Q3 2021 CDW Corp Earnings Call
Webcast and in our earnings release and form 8-K, we furnished to SEC today.
Please note that all references to growth growth rates or dollar amount increases in our remarks today are versus comparable period in 2020, unless otherwise indicated.
In addition, all references to growth rates for hardware software and services today represent U S. Net sales online and do not include the results from CDW UK or Canada.
A replay of this webcast will be posted to our website. Later today I also want to remind you that the conference call is property of CDW and may not be recorded or rebroadcast without specific written permission from the company.
With that let me turn the call over to Chris.
Thank you Kevin Good morning, everyone I'll begin today with an overview of third quarter results and drivers of performance Al will take you through a more detailed look at our financials as well as our capital allocation strategy and outlook, we'll move quickly through our prepared remarks is we always try to do to ensure we have plenty of time for questions.
Before I get started I do want to pause for a moment to honor the life and legacy of our former CEO, Tom Richards, who passed away last week after valeant tight with cancer.
Suspect most of you on this call have likely met Tom in person.
I am certain that everyone. On this call has been impacted by Tom He was a fierce competitor.
And equally a kind human being.
Tom had a lot of what we like to call. It CDW Tomism simple.
Simple ways of getting to the essence of something in a way that duck.
One of my personal favorites isn't onetime used to say at CDW, we take what we do seriously, but we don't take ourselves too seriously.
That's the essence of who we are that is our CDW culture captured so simply and amplifies those strongly by Com Richard.
Tom also had an unexpected way in signing off on our earnings call, usually with a wry comment about an upcoming holiday like Halloween, our mothers day or even Valentine's day.
As a result, we always entity called on a high note and with a chuckle.
Tom news audience as well.
And on <unk>, Tom I'd like to kick off this earnings call with the tagline <unk> on every communication to a co worker.
Only signed off with you make a difference literally injecting into each co worker, Tom personal belief in them and theyre important impact and.
Behalf of all of our coworkers around the globe, our customers and our partners our communities and our investors I would like to say thank you to Tom you made a difference.
Let me turn now to Q3 performance.
Once again, CDW posted strong top line growth and profitability.
Overall demand was strong and the teams did a great job addressing customer needs.
For the quarter, we delivered record net sales of $5 3 billion 11, 4% higher than last year and up 10, 7% in constant currency.
Non-GAAP operating income of $435 million up 12, 6% and non-GAAP net income per share of $2 13.
$15, 4% higher than last year on a reported basis and up 15, 8% in constant currency.
Our ability to deliver the strong top line and profitability was the result of three key drivers our balanced portfolio of customer end markets.
The breadth of our product and solutions portfolio and our ongoing execution against our three part strategy, which is focused on taking share and investing in our solutions and capabilities, our customers need and want.
So let me walk through each one of these and share some detail about how they contributed to our performance.
First our balanced portfolio of customer end markets. As you know we have five U S sales channels corporate small business healthcare government, which includes federal and state and local customers and education with K 12, and higher Ed. We also have our UK and Canadian operations, each serving public and commercial customers.
All of these operations represent meaningful businesses in their own right.
Often different factors impact these diverse customer end market and this quarter, we saw that play out as our commercial business in the U S are small and corporate channels and our international operations posted significant double digit increases while our U S public business posted a mid single digit decline.
From a macro perspective supply remained under pressure this quarter demand outpaced supply and lead times extended particularly in several solutions areas.
<unk> continued to leverage our distribution centers extensive logistics capabilities deep vendor partner relationships and strong balance sheet and liquidity position to navigate the supply environment. They did an exceptional job of working with our partners to stay on top of availability status.
Our sellers and technical specialists also work with customers and whenever possible found alternative available product and built alternative solutions.
These efforts helped to mitigate some of the pressure and our backlog increase was consistent with last quarter.
The tight supply environment continued to impact prices, which our teams were generally able to pass along.
Let's take a deeper look at third quarter customer end market performance.
Commercial customer priorities remain the same as in the second quarter digital transformation security and hybrid cloud solutions custom.
Customers continue to prioritize investments to enable the future and add resiliency to their operations to strengthen and secure infrastructure platform and endpoints.
Within this backdrop corporate increased 25% and customer demand customer demand remains strong.
While many customers delayed return to office, they continued to prepare as well as invest to facilitate hybrid work.
This drove ongoing strong double digit increases in transactions propelled by notebook audio visual and desktop.
At the same time digital transformation remains a top priority.
While buying sentiment was clearly there in many cases the product was not ratings were strong but with extended lead time backlog built during the quarter.
Lack of product availability, particularly in netcom and storage muted corporate solutions growth.
Small business also delivered another exceptional quarter of growth increasing almost 40%.
The team continued to help customers with remote enablement security and video driving strong growth across both transactional and solutions categories.
As we've shared previously small business customers tend to be more flexible in their technology requirements.
So while they did see some impact from supply constraints small business did not experience as much at corporate.
Example of the power of diverse end markets.
