Q2 2022 CDW Corp Earnings Call
$16 million up 23% and non-GAAP net income per share was $2 49.
Also up 23% year over year.
These exceptional results reflect our ability to address customers' priorities across a broad array of end markets with solutions across the full spectrum of it.
Digital transformation agility and security remain top priorities with ongoing focus on hybrid work and return to office driving collaboration networking and endpoint solutions custom.
Customers also continue to seek ways to manage costs, while meeting or exceeding coworker and customer service level requirements.
Our ability to meet all of these needs led to a broad based and balanced performance and was a result of three key drivers number one our balanced portfolio of customer end markets.
To the breadth of our product and solutions portfolio and number three our ongoing execution against our customer centric strategy.
Let's take a look at how each contributed to our growth this quarter.
First the breadth and diversity of our customer end markets. As you know we have five U S sales channels corporate small business healthcare government and education. Each channel is a meaningful business on its own with annual sales ranging from $1 9 billion to over $8 billion within each channel teams are further.
To focus on customer end markets, including geography and verticals.
We also have our UK and Canadian operations, which together delivered sales of $2 $6 billion.
This portfolio approach enables us to toggle to the best pockets of opportunity.
Each team did an exceptional job this quarter.
Our corporate team delivered another record quarter with 30 with a 34% net sales increase results were balanced and broad based customers continue to invest to stay ahead of the curve to either begin or advance their efforts to address the accelerating pace of change.
Digital transformation drove excellent solutions growth with strong double digit increases in netcom servers collaboration cloud and software customers.
Customers are increasingly seeking our advice and expertise in navigating their it journey and this drove strong performance in professional and managed services and warranties.
At the same time corporate customers continued to turn to us to meet their needs for hybrid and returned to office solutions and the team delivered another quarter of double digit client device growth, reflecting both unit and ASP increases.
Small business performance was in line with our expectations and the team delivered a 4% increase on top of last year's 60% growth.
This net sales growth understates demand as customers prioritize cloud and software solutions, which are accounted for on a netted down basis, a better barometer of customer demand in the quarter is the gross profit performance of small business, which increased at more than twice the rate of sales growth.
During the quarter customer spend increased more than 20% for both security and cloud as customers modernize optimize and secure the applications running on their endpoint devices.
Infrastructure spending is the natural follow on from remote enablement and return to office demand.
Remote enablement.
<unk> strong and the team produced another quarter of double digit collaboration and client device growth.
Public posted an 8% increase this quarter.
Care team deliver delivered another excellent quarter up 30%, we continue to help our hospital systems and health care organizations leverage technology to mitigate staffing shortages and wage and cost inflation.
Great example of this is seamless patient intake and record keeping solutions that use biometric security to improve emergency department throughput.
While healthcare has taken a more cautious view towards cloud in the past the benefits of flexibility and reduced support burden our compelling more customers to adopt cloud based solutions driving a double digit increase in cloud customer spend.
Government posted excuse me government posted 19% growth stay.
State and local performance reflected continued success, helping customers maximize the value of their it investments leveraging our expertise in professional and managed services at.
At the same time the team is helping customers navigate through the complexities of funding programs and the impact on their long term planning efforts.
Customers generally have until 2024 to 2025 to spend stimulus.
Data continues to proliferate and we delivered excellent cloud and storage performance.
Remote collaboration continues to be a priority driving double digit growth in devices and audio video.
As we expected federal returned to growth in the quarter federal customers prioritize services tied to solution inception, and ongoing management similar to state and local remote collaboration led to double digit transactions growth.
After the past two years of unusual spending patterns, we anticipate a return to more normal season patterns for federal including fiscal year end September budget activity.
Higher Ed strong performance was offset by the expected decline in K 12, and overall education sales decreased 6% off of last year's excellent second quarter performance. The higher Ed team continues to help universities enables students success and student access programs using technology to give institutions and enrollment edge.
This includes deploying comprehensive endpoint solutions security and campus connectivity to deliver enhanced dorm room experience.
K 12 posted a healthy seasonal increase but remained below last year's exceptional stimulus driven results.
During the quarter, a third wave of emergency connectivity funding ECF was announced which opened July one and extend through December 2023, adding complexity to an already broad array of funding.
