Flowers Foods Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2021

There are 10 speakers on the call.

Operator

Hello, everyone, and welcome to the CDW Third Quarter 2021 Earnings Call. My name is Bethany, and I'll be coordinating this call for you today. If you change your mind, you can press star 2. I will now hand the call over to your host, Kevin White, Director of Investor Relations. Kevin, over to you.

Speaker 1

Thank you, Bethany. Good morning, everyone. Joining me today to review our Q3 results are Chris Leahy, President and Chief Executive Officer And Al Morales, Chief Financial Officer. Our 3rd quarter earnings release was distributed this morning and is available on our website, investor. Cdw.com, Along with supplemental slides that you can use to follow along during the call, I'd like to remind you that certain comments made in this presentation are considered forward looking statements under the Private Securities Litigation Reform Act of 1995.

Speaker 1

Those statements are subject to 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 the Form 8 ks we furnished to the SEC today And in the company's other filings with the SEC. CDW assumes no obligation to update the information presented during the 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 You'll find reconciliation charts in the slides for today's webcast and in our earnings release and Form 8 ks we furnished to the SEC today.

Speaker 1

Please note that all references to growth rates or dollar amount increases in our remarks today are versus comparable period in 2020, unless otherwise indicated. In addition, all references to growth rates for hardware, software and services today represent U. S. Net sales only and do not include the results A replay of this webcast will be posted to our website later today. I also want to remind you that the conference call is property of CDW And may not be recorded or rebroadcast without specific written permission from the company.

Speaker 1

With that, let me turn the call over to Chris.

Speaker 2

Thank you, Kevin. Good morning, everyone. I'll begin today with an overview of 3rd quarter results and drivers of performance. Al will take you then through a more detailed look at our financials as well as our capital allocation strategy and outlook. We'll move quickly through our prepared remarks as we always try to do to ensure we have plenty of time for questions.

Speaker 2

But before I get I do want to pause for a moment to honor the life and legacy of our former CEO, Tom Richards, who passed away last week after a valiant fight I suspect most of you on this call have likely met Tom in person. I'm certain that everyone on this call impacted by Tom. He was a fierce competitor and equally a kind human being. Tom had a lot of what we like to call it CDW Tom isms, Simple ways of getting to the essence of something in a way that's stuck. One of my personal favorites is when Tom used to say, at CDW, we take what we do seriously, But we don't take ourselves too seriously.

Speaker 2

That's the essence of who we are. That is our CDW culture, Captured so simply and amplified so strongly by Tom Richards. Tom also had an unexpected way of signing off on our earnings Usually with the right comments about an upcoming holiday, like Halloween or Mother's Day or even Valentine's Day. As a result, we always end these calls on a high note and with a chuckle. Tom knew his audience well.

Speaker 2

In honor of Tom, I'd like to kick off This earnings call with the tagline he penned on every communication to a coworker. Tom always signed off with You make a difference, literally injecting into each co worker Tom's personal belief in them and their important impact. On behalf of all of our co workers around the globe, our customers and our partners, our communities and our investors, I would like to say thank you to Tom. You made a difference. Let me turn now to Q3 performance.

Speaker 2

Once again, CDW posted Strong top line growth and profitability. Overall demand was strong and the teams did a great job addressing customer needs. For the quarter, we delivered record net sales of $5,300,000,000 11.4 percent higher than last year and up 10.7% in constant currency. Non GAAP operating income of $435,000,000 up 12.6 percent and non GAAP net income per share of $2.13 15.4% higher than last year on a reported basis and up 15.8% in constant currency. Our ability to deliver the strong top line and profitability was the result of 3 key drivers, our balanced portfolio of customer end market, The breadth of our products and solutions portfolio and our ongoing execution against our 3 part strategy, which is focused on taking share and invest First, our balanced portfolio of customer end markets.

Speaker 2

As you know, we have 5 U. S. Sales channels, corporate, small business, Health Care, government, which includes federal and state and local customers and education with K-twelve and Higher Ed. We also have our UK and Canadian operations each serving public and commercial customers. All of these operations represent meaningful businesses in their own right.

Speaker 2

Often different factors impact these diverse customer end markets. And this quarter we saw that play out as our commercial Business in the U. S, our small and corporate channels and our international operations posted significant double digit increases, while our U. S. Public business posted a mid single digit decline.

Speaker 2

From a macro perspective, supply remained under pressure this quarter. Demand outpaced supply and lead times extended, particularly in several solutions areas. The team continues to leverage our distribution centers, Expensive logistics capabilities, deep vendor partner relationships and strong balance sheet and liquidity position to navigate the They did an exceptional job working with our partners to stay on top of availability status. Our sellers and technical also work with customers and whenever possible found alternative available products and built alternative solutions. These efforts helped mitigate some of the pressure and our backlog increase was consistent with last quarter.

Speaker 2

The tight supply environment continued to impact Let's take a deeper look at 3rd quarter customer end market performance. Commercial customer priorities remain the same as in the 2nd quarter, digital transformation, security and hybrid and cloud solutions. Customers continue to prioritize investments to enable the future and add resiliency to their operations to strengthen and infrastructure platform and endpoints. Within this backdrop, corporate increased 25% And customer demand remains strong. While many customers delayed return to office, they continued to prepare as well as invest to facilitate hybrid work.

Speaker 2

This drove ongoing strong double digit increases in transactions propelled by notebooks, audiovisual and desktop. At the same time, digital transformation remained a top priority. While buying sentiment was clearly there, in many cases, The product was not. Writings were strong, but with extended lean time backlog built during the quarter. Lack of product availability, particularly in net Common storage muted corporate solutions growth.

