Q2 2021 CDW Corp Earnings Call
$16 million, an increase of 23, 6% and non-GAAP net income per share with $2.02 up 29, 3% on a reported basis and up 27, 9% in constant currency.
Our outstanding results reflect our team's extraordinary execution and the importance of our scale industry experience and knowledge and strong customer relationships.
The diversity of our customer end markets and breadth of our solutions portfolio continues to serve us well.
Our record second quarter performance reflected a rebound in commercial customer spending driving excellent results in our corporate small business and Canada segments and continued strength in our education channel.
Our results reflect strong momentum across our business as technology spending recovers from lower spending last year and also increased demand as customers seek to modernize and optimize and innovate.
In 2020 customers prioritize remote enablement and continuity so far in 2021 customers have prioritized digital transformation security and hybrid cloud solutions as well as continued investments in endpoint solutions driving strong growth for solutions and transactions.
Customers are investing to enable the future and adding resiliency to their operations.
Strengthening in securing infrastructure platforms and endpoint.
Leveraging the cloud preparing for a return to in person operation and industrializing remote enablement for permanently changed work models.
We've combined our services and broad solutions portfolio with our extensive technical knowledge on the news logistical and distribution capabilities to advise design and orchestrate the best outcomes for our customers.
Last quarter, we leveraged our distribution centers extensive logistics capabilities deep vendor partner relationships and strong balance sheet and liquidity position to navigate the supply environment, our scale and strong financial position enabled us to continue to helping customers navigate the choppy supply environment.
As we previewed on our last earnings call supply challenges increased during the second quarter for many transactional products and some infrastructure product.
<unk> strength and as economies rebounded and more customers turn to CDW for expertise across a full technology solution stack and lifecycle, our backlog increased compared to the first quarter.
Another impact on the tight supply environment with increasing prices, which our teams were generally able to pass on.
We expect supply constraints to continue through the second half of the year and into next year.
Now, let's take a deeper look net effect at the second quarter customer end market performance.
Corporate increased 27% on customer spend sharply recovered with strong transactional and solutions performance.
<unk> remained focused on digital transformation hybrid cloud and security.
Customers also began to prepare for employees to return to the office in the coming months.
Driving endpoint solutions, including notebooks video and accessory growth on.
Our corporate backlog increased during the quarter as customers await availability due to standards requirements and generally larger orders.
Small business delivered exceptional growth growing 60%, yes, 6 zero percent as optimism improved and hiring increased our teams helps customers with remote enablement security and video leading to strong growth on both transactional and solutions.
As we've shared previously small business customers tend to be nimbler and their technology requirements.
Performance was less impacted by supply constraints.
Net sales for our government channel decreased 29%.
Federal declined double digits due to overlapping or devices and service solution for the U S Census Bureau, and other client device programs that were strong last year.
State and local decreased mid single digits customers evaluated their needs at the beginning of the quarter and started to make investments utilizing stimulus funding towards the end of the quarter, making timing versus demand more of a driver performance.
Our education channel grew 27%.
The team delivered another $1 billion plus quarter with strong double digit growth on both K 12 and higher Ed.
K 12, and higher Ed customers are focused on investments to support equity and access and to enhance the in classroom experience with schools prepare for students to return this fall, which drove both strong transactional and solutions performance.
Customers continued to turn to us for our holistic capabilities across technology solutions, and our deep education experience.
Healthcare increased 7% returning to year over year growth.
Customers resumed projects that have been sidelined during the pandemic as budgets reopening driven by conditions, returning for elective procedures and providers made investments for the future.
Growth was balanced between transactional and solutions category.
Other which represents our UK and Canadian operations increased over 20% on a reported basis and <unk>.
Local currency net sales decreased low single digits overlapping strong public sector performance and reflecting a slower commercial recovery.
Our Canada team drove strong double digit growth in local currencies powered by commercial customer strength and strong transactional and solutions performance.
Our second quarter performance.
Standard from the diversity of our customer base and from our deep and broad product portfolio.
Transactions increased strong double digits, driven by client device growth of 17% as well as strong growth on video and accessories.
Solutions also increased strong double digits, driven by software collaboration tools and data Center solutions.
Led to balance double digit growth across hardware software and services on.
Our services growth reflects strong organic performance and inorganic contribution.
As I've shared before services are fundamental to our go to market approach on a key enabler of our value proposition.
We also delivered excellent growth on our cloud practice cloud customer spend increased strong double digits across all customer segments, driven by robust growth in security infrastructure as a service and productivity.
We expect strong customer demand for cloud solutions to continue and we're well positioned to deliver.
I wanted to take a moment to highlight our security practice given its important to importance to our customers as cyber threats are constantly emerging and evolving and increasing.
Is there any customer spend grew strong double digits as customers increase their security frameworks to respond to increasing threats.
Our team's help customers through a cohesive strategy ex security assessment data protection and threat mitigation.
Our second quarter 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 3 part strategy for growth.
Our all important drivers of our past and future performance.