We continue to work with school systems to help identify how to maximize available funding to maintain equity and access it advancement into the future.
In the near term. The team also continues to help educators implement connected learning spaces and to enhance security.
Other our combined UK and Canada results increased 24% on a reported basis, both regions delivered excellent growth U.
U K was up significantly in local currency and delivered balanced growth across both public and commercial with excellent remote enablement activity.
Canada increased double digits in local currency, primarily driven by commercial our commercial customers with excellent solutions growth.
The second driver of our performance with our broad and deep portfolio, our ability to address customer priorities across the entire continuum resulted in excellent performance across our solutions and transactions portfolios.
Solutions grew twice as fast as transactions.
U S hardware increased low double digits growth was broad based and included double digit increases in server and server management and video audio. We also continue to see underlying strength in notebooks across our commercial business.
Client devices Netcom enterprise storage in printing and scanning increase at a healthy single digit rate.
This exceptional performance was on top of 2021 second quarter double digit hardware growth.
Demand continued to outpace supply in several key areas, notably in networking and enterprise storage customers. Once again placed orders to get in line for second half 2022 projects, especially netcom.
While overall backlog ticked down slightly from last quarter, we exited the quarter with backlog at nearly twice last years second quarter level and once again, we leveraged our competitive advantages, including our distribution centers, our extensive logistics capabilities deep vendor partner relationships, and our strong balance sheet and liquidity position to navigate and aren't.
<unk> supply challenge.
U S software increased nearly 40% compared to the prior year strength was broad based as we continue to help customers manage data enhanced productivity and secure their it environment with strong double digit increases in storage and network management software application suites and security software.
Cloud was an important driver of performance across the business and was a meaningful contributor to profitability with customer spend and gross profit increasing by double digits.
Infrastructure as a service productivity security application delivery and connectivity, where key growth workloads during the period.
U S services performance was excellent this quarter.
Growth was broad based and balanced driven by professional services managed services and warranties.
Services net sales were roughly twice last year's level and represented 8% of total sales up from 5% in 2021 and 2020.
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 relentlessly focused on executing our strategy to enhance our high relevance and high growth solutions and services fueled by organic and inorganic investments eight.
Acquisitions have deepened and advanced our services capabilities, including automation cloud native and Dev ops, and cyber security capabilities necessary to ensure we remain the trusted adviser to our customers as they accelerate their digital transformation capabilities that enable us to best serve customers well.
Other in a physical digital or cloud based environment in the U S and internationally.
Through our acquisitions, we welcomed nearly 3000, new co workers with more than half in technical roles. Since year end 2018, our technical team has doubled in size today more than 5400 pre sales specialists engineers work alongside our world class sellers to deliver that.
Complex digital transformation solutions from code to cloud and datacenter to database that our customers want and need.
All of our investments whether homegrown or acquired are designed to maximize our key points of differentiation in the marketplace and ensure we continue to help customers achieve the outcomes they need from technology. So they can do great things.
Let me share a couple of recent examples that demonstrate how our investments are making a difference for customers.
In the federal space, the power of bringing three winning teams from CDW serious and focal point together is evident in the cyber security solutions, we are delivering to the intelligence community together.
Together the focus is on enhancing our scope across the department of defense and civilian agencies.
To gain traction in this space you must deliver proof of concept, which we do with our dedicated advanced solutions lab, you must prove training you must provide training and support and you need agency to agency endorsement.
Well the CDW government team already had both expertise and scale serious as federal team brings a track record of success in solution configuration technical integration and managed services.
And our cyber experts at focal point Academy deliver the professional training these agencies need.
Our relevance to federal customers has never been greater.
The second example of how our investments enable customers to achieve great outcomes comes from our small business team.
A provider of software as a service solutions to pharmaceutical and life sciences companies needed to address their aging datacenter infrastructure there.
There are customers workloads and data were being run on servers that were well beyond end of life. The.
The servers clearly, we're not capable of supporting their existing business, let alone growing their SaaS offerings.
The CTO initiated a competitive bidding process for a very small scale professional services contract to provide proof of concept on cloud migration, starting with a couple of dozen servers.
CDW and our competitors all use utilize the same public cloud provider, but CDW one based on our experience with migrations are proven post migration support and our long standing trusted relationship with the customer serving their transactional product needs.