Speaker 2

Small Business also delivered another exceptional quarter of growth increasing almost 40%. The team continued to help customers with remote enablement, security and video, driving strong growth across both transactional As we have shared previously, small business customers tend to be more flexible in their technology requirements. So while they did see Some impact from supply constraints small business did not experience as much as corporate, a great example of the power of diverse end markets. You also see the power of our diverse end markets and our public performance. Net sales for our government channel decreased 33%.

Speaker 2

Federal declined double digits in large part due to the overlapping of our device as a service solution for the U. S. Census Bureau and other security remains robust with net sales up more than 30%. The gears of Washington were slower than typical at federal year end and we had contracting delays in several large contracts. This is not unusual.

Speaker 2

Given the magnitude of You've heard us talk about Federal's lumpy nature in the past. This will unwind and we expect to see a reversal back Growth in the first half of twenty twenty two. State and local posted a mid single digit decline. Stimulus Funding remained largely unallocated to the local level. This is because access to multiyear American Rescue Plan Act funding with deadlines in 2024 led to greater focus on multi year budget planning.

Speaker 2

At the same time, state and local customers were focused on digesting last We continue to work with our customers, but given the complexity of the various funding opportunities And multi year phasing, we do not expect to see projects moving ahead meaningfully until early 2022. Education increased by 2%. Higher Ed delivered high single digit growth driven by ongoing focus on campus connectivity And enhancing the dorm room experience with double digit growth in both security software and servers. The K-twelve team did an excellent job and matched last 20 call where we look for strong non seasonal first half performance to be followed by a deceleration in the second half. Chromebook availability continued to improve during the quarter and client devices increased low single digits on top of last year's Cumulus, Equity and Access Driven Growth.

Speaker 2

Overall, transactions increased low single digit on top of last year's Despite the 2nd wave of COVID, staff shortages and limited ICU bed availability during the quarter, some projects that have been sidelined did resume. This was to find the best solutions that protect their sensitive data and security sales increased strong double digits. Other, which represents our UK and Canadian operations increased over 30% on a reported basis. Both the UK and Canada delivered mid-twenty percent growth in local Customer priorities in both markets remain the same as the U. S, digital transformation, security and hybrid and cloud Solutions as do their investments to enable the future and add resiliency to their operations.

Speaker 2

Both operations Clearly, the 11% plus sales growth we delivered demonstrates the power of the first driver of our performance, Our balanced portfolio of customer end markets. It also demonstrates the power of the second driver of our performance this quarter, the breadth of our products and solutions portfolio,

Speaker 3

which you

Speaker 2

can see in our major category performance. Transactions increased low double digits driven by Client device growth in video. Solutions were flat with double digit increases in servers and collaboration tools, offset by declines in NetComm and Enterprise Storage. Drilling further down into key solutions categories, cloud customer spend once again increased strong double digit. We saw robust growth across all three top cloud workloads: security, infrastructure as a service and productivity.

Speaker 2

We expect strong customer demand for cloud solutions to continue and we are well positioned to deliver. And once again, given its ongoing importance to our Our security practice delivered excellent results. Customer spend was up strong double digits. Our teams continue to guide customers on their security posture, Assess their environment, design the best approach and deploy and manage the solutions throughout its lifecycle. Overall for the quarter, we delivered double digit growth in hardware, low single digit growth in software and strong double digit growth Software net sales increased low single digits, strong double digit increases in security software, database software and backup and recovery We're partially offset by declines in network management software, storage and telephony related software.

Speaker 2

As I have shared before, services are fundamental to our go to market approach and a key enabler of our value proposition. This quarter's nearly 30% growth was a product of both organic performance and inorganic contribution and was driven by both professional and managed And this leads to the final driver of our performance in the quarter, the impact of investments we are making in our 3 part strategy for growth. As you know, in October, we announced our planned acquisition of Sirius Computer Solutions. When we announced the acquisition, I shared how it deepens and adds scale to our services Capabilities that will ensure we remain the trusted technology advisor to our customers as they accelerate their digital transformation. Notice I said deepens.

Speaker 2

Sirius is additive to our existing capabilities, capabilities we have built through both organic and inorganic investments, Capabilities that enable us to serve customers as their trusted advisor, whether in a physical, digital or cloud based environment In the U. S. And internationally. Why so many investments in services capabilities? Simply put, services are becoming an increasingly larger component Total customer IT spend.

Speaker 2

For CDW, services position us to enable the whole solution, increase our engagement Customers and stickiness and provide insights into opportunities to further help our customers across the full IT lifecycle. Today, IT leaders are accountable for both running the business and using technology to transform the business and deliver strategic outcomes. To both run the business and transform it, leaders need to invest resources where they can have the greatest impact and do so with the greatest speed. Services are critical to making this happen. To address this need, we have built engineering services capability that span the full stack and full lifecycle.

Speaker 2

Our technical organization has grown to more than 3,700 presale specialists and engineers. Today, we can deliver complex digital transformation solutions from code to cloud and data center to database and deliver them quickly. Let me share an example of how our services team is helping a global online home retailer transform their business for their next wave of growth, A transformation that was hindered by legacy technology. To accelerate their transformation, our customer opted for a combination of public cloud technologies and new cloud This would create the agility they needed essentially an on demand environment. A great idea, but accelerating cloud technology requires specialized expertise that is inefficient to keep on staff and that is where CDW came in.