The diversity of our customer end markets served as well on the macro or other external challenges impact various industries and customers differently.
Our extensive product services and solutions portfolio positions us to meet our customers' total needs across the spectrum of IC.
The balance of our customer end markets and our offerings are especially relevant in the current environment technology has become more central to our customers and we are best positioned to help them navigate the complexity.
And the final driver of our performance our 3 part strategy for growth, which is to first acquire new customers and capture share.
Second enhance our solutions capabilities and third expand our services capabilities.
Each pillar is crucial to our ability to profit profitably advise 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 and action.
Earlier this week, we announced that we acquired focal points focal point is a leading provider of cyber security services with deep capabilities in identity and access management as well as the ability to serve customers across the full cyber security landscape.
Focal point is a leader in the cyber security space with an expert team and complementary customer relationship.
As I shared earlier security is a top focus area for our customers.
Focal point expand and accelerate our security practice, adding over 200 coworkers, who we welcomed CDW.
We see many significant opportunities pad and this is a great example of adding capabilities help customers across the full technology solutions GAAP and full technology lifecycle, we view M&A as an important part of our capital allocation strategy to expand CDW strategic capabilities. Our success is a testament to our co worker.
Including those who joined <unk> through acquisition.
Delivered consistent with the strategic rationale of each deal.
Delivering tremendous value to our customers.
Let me share in other examples.
Over the last year education customers have embraced technology more than ever and fundamentally changed how they purchase with district and school systems banding together to access stimulus program and procure technology to enable remote hybrid at in person model.
Long time higher end customer, who is transitioning from a decentralized technology programs and centralized turned to us to provide a better end user experience for students and staff across its 20 plus campuses.
Our team leveraged our digital capabilities to integrate directly into their systems with greatly improved the EBIT purchasing providing configured branded bundled hitting prenegotiated pricing direct to home logistics and product availability in a constrained environment.
Our customer first focus on logistical capabilities continue to be differentiators that drive value with our customers and vendor partners.
This is a great example of how we leverage our competitive advantages.
Lastly, I wanted to share a story about a corporate customer that our team helped execute a global compute refreshed changing from a D Y O D organization to corporate standard.
Director of Global service delivery, leading the project turned exclusively to us to partner on this important initiative for over 8000 employees in 20 countries, having a global partner with very important our teams in the U S. UK and Canada worked closely together to deliver for the customer.
We worked with our vendor partners to ensure we had product when the customer needed it which is crucial in the current environment.
The capability, we have given our deep partner relationships strong financial position and distribution centers.
What started as a device refresh has led to partnering on the customers return to office in Michigan and technology enhancements as well as software and security projects.
On the account from less than 1 million of net sales last year to over 7 million this year.
Our team understood the customers' challenges and leverage CDW capabilities on a worldwide basis to provide outstanding service leading to more opportunities.
These examples highlight TWD 3 part strategy for growth and demonstrate the value of M&A to add solutions and services capabilities to best serve our customers and how we leverage our competitive advantages to win in the marketplace.
I am so proud of the way our team continued to deliver for our customers our distribution and configuration centers remain fully operational.
During the quarter, our teams continued to safely reengage with customers and partners in person.
Although the environment is dynamic groups of co workers have started to return to our offices for key leading and small events and others are starting to work more regularly in our offices.
Our.
Team is working hard to thoughtfully re imagine and orchestrate the future of work. So we can continue to serve our customers and partners better than anyone else can while we continue to fortify our strong culture.
Let me now share our updated thoughts on 2021.
We are again, increasing our outlook for both U S. It market growth and CDW net sales premium to market. We now expect the U S market to grow about 5% and our topline growth for 425 to 500 basis points faster than the market income.
Instant currency.
For the third quarter, we expect customer demand trends to continue and have confidence in how our teams are executing and in our solutions and services portfolio.
That said, we remain cautious about the supply environment, which we expect to continue to be challenged.
While there are other wildcards, such as Covid variance vaccine rollout returned to office and potential policy changes, including infrastructure and taxes, our confidence in the prospects for the business has never been higher.
Technology is more sensitive to all sectors of the economy and will continue to play an increasingly important role in years ahead.
We have great confidence that we have the right strategy to best serve our customers and partners enhance our competitive position and deliver sustainable profitable growth.
Our role as a trusted strategic partner to our customers is more important now than ever we will continue to do what we do best leverage our competitive advantages to help our customers address their it priorities and achieve their strategic objectives.
And out execute our competition.
Finally, let me take a moment to update you on our CFO transition. The process is progressing very well I'm really pleased with the caliber of candidates interested and excited about CDW.
We will provide further updates once the process is completed until then Collin is fully engaged and after a successor is named people remain onboard to ensure a smooth transition.
With that I'll turn it over to Collin.
Thanks, Chris and good morning, everyone I will start my prepared remarks with more detail on our second quarter move to capital allocation priorities and then finish up with our 2021 outlook turning to our second quarter P&L on slide 8 consolidated net sales were $5.1 billion up <unk>.