CDW team bolstered by technical support from our IGN W. Digital velocity professional services team built a secure landing zone in the public cloud and the proof of concept proved so successful the customers now migrating hundreds of servers.
Seeing the huge burden CDW lifted off the customers' engineering team, who were having trouble balancing their day to day operations, while trying to expand their cloud footprint the.
The customer contracted CDW for ongoing managed services of their rapidly growing cloud environment. The current annual services opportunity is at $750000 run rate and is on a path to $1 $5 million by.
By staying close to the customer CDW once again had the opportunity to help make it work, allowing the customer to improve the scalability and performance of their software offering.
Investments in our customer and co worker centric growth strategy are foundational to our ability to consistently and profitably outgrow the U S. It market.
And that brings us to our expectations for the rest of the year.
Our team's terrific execution and relentless focus on the customer delivered significant outperformance to our baseline outlook in the first half of 2022, given the excellent performance. We continue to expect to outperform the U S. It market by 325 to 425 basis points.
125 basis points higher than both our long term average level of outperformance and our original view at the end of year 2021.
Our estimate of U S. It market growth in 2022 remains 4% Te.
Taken together this equates to constant currency growth of seven in the quarter to eight new quarter percent above 2021, combined CDW revenues of $22 8 billion recall 2021, combined CDW is calculated as those serious was acquired on January one 2021, instead of its actual acquisition date of <unk>.
Number one.
On a reported basis our outlook represents a 17 five to 18, 5% increase over 2021 results on a constant currency basis.
Our outlook continues to reflect our baseline expectations that we will mix into more sales of solutions in the back half of the year, notably cloud and security.
Given this expected change in second half mix, we also expect to deliver profit growth faster than sales growth.
Even as we continue to invest in our future.
Our outlook also continues to reflect our expectations that supply constraints remain relatively consistent with the first half of the year.
Well, we're cognizant of economic headlines to date, we have not seen a change in behavior that would impact our view on the second half of the year.
Of course, we remain mindful of economic risks as well as other wild cards, including the potential for further disruption to supply and changes, resulting from COVID-19 incidence rates.
We will keep a watchful eye as always on these and other potential issues and as we always do we will provide an updated view on customer activity and our annual outlook on the next call in the meantime, we will continue to do what we do best leverage our competitive advantages and out execute the competition. We will also continue to invest.
To ensure we are remaining our customers' trusted technology partner of choice, helping them deliver the business outcomes. They need now let me turn it over to al who will provide more details on our financials and outlook al.
Thank you, Chris and good morning, everyone.
I will start my prepared remarks with additional detail in the second quarter move to capital allocation priorities and finish up with our 2022 outlook.
Turning to our second quarter P&L on slide eight consolidated net sales were $6 1 billion.
Up 19, 4% on a reported and an average daily sales basis on a constant currency average daily sales basis consolidated net sales grew 25%.
On an average daily sales basis sequential sales increased one 7% versus the first quarter.
Second quarter sales were in line with our expectations, reflecting broad based and balanced growth across our portfolio.
On the supply side consistent with last quarter, we saw pockets of improvement in pockets of pressure.
The change in our overall backlog compared to the first quarter was insignificant.
Year over year, our backlog remains elevated in both transactional and solution categories, and we continue to manage inventory strategically to support our customers through this uncertain supply environment.
Team once again did a great job leveraging cdw's competitive advantages ensure strong returns on working capital.
We had excellent profitability in the quarter gross profit was $1 $2 billion a year over year increase of 32, 3%.
Gross profit margin was a record 19% up 180 basis points versus last year.
The expansion in gross profit margin was driven by several factors.
First increased netted down revenues, primarily within software as a service as the category continue to grow faster than overall net sales netted down revenues represented 28% of total gross profit.
Second product margins were strong driven by both mix and resilient demand for certain hardware products.
Third net sales in high margin professional service business nearly doubled as a result of our recent acquisitions.
Turning to SG&A on slide nine non-GAAP SG&A totaled $652 million for the quarter.
The year over year increase in non-GAAP SG&A was primarily due to higher payroll consistent with higher gross profit and higher coworker count.
Coworker count at the end of the second quarter was nearly 14600 up roughly 3900 from prior from the prior year quarter, reflecting organic and inorganic investments and co workers to support high growth solution areas and our own digital transformation.