You also see the power of our diverse end markets and our public performance net sales for our government channel decreased 33%.
Federal declined double digits in large part due to the overlapping of our devices and service solution for the U S Census Bureau, and other client device programs that were particularly strong last year.
Security remains robust with net sales up more than 30%.
The gears of Washington were slower than typical at federal year end, and we had contracting delays in several large contract. This is not unusual given the magnitude of federal contracts timing can influence performance.
You've heard us talk about federal is lumpy nature in the past this will unwind and we expect to see a reversal back to growth in the first half of 2022.
State and local posted a mid single digit decline.
Atlas funding remained largely unallocated to the local level because access to multi year American rescue plan Act funding with deadlines in 2024 led to greater focus on multiyear budget planning.
At the same time state and local customers were focused on digesting last year's meaningful stimulus funded it investments.
We continue to work with our customers, but given the complexity of the various funding opportunities and multiyear phasing, we do not expect to see projects moving ahead meaningfully until early 2022.
Education increased by 2% higher Ed delivered high single digit growth driven by ongoing focus on campus connectivity and enhancing the dorm room experience with double digit growth in both security software and servers.
The K 12 team did an excellent job and matched last year's record net sales coming in flat on top of last year's 30% plus growth.
This was consistent with the expectations, we shared on our year end 2020 call, where we look for strong non seasonal first half performance to be followed by a deceleration in the second half.
Chromebook availability continued to improve during the quarter and client devices increased low single digits on top of last year's stimulus equity and access driven growth.
Overall transactions increased low single digits on top of last year's strong double digit growth.
<unk> declined driven by a double digit decline in netcom, largely reflecting supply challenges.
We continue to expect above historical net sales against some very tough on seasonal fourth quarter compares.
Healthcare posted a 31% increase by the second wave of Covid.
SaaS shortages and limited ICU bed availability during the quarter. Some projects that had been sidelined did resume this was particularly the case in security as healthcare remains a target for cyber crime.
Our security experts continue to guide hospital system to find the best solutions that protect their sensitive data and security sales increased strong double digits.
Other which represents our UK and Canadian operations increased over 30% on a reported basis.
The U K and Canada delivered mid 20% growth in local currency.
Customer priorities in both markets remain the same as the U S digital transformation security and hybrid cloud solutions.
As do their investments to enable the future and add resiliency to their operations.
Both operations experienced increased back orders.
Clearly the 11% plus sales growth, we delivered demonstrates the power of the first driver of our performance our balanced portfolio of customer end markets. It also demonstrates the power of the second driver of our performance this quarter, the breadth of our product and solutions portfolio, which you can see in our major category performance.
Transactions increased low double digits, driven by client device growth in video solutions were flat with double digit increases in servers and collaboration tools offset by declines in netcom and enterprise storage.
Drilling further down into key solutions categories cloud customer spend once again increased strong double digits we.
We saw robust growth across all three top cloud workload security infrastructure as a service and productivity.
We expect strong customer demand for cloud solutions to continue and we are well positioned to deliver.
And once again, given its ongoing importance to our customers our security practice delivered excellent results.
Customer spend was up strong double digits. Our teams continue to guide customers on their security posture assessor environment design, the best approach and deploy and manage the solutions throughout its lifecycle.
Overall for the quarter, we delivered double digit growth in hardware low single digit growth in software and strong double digit growth in services.
Software net sales increased low single digits strong double digit increases in security software database software and backup and recovery were partially offset by declines in network management software storage and telephony related software.
As I've shared before services are fundamental to our go to market approach and a key enabler of our value proposition.
This quarter is nearly 30% growth was a product of both organic performance and inorganic contribution and was driven by both professional and managed services.
And this leads to the final driver of our performance in the quarter the impact of investments we are making in our three part strategy for growth.
As you know in October we announced our planned acquisition of serious computer solutions, when we announced the acquisition I shared how it deepens and adds scale to our services capabilities capabilities that will ensure we remain the trusted technology adviser to our customers as they accelerate their digital transformation.
Notice I said deepens Sirius is additive to our existing capabilities capabilities, we have built through both organic and inorganic investments.
Capabilities that enable us to serve customers as their trusted adviser whether in a physical digital or cloud based environment in the U S and internationally.
Why so many investments in services capabilities simply.
Simply put services are becoming an increasingly larger component of total customer it spend.
CDW services position us to enable the whole solution increased our engagement with customers and stickiness and provide.
Insights into opportunities to further help our customers across the full lifecycle.
Today IP leaders are accountable for both running the business and using technology to transform the business and deliver strategic outcomes.
Both run the business and transform it leaders need to invest resources, where they can have the greatest impact and do so with the greatest speed.
Services are critical to making this happen.
To address this need we have built engineering services capability that span the full back in full lifecycle, our technical organization has grown to more than 3700, presale specialists and engineers.
Today, we can deliver complex digital transformation solutions from code to cloud and data center to database and deliver them quickly.
Let me share. An example of how our services team is helping a global online home retailer transform their business for their next wave of growth.
