Q1 2022 CDW Corp Earnings Call
Payments under the private Securities Litigation Reform Act of 1095, those statements are subject to a number of risks and uncertainties that could cause actual results to differ materially.
Additional information concerning these risks and uncertainties is contained in the earnings release and form 8-K, we.
We furnished to the SEC today, and the company's other SEC filings with the SEC.
CDW assumes no obligation to update the information presented during this webcast. Our presentation also includes certain non-GAAP financial measures, including non-GAAP operating income non-GAAP operating income margin non-GAAP net income and non-GAAP earnings per share all non-GAAP measures have been reconciled to the most directly comparable.
GAAP measures in accordance with SEC rules, you'll find reconciliation charts in the slides for today's webcast and in our earnings release and form 8-K, we furnished to the SEC today. Please note our financial results. Today include results from our acquisition of serious computer solutions, which closed on December one 2002.
'twenty, one all references to growth rates or dollar amount changes in our remarks today are versus the comparable period in 2021, unless otherwise indicated references to growth rates for hardware software and services today represent U S. Net sales only and include serious they do not include the results.
From CDW, UK or Canada references to growth rates for specific products and solutions, including cloud and security today represent U S net sales only and exclude serious.
The historical combination information on CDW and serious discussed herein is for illustrative purposes, only and is not necessarily indicative of results that would have been achieved had the acquisition occurred at the beginning of the periods presented.
Replay of this webcast will be posted to our website. Later today I also want to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast without specific written permission from the company with that let me turn the call over to Chris.
Thank you Steve Good morning, everyone I'll begin today's call with a brief overview of our results strategic progress and outlook and al will run through the financials and our capital allocation priorities and then we'll move right to your questions.
We had an outstanding start to the year. The teams continued to execute well in a challenging supply environment and delivered exceptional top line growth and profitability for the first quarter net sales were $5 9 billion.
Billion, 23% higher than last year.
non-GAAP operating income was $462 million up 26% and non-GAAP net income per share was $2 20 up 26% on a reported basis.
These exceptional results reflect our ability to address customer priorities with solutions across the full spectrum of it.
And the inclusion of serious.
Customers can.
Can you to evolve as we move ahead into the new normal digital transformation agility and security remains top concerns with return to office driving collaboration networking and endpoint solutions.
Customers want to manage costs, while meeting or exceeding coworker and customer service level requirements at the same time customers across our diverse end markets are seeking ways to supplement technology resources in today's war for talent environment.
Our ability to meet all of these needs led to a broad based and balanced performance.
There were three drivers of our performance during the quarter.
The first driver was our broad and diverse portfolio of customer end markets. As you know we have five U S sales channels corporate small business healthcare government and education. Each of these channels is a meaningful business on its own with 2021 annual sales ranging from $1 8 billion to over $6 billion.
Within each channel teams are further segmented to focus on customer end markets, including geography and verticals. We also have our UK and Canadian operations, which together delivered $2 $6 billion in 2021 sales.
This scale and balance across customer end markets positions us to perform when external factors impact certain sectors or geographies.
This quarter, our commercial markets corporate and small business, along with our health care and international markets, all delivered strong double digit growth.
As expected education and government growth was depressed as they lapped strong prior year stimulus and large deal driven results.
Our corporate team delivered a 46% increase growth was strong and balanced across transactions and solutions. The team did an excellent job addressing customer demand for return to work solutions digital transformation and the need for agility and security.
Unit growth coupled with ASP increases resulted in another quarter of strong double digit growth in client devices and cloud spend was excellent.
Small business posted a 21% increase performance was broad based across both transactions and solutions.
Return to office strategy, and modernizing Workspaces drove strong collaboration networking and security growth for hybrid work environments remote enablement drove another strong quarter of client device growth up double digits, both in units and Asps.
Security performance was up mid teens in cloud spend was robust.
Public posted a 6% increase on top of last year's exceptional 20% plus growth healthcare increased 27% ongoing focus on driving productivity to offset higher costs from staffing shortages and other acute care needs led to double digit solutions growth cloud adoption was strong driven by the.
Speed and efficiency cloud solutions can deliver.
Government posted a mid single digit increase state and local delivered a high single digit increase driven by client devices and security as we shared last quarter. We continue to help our customers as they work through the various funding opportunities and multi year phasing and expect projects to continue to be implemented as we move through 2022.
Federal performance played out as expected and was balanced across both the department of defense and civilian while lapping tough compares.
As we shared last quarter, we continued to experience the lumpiness the lumpy nature of government contracts in contracting changes.
There is no change to our expectation that growth will return later in the year.
Higher Ed strong double digit performance was offset by the expected decline in K 12, and overall education sales decreased 4% off the first quarter of 2020 ones remarkable 101% growth.
The higher Ed team continues to help customers implement student's success programs using technology to give an institution an edge with comprehensive endpoint solutions improved security campus connectivity and enhanced dorm room experiences.
The team delivered excellent client device growth and school systems tapped our capabilities to address the war for technology talent, which drove increased usage of CDW services to fill the gap and staffing needs.
While K 12 delivered strong non seasonal results they posted a year over year decline on top of last year's exceptional 100% growth.