Speaker 2

First, we leveraged our cloud managed services and offloaded some of the cloud projects from the customer to CDW. Then we pulled in our Digital Velocity Talent Orchestration Services or DBT. DBT orchestration supplies customers with talent to work inside the Talent orchestration delivers highly vetted resources whether already employed by CDW or sourced by us. CDW services enabled the solution, But it did so much more. As you can imagine, this level of high touch integration creates customer loyalty With ongoing relationships on the ground and continued exchange between CDW and the customer, ultimately leading to more business, Great for the customer and great for CDW.

Speaker 2

This is an excellent example of our 3 part strategy in action and how M and A enhances organic investments to ensure we remain our customers' number one choice as a trusted advisor. Solving key business problems for our customer in today's environment requires strong service and solutions capabilities, capabilities that when combined with our great relationships Competitive advantages of scale, scope and disciplined execution enable us to win in the marketplace and deliver sustainable And that leads me to our expectations for the balance of the year. We continue to look for growth in 2021 to come in between 9.25% 10% in constant currency, Split roughly between 5 percent IT market growth and 4 25 to 500 basis points of CDW market outperformance. This reflects our expectation that supply constraints do not mitigate any time in the near future, but do not get materially worse. Remember, these constraints don't just reflect component shortages, but also labor and logistics challenges, challenges we do not Back to reverse in the near term and challenges that we do not expect to resolve as a flush rather gradually.

Speaker 2

As far as wildcards, in addition to the fluid supply situation and the potential for another wave of COVID, given the slowdown in 3rd quarter GDP growth, we will keep a watchful eye out for any slowdown in the economy. As we do, we will continue What we do best, leverage our competitive advantages to help our customers address their IT priorities and achieve their strategic objectives And I'll execute our competition. I hope you can tell from my comments that this quarter's performance reinforced our confidence that we have the right strategy in A strategy that serves us well when confronted with macro or customer specific challenges and positions us for sustainable growth. A strategy designed to continue our evolution as the leading IT solutions provider. And most importantly, a strategy that delivers Profitable growth and returns to shareholders.

Speaker 2

This confidence underpins today's action by our Board to increase our quarterly cash dividend by 25%. I know many of you may be wondering what we expect for next year. We are in the middle of our planning process and as we always do, we'll provide our outlook for 2022 on our year end conference call. And with that, let me turn it over to Al, who will share more detail on our financial performance. Al?

Speaker 3

Thanks, Chris, and good morning, everyone. I'll start my prepared remarks with more detail in the Q3, Move to capital allocation priorities and then finish up with the 2021 outlook. Turning to our Q3 P and L on Slide 8. Consolidated net sales were $5,300,000,000 up 11.4% on a reported and an average daily sales basis. On a constant currency average daily sales basis, consolidated net sales grew 10.7%.

Speaker 3

Net sales and channels most impacted by COVID-nineteen last year, corporate, small business and international continue to Posting strong double digit growth in the quarter and delivering sales above 2019 levels. This quarter's growth Also benefited from strong double digit performance in healthcare, but was tempered by a slowdown in education and decline in government. On the supply side, overall backlog increased several $100,000,000 in the quarter and continues to be elevated year over year. The team did a great job leveraging CDW's competitive advantages, so the backlog did not increase even more. Gross profit for the quarter was $915,000,000 an increase of 10.8% on a reported basis.

Speaker 3

Gross margin was 17.3%, down approximately 10 basis points versus last year. This is primarily driven by lower product margin, Partially offset by an increase in the mix of net service contract revenue, primarily in software as a service In addition to strong professional and managed services performance. Turning to SG and A on Slide 9. Non GAAP SG and A increased 9.2%. The increase is primarily driven by payroll costs, including sales compensation, which moves gross product growth and performance based compensation, consistent with higher attainment against financial goals.

Speaker 3

Finally, it reflects investments in the business, including increased co worker counts focused on execution of our strategy. Coworker count at the end of the 3rd quarter was 11,098, up 432 from the 2nd quarter and 1118 over prior year. The increase in co worker count reflects organic and organic inorganic investments to support high growth solution areas and our own digital transformation. GAAP operating income was $386,000,000 up 21.6%. Non GAAP operating income, which better reflects operating performance, was $435,000,000 up 12.6 percent And non GAAP operating income margin was 8.2%.

Speaker 3

Moving to Slide 10, interest expense was $36,000,000 Down 9.4%. The decrease is primarily due to savings from last year's refinancing. Our GAAP effective tax Rate shown on Slide 11 was 23.9%. To get to 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 25.3%, Up 200 basis points versus last year's rate, primarily due to a one time impact of state and foreign tax benefits recognized in the prior year.

Speaker 3

As you can see on Slide 13, with 2nd quarter weighted average diluted shares outstanding of 139,000,000, GAAP net income per share was $1.91 up 43.2 percent. Our non GAAP net income was $298,000,000 in the quarter, Up 12.3 percent and non GAAP net income per share was $2.13 up 16.4% from last year. Turning to year to date results on Slides 14 through 19. Net sales were $15,000,000,000 an An increase of 13.1% on a reported basis and 13.7% on an average daily sales basis. We had 1 fewer selling day year to date 2021, which will be made up in Q4 when we have one extra selling day compared to the prior year.