19, 9% on a reported and an average daily sales basis on a constant currency average daily sales basis consolidated net sales grew 16, 3%.
Compared to the second quarter of 2019, net sales increased more than $5 billion or 11, 2%.
On an average daily sales basis sequential sales increased 4.7% versus the first quarter.
Quarter sales were stronger than expected, reflecting several factors on the demand side. The rebound was sharper than expected in several channels. Most impacted by COVID-19 last year corporate small business and CDW, Canada, all delivered very healthy double digit growth versus 2020 and are up versus 2019.
So the strong growth reflects more than easy comparisons as.
As Chris mentioned education momentum continued delivering the fourth consecutive quarter of over $1 billion of net sales.
On the supply side, while the backlog increased several hundred million dollars on the second quarter. The team did a great job leveraging cdw's competitive advantages and supporting stronger than expected demand. So the backlog did not increase even more.
Gross profit for the quarter was $883 million, an increase of 18, 2% gross margin was 17, 2% up approximately 10 basis points versus last year, primarily driven by an increase in the Mexican the mix of net service contract revenue primarily software as a service and.
Strong professional services performance.
Actually offset by overlapping higher margin configuration services for the census project last year.
Turning to SG&A on slide 9 non-GAAP SG&A increased 13, 6%. The increase was primarily driven by payroll costs, including sales compensation, which moves with gross profit growth.
Performance based compensation consistent with higher attainment against goals and investments in the business, including coworker count to drive our strategy co worker count at the end of the second quarter was $10.666 co worker count increased 480 from the first quarter and 618 from the prior year the increase in coal.
Worker count reflects organic and inorganic investments to support high growth solution areas and our digital transformation.
GAAP operating income was $370 million up 35% non-GAAP operating income, which better reflects operating performance was $418 million up 23, 6% non-GAAP operating income margin was 8.1%.
Moving to slide 10 interest expense was $36 million down 10, 6%.
The decrease was primarily due to savings from last year's refinancing a lower LIBOR rate and lower revolving credit facility borrowings.
Other income reflects $36 million from the sale of our ownership interest in an equity method investment proceeds from the sale were excluded from non-GAAP metrics.
Our GAAP effective tax rate shown on slide 11 was 26, 2%. This resulted in second quarter tax expense of $97 million compared to $56 million last year.
To get to our non-GAAP effective tax rate, we adjust taxes consistent with non-GAAP net income add backs as showed on slide 12.
For the quarter, our non-GAAP effective tax rate was 25, 4% up 50 basis points versus last year's rate, primarily due to higher foreign taxes.
As you can see on slide 13, with second quarter weighted average diluted shares outstanding of 142 million GAAP net income per share was $1.93 up 47, 4%.
Our non-GAAP net income was $286 million in the quarter up 27% non-GAAP net income per share was $2 <unk> up 29, 3% from last year.
Turning to first half results on slides 14 through 19 net sales were $10 billion, an increase of 14% on a reported basis and 14, 9% on an average daily sales basis, as we had 1 fewer selling day on the first half of 2021.
The 1 fewer selling day will be made up in Q4, when we have 1 extra selling day compared to the prior year.
On a constant currency average daily sales basis first half consolidated net sales were 13, 6% higher than the prior year gross profit was $1.7 billion up 11, 6% and gross profit margin was 16, 8% down approximately 40 basis points operating income.
With $693 million on non-GAAP operating income was $786 million up 22, 4%.
Net income was $507 million on non-GAAP net income was $536 million up 25, 9% non-GAAP net income per share was $3.76 up 27, 9%.
Turning to the balance sheet on slide 20 at June 30, cash and cash equivalents were half of $1 billion and net debt was $3.4 billion.
Liquidity remains strong with cash plus revolver availability of approximately $1.7 billion.
Year to date free cash flow was $110 million as shown on slide 21.
This was lighter than a typical first half, but expected given last year's record $1.2 billion of free cash flow, which benefited from timing and 1 time items year to date, we saw some of the timing reversed as we mixed other vendors with extended payment terms.
Additionally, working capital increases during periods of rapid growth and we made strategic investments in inventory to support customers. During this choppy supply environment.
For the quarter, we deployed cash consistent with our capital allocation priorities, returning $433 million to shareholders, including $56 million of dividends and $377 million of share repurchases at an average price of approximately $170 per share.
Moving to slide 22, the 3 month average cash conversion cycle was 21 days down 4 days from last year's second quarter. The decrease was primarily driven by improved accounts receivable collection performance.
Turning to capital allocation on slide 23, our priorities remain the same first increased the dividend in line with non-GAAP net income to guide. These increases we will target the dividend at 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 2.5 to 3 times. We ended the second quarter at 2.1 times up 4 tenths of a turn from year end.
Third supplement organic growth with strategic acquisitions focal point and amplified IP are great. Examples.
And fourth return excess cash after dividends and M&A to shareholders through share repurchases.
Going forward, we expect to continue to move closer to our target net leverage range of 2.5 to 3 times through a combination of organic investments M&A and cash returned to shareholders. We now expect to return over $1.7 billion to shareholders in 2021, including at least $1.5 billion for share.