Investment in our coworkers and our strategy are integral to our ability to outgrow the market profitably and sustainably.
We're seeing our disciplined and balanced investments pay dividends as evidenced by record sales and profitability in the period.
GAAP operating income was $435 million up 17, 7%.
non-GAAP operating income was $516 million up 23, 5%.
non-GAAP operating income margin was a record eight 4% up 30 basis points from the prior year 60 basis points from Q1.
Moving to slide 10 interest expense was $58 million higher interest expense is primarily driven by the senior notes issued last year to fund the acquisition of serious as well as higher interest rates on our floating rate debt.
Our GAAP effective tax rate shown on slide 11 was 26%.
This resulted in second quarter tax expense of $98 million.
To get to our non-GAAP effective tax rate, we adjust taxes consistent with non-GAAP net income add backs as shown on slide.
Slide 12.
For the quarter non-GAAP effective tax rate was 25, 9% up 50 basis points versus last year as a result of an increase in nondeductible expenses.
As you can see on slide 13, with second quarter weighted average diluted shares of $103 7 million GAAP net income per share was $2.04.
Our non-GAAP net income was $340 million in the quarter up 19%.
And non-GAAP net income per share was $2 49.
23% from last year.
Year to date results can be found on slides 14 through 19.
Moving ahead to slide 'twenty at period end cash and cash equivalents were $542 million and net debt was $6 billion.
Liquidity remains strong with cash plus revolver availability of approximately $1 7 billion.
Moving to slide 20, the three month average cash conversion cycle was 19 days down two days from last year's second quarter, and reflecting a tighter spread between DSO and GPO.
Year to date free cash flow was $717 million as shown on slide 21. This.
This is higher than a typical first half reflecting strong growth in the business and effective working capital management.
For the quarter, we utilized cash consistent with our 2022 capital allocation objectives, including returning $68 million to shareholders through dividends and further reducing our net leverage ratio.
Which brings me to our capital allocation from slide 22.
Our 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 to.
To guide future increases, we will continue to target the 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 two nine times down from three four at the end of 2021, demonstrating strong growth in the business and excellent cash generation.
And while we're at the top of our targeted net leverage range. We are balancing rating agency capital expectations, which would call for us to be towards the bottom of our range.
As such we will continue to prioritize delevering until we were more firmly in our targeted net leverage range and can satisfy the commitments. We made when we finance the acquisition of serious.
We continue to expect to achieve this by the end of 2022.
And while we continue to temporarily put a lower priority on our third and fourth capital allocation priority is M&A and share repurchases.
Firstly on a path to getting back to delivering on these priorities.
Moving to the outlook for 2022 on slide 23.
Starting with sales our outlook remains unchanged from last quarter on a constant currency basis, including holding our second half outlook at our initial aggressive base baseline.
While we are cognizant of potential market variables as we look forward. We are confident in our ability to execute pivot to where the growth opportunities are and outperformed the broader market.
We continue to expect the back half of the year will reflect a greater mix of netted down revenues as we overlapped 2020 one's strong client device sales.
Call 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 and thus resulted in higher gross margin all else equal.
With that in mind, our outlook for full year 2022 continues to be U S. It market growth of 4% plus 325 to 425 basis points of CDW outperformance in constant currency on a combined basis.
Recall that on a combined basis Cdw's net sales would have been $22 $8 billion in 2021, including two $1 7 billion from series.
On a reported basis, our full year net sales outlook equates to approximately 17, 5% 18, 5% growth in constant currency.
Currency is expected to be a headwind of approximately $120 million to net sales in the second half of the year.
This assumes an exchange rate of $1 22 to the British pound and <unk> 78 for the Canadian dollar in the second half.
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, if we mix more into netted down revenue streams than expected.
<unk> or experienced elevated levels of supply constraints.
We would be at the higher end, if hardware growth is stronger where supply improves.
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 on a full year combined basis compared to our reported $7 97.
Which included only one month of serious.
We now expect full year non-GAAP earnings per share growth to be in the mid teens call it 14% to 15% in constant currency on a combined basis.
This equates to a low 20% full year growth rate in constant currency on a reported basis.