Emergency connectivity funding, which was expected to end during the first half of 2022 was extended and a third wave was announced adding complexity to an already challenging process.
Many school systems are leveraging the extended funding window to digest better options and plans and plans for their it spend.
Other our combined UK and Canada results increased 13% on a reported basis U K grew double digits in local currency in Canada increased high single digits in local currency each market saw balanced strength across both commercial and public customers customer priorities remained similar to those in the U S.
The second driver of first quarter performance with our broad and deep product and solutions portfolio, our ability to address customer priorities across the entire continuum drove excellent performance across both our solutions and transactions portfolios.
We continue to leverage our competitive advantages, including our distribution centers extensive logistic capabilities deep vendor partner relationships and strong balance sheet and liquidity position to navigate and ongoing supply challenge.
U S hardware increased high teens growth was broad based and included double digit increases in net com servers and server management client devices and video audio. This exceptional performance was on top of 2021 first quarter double digit high.
Hardware growth.
<unk> continued to outpace supply in several key areas, notably in the networking space and remaining orders built during the quarter.
Customers once again placed orders to get in line for a second half 2022 projects, especially in that com.
U S software posted a 40% increase driven by success, helping customers upgrade their edge and secure their it environments with double digit increases in network management software and security software.
Cloud was a meaningful contributor to this quarter's strong performance with significant double digit increases in customer spend and gross profit led by productivity platform security and collaboration workloads.
U S services sales doubled.
<unk> was broad based and balanced driven by professional services managed services and warranties.
As you can see excellent broad and balanced performance across the business.
And that leads to the third driver of our performance this quarter, our customer in coworker centric strategy over.
Over the past three years, we have executed against our strategy to enhance our high relevant and high growth solutions and services with both organic and inorganic investments.
Eight acquisitions at deepened and advanced our services capabilities, including automation cloud native and Dev ops, cyber security and our services scale and reach.
We welcomed nearly 3000, new coworkers from these eight acquisitions with more than half and technical rules since year end 2018, our technical team has doubled in size and at the end of this first quarter was more than 5000 strong.
Today technical coworkers comprised more than half of all customer facing coworkers together with their other CDW colleagues. They form an amazing high performing team a high performing team that is a key competitive advantage for CDW a team that has the most engaged enabled and energized team in the industry.
All our investments whether homegrown or inorganic are intended to maximize our key point of differentiation in the marketplace. We are a one stop trusted partner with capabilities across the entire continuum of it.
Capabilities to help customers achieve the outcomes they need from technology. So they can do great things.
Let me share a couple of recent customer examples that demonstrate how our investments help customers achieve outcomes.
A soft drink manufacturer wanted to upgrade their on premise voice system, the customer had to desired outcomes for the solution number one flexibility to expand as their business grew and number two an excellent user experience.
Since it staff was focused on other priorities the solution needed to be managed off premise leveraging cdw's World class Unified communications as a service capability and service now capabilities. The team designed a flexible and cost competitive integrated full stack managed collaboration anywhere solution. The solution included CDW professional.
Services for upfront design planning configuration, and deployment and CDW managed services to provide ongoing MCA support and integration with our service now ticketing platform a great outcome for the customer and for the team who bested large telecom providers to win the deal.
They also deepen their relationship with the customer and delivered more than $3 million in licensing and services revenues.
The second example of how our investments enable customers to achieve the outcomes. They need is the recent adoption of focal point Academy by a major technology company.
Focal point Academy is a bespoke training program that delivers workforce development programs that solve today's greatest cyber security problems.
<unk> training and retaining skilled cyber professionals focal point academies operationally focused portfolio, which covers high demand topics like threat hunting and application security coupled with its ability to train and develop both senior and junior technical professionals was exactly what the customer needed to achieve its desired outcome.
Mitigating risk prior.
Prior to our acquisition of focal point, we would not have been able to deliver this important global solution and further deepen our relationship with the customer.
Investments in our customer and coworkers centric growth strategy are integral to our ability to consistently and profitably outgrow the U S market.
And that leads to our expectations for the rest of the year.
During the balance of 2022, we will continue to execute against our strategy to deepen our services and solutions capabilities, we are making excellent integration progress with serious and that will remain a key focus area for the balance of 2022 as well investments in our coworkers and our own digital transformation.
We will continue to balance investments with our growth and profitability expectations, which are now higher than previously shared at year end.
Given our excellent momentum coming into the second quarter and first quarter performance. We now expect to outperform the U S. It market by 325 to 425 basis points 125 basis points higher than our view at year end 2021.
Our view of the U S. It market growth has also increased and we now look for 2022 growth of 4%, which is 50 basis points above our prior view.
Taken together this equates to constant.
Constant currency growth of seven in the quarter to 8.25% above 2021, combined CDW revenues of $22 8 billion.
Recall 2021, combined CDW is calculated as those serious had been acquired on January one 2021, instead of the Tactual acquisition date of December one.
On a reported basis, our outlook represents a 17, 5% to 18, 5% increase over 2021 results.
This outlook reflects our baseline expectations that given 2021 second half strong hardware performance, we will mix into more cloud and security in the back half of this year. It also reflects our expectation that supply constraints remain relatively consistent with the first half of the year.