Purchases with the balance from dividends.
This has a $1 billion increase from last quarter's comments reflects our confidence on the cash flow generation and earnings power of the business. We remain active in evaluating M&A targets and we will continue to deploy capital for M&A that passes our screens.
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 24, the current environment continues to be challenging to forecast with a high degree of confidence on.
The demand side, we continue to see strong activity and momentum, particularly with U S commercial customers and in CDW, Canada on the supply side visibility remains a challenge notebooks displays documentation certain infrastructure of hardware, including networking and servers are constrained resulting in.
<unk> lead times, and a higher backlog with the exception of Chromebooks the supply environment has not improved since our last earnings call and most vendor partners do not expect the situation to improve in the second half.
With that context, our updated outlook is for the U S market to grow approximately 5%, we expect CDW net sales to grow $425 to 500 basis points faster than the market in constant currency, including the contribution from focal point currency is expected to be a tailwind of approximately 80 basis.
<unk> points for the full year, assuming exchange rates of $1.36 to the British pound and <unk> 79 for the Canadian dollar.
Moving down the P&L, we continue to expect non-GAAP operating income margin to be in the mid 7% range for 2021, we now expect non-GAAP constant currency earnings per share growth and a strong mid teens call. It 16% to 16, 5% currency is expected to contribute an additional approximately <unk>.
70 basis points to earnings per share growth.
<unk> full year outlook for non-GAAP earnings per share is an increase of approximately 35 over last quarter.
Additional modeling thoughts for annual depreciation and amortization interest interest expense and the non-GAAP tax rates can be found on slide on slide 25.
Moving to modeling thoughts for the third quarter 2015 to 2019.5 year average sequential increase from Q2 to Q3 on an average daily sales basis was approximately 4% and we expect this years third quarter to be in line with normal seasonality, which.
Which equates to low double digit year over year growth, we expect third quarter non-GAAP earnings per share to grow low double digits.
Our updated outlook for the balance of the year assumes modest growth in the backlog if supply turns out to be more resilient, enabling us to work down the backlog are key to keep pace with even stronger demand that would be upside to the outlook. We feel good about the health of the business and believe supply uncertainty. It's a question of timing across the second half and into 2022.
Our long term free cash flow rule of thumb remains unchanged at 3 and 3 quarters to 4 on a quarter percent of net sales assuming current tax rates.
Given the timing impacts that contributed to 2020 'twenty significant over delivery. We continue to expect 2021 free cash flow to be at or slightly below the low end of the range additional modeling thoughts on the components of free cash flow, including capital expenditures and the cash conversion cycle can also be found on slide 25.
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 to me and to open it up for questions can we please ask each of you to limit your questions to 1 with a brief follow up thank you.
Thank you as a reminder to ask a question you will need to press star 1 on your telephone to withdraw your question press the pound or has key please standby, while we compile the Q&A roster.
Our first question comes from the line of Matt Cabral with Credit Suisse. Your line is open.
Yes. Thank you very much like a strong quarter on the client device side again.
Any concern out in the marketplace around just the sustainability of PC and chromebook demand curious what you're hearing from your customers around sustainability of demand and I guess.
I also heard the commentary about the backlog continuing to grow just curious how much of that increase was within PC, specifically and when do you think you'll actually be able to catch up to that backlog.
Okay.
Good morning, Matt It's Craig look on demand I would tell you what we're seeing from customers is continued resiliency and.
And need for devices, whether in more devices in the hands of people, who are working remotely or at least partially remotely.
Kids in school, new use cases, the ability to utilize the stimulus dollars now to buy those devices and then you add on refresh that's coming up a pretty large installed base of looking towards refresh I would just tell you that the demand sales resilience.
These are the CDW, we certainly at the top overlap.
Compares were looking at in K through 12, given the enormous growth last year, but generally speaking demand.
On the solid on.
On the supply side, chromebooks, but really starting to ease up a little bit that the Oems on the plan for that last fall and they did.
But we are still team.
Supply constraints with regard to on notebooks.
Yes, Matt I would just add on in terms of the composition of the growth in the backlog. It's Chris said notebooks, certainly contributed to that with chromebooks getting better, but we did see backlog growth in some of the other areas.
In the transactional part of the business things like displays.
And panels.
It monitors things like that and then we also saw the backlog increase across some infrastructure products.
Got it that's helpful. And then for my follow up on on operating margin you guys. Just did 8.1% and if I look at the first half year slightly below 8%.
Yes.
Your guidance, if I heard it correctly as sales for mid <unk>. So I guess just wondering what the offsets are in the second half of the year and maybe just help us bridge from that first half to the second half.
Yes.
On a full year guide mid Sevens, obviously, theres a range there.
I would expect us probably to be at the stronger end of that mid sevens, but as you think about the back half of the year.
As we talked about in our prepared comments. We believe now is the time to invest in the business and we will continue to aggressively invest in the business you saw that we added nearly 500 co workers in the second quarter.
