guys. Thank you for taking the question so as far as per your supply chain.
You referenced are those primarily for chromebooks are you seeing any other constraints.
Yes, and no if we get there.
And as more than just chromebooks and certainly glass is probably the biggest overall shortage and of course that would say.
Notebooks and displays of sorts and certainly chromebook volume has increased pretty significantly so there is.
It's not helping the cost because so much of that book.
But we're also seeing and other areas that are.
Concerning our processes have been sort of.
Tipsy turvy here for the last almost 18 months right it hasn't been real and consistent supply and so thats continues to be a little bit of a concern I think that gets alleviated more and the future times and Apple of course is committed to using non silicon, we've seen Microsoft announced theyre going to use their own silicon and their surface devices and Samsung.
Announced different user and silicon. So so I think that does certainly alleviate but thats a longer term sort of recovery than what we're seeing here for the next quarter or two.
And of signs of some memory shortages that are occurring as.
As well and of course that goes because more and more of that of course is huge you're seeing automotive complain about the fact, they can't get enough.
Devices themselves. So it goes across the full supply chain and certainly infrastructure products are also impacted by that.
It's not net.
Reason for alarm at this stage, but it's certainly lead times are stretching and and there is a lot of focus on improving lead times at this stage, but it definitely is not flowing like it would normally flow.
Got it okay. Thanks for that color, Ken definitely appreciate that and then as far as.
Just looking at.
<unk>.
Guidance for the year so low.
We're expecting back half to be better than the first half and as.
As far as.
Just wondering now that you have PCM fully integrated you've had it for a while.
So if you could just talk a little bit as far as sales growth that you've seen from existing customers versus your ability to win new customers now that you've had the PCM under your belt.
Yes, Anthony really good question and.
And I think one of the other reason is of course, we are optimistic on growth for 2021 is the fact that last year was a heavy year for integrating PCM, especially during the Covid environment. We're doing much of this remotely. So you can imagine the numbers of people internally operating to white glove clients over to our new systems and platforms and.
Web interface and the evi transactions. So a lot is very internally focused as you would expect when you do an acquisition of that size.
Thats, certainly all well behind US now as we enter 2021. So so we believe that certainly a lot of those clients that smell.
<unk> fully understand all of our reporting and all of our systems all of our tools. So they are operating and certainly a much higher degree of efficiency and then they certainly operated last year at this times and examples so that certainly gives us also.
Optimism for growth and acceleration of the business.
Got it alright, thank you and best of luck. Thank.
Thank you.
As a reminder, if you'd like to ask a question. Please press star one.
Next question is from Mark Weisenberger of B Riley Securities.
Thank you and good morning.
Wondering if you could talk about wallet share gains across your customer cohorts and where were you able to successfully increase scale or scope with these customer cohorts and maybe if you could quantify some of those inc.
Yes, I mean, certainly when you looked at where we certainly gained.
And certainly the software business was continued to be strong for us.
And we saw cloud again, and we talked public cloud revenues and CPB.
TPB and 20%.
Of our total GP, so that continues to grow and certainly the data sets. We have that we are gaining share and.
Those areas.
From a business point of view, what we saw and fourth quarter, specifically was that our public sector business.
Was up nicely.
And the 15% range.
Q4 year over year.
And that represents and the quarter about 13% of our total revenues came from public sector. So good growth, but we know there's a lot more opportunity and the public sector space and we're continuing to invest very heavily in that area to continue to grow that.
And then where we saw really pretty much from our enterprise clients debt and our commercial client sets the remaining parts of our business in the quarter they were down 2%.
From a comparison point of view and so.
That's where we sort of saw how the market sort of played out which again was a significant improvement from what we saw and Q2 and Q3 in those categories.
Great. Thank you.