Our transformation that was hindered by legacy technology.
To accelerate the transformation of our customer opted for a combination of public cloud technologies and new cloud native plot at pattern. This would create the agility they needed essentially an on demand environment.
Great idea, but accelerating cloud technology requires specialized expertise that is inefficient to keep on staff and that is where CDW came in.
First we leveraged our cloud managed services and Offloaded some of the cloud projects from the customer to CDW, then we pulled in our digital velocity talent orchestration services for DVT DVT orchestration suppliers customers with talent to work inside the customer's existing team talent that is becoming more and more vital in today's.
Environment.
Digital velocity talent orchestration delivers highly vetted resources, whether already employed by CDW or sourced by us.
CDW services enabled the solution.
It did so much more as you can imagine this level of high touch integration creates customer loyalty with ongoing relationships on the ground and continued exchange between CDW in the customer ultimately leading to more business right for the customer and great for CDW.
This is an excellent example of our three part strategy in action and how M&A enhances our organic investments to ensure we remain our customers number one choice as a trusted advisor.
Solving key business problems for our customer and today's environment requires strong service and solutions capabilities capabilities that when combined with our great relationships and competitive advantages of scale scope and disciplined execution enable us to win in the marketplace and deliver sustainable profitable growth today and in the future.
And that leads me to our expectations for the balance of the year.
We continue to look for growth in 2021 to come in between nine and a quarter and 10% in constant currency split roughly between 5% market growth and $425 to 500 basis points of CDW market outperformance.
This reflects our expectation that supply constraints do not mitigate anytime in the near future, but do not get materially worse.
Remember these constraints don't just reflect component shortages, but also labor and logistic challenges challenges, we do not expect to reverse in the near term and challenge that we do not expect to resolve as a flush rather gradually.
As far as Wildcards. In addition to the fluid supply situation and the potential for another wave of Covid given the slowdown in third quarter GDP growth, we will keep a watchful eye out for any slowdown in the economy.
As we do we will continue to do what we do best.
Leverage our competitive advantages to help our customers address their it priorities and achieve their.
Objectives and out execute our competition.
I Hope you can tell from my comments that this quarter's performance reinforced our confidence that we have the right strategy in place a strategy that serves us well when confronted with macro or customer specific challenges and positions us for sustainable growth.
Our strategy designed to continue our evolution as the leading it solutions provider.
And most importantly, a strategy that delivers profitable growth and returns to shareholders. This confidence underpins today's action by our board to increase our quarterly cash dividend by 25%.
I know many of you may be wondering what we expect for next year. We're in the middle of our planning process and as we always do we'll provide our outlook for 2022 on our year end conference call.
And with that let me turn it over to al who will share more detail on our financial performance.
Thanks, Chris and good morning, everyone I'll start my prepared remarks with more detail on the third quarter moved to capital allocation priorities and finish up with a 2021 outlook.
Turning to our third quarter quarter P&L on slide eight consolidated net sales were $5 3 billion.
Up 11, 4% on a reported and an average daily sales basis.
On a constant currency average daily sales basis consolidated net sales grew 10, 7%.
Net sales and channels most impacted by COVID-19 last year corporate small business and international continue to rebound posting strong double digit growth in the quarter and delivering sales above 2019 levels.
This quarter's growth also benefited from strong double digit performance in healthcare.
Was tempered by a slowdown in education and decline in government.
On the supply side.
Overall backlog increased several hundred million dollars in the quarter and continues to be elevated year over year.
The team did a great job leveraging cdw's competitive advantages to the backlog did not increase even more.
Gross profit for the quarter was $915 million, an increase of 10, 8% on a reported basis.
Gross margin was 17, 3% down approximately 10 basis points versus last year.
This is primarily driven by lower product margin, partially offset by an increase in the mix of net service contract revenue primarily in software as a service. In addition to strong professional and managed services performance.
Turning to SG&A on slide nine non-GAAP SG&A increased nine 2%.
Increase was primarily driven by payroll costs, including sales compensation, which moves gross profit growth.
And performance based compensation consistent with higher attainment against financial goals.
Finally, it reflects investments in the business, including increased coworker counts focused on execution of our strategy.
Coworker count at the end of the third quarter was 11098 up 432 from the second quarter and 1100 18 over prior year the.
The increase in coworker count reflects organic and organic inorganic investments.
<unk> high growth solution areas and our own digital transformation.
GAAP operating income was $386 million up 21, 6%.
Non-GAAP operating income, which better reflects operating performance with $435 million up 12, 6%.
And non-GAAP operating income margin was eight 2%.
Moving to slide 10 interest expense was $36 million.
Down nine 4% the decrease was primarily due to savings from last year's refinancing.
Our GAAP effective tax rate shown on slide 11 was 23, 9% to.
To get to our non-GAAP effective tax rate, we just taxes consistent with non-GAAP net income add backs as shown on slide 12 four.
For the quarter, our non-GAAP effective tax rate was 25, 3%.
Up 200 basis points versus last year's rate, primarily due to a one time impact of state and foreign tax benefits recognized in the prior year.