Co workers come into the P&L, obviously all of that is not reflected as we go forward. So we'll be carrying 2 full quarters of expense for that and continuing to make additional investments on the business.
Got it thank you very much.
Our next question comes from the line of Amit <unk> with Evercore. Your line is open.
Hi, This is <unk> on for Amit.
Yes, Thank you for taking the question.
Yes, Collin you just mentioned.
Think back and channel business and it will be great. If you could talk about some of those initiatives.
We're set to undertake that.
Yes, I'm happy to take that.
Really a variety of initiatives, both organically and inorganically on the organic side.
We continue to invest.
Behind the areas.
Our solution areas that are particularly high value to our customers so customer facing coworkers and technical areas. Both on the pre sales and the service delivery side.
Thank you began to see some of the fruits of those investments in the second quarter as we referenced the success that we're having on the <unk>.
Professional services part of the business.
We're also making investments in our own.
Digital transformation into our own infrastructure.
Drive productivity with our sales force and how we interact with customers and just how we scale and operate the business more efficiently.
Great. Thank you for that.
Thanks Akshay.
Our next question comes from the line of Katy Huberty with Morgan Stanley. Your line is open.
Good morning, Thank you for taking the questions I guess first talk about what the drivers are behind the assumption of greater share gains this year, which is reflected in the 425 to 500 basis points gross premium.
Well good morning, Katie good to hear from you in terms of our increased growth. If you look at where we've had meaningful growth client devices video other hardware category and of our customers priorities are going forward, where they're allocating more technology spend on infrastructure need.
Yeah.
We don't think the market is growing at the same rate that we're growing so we're flowing some of that increased 3.2 on premium and as you know.
Could you guys do tend to outpace the U S market by more than 2 to 3 basis points from periods of hardware brush. So we tend to over index, because we have more recognized at the net line.
1 thing I would say and supply remains a wildcard Tom talked about it I've talked about it we're not underestimating supply the teams have done a phenomenal job frankly in managing it and getting our fair share.
Given that the mix of what we're seeing our customers by Ann.
<unk>.
And how that hits the cap line that that's what's driving that.
Thank you on that.
But also just just to follow up on that because it does seem like the supply environment is working to your favor, it's hitting everyone, but it seems like it's hitting your business less than others and that's also driving.
Some of the share gains is that fair.
It is.
Sure Katy to some extent, what our distribution center on logistics capabilities all of the things that we talk about putting us in a position where.
Customers are betting on us they are turning to us as their best bet to get supply and partners understand so I like the day to get our fair share your concern we get our unfair share, but we do tend to benefit in supply constrained environment that said.
Our people you can say for the past couple of quarters, we felt prevailing at this point and the visibility is very difficult.
Thanks.
It's hard to really its hard to really have a good view over the next couple of quarters other than to say, we think it can get a little worse before it gets better but will continue into next year, but I'll tell you we've been working very closely with our OEM and terrific.
And we're also working closely with customers to find choices for them.
Moving to meet their requirements and their standard with small business with our other lines, but we generally because we.
Can create a solution and delivered to customers. We generally get are greater than fair share if you will.
Thank you for that I guess, maybe a follow up for Collin.
As you turned into the September quarter on the month of July was did you see any change in the pace of order growth or the degree of supply constraints in the first few weeks of the current quarter.
Yeah, Katy we're really not.
Providing.
More detail on on Q3 intra quarter beyond what we shared in the comments.
Which was we continue to see strong activity and momentum, particularly with commercial customers.
VW, Canada.
And.
On the supply side, we are expecting modest growth in the backlog as we move throughout the year.
Great. Thank you thanks Kerry.
Our next question comes from the line of Jim Suva with Citi. Your line is open.
Thank you and congratulations on great results on the increased outlook.
There is a bit of a debate out there balance.
Bookings in over ordering from basically every end market. So I was hoping you could kind of give some commentary because I would kind of assume and maybe I'm wrong at small and mid sized businesses.
Indication that really can't and don't double where they were because they just don't have quite a large needs as maybe you say the fortune 100 companies, where they know they're going to always need so much maybe I'm wrong on that but any thoughts about double ordering from your end markets and then that leads to the follow up question part about.
On the concern about a potential pockets.
Air or slowdown post when the supply chain gets back to equilibrium any commentaries on those would be great. Thank you.
Yes, Sir good morning, I'll start with the first 1 in terms of double ordering of course, that's something that we would we always worry about and look at carefully in this type of environment, what I'd tell you in on.
The information that we are working with our Oems.
If you get and provide some level of visibility.
To our customers is resonating really well and therefore, they have a level of confidence when CDW sales, it's going to be 8 weeks or 12 weeks when we can get it but we actually havent or can't get it we have seen minimal it's really any double ordering with our customers. So we feel very confident on the orders that have come in in our backlog.
Lord.
And the way that we're operating with the customers.
In terms of an air pocket Collin do you want to chat a little bit about backlog yes.
Sure, Chris maybe I'll, just add a little bit on to the double ordering comment as well Jim I think also we.