Speaker 3

On a constant currency average daily sales basis, year to date consolidated net sales were 12.6% higher than the prior year. Gross profit was $2,600,000,000 up 11.3% and gross profit margin was 17%, Down approximately 20 basis points year over year. Operating income was roughly $1,100,000,000 and non GAAP operating income was $1,200,000,000 up 18.7 percent. Net income was $773,000,000 Non GAAP net income was $834,000,000 up 20.7%. Non GAAP net income Share was $5.89 up 23.5 percent.

Speaker 3

Turning to the balance sheet on Slide 20. At September 30, cash and cash equivalents were $245,000,000 and net debt was $3,800,000,000 Liquidity remains strong with cash plus revolver availability of approximately $1,400,000 Year to date free cash flow was $341,000,000 as shown on Slide 21. This was lighter than last year's record $1,200,000,000 of free cash flow, Which benefited from timing and one time items. Year to date, we saw some of the timing reverse as we mixed out of vendors with extended payment terms. Additionally, working capital increased to support our strong year to date growth, and we continue to make strategic investments in inventory To support our customers through this choppy supply environment.

Speaker 3

Moving to Slide 22, the 3 month average Cash conversion cycle was 25 days, up 9 days from last year's Q3. The increase is primarily driven by mixing out of vendors with longer payment cycles In addition, the holding customer driven stocking positions and the timing of receipts and shipments. Turning to capital allocation on Slide 23. Our 2021 priorities remain the same. 1st, increase the dividend In line with non GAAP net income, including today's 25% increase to the dividend.

Speaker 3

The increased annual dividend of $2 is Approximately 25 percent of trailing 12 month non GAAP net income through September. The Q4 2021 dividend demonstrates Confidence in the earnings power and cash flow generation of the business, it marks the 8th consecutive year of Increases since our initial public offering in 2013. Our dividend has grown at a compound annual growth rate of 36% from its initial level. We will continue to target a 25% payout ratio going forward, growing the dividend in line with earnings. 2nd, we ensure we have the right capital structure in place with a targeted net leverage ratio of 2.5 to 3 times.

Speaker 3

We ended the Q3 at 2.3 times. 3rd, supplement organic growth with Strategic acquisitions, Sirius, which we announced on October 18th, and our recent Focal Point and Amplified IT acquisitions are great examples. And 4th, we returned excess cash after dividends and M and A to shareholders through share repurchases. During the quarter, we continue to deploy cash consistent with our capital allocation priorities, returning $505,000,000 to shareholders, Including $55,000,000 of dividends $450,000,000 of share repurchases at an average price of approximately $188 per We continue to expect to return approximately $1,700,000,000 to shareholders for the full year 2021, Including $1,500,000,000 in share repurchases with the balance from dividends. Going forward, we continue to execute Against our capital allocation priorities as we have done since 2014.

Speaker 3

In 2022, post closing of the Sirius acquisition, We expect to have an initial net leverage ratio of approximately 3.3 times. While our capital allocation priorities will remain the same, We will shift our objectives to focus on paying the dividend and reducing debt. As a result of this focus, we'll put a lower priority on M and A And share repurchases until our net leverage is in our target range of 2.5 to 3 times, Which we expect to achieve by the end of 2022. We continue to expect to close the Sirius acquisition in December, and we tend to share additional thoughts on the financial impacts of consolidating Sirius into CDW on our Q4 call. Moving to the outlook for 2021 on Slide 24.

Speaker 3

Supply and product lead times remain fluid, Making it challenging to comprehensively forecast the high degree of confidence. On the demand side, we continue to see strong activity and momentum, Particularly with both U. S. And international commercial customers. On the supply side, visibility remains a challenge.

Speaker 3

Constraints continued in notebooks, desktops, video, netcomm and data center categories, resulting in longer lead times and a higher backlog. With the exception of Chromebooks, the supply environment has not improved since our last earnings call, We do not expect it to improve in the near future. With that context, for full year 2021, we continue to expect The U. S. IT market to grow approximately 5% and our net sales to grow 425 basis points to 500 basis This assumes a consistent supply chain environment And impact to our backlog.

Speaker 3

We feel good about the health of the business, and we continue to navigate the fluid supply environment. We continue to expect currency to contribute an approximately 80 basis points to the full year net sales growth, Assuming exchange rates of $1.38 to the British pound and $0.80 to the Canadian dollar. Moving down the P and L. We now expect non GAAP operating income margin to be in the high 7% range for full year 2020 As you've heard us say, we believe now is the time to invest in the business and expect investments made in the Q4 to drive an operating margin, which will deliver our Full year outlook. Putting it all together, we now expect non GAAP constant currency earnings per share growth In the high teens, call it 18% plus or minus 25 basis points.

Speaker 3

Currency is expected to contribute an additional seventy basis Additional modeling thoughts for annual depreciation and amortization, interest expense and the non GAAP Effective tax rate can be found on Slide 25. For free cash flow, our long term rule of thumb remains unchanged 3.75 percent to 4.25 percent of net sales, assuming current tax rates. However, Given the timing impacts that contributed 2020 significant over delivery and ongoing customer driven stocking positions, As well as the time of receipts and shipments, we expect 2021 free cash flow to come in slightly below the low end of the range. Additional modeling thoughts on the components of free cash flow, including capital expenditures and the cash conversion cycle can 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.

Speaker 3

And with that, I'll ask the operator to open up for questions. And we would just

Operator

Thank you. The first question comes from Adam Tindle at Raymond James. Adam, your line is open.

Speaker 4

Okay. Thank you and good morning.