As you can see on slide 13, with second quarter weighted average diluted shares outstanding of 139 million GAAP net income per share was $1 91 up 43, 2%.
Our non-GAAP net income was $298 million in the quarter up 12, 3%.
And non-GAAP net income per share was two 4% from last year.
Turning to Europe.
Year to date results on slides 14 through 19 net sales were $15 billion, an increase of 13, 1% on a reported basis and 13, 7% on an app.
Average daily sales basis, we.
We had one fewer selling day year to date in 2021, which will be made up in Q4, and we have one extra selling day compared to the prior year.
On a constant currency average daily sales basis year to date consolidated net sales were 12, 6% higher than the prior year.
Gross profit was $2 6 billion up 11, 3% and gross profit margin was 17% down approximately 20 basis points year over year.
Operating income was roughly $1 1 billion and non-GAAP operating income was $1 2 billion.
Up 18, 7%.
Net income was $773 million and non-GAAP net income was $834 million up 27%.
Non-GAAP net income per share was $5 89 up 23, 5%.
Turning to the balance sheet on slide 20 at September 30, cash and cash equivalents were $245 million and net debt was $3 8 billion.
Liquidity remains strong with cash plus revolver availability of approximately $1 4 billion.
Year to date free cash flow was $341 million as shown on slide 21. This is lighter than last year's record $1 $2 billion of free cash flow, which benefited from timing and one time items.
Year to date, we saw some of the timing reverse as we mixed out of vendors with extended payment terms.
Additionally, working capital increased to support our strong year to date growth and we continue to make strategic investments in inventory to support our customers through this choppy supply environment.
Moving to slide 22 to three month average cash conversion cycle was 25 days up nine days from last year's third quarter.
The increase was primarily driven by mixing into vendors with longer payment cycles. In addition to holding customer driven stocking positions and the timing of receipts priorities remain the same.
<unk> increased the dividend in line with non-GAAP net income, including today's 25% increase to the dividend.
Yes.
Increased annual dividend of $2 is approximately 25% of trailing 12 month non-GAAP net income through September.
The Q4 2021 dividend demonstrates our.
Confidence in the earnings power and cash flow generation of the business and marks the eighth consecutive year of increases since our initial public offering in 2013.
Our dividend has grown at a compound annual growth rate of 36%.
Percent from its initial level we.
We will continue to target a 25% payout ratio going forward growing the dividend in line with earnings.
Second we ensure we have the right capital structure in place with a targeted net leverage ratio of two five to three times.
We ended the third quarter of two three times.
Third supplement organic growth with strategic acquisitions serious, which we announced on October 18th and our recent focal point and amplified it acquisitions are great. Examples.
And fourth we return excess cash after dividends and M&A to shareholders through share repurchases.
During the quarter, we continued to deploy cash consistent with our capital allocation priorities, returning $505 million to shareholders, including $55 million of dividends and $450 million of share repurchases at an average price of approximately $188 per share.
We continue to expect to return approximately $1 7 billion to shareholders for the full year 2021.
Including $1 5 billion in share repurchases with the balance from dividends.
Going forward, we continue to continue to execute against our capital allocation priorities as we have done since 2014.
In 2022 post closing of the serious acquisition, we expect to have an initial net leverage ratio of approximately three three times.
While our capital allocation priorities will remain the same we will shift our objectives to focus on paying the dividend and reducing debt.
As a result of this focus we will put a lower priority on M&A and share repurchases until our net leverages in our target range 22.
425 to 500 basis points faster than the U S market in constant currency.
This assumes a consistent supply chain environment and impact to our backlog.
We feel good about the health of the business and we continue to navigate the fluid supply environment.
We continue to expect currency contributed approximately 80 basis points to the full year net sales growth.
Sumit exchange rates of $1 38 to the British pound and 80 to the Canadian dollar.
We expect 2021 free cash flow to come in 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.
That concludes the financial summary, as we always do we will provide updated views on the macro environment and our business on our future earnings calls.
And with that I'll ask the operator open up for questions and we would just please ask each of you to limit your questions to one with a brief follow up thank you.
Thank you if you would like to register a question you can do say by pressing star followed by one on your telephone keypad now.
First question comes from Adam Tindle, Raymond James Adam Your line is open.
Okay. Thank you and good morning, Chris I wanted to start on serious to see if you had some early feedback from customers now that the announcement has been out specifically wondering if those serious enterprise customers are perhaps willing to breach the conversation on utilizing cdw's transactional portfolio that serious didn't have.
And Conversely, the CDW mid market customers more interested in serious as services portfolio. So kind of a qualitative view from the customer perspective on potential revenue synergies in this deal.
Yes, good morning, Adam Thanks for the question and you know we're in a little bit of a quiet period here as we go through the various regulatory approvals that said one of the areas that we focus very quickly was feedback and I would just tell you. It's been really really positive on both fronts. So our customers.
CDW are delighted.
About the acquisition and really looking forward to the combined entity.