When you think about what the majority of our customers are ordering they're not widgets.
Customized.
To the specs.
Large corporate customer the needs of the school district, and the thought that you're going to place an order like that with multiple vendors I think is low at the very small and small office home office customer that needs 20 notebooks is it possible that there is some double ordering going on there, yes, but I think.
Overall, when you look at the backlog, we feel pretty good that those are firm orders sitting in the backlog.
The comment I will make actually gets into your next 1 what we have seen though is what I would call an order pull forward where customers are placing orders sooner than they might normally because of the supply environment or to try to get ahead of expected price increases from our OEM vendor partners. So sitting in that backlog is a little.
Bit of a pull forward and I think that's getting to your question around the air Pocket I guess the way I think about it is there's a little bit of a hedge here you know to the extent that there.
<unk> made that would be a little bit of a lull in the ordering it at some point in the future orders returned to a normal timing and flow pattern. We would also then have the flush of the backlog at some point in time so.
I think.
Maybe that's 1 way to think about it.
Great. Thank you so much for the details on clarifications, it's I appreciate it.
Thanks, John.
Our next question comes from the line of Shannon Cross with Cross Research. Your line is open.
Got it. Thank you very much I wanted to ask about some of the stimulus programs that are out there and being discussed and how you think may benefit.
I realize timeliness is a question, but thinking about the infrastructure plan. That's being discussed also E rate I think there were some changes to that and then are you hearing any of the education customers talking about using some other prior stimulus.
I think theres still an awful lot of that money floating ram. Thank you.
Yes, Shannon well yet to all your questions. Let me start with education Emergency connectivity Act, which is about $7.1 billion. When we have worked closely with educational systems to cap that so that's been something that the education customers are very focused on on taking advantage of with our help facilitate.
Navigator, so absolutely there.
Also as a state and local you know we've talked about the 3 rounds of stimulus funding last March last December this march and how that impacted state and local.
In particular because in December.
Decembers Appropriations Act there was no additional funding for state and local and state and local tended to pause kind of step back and say, what's going to happen in the next round well in the next round with March with dollar allocated to state and local.
So we have now seen the youthful both funds pick up I would tell you that the first couple of months in the quarter.
A lot of the testing understanding again, working with our customers to help them understand how to cap. The fund we already get the money how to get the money et cetera, but we did see a nice pickup in the last part of the second quarter in terms of using a stimulus dollars. So thats another area, where we're seeing strength in stimulus in terms of the packages coming forward.
The new 1 coming out yet to be seen.
We view those and to the extent that there is opportunity to help our customers certainly will take advantage of those.
Clearly the focus on the administration on things like technology infrastructure on technology as infrastructure and cyber security.
Our high on the list of priorities for our customers and we have capabilities that can help them to both implement solutions around those but more importantly, navigate the stimulus funds.
I think will be very effective in doing that.
Okay. Thanks, and then just a quick follow up in terms of cash flow is there anything we should think about I guess the demand seems strong uncertainty on so many areas in your backlog in and that I mean, how should we think about cash flow dynamics from a working capital perspective.
In coming quarters, because I would assume.
Somewhat of a fluid situation. Thank you.
Yes Shannon.
From a cash flow perspective, obviously as the business experiences rapid growth, we do make an investment in working capital and you saw some of that in the quarter.
And as I mentioned in my prepared remarks, we have intentionally been carrying higher inventory levels, specifically customer specific inventory.
Help them work through Rollouts of their projects. So I think as long as we're in this choppy supply environment I would expect it.
Inventory could be running higher than typical levels.
As it relates to our total free cash flow.
We were down in the first half of the year relative to a normal first half of the year I would attribute that mostly to the strong timing and things we benefit from in the prior year and not indicative of any type of.
Change in the future free cash flow generation capability of the business.
Thank you.
Our next question comes from line of Rich <unk>.
<unk> with Bank of America. Your line is open.
Hi, Thanks for taking my questions.
Chris can you give us your thoughts on the federal business I mean, youre facing tough comps from the U S census project.
Just wondering when that.
Our business can can turnaround and grow year on year are there projects that you're seeing there. Some government agencies, probably have Pcs that are coming up that are windows 10, Pcs, even that are coming up for replacement. So just your thoughts on on the on the opportunity set that you have in federal and when that business can turnaround from a year on year growth standpoint.
Sure. Good morning, what I would say that the fed business is we had a number of large opportunities that.
I was going to be rolling out in the second half of the year and others that were Christine.
Overlapping expenses projects, we knew we had that we had another a number of other very large client device projects last year.
What we've been putting on the back half of the year is not going to be enough likely to overcome that.
The beauty of our model is the diversity of our of our customer and market. So we've been having such strength last year on the center.
And kind of coming back this year, if you will with I'd say <unk> net.
Next year 2022 points on that.
From a growth perspective, we've got all of our other customer end markets that are.
That are going to see strength anything I would just say.
And there are other federal thing the census deal and some other deals that we're doing that are frankly, they're working on that are fairly similar.