Speaker 5

Chris, I wanted to start on Sirius to see if you had some early feedback from customers now that the announcement has been out. Specifically wondering if those Sirius enterprise customers are perhaps willing to breach the conversation on utilizing CDW's transactional portfolio that Sirius didn't have and conversely the CDW mid market customers more interested in Sirius' Services portfolio, so kind of a qualitative view from the customer perspective on potential revenue synergies in this deal.

Speaker 2

Yes. Good morning, Adam. Thanks for the question. And you know we're in a little bit of a quiet period here as we go through The various regulatory approvals. That said, one of the areas that we focus very quickly was feedback, and I would just tell you it's been really, Really positive on both fronts.

Speaker 2

So, our customers at CDW are delighted About the acquisition and really looking forward to the combined entity and the capabilities that they help bolster CDW given their reputation And the quality of their services. And the reciprocal is true as well. I talked to Joe Mertens late in the day of the announcement He had made his way through a lot of customers and had their frontline sellers and it was for the most part all positive. So again, we think that I said the word before a home run deal, and we're going to make it work really well, and our customers seem to be excited. Our partners equally are thrilled.

Speaker 2

It's exactly what they were looking for us to do and they are thrilled.

Speaker 5

Right. And I think that aspect of Home Run deal has Some investors wondering a little bit more on Sirius' recent performance. The purchase price was very attractive, all cash in nature, Sure. I know some skepticism on what's been going on with the business in 2021. I know you gave us color based on 2020, but Maybe you could help dispel any of that concern by talking about what you've seen out of Sirius Performance in 2021?

Speaker 2

Well, look, they're doing just fine and their customers like us in areas like federal, which we Talked about today are enterprise customers. And as you know, that can be a lumpy business. So when we did our diligence and looked at the pipeline and the types of Programs they're running with customers, they were having a similar impact that we were having with regard to our larger customers. Some things being delayed, some things being Planned yet not yet rolled out necessarily, particularly in terms of delays going back to the office, etcetera. But I would tell you that we feel very confident, Adam, in the health of the business, in the prospects of the business, in the pipeline for the business, And then the opportunities for Sirius and CW, the combined entity.

Speaker 5

Very helpful. Thank you very much.

Speaker 2

Thanks, Adam.

Operator

The next question comes from Shannon Cross at Cross Research. Shannon, your line is open.

Speaker 6

Thank you very much. I wanted to dig a bit more into backlog composition, If you're seeing any order cancellations or how it developed over the quarter, maybe linearity, just to get an idea How sustainable and sticky do you think the backlog will be?

Speaker 3

Yes. Good morning, Shannon. This is Al. So a couple Things that I would note. So going into the quarter, we maybe would have expected that to be a bit of a kind of a modest view Backlog, I'd say overall for the quarter, it was a bit more than modest, and let's call it in terms of just all characteristics Similar to Q2, a couple of variants or components that maybe looked a little different, and I think Chris touched on this in the prepared remarks is that We saw a bit more of an effect from a solutions perspective, and that would have included notably NetComm and Storage.

Speaker 3

Notwithstanding that similar to Q2 and look, I would just note the all things considered, the The team did an exceptional job navigating through that and delivering on the results.

Speaker 6

And Okay. So you but you don't you're not seeing double orders, you're not worried about any kind of a loss of backlog?

Speaker 3

We are not. I would just note that look, I think there's component in the backlog that there's likely some pull forward, right? It's been a Tenuous environment and so there are customers that I think probably have a perspective that knowing that this doesn't have a clear end date, Maybe get in front of some of their projects, and so there's probably a component that's pulled forward. We're not feeling the effects or seeing Effect of either double bookings or order cancellations.

Speaker 6

Okay. Thank you. And then just a quick question on, Chris, maybe how are you thinking about inflation? And clearly, you can pass through higher product costs. But just sort of in general, As you go through your budgeting and planning for 2022, are you thinking more transitory or are you sort of planning for some of these cost Increases to be here for the long term.

Speaker 6

Thank you.

Speaker 2

Yes, Shannon. We'll share more with our about our planning next year. As we think about it, Look, it feels like the perspective out there is maybe a little worse than transitory. And so we will just Keep our eye on the economy and how this could impact in particular different segments of our business. For example, I mean, think about small business, They are really doing a terrific job right now, but we're keeping a very close eye on that segment of the market to understand And how the economy might be impacting them, where their optimism is, their ability to hire, etcetera.

Speaker 2

So as we always do, we'll keep an eye on it. It feels a little We'll continue to invest in technology. If in fact it becomes a little more expensive, we think they'll keep the priority there. And look, if we can keep the economy coming out of the pandemic with the momentum we seem to be building and positive nature in the economy, we're feeling pretty good.

Operator

The next question comes from ruklu Bhattacharya of Bank of America. Ruklu, your line is open.

Speaker 4

Hi. Thanks for taking my questions. Chris, I wanted to ask about the education market. In 3Q 'twenty, Q 'twenty, you had $2,000,000,000 quarters. And again, this year in June September, you've again had $2,000,000,000 quarters.

Speaker 4

There's a year on year headwind from the Mississippi Department of Education project that you had in December. So how should we think about can you give us your thoughts on this end market going into 4Q, I mean, how do you balance I mean, what are your thoughts on the stimulus package and the benefit you can get there versus the year on year headwinds

Speaker 2

They will appreciate that. Look, we called this out earlier in the year and I mentioned it again in my prepared remarks, but It's really been unseasonal and we expected to see the first half of this year be quite strong as it has been, but we have We are lapping a big back half of the year. So we would expect to still continue to see, I'll call it solid performance And it's a bit unseasonal because it's the end of the year, but it's going to decelerate in our view and it's going to be to overcome the level of growth that we saw last year. That said, Ruplu, it's the stimulus funding, for example, the Emergency Connectivity Act is yet another source of funds For education institutions to be able to fortify their classrooms in the hybrid environment. The one thing with That funding is schools are able to use it for orders that are placed.