The capabilities that they helped bolster CDW given their reputation in the market and the quality of their of their services.
And the reciprocal is true as well you know I talked to Joe Martin late in the day of the announcement needed he'd made its way through a lot of customers that had their frontline sellers and it was for the most part all positive. So again, we think as I said the word before homerun deal and we're going to make it work really well and our customers seem to be.
Our partners equally are thrilled.
Exactly what they were looking for us to do in their growth.
A little bit more on serious recent performance the purchase price was very attractive all cash in nature and there was some skepticism on what's been going on with the business. In 2021, I know you gave us color based on 2020, but maybe you could help dispel any of that concern by talking about what <unk> seen out of serious performance in 2021.
Well look.
Theyre doing just fine and their customers like us.
In areas like federal which we talked about today are enterprise customers and as you know that can be a lumpy business. So when we did our diligence and looked at the pipeline and the types of programs. They are running with customers. They were having a similar impact that we were having with regard to our larger customers some things being delayed some things being.
And going back to the office et cetera.
Sure.
But I would tell you that we feel very confident.
In the health of their business.
The prospects of the business in the pipeline for the business and in the <unk>.
The opportunities for serious with VW that combined entity.
The next question comes from Shannon Cross.
At Cross research Shannon.
Your line is open.
Alright. Thank you very much I wanted to take a bit more into backlog composition, if youre seeing any order cancellations or how it how it developed over the quarter, maybe linearity just to get an idea of how.
How sustainable and sticky do you think the backlog will be.
Yes, good morning, Shannon This is al so.
A couple of things that I would note so.
Going in in the quarter.
We may we would have expected that there'd be a bit of a kind of a modest view of backlog I'd say overall for the quarter was a bit more and modest and let's call. It in terms of just all characteristics similar to Q2.
A couple of variance or components that maybe looked a little different and I think Chris touched on this in your prepared remarks is that.
We saw a bit more of an effect from a solutions perspective.
Included.
Notably net common storage.
Notwithstanding that similar to Q2 and look I would just note. The all things considered the team did an exceptional job navigating through that and in delivering on the results.
And okay. So you don't youre not seeing double orders youre not worried about any kind of.
Our loss of backlog.
We are not I would just I would just note. The look I think theres component in the backlog that there's likely some pull forward right. It's been a tenuous environment and so there are customers that I think probably have a perspective that knowing that this doesn't have any clear end date.
Maybe get in front of some of their projects and so theres probably component that's pull forward, we're not feeling the effects youre seeing the effects of either double bookings or order cancellations.
Okay. Thank you and then just a quick question on Chris.
Chris maybe how are you thinking about inflation and clearly you can pass through higher product costs, but just sort of in general.
As you go through your budgeting and planning for 2022.
Are you thinking more transitory or are you sort of planning for some of these cost increases to be here.
For the long long term thank you.
Yeah understand and we'll share more with our about our planning next year as we think about it.
Look it feels like the perspective out there is maybe a little a little worse than transitory.
So we will just keep our eye on the economy and how that impacts in particular different segments of our business for example, and when you think about small business.
They are really doing a terrific job right now, but we're keeping a very close eye on that segment of the market to to understand how the economy might be impacting them, where their optimism is there ability to hire etcetera. So as we always do we will keep an eye on it it feels a little worse than transitory, but again, we think that.
Technology is an 81 priority and our customers will continue to invest in technology. If in fact, it becomes a little more expensive, we think they'll keep the priority there.
And look if we can keep the economy coming out of the pandemic with the momentum we seem to be building and then positive nature in the economy.
We're feeling pretty good.
Thank you.
Yeah.
The next question comes from <unk> Bhattacharya of Bank of America, but can you. Your line is open.
Hi, Thanks for taking my questions.
Chris I wanted to ask about the education market.
In <unk> 'twenty four 'twenty, you had 2 billion dollar quarters and again this year in June and September again had $2 billion of quarters. So.
Year on year headwind from the Mississippi Department of Education project that you had in December So how should we think about can you give us your thoughts on this end market going into <unk> I mean, how do you balance.
I mean, what are your thoughts on the stimulus package and the benefit you can get there versus the year on year headwinds <unk> had from a stronger year ago quarter.
Well good morning, <unk> and thanks for reminding the team of the great performance. They will appreciate that.
Look we called this out earlier in the year and I mentioned it again in our prepared in my prepared with strong as it has been but we have we are lapping a big back half of the year. So we would expect to still continue to see.
I'll call it solid performance and it's a bit on seasonal because at the end of the end of the year.
But it's going to decelerate in our view and it's going to be it.
It will be difficult to overcome the level of growth that we saw last year that said <unk> is the stimulus funding for example, the emergency connectivity.
<unk>.
As yet another source of another source of funds for education institutions to be able to fortify their classrooms and hybrid environment. The one thing with that that funding is pools are able to use it for orders that are placed so we're working our way through what of that money relates to orders.