Currency is expected to be a headwind of approximately <unk> <unk> to earnings per share in the second half of the year based on the reference exchange rates.
Please remember that we hold ourselves accountable for delivering our financial outlook on a full year constant currency basis.
<unk> modeling thoughts for annual depreciation and amortization interest expense and the non-GAAP effective tax rate can be found on slide 25.
Moving to modeling thoughts for the third quarter, we expect a low single digit increase from Q2 to Q3 on an average daily sales basis.
This equates to a roughly 17% year over year reported net sales growth rate for the third quarter.
We expect third quarter non-GAAP earnings per share to grow approximately two percentage points faster than reported net sales.
Finally, we now expect to be towards the top end of our long term free cash flow rule of thumb of three three quarters to 4.25% of net sales in 2022, assuming current tax rates.
As you know timing has a meaningful impact on free cash flow and it may ebb and flow by quarter.
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.
We would ask each of you to limit your questions to one with a brief follow up thank you.
Thank you.
He would like to ask a question. Please press star followed by one on your telephone keypad. If you changed your mind. Please press star one chain or preparing to ask your questions. Please ensure that you will find somebody took like connect.
Our first question comes from Sal <unk> from J P. Morgan saw me he's got a hedge.
Great. Thank you thanks for taking my questions I.
I guess.
You mentioned, you haven't really seen any impact of the macro in your business yet.
To monitor it closely.
Maybe if I can ask it another way when you sort of correct with your customer then we know a lot of the <unk>.
So it is starting to slow down their own hiring plans.
Are you seeing the great.
Great.
And then relying on CDW and your service capabilities as we head into sort of the next year or just on account of them.
Doing down there.
In terms of hiring and doing resources et cetera.
I have a quick follow up thank you.
Good morning. Thanks for the question I would say just the short answer is yes, we are seeing our customers rely more heavily on us in the labor shortage World. We're in we've said often that technology has become just absolutely essential more integral to our customers' success and more vital to their businesses whether it is.
Delivering experience whether it is profitability, whether it's teaching kids, whether it's you know.
Providing health care.
It is just essential to what organizations do and CDW is as their trusted adviser and we are continuing to see our.
Our customers lean into us more for some of the things that we.
Referenced in our prepared remarks for example.
Advisory services on the front end professional services as they're going through their you know disciplined planning etcetera, but equally relieving their staffs of important management like a datacenter security and things like that so it's been a very it's been a very positive move for us.
And it is driving some of our growth.
And for my follow up if I can just ask you on the supply chain I know your guidance sort of outperformance is based on certain sort of improvement in supply chain that could potentially happen, but as we've talked to a lot of the Oems clearly seeing signs of them expecting more availability of components.
Things in relation to lead times.
Do you sort of what are you seeing in terms of lead times are you expecting things to get better or are you sort of not really seeing much change yet.
Communication from the Oems themselves.
Yes, I'll start with that al can add if he'd like I would tell you that.
Look we don't expect.
Supply constraints to meaningfully change beyond what we've experienced in the first half of the year as we look to the back half of the year I mean, it's still I would call it with.
What's the best were choppy, we're seeing pockets of pressure in pockets of improvement.
As I mentioned in my remarks, I would tell you we kind of have ticked down which is fairly negligible.
So not expecting any necessarily meaningful change in the back half of the year.
But for us that means we just continue to navigate and press our competitive advantages and navigate as we have been through these past several years.
And that's what I say about the supply chain.
Thank you thanks for taking my questions.
Okay.
Thank you. Our next question comes from Jim Suva from Citi, Great. Jim. Please go ahead.
Thank you, Chris and now with the raising interest rate environment can you talk about have customers changed their behavior at all asked for some better funding or talk to you about that at all and how should we think about that interest rate environment also on the financials.
CDW. So that's kind of both of my questions on the same topic on your customers and then on your own self company. Thank you.
Yeah, Jim good to hear from you, let me I'll start with the customers and what I would just say this is more of a general answer to the current environment and uncertainties out there interest in <unk>.
Interest rates are going up labor shortages in place and everything that we hear about in the headlines what I would say is customers are.
We are being disciplined around their investments and that is good for CDW in so far as they look to a trusted advisor with a depth of experience we have to be able to work with them towards the best solutions. So the environment frankly is playing into our competitive advantages and.