Speaker 2

So we're working our way through what of that Money relates to orders that have been placed, but we're confident that there's a large portion that are additive to the base. And again, the team as they always do has done Phenomenal job helping our K-twelve customers work through that funding. So as you've heard me say before, I feel very confident in education over Long term, it is a growth area. The education market has inflection points and we have always been ahead of those inflection points, Whether it's how the classroom itself changes, whether it's going to hybrid, whatever those are, we are usually there. And I'll tell you, Amplified IT, which we just Added is taking us to yet another leg of growth for K-three twelve with their cloud enabled capabilities and their IP developed Technology that they offer for classrooms.

Speaker 2

So, top half year, but the team is doing very well in long term growth area.

Speaker 4

Okay. Thanks for all the details there, Chris. Maybe for my follow-up, if I can ask Al about operating margins. So you had another good quarter, another quarter of Above 8% operating margin and you're guiding an increase for the full year to high 7s. If we just look at core CDW and not Consider Sirius right now, which is accretive to the company.

Speaker 4

But if we just look at core CDW, do you think Having a high 7s operating margin is a sustainable level going forward. What are the puts and takes that we need to keep in mind?

Speaker 3

Yes, sure. Thanks for the question, Ruplu. So I think you just hit it at the end there. Look, there are lots of And I'll just start if you just put aside the supply chain environment, right, Mix does really matter. So if we think about components, what's transactional, what's solutional from a mix perspective, that matters.

Speaker 3

Channel mix matters, all those things have an impact, I'll say, to start on your gross margin and obviously then the kind of The drop down from an operating margin perspective. So let's just keep that in mind, and again, kind of supply chain will matter as well. In the case of this particular quarter and maybe as an example, so on a sequential basis, our gross profit margin Increase from the prior quarter, right? And we have some moving parts there in terms of mix Fair. That is a little bit less public mix from a channel perspective.

Speaker 3

And then you have got transactional solution. And then very notably, Ruplu, I would just note the fact that your 100% gross margin items will have an impact in this quarter. Our 100% gross margin items grew faster than our net sales. So that's going to have an impact as well. And so again, all of that steeped in, Focus on gross margin.

Speaker 3

Then finally, if we walk that down to operating margin, it's then just a matter of the at what pace Is our non GAAP SG and A spend happening? In the case of this quarter, I would say our non GAAP SG and A spend Lagged some of that growth in gross profit, and so we dropped more to the operating margin for the quarter. And when you look to our outlook, Relative to what that operating margin was for this quarter, we're giving an outlook of high 7s And that reflects that we would expect in the Q4 that spend is going to pick back up and it's going to balance us back out to a high 7th on the operating margin. As you look forward, look, I think you get a good sense for the strategy and the movement and where we're going longer term in terms Mixing into services and mixing into 100% gross margin, all those mix components will matter as we go forward.

Operator

The next question on the line comes from Jim Suva at Citigroup. Jim, your line is open.

Speaker 7

Thank you. Probably a question for Chris, but when we think about stimulus, the timing of it, the political nature of it is a little bit hard To pinpoint, but then when we layer in the supply chain challenges and deal with schools and Local governments and smaller sized governments and municipalities who may not be as tech savvy as the Fortune 50 or 500. Can you talk a little bit about the visibility? Are they starting to place orders or starting to say, hey, if this It's approved and if we get this amount, here's what I want because it seems like with the long lead times, if they say they want to implement something in the Some are for education. We're getting to a point of window where you won't be able to procure the item.

Speaker 7

So any Talk or color on the discussions you're having around these topics?

Speaker 2

Yes. Good morning, Jim. There's a Packed in there, seamless across many different segments. So let me start with education, which is I think where you were going there. Yes, it's complicated, right.

Speaker 2

We've got the supply ecosystem that has got some impacts To it right now, so we're trying to manage through all of that. Here's what I'd say about K-twelve. You know we have a lot of experience understanding Funding, stimulus funding and other types of funding for educational institutions. So we sit side by side with our customers to make sure they understand Both where the dollars can be used for what products in particular or for what outcomes because sometimes outcome based And what the deadlines are and what those deadlines mean. Do you have to have the product in house?

Speaker 2

Do you have to have the product order placed? So there's a lot of navigating that's going on, and I feel highly confident that the team is doing a phenomenal job with our customers And that our K-twelve customers are not going to lose out on any funding. That's really clear. In the State and local space where we've got stimulus funding coming down, it's been a bit complicated because The funding packages, there were 3 of them as we've talked about before. The CARES Act package, for example, had a deadline at the end of this coming year.

Speaker 2

That was March of last year. The end of last year, it was there was nothing for states and locals in the stimulus package. And then this March, there was a hefty amount. But as we all know, when it comes to state and local, it's about budget cycles and it's about funding deadlines. So the spending that's taken place in 2021 is primarily from the CARES package with a deadline this year.