That had been placed but we're confident that there is a large portion that are additive to the to the base and again the team as they always do has done a phenomenal job, helping our K 12 customers worked through that funding. So as you've heard me say before I feel very confident in education over the long term it is a growth area.
The education market has inflection points and we have always been ahead of those inflection points, whether it's how the classroom itself changes, whether it's going to hybrid whatever those are we are usually there and I'll tell you amplified it.
Which we just added is taking us yet another another leg of growth for K 12, with their cloud enabled capabilities and they're there.
Our IP developed technology that they offer for classrooms. So.
Top half year, but the team is doing very well in long term.
Growth area.
Okay. Thanks for all the details there Chris maybe for my follow up if I can ask al about operating margins. So you had another good quarter another quarter of above 8% operating margin and you're guiding an increase for the full year to high Sevens. If we just look at core CDW and not consider serious right now which is.
Which is accretive to the company, but if we just look at core CDW do you think that having a high <unk> operating margin as a sustainable level going forward what are the puts and takes that we need to keep in mind.
Yeah sure. Thanks for the question. So I think you just hit it.
At the end there look there are lots of puts and takes in any given quarter and I will just.
Start if you just.
Put aside the supply chain environment right mix does really matter. So if we think about component towards transactional what solution.
From a mix perspective that matters channel mix matters, all those things have an impact.
I will say to start on your gross margin and obviously then the kind of the drop down from an operating margin perspective, so, let's just keep that in mind and again kind of supply chain will matter as well in the case of this particular quarter and maybe as an example.
So on a sequential basis, our gross profit margin increased from a channel perspective.
And then you have got you've got transactional solution and then very notably <unk> I would just note. The the fact that youre, 100% gross margin items will have an impact in this quarter.
Our 100% gross margin items grew faster than our net sales. So that's going to have an impact as well.
And so again all that steeped in focus on gross margin. Then finally, if we walk that down to operating margin.
It's been just a matter of at what pace are is our non-GAAP SG&A spend happening in the case of this quarter I would say.
Growth in gross profit and so we dropped more to the operating margin for the quarter and when you look to our outlook.
Look.
Relative to what that operating margin was for this quarter.
We're giving an outlook of high sevens and that reflects that.
We would expect in the fourth quarter that spend is going to pick back up and it's going to balances back out to up to a high sevens on the operating margin.
As you look forward look I think you've got a good sense for this strategy and the movement in where we're going longer term in terms of mixing into services and mixing into on a 100% gross margin, but all of those mix components will matter as we go forward.
Okay. Thanks for all the details.
I appreciate it.
The next question on the line comes from Jim Suva Citigroup, Jim Your line is open.
Thank you to pinpoint.
But then when we layer in the supply chain challenges and do with schools and local government and smaller sized government submissions.
So colleagues, who may not be as tech savvy as the <unk>.
<unk> Fortune 50 or 500.
Can you talk a little bit about the visibility or are they starting to place orders are starting to say hey, if this gets approved and if we get this amount here's what I want because it seems like with the long lead times, if they say they want to implement something in the summer for education, we're getting to a point a window, where you won't be able to procure.
The item so any talk or color on the discussions you are having around these topics.
Yes, good morning, Jim there's a lot packed in there are stimulus across many different segments. So let me start with.
Education, which is I think where you.
You were growing there.
<unk>.
Yes.
The complicated right. We've got the supply ecosystem that is is.
He's got some impacts to it right now so we're trying to manage through all of that here's what I'd say about K through 12.
You know we have a lot of experience understanding fund.
Funding stimulus funding and other types of funding for educational institutions. So we sit side by side with our customers to make sure. They understand both where the dollars can be used for what products in particular for what outcomes because sometimes outcome base.
And what the deadlines are and what those deadlines mean do you have to have the product in house you have to have the product order placed so theres a lot of navigating that's going on and I feel highly confident that the team is doing a phenomenal job with our customers and that our K 12 customers are not going to lose out on <unk>.
And any funding that's really clear.
And the state and local space, where we've got stimulus funding coming down it's been it's been a bit complicated because.
Funding packages there were three of them as we've talked about before the cares Act package for example had a deadline at the end of this coming year.
That was from March of last year. The end of last year. It was there was nothing for state and local in the stimulus package in March there was a hefty amount.
But as we all know when it comes to state and local it's about budget cycles, and it's about funding deadlines.
The spending that has taken place in 2021 is primarily from the <unk> package with a deadline. This year, what we're seeing now is.
I don't want to call it slowing down, but I am going to say, a moderating and planning and state and local government now have this funding where they don't have to spend until the end of 2024 and so they are now looking at a multiyear approach pretty unusual this multiyear approach, but thats, what theyre doing and we're helping them with that theres a lot of complexity.
It's very solutions based in my view in terms of what customers are trying to do so we don't really expect that to meaningfully come to fruition until early next year, but theres just a lot of tentacles and theyre all different based on the stimulus package and on the actual.
The market that we're talking to but again I would just reiterate that this is something we do with frankly, a core capability like working with partners is a core capability to understand in the federal state local education healthcare spaces, where the funding is what it means what the deadlines are and how to use it and then to basically walk our customers through it so I know.