As always we remain mindful of our wildcards the potential for further disruption to the supply chain changes and COVID-19 or macroeconomic performance and we will keep a watchful eye on these and other potential issues as.
As we always do we will provide an update on our view on our next call in the meantime, we will continue to do what we do best which is leverage our competitive advantages and out execute the competition. We will also continue to invest to ensure we remain our customers' trusted partner, who delivers the outcomes they need whether for innovation cost management.
<unk> risk mitigate risk mitigation or user experience.
If the past two years have shown us anything it is that our role as a trusted strategic partner to our customers is more important now than ever let me turn it over to Alan now who will provide more detail on our financials and outlook al.
Thank you, Chris and good morning, everyone I'll start my prepared remarks with more detail on the first quarter move to capital allocation priorities and finish up with our 2022 outlook.
Turning to our first quarter P&L on slide eight consolidated net sales were $5 9 billion up 23% on a reported and average daily sales basis in constant currency.
On an average daily sales basis sequential sales increased seven 4% versus the fourth quarter, which is well above historical average sequential decline of 5%. This reflected two primary factors first demand for our return to work and remote enablement solutions remains strong and drove sequential growth in our commercial channels.
And international as Chris mentioned, corporate and small business had broad based and balanced growth across both transactions and solutions.
Second Q1 reported results reflected three months of contribution from serious versus one month in Q4, notwithstanding that serious as first quarter is historically storage <unk> been the lowest quarter of absolute sales and gross profit dollars for the business.
On the supply side, our overall backlog increased in Q1 had a similar level to the fourth quarter remained elevated year over year in both transactional and solution categories. We continue to make strategic investments in inventory to support our customers to just constrained supply environment and the team once again did a great job leveraging <unk>.
Abuse competitive advantage to ensure strong returns on working capital.
Gross profit for the quarter was $1 $1 billion a year over year increase of 38, 8% netted.
Netted down revenues grew faster than the underlying business and represented nearly 31% of total gross profit more than three points over the last year.
A higher mix of net service contract revenue, primarily within software as a service favorable product mix and rate and increased net sales and margin on professional services combined to deliver a record gross margin of 18, 6% up 220 basis points versus last year.
Turning to SG&A on slide nine non-GAAP SG&A totaled $642 million for the quarter year.
Year over year increase in non-GAAP SG&A was primarily due to higher payroll as a result of increased co workers.
Coworker count at the end of the first quarter was 14005.
Over 3800 from prior year quarter, reflecting organic and inorganic investments and co workers that support high growth solution areas and our own digital transformation.
Recall that serious as payroll as a percentage of net sales is higher than our core operations given their higher mix of solutions and services revenues and this ratio is historically highest in the first quarter sales seasonality.
The higher level of SG&A also reflects continued investments in the training and development of coworkers our return to office efforts and investment in our own digital transformation and technology strategy.
As Chris mentioned, we will continue to balance investment with our growth and profitability expectations.
Investments in our strategy are integral to our ability to outgrow the market profitably and sustainably.
GAAP operating income was $387 million up 19, 6%.
non-GAAP operating income was $462 million up 25, 7%.
non-GAAP operating income margin was seven 8% up 20 basis points from the prior year and 10 basis points from Q4.
Moving to slide 10 interest expense was $56 million higher interest expense is primarily driven by the senior notes issued last year to fund the acquisition of serious.
Our GAAP effective tax rate shown on slide 11 was 24, 3%. This resulted in first quarter tax expense of $80 million.
Together, our non-GAAP effective tax rate, we adjust taxes consistent with non-GAAP net income add backs as shown on slide 12.
For the quarter, our non-GAAP effective tax rate was 25, 7% up 50 basis points versus last year's rate, primarily driven by higher state taxes as well as taxes on foreign earnings.
As you can see on slide 13, with first quarter weighted average diluted shares outstanding of 137 million GAAP net income per share was $1 83.
Our non-GAAP net income was $302 million in the quarter up 21%.
non-GAAP net income per share was $2 20.
27% from last year.
Turning to the balance sheet on slide 14 at March 31, cash and cash equivalents were $387 million and net debt was $6 2 billion.
Liquidity remains strong with cash plus revolver availability of approximately $1 4 billion.
Moving to slide 15, the three month average cash conversion cycle was 20 days down two days from last years first quarter, reflecting the impact of the serious acquisition.
Free cash flow for the quarter was $466 million as shown on slide 16.
This is higher than a typical first quarter, reflecting strong growth in the business and effective working capital management.
For the quarter redeployed cash consistent with our 2022 capital allocation objectives are paying dividends and paying down debt, including 62 million $67 million of dividends and $260 million in debt repayments.
Turning to capital allocation on slide 17 objectives remain consistent with what we shared last quarter.
<unk> increased the dividend in line with non-GAAP net income.
Last November we increased the dividend, 25% to $2 annually.
<unk> future increases, we will continue to target a dividend at approximately 25% of non-GAAP net income and to grow in line with earnings.
Second ensure we have the right capital structure in place with a targeted net leverage ratio of two five to three times.