Speaker 2

What we're seeing now is, I don't want to call it slowing down, but I'm going to say a moderating in planning in State and local governments now have this funding where they don't have to spend it till the end of 2024. And so they are now looking at a multiyear approach, pretty unusual this multiyear But that's what they're doing. And we're helping them with it. There's a lot of complexity. It's very solutions based in my view in terms of what customers are trying to do.

Speaker 2

We don't really expect that to meaningfully come to fruition until early next year. But there's just a lot of tentacles and they're all Based on the stimulus package and on the actual market that we're talking to. But again, I would just reiterate This is something we do. It's frankly a core capability like working with partners. It's a core capability to understand in the federal, state and local education, healthcare spaces Where the funding is, what it means, what the deadlines are and how to use it and then to basically walk our customers through it.

Speaker 2

So I know that was a long answer. I hope it was helpful.

Speaker 7

That was exactly what I was looking for. Thank you so much.

Speaker 2

You're welcome.

Operator

The next question on the line comes from Katie Huberty at Morgan Stanley. Katie, your line is open.

Speaker 6

Yes. Thank you. Good morning. Just given the backlog commentary, can you talk about the gap between net Sales growth and orders or writing growth in 3Q and maybe how that compared to the 2nd quarter? And then I have a follow-up.

Speaker 3

Hi, Katie. Good morning. This is Al. Look, we won't quote the exact delta there, but I think it's safe To say that we continue to see strong written demand and that continues to show up and that's part of what bolsters our confidence. Certainly Shipments have lagged that.

Speaker 3

And again, I'll go back to my comments. I would say the delta there, mix looks like the second quarter did. And that would be consistent across products with the one caveat that, as we mentioned, solutions was a little bit stronger, a little Worse than it was in Q2.

Speaker 6

Okay. Thank you. And then maybe a follow-up for you. The Ending cash balance of $245,000,000 is lower than your typical buffer. Can you just talk about The drivers of cash outflow in the quarter and the financing needs near term to rebuild that buffer and Also to fund the Sirius acquisition?

Speaker 6

Thank you.

Speaker 3

Sure. So first on the Sirius acquisition, I think we mentioned on the previous call, We have committed financing in place, so we expect that we are going to finance the acquisition fully. From a Cash balance perspective, I think, Katie, if you compare it to where we were at the end of the year and maybe a year ago, certainly, we look lower. And a couple of things there. 1, we had a debt refinancing or financing, I should say, in 2021.

Speaker 3

So that bolstered that cash position. And then notably for 2021, we've used a fair amount of cash for the existing acquisitions we've Add as well as share repurchases. So I think the combination of where we sit from a cash balance and a revolver availability perspective, We feel quite good with where we stand, and then we feel quite good about our ability to create and generate free cash flow in 2022.

Operator

The next question comes from Matthew Sheerin at Stifel. Matthew, please go ahead.

Speaker 8

Yes, thanks and good morning. Chris, I wanted to ask about the strong cloud growth that you're seeing, particularly infrastructure as a service. And I'm wondering If some of that is positively impacted by the fact that customers maybe are moving or accelerating toward the cloud because of the product and infrastructure, On prem product shortages, are you seeing any of that in terms of customers saying, yes, maybe now is the time to move because we don't want to wait?

Speaker 2

Yes, Matt, it's a great question. We've been asking ourselves that as well and talking to customers about it, given the Pervasive and persistent nature of the supply chain and the fact that it continues to extend, I would say I would characterize it this way. Customers are rethinking and considering accelerating some movement to cloud and potentially re architecting Some of their solutions in more in a public cloud like environment versus, for example, on prem cloud. But what I wouldn't characterize it as is just a wholesale shift. Customers are still very strategic in how they think about both flexibility, obviously, and scalability, but also cost.

Speaker 2

And if you combine all of those things Together, they're still looking for the absolute best solution and therefore not just doing the wholesale shift. So I guess the answer would be, We are having those conversations. We are seeing some decisions made around accelerating to public cloud, but I wouldn't say that It's with and wholesale, if that helps.

Speaker 8

Got it. Okay. Thanks for that. And then on the PC demand that you're seeing, which sounds like that continues to be strong, you just talked about Shortages, particularly on the commercial side. What are your thoughts there in terms of the PC cycle?

Speaker 8

And are you seeing any early Signs of adoption of Win10 and do you see that as a driver going forward?

Speaker 2

Well, look, I wouldn't say that I've seen necessarily early adoption just yet, but as is always the case, there will be early adopters and there will be later adopters and they will be our So we'll help them through that. You all are familiar with the end of life for Win 10 and the timing for Win 11 around the 2024 2025 time period. So it will be a driver. It's not been a driver yet. I think PCs generally, you've heard me say, I continue to believe in PCs.

Speaker 2

I think that we have more PC density now. We are going to see shorter Replacement cycles of PCs for a couple of reasons, wear and tear, but also the technology improves at a faster pace And client devices are more and more important to the productivity of the people using them. You also have use cases that are expanding And the hybrid work model obviously is really driving PC usage. So we feel good about PC growth And Win 11 will certainly be a driver of that at some point over probably a couple of year period.

Speaker 8

Okay. Thanks a lot.

Operator

The next question comes from Samik Chatterjee at JPMorgan. Samik, your line is open.

Speaker 9

Great. Thank you. Chris, I just wanted to start off and go back to your comments. You mentioned this a couple of times now about monitoring the SMB segment And for economic activity, just given the increase in cases, etcetera. And you mentioned you haven't Seen any sizable impact yet, but is there something more on a regional basis when you look at across the U.