That was a long answer I hope it was helpful.
That was exactly what I was looking for thank you so much.
You are welcome.
The next question on the line comes from Katy Huberty at Morgan Stanley <unk>. Your line is open.
Yes. Thank you good morning, just given the backlog commentary can you talk about the gap between net sales growth in orders or writing growth in <unk>, and maybe how that compared to the second quarter kind of a follow up.
Sure Hi, Katy good morning, this is al.
Look we won't quote.
The exact delta there, but I think it's safe to say that we continue to see strong written demand.
That continue to show up and that's part of what bolsters our confidence.
Certainly shipments have lagged that and again I'll go back to my comment I would say the delta there.
Mix looks like second quarter did and that would be.
Consistent across products with the one caveat that as we mentioned solutions.
As a little bit stronger a little worse than it was in Q2.
Okay. Thank you and then maybe a follow up for you.
<unk> cash balance of 245 million is lower than your typical buffer can you just talk about the drivers of cash outflow in the quarter and the financing needs nearer term to rebuild that buffer.
To fund the serious acquisition.
Sure.
Sure. So first on the serious acquisition I think we mentioned on the previous call. We have committed financing in place. So we expect that we are going to finance the acquisition fully.
From a cash balance perspective, I think Kate if you compare it to where we were at the end of the year and maybe a year ago. Certainly we would look we look lower.
And a couple of things there one we had a debt refinancing are.
Financing I should say in 2021, so that bolstered that cash position and then notably for 2021.
We've used a fair amount of cash for the existing acquisitions, we've had as well as share repurchases. So I think the combination of where we sit from a cash balance on our revolver availability perspective.
We feel quite good with where we stand and then we feel quite good about our ability to create generate free cash flow in 2022.
That's great. Thank you.
The next question comes from Matthew Sheerin Stifel. Mathew. Please go ahead.
Yes, Thanks, good morning, Chris.
Chris I wanted to ask about the strong cloud growth that you're seeing particularly.
Infrastructure as a service and I am wondering if some of that is positively impacted by the fact that customers. Maybe you are moving are accelerating towards the cloud because of the product and infrastructure on Prem product shortages are you seeing any of that in terms of customers, saying, maybe now is the time to move.
Because we don't want to wait.
Yes, Matt it's a great question, we've been asking ourselves that as well and talking to customers about it given the kind of pervasive and persistent nature of the supply chain and the fact that it continues to extend.
I would say I would characterize it display customers are rethinking.
And considering accelerating some movement to cloud and potentially re architected.
Some of their solutions and more.
Cloud like environment versus for example on Prem cloud.
But what I wouldn't but I wouldn't characterize it as just a wholesale shift.
Customers are still very strategic in how they think about flexibility, obviously and scalability, but also cost.
And if you combine all of those things together, they're still looking for the absolute best solution.
And therefore, not just doing a wholesale shift so I guess the answer would be we are having those conversations we are seeing some decisions made around accelerating to public cloud, but I wouldn't I wouldn't say that it's.
Yeah.
In wholesale if that helps.
Got it okay. Thanks for that and then.
On the PC demand that youre, seeing which it sounds like that continues to be strong you've talked about shortages, particularly on the commercial side. What are your thoughts there in terms of the PC cycle and are you seeing any early signs of adoption of win 10, and do you see that as a driver going forward.
Well look I wouldn't say that I've seen necessarily early adoption just yet but as is always the case.
There will be early adopters and it will be later adopters and they will be our customers. So we will help them through that you all are familiar with the end of life for win 10, and the timing for when 11 around the 2020 for 2025 time period.
So it will be a driver it's not been a driver yet I think Pcs generally you've heard me say I continue to believe in Pcs I think that.
I think that we have more PC density now we are going to be sort of replacement cycles of Pcs for a couple of reasons wear and tear but also the technology the technology improves at a faster pace and client devices are more and more important to the productivity of the people using them you won't have you.
Cases that are expanding.
And hybrid work model, obviously is really driving PC. So.
We will we feel good about PC growth.
And when when 11 will certainly be a driver of that at some point over probably a couple year period.
Okay. Thanks, a lot.
Yeah.
Okay.
Okay.
The next question comes from Simeon chassis at J P. Morgan Your line is open.
Great. Thank you.
Chris I just wanted to start off.
Go back to your comments you mentioned this a couple of times now about monitoring the SMB segment for.
Economic activity just given the increase in.
Cases et cetera, and you mentioned you haven't seen any sizable impacted but is there something more on a regional basis. When you look at across.
Across the U S or maybe in some international markets on a more regional specific reason that youre seeing any changes in activity from your customers there.
Maybe there is a stronger foundation.
Okay.
Okay.
Any insights on that and I have a follow up please.
Yes sure.
Here's what I would say about the current environment.
We're watching it as does everybody and we're cautious about it and we put it in the category of wildcard because I don't know that anybody knows what's going to happen, but we all know there has been.