We ended the quarter at three one times down from three four times at the end of 2021, demonstrating strong cash generation and progress towards returning to our targeted net leverage ratio. We continue to expect to achieve this by the end of 2022.
While we continue to temporarily put a lower priority on our third and fourth capital allocation priorities of M&A and share repurchases until net leverage is in our target range. We are on a path to delivering on these priorities.
Moving to the outlook for 2022 on slide 18.
Starting with sales as Chris mentioned, the first quarter was a great start to the year. We have excellent momentum entering Q2, we are cognizant of potential market variables as we look further out.
Call that on a combined basis Cdw's net sales would have been $22 8 billion in 2021, including two $1 7 billion from serious with.
With that in mind, our updated outlook for the full year 2022, if not in U S. It market growth of 4% plus 325 to 425 basis points of CDW outperformance in constant currency on a combined basis.
On a reported basis, our full year net sales outlook equates to approximately 17 five to 18, 5% growth in constant currency.
Our baseline outlook assumes that supply does not materially impact net sales beyond what we've been experiencing we would expect to be at the lower end of our premium range remixed more into netted down revenue streams than expected and or experienced elevated levels of supply constraints.
We have got the higher end.
Hardware growth is stronger and supply improves.
Our outlook also assumes neutral currency impact for the full year.
Moving down the P&L, we continue to expect full year non-GAAP operating income margin to be in the low 8% range for non-GAAP earnings per share recall that 2021 would have been $8 49 per share on a full year combined basis compared to a reported $7 97 per share.
<unk>, which included only one month of serious.
We now expect full year non-GAAP earnings per share growth to be approximately 13% plus or minus 50 basis points in constant currency and on a combined basis.
This equates to low 20% full year growth in constant currency on a reported basis.
Please remember that we hold ourselves accountable for delivering our financial outlook on an annual constant currency basis.
Slide 19 provides additional modeling thoughts, including our updated net sales split for the year. We now expect the first half of the year to be approximately 25 basis points above the high end of our historic norm of 48% to 49%.
This reflects our over performance in the first quarter and strong momentum coming into Q2.
It also reflects that it's too early to update our expectations for the second half of the year.
We continue to expect the back half of the year will reflect a greater mix of netted down revenues as we overlap 2021 strong client device sales.
Recall that the accounting treatment for netted down revenues has a dampening effect on our absolute net sales dollars, but is neutral to gross profit dollars invest results in higher gross margins all else equal.
Our expectations for the first half split assume low single digit sequential increase from Q1 Q2 on an average daily sales basis.
This equates to close to 20% year over year reported net sales growth in the second quarter, which is roughly 230 basis points above our Q2 implied growth rate expectations from last quarter.
We expect second quarter non-GAAP earnings per share to grow in line with the second quarter reported sales.
Finally, as you know timing has a meaningful impact on free cash flow it may ebb and flow by quarter, but over the content continuum. We continue to expect to be within our long term free cash flow rule of thumb of three and three quarters to 4.25% of net sales assuming carrying tax current tax rates.
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.
With that I'll ask the operator open it up for questions and can we please ask each of you to limit your questions to one with a brief follow up thank you.
Thank you just a reminder, if you would like to ask a question is star followed by one on your telephone keypad.
Star followed by one on your telephone keypad.
I can see we have eight people, which just for questions. The first question. We will take is from Matt Sheerin from Stifel.
Your line is now open. Please go ahead with your question.
Yes, Thank you and good morning.
My first question just regarding.
The strength youre seeing across court.
Corporate and SMB customers in terms of the remote enable them in.
Seems like there is a second wave.
Work from home.
And could you elaborate on that and then also just in terms of.
The back to office trends, how long do you see that playing out in due to the backlog and the supply constraints do you see this playing out through the year.
Yes, good morning, Matt It's Chris.
Yes, we are what we're seeing is customers across our commercial segments kind of as we mentioned last time getting on with it meaning.
Living within the current environment, and making decisions about their back to work strategy, which means they are bolstering their capabilities in offices there.
Bolstering their capability and home environments, because they're really focused on their coworkers ability to be productive and deliver seamlessly moving from remote and office and as we expected.
We continue to see very strong endpoint solution.
Performance this quarter.
And we're also seeing what usually typically follows that and what was delayed a bit over the last couple of years, which is an investment in the.
Hybrid infrastructure to support all the needs of the coworkers in the expectations, both at the workload and application level and everything required to create.
A stronger and more robust infrastructure for those devices. So we will continue to see those two dynamics play out through the course of the year would be our view is different in different segments, but in the commercial segment for sure. We will continue to see that.
Okay. Thank you for that and the education market seems to be holding up better than most expect you talked about some of the dynamics there are higher Ed spending offset by weakness in K through 12, although it seems like that next round of or the extended funding period.
At least helps that market near term should we expect a falloff there youre following that funding period or just general expectations for the K through 12 market.
Yeah, So Matt Here's how I think about it the extension and the new the little bit of an added round of funding for ECS.
Just just as timing right. So it gave the school is a little bit of a breather to reflect on there.
They are planning and not be rushed to buy so that's just an extension. So we will see that play out over the next 18 months at the same time schools are working very hard on ensuring that they don't lose ground in.