Really reflects the positioning that we have with our customers to net in that customer end market, which is a real thought leader.
On a real solutions provider and a services first player so kudos to the team for continuing to grow our reputation and capability and we can see what we can see it paying off and the opportunities that we've got on the pipeline.
Got it thanks for the details on that Chris and just for my follow up Collin can I ask of the 50 basis points improvement sequentially that you saw on operating margin is there a way to quantify how much of that was mix versus.
Higher volumes or FX and.
Is there anything in that that is not sustainable going forward.
<unk>.
<unk>.
If you think about the gross margin improved sequentially. We went from a 16 forward to <unk>. So that was 80 basis points now we have a variable cost structure. So.
Not all of that passes to the operating margin.
I would say that there are some elements of seasonality in that.
When you think about a software vendor a big partner of ours, who has a fiscal year end in June.
And as we mentioned on our comments.
Very strong software results in very strong cloud and software as a service results. So we didn't benefit seasonally from mixing into netted down items, there that I wouldn't expect to recur at necessarily at the same pace in the second half of the year.
And then also our partner funding improved a bit sequentially from Q1 to Q2, our partners reimbursement of our advertising.
And as we increase our advertising investment sequentially you saw part of that sitting in the gross margin.
So I think most of the increase is.
This is primarily explained by the gross margin and then in terms of how you think about the back half of the year on just the.
Comment on it.
Made to Matt earlier in the call around we are continuing to invest in the business and that co worker count gets layered in and Youll have full quarters worth of that expense coming up in subsequent quarters.
Hey, Thanks for all the details appreciate it thanks for growth.
Our next question comes from the line of Matt Sheerin with Stifel. Your line is open.
Yes, thanks, and good morning, everyone.
Wanted to ask.
Again regarding the strength that youre seeing on the corporate side Reacceleration. There I mean, you did talk about on Prem infrastructure spending.
Just based on on time.
Pent up demand are you seeing company.
Companies reinvest as Theyre getting back to the office and in terms of the areas you talked about networking you've talked about servers could you just give more color on what youre seeing there.
Yes, good morning, Matt. Thanks for the question, Yeah, it's a little bit of everything on the launch and there. We certainly are seeing it driven by.
Both getting back to the office.
We're seeing a pent up demand I think 1 of our leader in that.
So it's an area for our partner relationship.
2020, as the rain delay in terms of as we think about refresh and Thats not a bad day to think about it you know last year was the pause on a lot of things allow us to serve is growing double digits.
Certainly that's what our customers are focusing on is things like workload optimization on application performance.
So that's where they're focused on 2.
To invest in it infrastructure and ultimately frankly.
Digital transformation, which is at the forefront of that rate customers.
Model.
So I think if you look forward hybrid work is driving assessment on what customers are going to need somebody.
Accordingly awful.
And we've got new Nextgen releases in 2 key technologies, given the analytic quality nature of the future Andy on now analytics.
He was on needing to really.
And we keep in the marketplace I think we're going to continue to see some upgrades.
Net in the <unk> there.
And then on the other.
Other areas like storage.
Now our real enhanced focus on data center availability. So the customers are looking at cost optimizing operations reported.
Our growing in the digital system.
Monitoring and automation.
Our digital velocity on trend with market includes on really on fire.
And then just presume to scrutinize the spend now that said where customers are hanging up on.
<unk>.
Proved out by how customers are enhance Mr income multis.
At multi cloud world, which includes on Prem on public cloud like capabilities, which is which is growing in terms of eagle assets well on multiple clouds, because even last year I think we talked about earlier.
Hear about customers really taking a step back and we assessed what we try to optimize their infrastructure and thats what were seeing the big moving whether they're refreshing and updating whether they are moving to a 2 meter consumption model on time, whether they're going to co lo of whether theyre moving workloads various cloud public cloud, we're hoping momentum.
In terms of planning on that than to implement the plan. So it keeps us right front and center of helping them to deploy their infrastructure strategy.
Got it thanks very much for that.
My second question is regarding the education market, obviously, its been a huge growth area for you know running roughly 20% of revenue versus.
Low to mid teens.
18.19 so.
And you talked about some of the continued strong drivers including funding.
At some point, though I would expect.
And on that spending to wind down so what should we expect.
Terms on the base case for that market as it should be higher because you've got a lot more on school district, so I'm using devices maintenance et cetera, but how should we think about that that business long term for you.
Yeah, It's a great question and we continue to see it as a as a growth opportunity. If we just think about the various cycles. We've been through in case of quality. They can go back 10 years, and chromebooks were introducing creative display cluster definitely help to see modernization of the classroom in every cycle. The education has been through CDW has been at the forefront of helping.
Educators administrators technology to figure out the best way to teach kids education in the classroom and now outside the classroom in different ways in the learning and buy in that physical facility Act on in the classroom. So we continue to see it as a growth opportunity because of the natural evolution of.
<unk> in this country and in our other market I think certainly given how strong last year was in particular Q4, yes, I don't think were going to see the equity and access in the classroom.