More momentum around that vaccination availability at lower ages.
Anti virals the rate of vaccine, particularly when we think of our locations the U K and Canada. The U S is a little lower but that's obviously deferred dispersed geographically all of that said I will tell you the sentiment of our customers is.
We're moving forward.
We're thinking in investing for getting back to kind of.
A robust environment and economy, and we're thinking forward. So I think a little bit unlike going into last year's winter months, where there. The cautiousness I would say was on a really high level.
We're just fueling customer, saying, we got to invest and so if we're not going to be going back to work until early next year or work from anywhere we've got to invest and that is I would say ubiquitous across the markets that we serve.
So.
<unk>.
In 2020, we talked about the unevenness and the impact of certain geos certain industries et cetera, I just feel like the tone has really changed to this platform of we got to get back we got to get back we got to build for the future. So that's what we're seeing.
Okay.
A quick follow up.
Thank you, okay, and indicating that the operating margin <unk> doesn't repeat in <unk> any incremental spend coming through how much of that is as you mentioned some of the catch up on SG&A versus what you outlined does the right thing to spend and I'm just trying to think of what portion of that incremental spend should I be annualizing for the next year.
Thank you.
Sure. Thanks, Nick.
Well in fourth quarter, we will give more guidance with respect to what what that looks like for 2022 and reflective of.
Our combination with serious right so, but let me just focus my comments on fourth quarter I would say.
Non-GAAP SG&A spend is just an uneven necessarily timing effect of that spend.
In Q3 that probably lagged a bit in Q4, we would expect that to pick up there is probably a component there and as we think about the serious combination we're thinking more broadly about.
What that that combination looks like and how does that ultimately impact our investment spend that being said, we're going to continue forward in Q4 with.
With the efforts that we've been focused on and notably our own digital transformation as well as to continue invest in high growth solution solutions and services areas.
Okay.
Okay.
Welcome.
Okay.
The final question comes from Keith <unk> of Northcoast Research Keith Your line is open.
Thank you good morning, guys, Hey, Chris I'm, just kind of thinking here through the investments that companies are making in technology and based on a surprising charges, but they are is there a willingness of your customers to move to another solution set or hardware solution set.
Can be fulfilled by the end of the year, because I'm thinking there's a lot of these companies have IP budget. They want to spend anyway. So there's always a private wish that they want to do are people willing to convert to other products in order to spend that money or are they holding on to the products are available.
Yes. Good morning, it's a great question and I would say it really depends frequently on the on the customers. So the small businesses have always been more nimble and less kind of.
Tied to particular requirements and we have seen success, there and I think in my prepared remarks, we indicated that supply chain, while they were impacted supply chain constraints didn't impact and as much as in corporate because we could help them find alternatives when you get to larger organizations.
It becomes harder because those organizations have specific requirements and they really don't want to shift off of them. It creates more work frankly within the organization what we've seen there and I think Alan mentioned it is we have worked with our customers to get in line earlier so.
A lot of customers are have been working very hard to get their orders in earlier than they typically would in hopes that they will get.
Get the product by year end all of that said anywhere that there are I'll say mission less in mission critical type technologies that we can help them find alternatives.
Whether it's a brand whether it is the cloud whether it's something else that they can be using you can you can bet, we're doing it but youre absolutely right, there's going to be a lot of pressure as we go into the back end of the year to get that product out.
<unk>.
And we expect we'll be able to help them do it.
Gotcha.
Up here in terms of the shortages that you're experiencing are you finding that those shortages over this quarter I guess or the previous quarters are they consistent with specific products that our solution sets or is it really kind of a game of whack, a mole where it gets fixed in one area of our new product <unk> comes up in another area.
Well here.
I said this before you've got this kind of supply.
Jane ecosystem and so you've got you have capacity you get components you got logistics, you've got labor you've got all of this impacting the ability to get product and it has kind of shifted through the course of the year. So we've had on the transactional side notebook and video and monitors and things like that that have been.
Constrained chromebooks were very much constrained okay. Chromebooks have started to ease up a little that is planning a good 13 months ago to get get to that point by the Oems. What we saw this year in the in this past quarter and a little before was.
In our solutions product.
Now being more constrained and we mentioned netcom in particular in storage in particular, so that is a problem when things are moving around particularly when what customers need our comprehensive and holistic solutions not just piece parts. So.
Whack, a mole is or.
Is a good word for it or good term for it.
Great. Thank you.
We have no further questions registered on the line, so I'll hand, the call back to Chris Leahy.
Cool.
Bethany. Thank you I want to recognize the incredible dedication of our coworkers around the globe and their extraordinary commitment to serving our customers our partners and all of CDW stakeholders.
And thank you to our customers for the privilege and opportunity to review and to our investors and analysts participating in this call. We appreciate you and your continued interest in and support of CDW and we look forward to talking with you again next quarter.
Good day.
Okay.
This concludes today's conference call. Thank you for joining you may now disconnect your lines.
Yeah.
Uh huh.
[music].
Okay.
Okay.