And what they're trying to do which is teach students and learn and so when you think about the dynamics of the classroom and the infrastructure needed to support the classroom, including audio visual interactive.
Monitors and kind of the new generation of the classroom, we're starting to already help our customers with that so look we look at this as a kind of steady Eddie long term growth opportunity for CDW. It every time, there's been an inflection point in K through 12 in the classroom learning space CDW has been at the absolute tip of the.
Spear in helping customers get there and we've seen growth as a result.
Okay, great. Thank you.
Okay.
Thank you very much. Our next question comes from Erik Woodring from Morgan Stanley Eric can remind is now open. Please proceed with your question.
Great. Thank you very much good morning, guys. Congrats on the on the results.
Maybe as we sit here 90 days since you last reported a roughly 90 days maybe can you just help us understand where some of the supply challenges <unk> been facing have you either worsened or where some have improved and then I have a follow up from there.
Yes, I guess, what word what I use I think I'd say kind of unchanged mean.
Meaning the we're not seeing a lot of change and the challenges that we're all facing when we think about the supply chain environment I'd say two things number one.
It's an opportunity, but it's also frustrating it's an opportunity for CDW, because we know what we know what's happening we have more visibility with our partners I think than anybody when you think about our competitive advantages our ability to take on inventory to support our customers with our balance sheet, having the distribution and logistics capabilities that put us in a great position to manage <unk>.
And as the supply chain issues, I think again better than anybody in the market, but it's you know it's frustrating for customers.
And we're helping customers get through that because we can help them choose alternatives, which they are a little more open minded now too, which we have a pretty good path to get to but the short answer is supply chain is what it is and it's not getting better it's not getting worse. Some pockets are getting better some pockets are getting more difficult, but net net we're going to be living.
With this through 2022, if not into 2023 and again, it's a matter of who manages it the best and I think we're doing a really good job of that.
Great Super helpful. And then maybe my follow up would just be you.
You beat the first quarter by a healthy amount of call. It 288 290 million you raised the full year guide by 400 million and then your guide implies.
<unk> needs to come up by let's call it $115 million. So most of the raise comes from <unk> <unk>.
Is that just you guys, taking the view here that perhaps visibility into the back half might not be as clear as perhaps any other year given the supply challenges and what's going on the market or is there anything else that we should be thinking about just as we think about the second half mixing netted down revenue those types of factors.
Yes, Eric It's a fair question look it's our.
Cdw's typical approach, which is we'll call it when we're ready to call. It and then when we think we have good visibility and it's just too early to call that in the back half of the year right now, but but that said outstanding start to the year as you as you know and we see absolutely excellent momentum going into Q2 and <unk>.
What a robust 20% profit growth in the second half of 2022. So we look at this and see a really aggressive but achievable.
Joel in front of us so we're feeling very optimistic about the year and we'll call the back half of the year, when we get a little closer to the back half of the year.
Great. Thank you so much congrats again.
Thanks, very much I appreciate it.
Thank you very much. Our next question is from Sami <unk> from J P. Morgan.
Your line is now open. Please go ahead.
Hi, Yes. This is Joe Cardoso on for Sonic strategy. So my first question is a follow up on the full year guide.
Question prior.
Can we dissect that a little bit, particularly as it relates to the raised outlook for the underlying market and Cdw's outperformance to what are you seeing as the main drivers of contributors to the raised outlook for both and then I guess, how much of that raised outlook is being driven by recent acquisitions like Sirius tracking better than expected as opposed to kind of the traditional CDW business and then I have a follow.
Rob.
Yes, So let me start with the last past part first which is our premium to market when we look at.
The areas that we've outperformed in Q1, let's take notebook overall solutions.
Several areas, where we just our view is look we're really outperforming the market, it's pretty clear so that goes into the premium.
In terms of whether or not serious as contributing here's how I think about it on a combined basis.
We are we are.
We're responding to customer needs in the current environment and seeing healthy business across both the underlying and serious segments.
In terms of the underlying.
Industry, Yes, we brought that up because we're starting to feel.
Real momentum in the business the demand is there the writings there. So it just feels to us like the market is growing a little faster than we would have thought at the beginning of the year. So the market generally is kind of the written and demand that we're seeing the premium is the categories that we are delivering in and looking at what.
What we triangulate the growth rates to be in the market. We just think we're outperforming by a wide margin.
Got it and then just quickly for my follow up can you help me understand what you guys are seeing from a pricing perspective versus 90 days ago, and whether that's translating into a tailwind or headwind for CDW.
Yes, we arent look pricing is pricing continues to be fairly dynamic and fluid I guess, I'd say and we are continuing to see pricing increases given what's what's happening out in.
The macro environment that said.
We are a cost plus model as you know and we are we are not seeing were not.
Seeing constraints in it budgets are customers are still buying theyre not cutting it budgets because of pricing.
And as I think I mentioned in our prepared remarks were seeing some of the growth kind of split between unit unit increases in ASP increases. So they are both contributing to growth across across the board really.
This is Scott I would just add and I think we've mentioned this before one thing we see in the supply environment is.
More creativity and agility, both ourselves and with our partners in terms of where do we pivoted to different products, where do we pivot to different solutions and finding customers are accommodating that and working with us to try to get to their solutions.