Speaker 9

S. Or maybe in some international markets on a more On a specific basis, you're seeing any changes in activity from your customers where maybe there is a stronger correlation to how cases are trending? Any insights on that? And I have a follow-up please.

Speaker 2

Yes, sure. Here's what I would say about the Current environment, we're watching it as is everybody and we're cautious about it and we put it in the category of Wildcard because I don't know that anybody knows what's going to happen, but we all also know there's been more momentum around Vaccination availability at lower ages, antivirals, the rate of vaccine, particularly when we think of our locations, the UK and Canada, the U. S. Is A little lower, but that's obviously dispersed geographically. All of that said, I'll tell you the sentiments of our customers is, we're moving forward.

Speaker 2

We're thinking and investing for getting back to kind of a robust environment and economy, and we're thinking forward. So I think a little bit unlike going into last year's winter months where there the cautiousness, I would say, was on a really high level. We're just feeling We're saying we got to invest. And so if we're not going to be going back to work until early next year or work from anywhere, We've got to invest. And that is, I would say, ubiquitous across the markets that we serve.

Speaker 2

So, In 2020, we talked about the unevenness and the impacts of certain geos, certain industries, etcetera. I just feel like the tone has really changed to this platform of we got to get back, we got to get back, we got to build for the future. So that's what we're seeing.

Speaker 9

A quick follow-up. I think you're clearly indicating that the operating margin in 3Q doesn't repeat in 4Q and you have incremental spend Coming through, how much of that is, as you mentioned, some of the catch up on SG and A versus what you outlined as this is the right time to spend? I'm just trying to think of what portion of that incremental spend should I be annualizing for the next year? Thank you.

Speaker 3

Sure. Thanks, Mick. So look, in Q4, we'll give more guidance with respect to what that looks like for 2022 and reflective of Our combination with Sirius, right? So, but let me just focus my comments on Q4. I would say, the non GAAP SG and A spend is just an unevenness or a timing effect of that spend in Q3 that probably lagged a bit in Q4 we'd expect that to pick Scott, there's probably a component there that as we think about the Sirius combination, we're thinking more broadly about what that combination looks like And how does that ultimately impact our investment spend?

Speaker 3

That being said, we're going to continue forward in Q4 With the efforts that we've been focused on, notably our own digital transformation, as well as to continue invest in the high growth Solutions and Services areas.

Operator

The final question comes from Keith Housum of Northcoast Research. Keith, your line is open.

Speaker 8

Thank you. Good morning, guys. Hey, Chris, I'm just kind of thinking here through the investments that companies are making in technology and Based on the supply chain shortages that they are, is there a willingness of your customers to move to another solution set or hardware solution set That can be fulfilled by the end of the year because the thinking is a lot of these companies have IT budgets they want to spend anyways and there's always a project wish that they want to do. Are people willing to Convert to other projects in order to spend that money or are they holding on to the products are available?

Speaker 2

Yes. Good morning. It's a great question. And I tell you, it Really depends frequently on the customer set. So small businesses have always been more nimble and less kind of tied to And we have seen success there.

Speaker 2

And I think in my prepared remarks, we indicated that supply chain, while they were impacted, supply chain constraints Didn't impact them as much as in corporate because we could help them find alternative. When you get to larger organizations, It becomes harder because those organizations have specific requirements and they really don't want to shift It creates more work, frankly, within the organization. What we've seen there, and I think Al mentioned it is, we have worked with our customers to get in line earlier. So, a lot of customers are have been working very hard to get their orders in earlier than they typically would in hopes that they will Get the product by year end. All that said, anywhere that there are, I'll say mission less than mission critical Technologies that we can help them find alternative, whether it's a brand, whether it is the cloud, whether Something else that they can be using, you can bet we're doing it.

Speaker 2

But you're absolutely right, there's going to be a lot of pressure as we go into the back end of the year to get that product out. And we expect we'll be able to help them do it.

Speaker 8

Got you. And then as a follow-up here, in terms of the shortages that you're experiencing, are you I mean that those shortages over this quarter and guess over the previous quarters, are they consistent with specific product set or solution sets? Or is it really kind of like a game of whack a mole where It gets fixed in one area, but a new product shortage comes up in another area.

Speaker 2

Well, here's I said this before, you've got this kind of supply Chain Ecosystem. And so you've got you have capacity, you got components, you got logistics, you got labor, you got all of this impacting The ability to get product. And it has kind of shifted through the course of the year. So we've had on the transactional side notebook And video and monitors and things like that, that have been constrained. Chromebooks were very much constrained, okay?

Speaker 2

Chromebooks have started to ease up a little. That's planning a good 13 months ago to get to that point by the OEM. What we saw this year in this past Order and a little before was solutions product now being more constrained and we mentioned NetComm in particular and storage in So that is a problem when things are moving around, particularly when what customers need are comprehensive Holistic Solutions, not just KeySmart. So, whack a mole is a good word for it or a good term for it.

Speaker 8

Great. Thank you.

Operator

We have no further questions registered on the line. So I'll hand the call back to Chris Leahy to conclude the call.

Speaker 2

Bethany, thank you. I want to recognize the incredible dedication of our coworkers around the globe and their extraordinary commitment to serving Our partners and all of CW stakeholders. And thank you to our customers for the privilege and opportunity to serve you. And to our investors and analysts participating in this call, we appreciate you and your continued interest in and support of CDW, and we look forward to talking with you again Next quarter. Have a good day.

Operator

This concludes today's conference call. Thank you for joining. You may now disconnect your line.

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