Harry and opportunities that we're selling into and we're not going to see ourselves overlap or overcome how well we did last quarter, but over the long term that I would say, it's a great. It's a great market, we had fantastic expertise, especially when you think about amplified.
The acquisition, we did last quarter and we're seeing we're seeing traction on the market incredibly strong so we're.
Very bullish on February 12.
Okay, great. Thank you.
Yes.
Our next question comes on line of key Towson with Northcoast Research. Your line is open.
Good morning, guys. Just a quick question here on the latest acquisition of focal point data.
Can you give us a little bit of color in terms of the margin profile and I guess, what I'm trying to look at here is how quick or what's going to impact on the overall operating margins CDW.
Over the next year or 2 I mean, im assuming would you expect that to go higher because of these acquisitions, but hoping you could provide some color on as we get an idea of the context.
Hi, good morning, Keith.
Typically would not provide.
That level of granularity with with our acquisitions.
It's.
While strategically important and of high value to our customers and sellers. It is a services business. So in terms of just absolute magnitude of contribution to CDW.
I would say the impact will be relatively small and as we stated in the press release on Monday expected not to have a material impact to earnings for the full year I guess, what I would say, though is I mean, if you look at the investments we've been making over the past couple of quarters.
We have been.
Picking up the services businesses that are of high value to our customers and I think collectively.
There.
Contributing to some of the gross margin strength that you saw that in the second quarter and we commented on it so.
Didn't call out anything specifically, but would just say in aggregate.
The investments, we're making behind these services businesses in high growth areas that our value to our customers are helping the margin.
Great I appreciate it and then looking at the overall environment now obviously raw materials are a significant cost.
So it could put increases that we're seeing in technology is there a way to kind of rate.
I will provide an average of what youre seeing in terms of price increases within your biggest sellers I mean are we saying, 4% to 5% increases right now.
Is that going to be contributed growth here.
Half of the year, but into next year as well.
In terms of contribution to our sales growth Keith Yes, yes, yes.
Sure.
That's a difficult question to answer at a portfolio level because it's much of what we sell it doesn't have a hardware unit associated with it right. When you think about software services cloud and then you see things like value shifting to the software for integrated solutions, but.
Maybe 1 way to think about it is if I.
Pick a big category wide client devices, which were up high teens in the quarter.
We saw balanced growth in terms of both units and ASP average selling price and that was true for most customer customer end markets. So.
It's a combination of both unit growth and pricing.
That's helpful. Thank you.
Our final question comes from the line of <unk> <unk> with Jpmorgan. Your line is open.
Hi, Good morning, Thanks for squeezing me in I.
I guess.
Repaired remarks.
You've talked about.
Investments on this being the right time to invest in the back in the business just wondering how should we think about that.
From a modeling perspective like are we entering a period of time in on your Opex increases that would be more in line with revenue growth or does the along with the modest.
Kind of for Opex to be below Opex increases below revenue growth and just thinking about where we are in.
In terms of buying period of investment.
I have a follow on business. Thank you.
Yes to me thanks for joining the call and welcome.
We havent provided multiyear thoughts just a view for the year and you can see for the full year.
Continue to believe we'll deliver a mid <unk> operating margin. So you can then think about those investments being funded within the context of that those thoughts around the operating margin.
Okay. Okay.
Quick follow up I think you.
You mentioned for <unk>, you're expecting it to be.
In line with seasonality that you've seen historically.
If I walk through the non blues and try to get to an implied <unk>.
Does look like you.
And if im doing the math right it looks like you're guiding something very in line again with seasonality just thinking.
With all other backlog that you have on the demand backdrop that we are in where things look pretty strong.
Is that.
Alright, we look at it given that.
Expecting a seasonal moderation in December or should we be expecting something meadows.
Yes, I think you can do the math given the thoughts on the guide for the third quarter and then whats leftover for the fourth.
I would just be careful about your your thoughts on the backlog as we said.
We don't assume an improvement in the backlog on our full year modeling thoughts. So that's not captured in if the backlog where to get worked down that would be upside to the outlook.
I think when you run the math on what the implied Q4 growth rate is year over year. That's again, just a reflection of some of the big overlap that we've been talking about specifically within education in the fourth quarter last year, we had the large Mississippi Department of education deal and obviously, a big contribution from the census of <unk>.
Mrs came back.
Okay. Thank you thanks for taking my questions. Okay. Thank you Sir.
I would now like to turn the call back over to MS. Chris Leahy for closing remarks.
Thank you.
<unk>.
Let me close by saying.
I'd like to acknowledge.
On the incredible dedication of our coworkers around the globe.
On their extraordinary commitment to serving our customers partners on all of our CDW stakeholders, particularly this quarter, our first quarter delivering over $5 billion in sales and extraordinary quarter supporting our customers. Thank you all thank.
Thank you also to our customers with a great privilege and opportunity to serve you.
To our investors put.
Building on the call. We appreciate you and your continued interest on supports on CDW. We look forward to talking with you again next quarter. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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John.
Yes.
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