We're not seeing that type of macro environment impact our sales opportunities our profit opportunities on the contrary, it's actually I'm being something that pulls us more closely with our customers. So I'll just answer that part of it and I'll turn it to al for interest expense either be CDW, yes sure.
Sure Jim So first on your question on any change in attitude or direction with customers with respect to financing et cetera, I would say no nothing material there as we typically would with every customer we're looking at the avenues of.
Whether they would like financing solutions or otherwise, but nothing's changed materially there.
With respect to the impact us from a financing perspective and interest expense.
Based on my prepared remarks, we do have a component of our debt. That's floating rate, we did see in the quarter a bit of a tick up in the interest expense commensurate with that and we've got that baked into our outlook. We do have interest rate caps in place. We just haven't quite hit those yet, but we do feel like that that's capped out and it certainly.
Manageable.
Thank you so much for the details and clarifications, it's greatly appreciated.
Thanks, Jim.
Okay.
Thank you. Our next question comes from Eric which bring from Morgan Stanley Eric. Please go ahead.
Thank you so much and thanks for taking my questions. This morning, guys, maybe Chris if I, if I start with you.
If we take a step back you've obviously CDW is obviously consistently outperformed market growth from anywhere between 200 to 500 basis points in any given year.
How do you think about kind of in the potential that this market gets more challenging how do you think about the potential to increase those share gains and kind of what I'm getting at is maybe the implication would be slower market growth and that type of scenario, but given your scale. Your reach the broad breadth of products that you have.
Do you see a more recessionary type of environment as an opportunity for CDW to gain share perhaps in excess of your average annual outperformance versus the mark to market and then I have a follow up thanks.
Yes sure Eric.
Again, the answer is yes. Some of these short answer is the answer is yes, we certainly.
Perceive and look we have historically been well positioned and outperformed the market and our peers in a challenging macro environment and we would expect that to be similar going forward. In fact, I would say that we are better positioned now than ever.
To be opportunistic in down markets, given the full spectrum of our technology solutions for our customers now needing a trusted adviser that can that brings the a comprehensive suite of solutions in the complete end to end services required has become more integral and worse.
Central to how they do business and so the answer is yes, we would intend to press our competitive advantages and we see great opportunity and that's been part of what we've been really focused on building over the past couple of years through executing our strategy and ensuring that our portfolio is is a fulsome and has the services that are relevant.
And to delivering on the solutions our customers need.
Okay Super. Thank you and then maybe one for you obviously, a 19% gross margins I think that's an all time high obviously very strong.
You kind of went through the three different drivers earlier in your prepared remarks I'm just wondering if there if theres any way you can kind of quantify or help us better understand the significance of those three factors relative to each other meaning how significant was the mix of netted down revenue to gross margins, perhaps versus the inclusion of serious verse.
Perhaps mix on the on the non netted down revenue side would just love to get a better understanding there and that's it for me. Thanks.
Sure Eric So first I Didnt mentioned serious right because we would think of them serious had more kind of macro level, but I would just note that the.
The contribution from serious and really the power of putting the teams together we are seeing exactly what we would've expected in terms of accretive effect on gross margin on the netted down revenues I mentioned grew 30% year over year, 28% of gross.
Gross profit.
That was a solid contribution there absolute dollar amount consistent with Q1, but what was different this quarter is we had even stronger contributions from professional services, right, which is coming online and accelerating.
And then firm.
Margins on product.
And so multiple variables there.
In terms of as we as we look forward and we think about.
Durability look theres always going to be puts and takes and that's why our outlook focuses on in July margin, because it's just a little bit more balanced a little bit more stable, but certainly this quarter you saw all of his contributions on the gross margin front come to floor.
Great. Thank you all.
Thank you. Our next question comes from Matthew Sheerin from Stifel. Mathew. Please go ahead.
Yes, Thank you and good morning.
I wanted to ask.
Another question regarding the PC market and your outlook there.
You talked about double digit growth on the commercial side.
Very strong backlog still but you also talked about solutions growing faster in the back half as it did last quarter. So could you give us an outlook there in terms of backlog on supply is supply improving there and is that in the <unk>.
<unk> you.
To fulfill that backlog and do you see that falling off in the second half.