Sooner than later, so that certainly had a bit of a impact from a mix and rate perspective. So just I would note that.
Got it thanks appreciate the colors.
Thank you very much. Our next question comes from <unk> <unk> from Bank of America pull your line is now open. Please go ahead.
Alright, Thank you for taking my questions and congrats on the strong quarter Chris.
Chris from my first question I would like to add something which is a high level question. Some investors are concerned that we may be going into a recession in the U S. Because the rates are going up or we might see a slowdown in Europe because of the war. There. So can you maybe talk to us about how CDW is the company is different from what it was in the.
Wade or nine timeframe and do you think the company is better prepared to face a downturn and in the same way you raised your guidance for the full year.
Can you talk about what are some of the things that are giving you confidence to do that given all of the macro and the supply chain headwinds that are continuing.
<unk>.
Yes, good morning, <unk> and thanks, Thanks for the comment let me start with the second part first with raising <unk> with <unk>.
Feeding our content, it's what we're seeing with our customers it's the demand momentum.
The criticality of it in every walk of every industry to drive competitive advantage experience et cetera. So.
We just see technology as absolutely central and really it's our investment.
Investment in innovation, it's not it's no longer viewed as a cost to the business as much as as an asset of innovation and we're seeing that and feel very confident that that will continue possibly at the expense of some other investments that organizations make but technology is top of the list as.
As far as the macro environment and what might happen, here's what I would tell you.
First of all we have our broad and deep portfolio is the best it's ever been at any point in time secondly, our flexible business model has allowed us in any challenging time has allowed us to outperform the market and deliver results and if you look actually at the great recession.
Did outperform the market and if you think about the last three years significant.
Delivery of great great performance versus the market so.
In those cases, we also emerged stronger so you've got our portfolio, which is better than it's ever been you've got a flexible business model, which has a track record of working and having us deliver performance in downtime and when you think about our value propositions at third thing I would say the value proposition for our customers and our partners becomes even more important.
To them they become even more.
Reliant on our on our stability on our scale and all the things that we deliver and at the end of the day that allows us to be.
Be opportunistic and helping them and gaining share in the market.
I point, you to our track record and our model and our portfolio and our value proposition, which has over 35 years reflected the fact that CDW is a different company performs in tough times and in good times and typically in tough times, we come out even stronger than when we entered them.
Okay. Thanks for all the details there Chris maybe for my follow up if you can talk.
Talk a little bit about the government segment. It was good to see revenues grow 5% year on year after several.
<unk> been facing tough comps in <unk>.
Several quarters of year on year declines last year, you talked about some projects that were delayed you think those come back in the first half.
Do you think of government revenues can continue to grow year on year over the next couple of quarters. Thank you.
Yes, no problem on the government side the federal side.
We've been saying now for a couple of quarters that we expect growth to to see growth in the second half of the year and that expectation has not changed so.
The projects, we've talked about the green shoots we've talked about we expect to be taking hold in the second half of this year.
As expected as far as state and local that's playing out as we thought it would as well if you'll remember the funding was coming in a multiyear fashion the <unk>.
Our funding and that was extending customers' buying patterns a bit and we've been really helping them on the planning phase of spending those that funding federal funding and we're starting to see that come to fruition and you see that in the results. This quarter, which is those projects starting to flow out now, which is which is a very positive thing and reflective of what we expected.
It happened.
Congrats again on the quarter end.
Strong guidance. Thank you.
Thanks, Thanks very much.
Yeah.
Our next question comes from Adam Tindle from Raymond James Adam. Your line is now open. Please go ahead with your question.
Okay. Thanks, good morning.
But I would just maybe start with a question on margins if I remember right. When you close the Sirius acquisition, you talked about it adding just over 100 basis points of gross margin and about 20 basis points of operating margin based on 2020 numbers with no synergy assumption. We look at this quarter gross margin was up over 200 basis points, so double that.
The operating margin still up just about 20 basis points year over year maybe.
Maybe you could give us some color on the better mix on gross margin the growth metrics being healthy overall, but seeing minimal leverage on the operating line and I imagine youre going to talk about investments so more specifics on the nature of those investments and expectation for return would be helpful. Thank you.
Sure Adam and good morning, Sal So so on gross margins for the quarter I would comment on a few things certainly you had the impact from serious for the quarter and I would say that our cricket benefit was as expected and we had a couple of other things that benefited our gross margin for the quarter number one.
Stronger net netted down revenues actually grew two times the level of our sales product margin mix and rate were strong and so they were important components on the gross margin front, so down to your NGL margin questions. So, yes, Andrew high margin 20 basis points better than prior year.
10 basis points better than the prior quarter, certainly had the benefit of serious just the one call out I would give you in terms of the accretive benefits. There for serious is that given the seasonality of their business Q1 is typically lower on the scale of the full year and therefore some of the fixed cost leverage we get.
From serious.
It is more on the latter half of the year. So that is a bit of a dilutive effect for the quarter, but still we're able to turn in really strong seven eight for the quarter.
Understood and maybe as a follow up for Chris on backlog you previously talked about feathering in over multiple quarters versus the big Bang in one quarter. Just wondering if you could maybe revisit this since we saw such a strong quarter here on growth metrics. I think you did say remaining orders built in the quarter.