Hi, Matt Let me, let me start on this and then we can dive into the backlog a little more specifically you know the way I would characterize it is we have we do continue to expect.
Resilient commercial demand.
As we've said a number of times and client devices endpoint devices devices are low cost productivity enhancing investments and given the changing dynamics of delivering goods digital curbside et cetera, they've just become important parcel of the solutions for every commercial business.
In terms of the total client device sale and backlog, we had healthy I think it was low single digit client device growth this year, which compared to any.
Anything out there I think has been really solid in terms of the backlog. We have had some backlog open up a little bit over the last over the last six months or so I think.
But al did you want to add more about the backlog specifically.
Yes, Matt I would I would say as we as we mentioned no significant changes dramatically in the backlog.
Some of the pressure points versus relief to Chris's point on client device. It's just more fluid right. So we do see a bit more flow and we've mentioned this before but if nothing else we have a bit more.
Read into transparency of what to expect on lead times, but look the friction is still there on the solution space and we wouldn't expect that that's going to change our job is to continue to navigate it and be there for the customers to get them stuff as quick as we can and most effectively.
Okay. Thanks, very much for that.
And then just turning to your outlook on the solutions side.
<unk>.
And specifically.
Investments from customers.
In infrastructure, we have.
Picking up from from our var survey the customers are taking longer to close larger deals being a little bit more scrutiny on deals requiring more and more sign offs are you seeing that at all in terms of a hesitation or little bit more scrutiny from customers on deals.
Yeah, I guess, here's how I, here's how I'd characterize it with the context of the last couple of years, where I'd say your normal purchasing process.
I'm kind of was put aside a little bit I would just say that we're kind of back to a normal normalized disciplined buying process.
Wouldn't characterize it beyond that and as I said earlier, that's actually good for CDW, because we're a trusted adviser and can help our customers make the best most cost effective most effective decisions.
In the process.
Okay. Thank you.
Okay.
Our next question comes from repeat Bastard child.
<unk> replay. Please go ahead.
Hi, good morning, Thanks for taking my questions.
Chris in the past you've talked about the SMB or small medium business segment as a bellwether for the macro environment as they react fast to the macro changes.
This quarter it looks like revenue growth slowed to 4% year on year, albeit on tough compares.
And you've kept the full year guide unchanged and you had a strong fiscal <unk>. So first can you give us your thoughts on what the SMB segment is indicating to you and then second on the in the prepared remarks, you talked several times about continuing to invest in the business.
It looks like Capex as a percent of sales declined slightly to <unk>, 6%. So just give us your thoughts on what areas of investment you would like to make in this environment and how would you just judge.
Judge the success of those investments.
Good morning, everyone, let me start with small business and.
Look we're pleased with small business results. We're just we're not seeing a weakness to date and I just would say investors and analysts should not extrapolate from the decelerating growth rates as I mentioned in my prepared remarks.
<unk> business customer spend was up but it wasn't the categories of areas that net down so a more appropriate barometer of the health of demand in small business.
We think his gross profit performance, which increased at more than twice the rate of sales growth. So I would just keep focused on that cloud and software solutions, where we're at.
We're really really well delivered really really well this quarter.
We also just to be clear continue to see strong momentum in the strategic execution and small business across a wide variety of solutions that customers are investing and so whether it's our solutions to modernize and optimize their infrastructure.
It's continued remote enablement, which we are still seeing resilience in but we're not we're not looking at small businesses.
As softening at this point, it's really been resilient and our momentum is strong.
In terms of investments what I would tell you is we're a people business. So when you think about investments that are maybe non capital intensive related that's all about people. It's you look at the acquisitions and the number of.
Folks and our technology organization that we've brought to CDW that number that we are in.
That we've hired over the year there organically brought in but then think about things like our CRM.
CRM program and modernizing our CRM program using sales force. If you think about our unique training programs that are very.
It's the best efficacy EW you know our training programs are best in the business. When you think about leadership development. When you think about all of the things that we're doing that drive efficiency and effectively and productivity for our sales organization and the ability for our technical organization and sales organization to go to market.
It's a one CW company as one team all of those investments are the kinds of things that we're doing to.
To continue to execute our strategy.
Okay. Thanks for the clarification on the details there for my follow up if I can just ask it was great to see the federal business grew year on year.