I wanted to clarify that and certainly any color on the size and composition of backlog today versus 90 days ago would be super helpful. Thank you.
Yeah. Good morning, Adam I'd say look in terms of backlog building. It was in line with what we saw in Q4, so that would give you kind of characterize.
The size in terms of what we're seeing it is a feathering out. So I think I said, we were seeing pockets of improvement yet new pockets of pressure. So we've seen notebooks free up a little bit chromebooks free up a little bit over over the course of time, but solutions products really more constrained now than they were before in particular in that comment Im sure Youre hearing that.
A lot.
So look we.
We still expect that feathering out we're not seeing anything in our results frankly or in our conversations with partners that suggest anything then the way we've already described it to you.
Understood. Thank you.
Yep.
Thank you very much. Our next question comes from Amit <unk> from Evercore ISI Amit. Your line is now open. Please ask your question.
Thanks, Amit <unk> to be clear, but.
Ill.
Chris I'm, hoping you could talk about sort of you soon.
This increased complexity of IP operations, I think especially with the return to work.
And this seems to be a sustained and acute labor shortage, especially in the skilled worker side.
I'm wondering if that combination of those two factors has resulted in fees that we've seen that time Sunday expanded you're starting to see that you're engaging with more mid and larger enterprises, we typically would.
I'm just curious are you seeing this enabled lead time expansion in walkabout due to your growth rates as you go forward.
Yes.
Yes, good morning, Amit.
In terms of the tech now I want to make sure I'm, having trouble hearing you a little bit, but you were asking about Tam expansion due to servicing enterprise sized customers and in particular technology.
Technology talent supply shortages did I get that right.
Yeah.
Yes.
Given the labor shortages it is getting more complex or you're getting pulled in by bigger enterprises that you typically would have.
And does that expand your time does that alter your growth rates as we go forward.
Yes, Okay I got it fair question, Yes, when you look at a couple of things you look at Sirius is customer segment and it's heavily enterprise oriented. So yes. We are we are focusing on the enterprise. If you look at the AWS customers. While we've typically said our sweet spot as customers with up to 5000 end users we have a very large number of enterprise.
Customers that we service and that served us extremely well in the past five years, given the increase in complexity.
So.
Yes, we are in the enterprise space, we're continuing to grow in the enterprise space and we have not done the calculation regarding the Tam, but we certainly expect to be able to continue to be successful in that space now more than ever used to be you'd think about enterprise.
And one of the reasons they might not have turned to CDW was because they would have and could afford and the technology talent within their organization to handle everything that they need it but now given the speed and complexity, even the larger organizations can't keep up with the changing nature of technology, and our ability to supplement and <unk>.
Dress that problem has really become a very interesting value proposition for those organizations and boy did we see it play out in that during the pandemic.
Yes.
Thank you and then.
You talked about gross margins and some of the levers that led to the better performance in March.
Could you just talk with the durability of these gross margins.
I think you talked about the mix getting better in the back half of the yielded more cloud and security.
Would be one in the mid 18%, 19% gross margins for the remainder of the year or what are the puts and takes as we go forward.
Sure. So first first let's just start with the.
Our expectation our outlook of low eight percents on NGL high margin right. So that is.
That is what we guide on in that regard, but just back to your comment. Your question on gross margin look if we look at our strategy and the execution I think that that has played out over time in terms of expansion of our gross margin I think this quarter is a great example of that really bring the power of all of that drives strong netted down revenues.
Product margin was a factor serious coming online. So a lot of those variables are playing out we would anticipate that that would continue in particular, we talked about the second half we expect a higher level of netted down revenues would certainly as a theme so.
If you get back to that NOI margin, we believe that execution of this strategy and follow through on that will deliver the outcomes we're expecting.
Thank you.
Our next question comes from Jim Suva from Citigroup, Jim. Your line is now open. Please go ahead with your question.
Thank you and congratulations Chris earlier in the call you had mentioned that the supply situation.
He hasnt changed from say 90 days ago, when the investors last spoke to you on such a call I wanted to ask though if you dissect the end markets, though or I'm, sorry in our end markets and products, whether it be pcs or servers or computer devices.
We've seen some shifts there because there has been indications of things like chromebooks seeing actually.
Deterioration, while maybe others seeing higher demand. So I'm wondering if you can get to the device level have you seen some material puts and takes in shifts.
Yeah, Jimmy Here's here's what I would say I would characterize.
The supply environment.
Yes.
Pockets of improvement and pockets.
Pressure.
The pockets of improvement over the past several months has been in the notebook and chromebook the transactional side of our business in the pockets of pressure have really showed up in the solutions side. So we did see a shift if you will so we saw some feathering out.
On the client devices.
And but we've seen backlog grow in the solutions side of the business and it's complex because.
The solution side, what happens is if your integrated solution, if you're missing one part of that you can't get the software out if you don't have the hardware so it gets pretty complex.
So that's what we're seeing and I think I mentioned also netcom was a particular networking as a particular area.
<unk> area, I guess I would say within the solutions.
Categories.
Okay that makes a lot of sense and then as my follow up probably more appropriate for al.
When we think about cash flow and uses.
Am I correct in kind of 2022 should be kind of a debt pay down year or is there sufficient cash flow equals component costs are going higher and high growth.
Inventory will need to be.
Cash flow consumed to support the inventory or are you guys looking at actually strategically, adding more software services.
Security skill sets to your portfolio. Thank you.
Sure. Thanks, Jim So first just on the quarter and free cash flow we.
We had a strong free cash flow quarter and above our rule of thumb.
Youll recall prior quarter, we were somewhat below that rule of thumb and so I would just I would just note to you were seeing some variability as environment and some of that Jim is a function of us, making those investments and really leveraging our working capital for the full year, we still expect to be within our rule of thumb for free cash flow.
Albeit there may be some variability quarter to quarter all of that intended really to go to number one our capital priority of dividend payment and then to debt repayment and I will note that for the quarter, we had pretty meaningful repayment of our debt and we got our net leverage down from three four to $3 one.
And our expectation is we'll continue to make that a priority and our goal is to get back on our net leverage range for the full year by the end of the year.
Thank you so much for the details Chris them now.
Thank you Jim.
Our next question comes from Keith from North Coast Research Keith Your line is now open. Please go ahead.
Good morning, guys.
Hopefully a little more color on the 23% growth I understand it was a very good quarter for demand, but can you provide a bit more breakdown between the three different elements and so I think I'm hearing is the serious.
Growth in the volume growth and price increases can you provide a context about the contributions of each.
Yes.
Sure Keith happy to weigh in and Chris May have something on the back end of that so 23%.
Is the all in as we as we mentioned prior quarter. Our focus is on integrating the companies and just the nature of integrating our sales. We're looking at it on combined basis. So that 23% is inclusive of serious and I would just note notwithstanding my comment about seasonality of serious business is operating as expected.
And things are moving a pace on the integration.
Otherwise I would just point back to our comments about.
In channels and contribution as well as product portfolio and I'd say.
For the quarter, we fired on all cylinders and really contributions came from many of the key spots in the investment areas that we've been focused on.
Keith and its Chris just to add onto what Al said I think I think he really coined it with.
Hitting on all cylinders. So the business is hitting on all cylinders the customer end markets the portfolio and the integration I know you asked the question about integration I guess, what I would say is number one serious the integration is going outstanding I could not be more pleased with the pace and with the results.
And also with the execution in the marketplace.
As we said last quarter, we're really really focused on integrating the businesses and bringing them together and going to market as one CDW and not really parsing out dollars in assigning credit as we like to say.
So I would just tell you that it's going great. Our focus this first quarter has been all about our customers and our partners and our coworkers in particular and in creating the roadmaps and the support and the tools they need to be successful and at the end of the day I think we said a couple of quarters ago, We expect one one plus one equal more.
And then two and there is absolutely nothing that is it is making us doubt that we're very excited about what we're bringing to the market and in particular excited about how our customers are responding to the value add and the combined entity.
Okay I appreciate that.
So up to that in terms of like the turnover of the cobalt grades and I guess the inflationary environment can you guys provide a little color in terms of how is the turnover of the cohort right now.
In terms of the comparative prior years and then in terms of what you guys are forced to do in terms of salary adjustments, perhaps the impact that will have on operating expenses.
Yes look it's a great question and we are facing the same tight labor market that everybody does.
The good news is we've been an employer of choice for a very long time, and we've focused on investing in our coworkers.
Since our founding and so the unique environment that unique culture is a real draw for co workers.
The ability to grow one's career the interesting work, we do that all that all as important as important as compensation to co workers staying with VW we've.
We've seen some tick up a little bit of tick up in attrition in certain pockets of the.
CDW, but nothing that I would say is kind of worth noting.
We're working harder to bring in the talent it takes a little longer to get new talent in but we're of course very focused on keeping our talent.
And.
And that that potential for nutrition in terms of the costs and adjustments to our compensation look again, we think about total rewards to co workers and that includes.
The work the people the the benefits everything combined and not just the compensation per se.
So we haven't had to make major adjustments and then don't forget that the large protection of our organization is variable comp and so it's all about driving growth into more growth to drive they drive the more they make and as you can see from our results we should have a pretty happy team.
Got it thanks.
Yes.
Thank you very much we have no further questions.
As a reminder, if you would like to ask a question is star followed by one on your telephone Keypad Star followed by one on your telephone keypad.
Yes, and there are no further questions. So I'd like to hand back to Chris the CEO for closing remarks.
Thank you Daniel I appreciate it and I appreciate everybody's time today I just want to emphasize that CDW has never been more well positioned to support our customers in a in a fast paced and changing technology environment and we're very excited about the future. So I want to close by recognizing the incredible dedication and hard work of our more than 14.
<unk> thousand coworkers around the globe. It is their ongoing dedication to serving our customers, which is key and we will continue to be key to profitably outperforming the market going forward. Thank you to our customers for the privilege and opportunity to help you achieve your goals and thank you to those listening for the time and continued interest in CDW.
And I look forward to talking to you all next quarter. Thank you.
Okay.
Thank you you May you may now disconnect your lines.
Oh.