Think that strength continues and within government, how should we think about the relative growth from federal versus state and local in the second half of this year. Thanks again.
Yeah, I'll start with that one.
Yes, we've said that we would expect fed to continue growth you'll start growth in the second half of the year and continue in Italy.
We'd expect it to look more seasonal I think we're kind of back into more of a seasonal rhythm with federal.
And state and local it's been interesting because as you know the budget.
The funding that they've received has allowed them to make investment decisions over a more extended period of time versus the one year that they typically do and we've been supporting customers with that all that said given things like data proliferation et cetera, they're still investing now. So you can expect to see solid growth across both both of them.
Those sales channels in the second half of the year.
Thanks for all the details and congrats on the strong execution.
Thank you really appreciate it.
Thank you. Our next question comes from Keith <unk> from Northcoast Research. Please go ahead.
Good morning, Chris.
Let's talk about Cdw's own hiring plans for the rest of the year and how youre seeing that growth.
Our higher hi, Keith our hiring plans for the rest of the year.
Yeah, I'll take that question.
Sorry, I understand yes.
Yeah, Yeah well.
Investing in people.
Obviously, we've got our eyes on the headlines we're being prudent in how we run our business.
But we're continuing to invest in those areas that support the important capabilities that our customer needs from us and we're investing in areas to drive efficiency. So we have not slowed down our investment in people at this point and we feel very confident with that.
Great I appreciate it.
Talk with investors in terms of the concerns about the chip manufacturers and concerns that Pcs will be slowing down.
How would you address that question.
And the chips that are perhaps a canary in a coal mine for the entire tech industry.
I had a hard time hearing the beginning can you just repeat the question. Please.
Yes, absolutely some questions from investors that we're getting it oftentimes is looking at sales of Pcs and with the chip manufacturers now, believing that the chips will be down to personal computers by as a time to 15% for the rest of the year, there's concerns that that might be a canary in the coal mine for technology spending how would you respond to.
That question.
Yeah, what I would say is I think technology spending is going to be even more resilient.
In the face of all kinds of challenges going forward, because it's so essential to businesses whether it is <unk>.
<unk> around chips challenges around the macro environment et cetera businesses can't.
Win in the marketplace without utilizing technology to drive efficiency effectiveness experience all the things we talk about so.
We arent, we arent concerned about some of that talk track, we feel very confident that our customers and we see the momentum our customers are continuing to invest in technology across the spectrum from endpoint solutions to hybrid infrastructure.
And we feel very confident that we'll be able to press our advantage our competitive advantages.
And have access to the technology needed for our customers given our size and scale.
Great. Thanks, Chris I appreciate it.
Yep.
Thank you. Our final question comes from Laura Lucas from Evercore. Please go ahead.
Hi, This is Lauren on for Amit.
So thanks for taking the question could you guys did you guys can provide some more color on the change in expectations and netted down revenues for the second half. So anything you guys talked about F&B shifting spend this way, but I mean, how should we be thinking about this kind of in terms of where gross margins could reach.
Yeah.
Yeah. Thanks. Thanks, Lauren this is al I think.
Previous to today, we talked about we expected a higher level of netted down revenues in the second half and that still holds true.
If we look at the if we look at Q2 and a contributor contributors to our gross margin otherwise I'd talked about professional services, obviously at a macro level.
The accretive effect of serious and product margins were firm, but the theme kind of as we look at the second half as well is really ongoing with netted down revenues, which which makes up just for clarity SaaS software assurance warranties and commissions.
Those themes continue and we continue to expect that they will outpace our net sales overall.
Got it thank you.
Thank you that's just the end of the Q&A session. Today I will now hand, you back to Chris Leahy for closing remarks.
Thank you very much Lauren let me close by recognizing the incredible dedication and hard work of our over 14600 coworkers around the globe their dedication to serving our customers. It is what makes us successful and in particular embracing a better together approach and philosophy as we brought together many amir.
And companies over these last few years.
Thank you to our customers for the privilege and opportunity to help you achieve your goals and thank you to those listening for your time and continued interest in CDW al and I look forward to talking to you next quarter.
Okay.
This concludes today's call. Thank you for joining you may now disconnect your lines.
Uh huh.
Yes.
Okay.