CDW Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 9, 2022

There are 15 speakers on the call.

Operator

Hello, and welcome to today's CDW 4th Quarter 2021 Earnings Call. My name is Bailey, and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to Kevin Director of Investor Relations. Kevin, please go ahead.

Speaker 1

Thank you, Bailey. Good morning, everyone. Joining me today to review our Q4 and full year results are Chris Leahy, our President and Chief Executive Officer and Al Morales, our Chief Financial Officer. Our Q4 earnings release was distributed this morning and is available on our website, investor. Cdw.com, along with supplemental slides that can be used to follow along during the call.

Speaker 1

I'd like to remind you that certain comments made in this presentation are considered forward looking statements under the Private Securities Reform Act of 1995. 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 Company's other filings with SEC. CDW assumes no obligation to update the information presented during this webcast. Our presentation also includes certain non GAAP financial measures, including non GAAP operating income, non GAAP operating income margin, non GAAP Net income and non GAAP earnings per share.

Speaker 1

All non GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You'll find reconciliation charts in the slides for today's webcast and in our earnings release and Form 8 ks we furnished to the SEC today. Please note that our financial results presented include the results from our acquisition of Sirius Computer Solutions, which closed on December 1, 2021. References to growth rates on dollar amount changes in our remarks today are versus the comparable period in 2020, unless otherwise indicated. Also note there was one extra selling day in the Q4 2021 compared to the Q4 of 2020, and net sales growth rates are provided as an average daily sales.

Speaker 1

References to growth rates for hardware, software and services today represent U. S. Net sales only and include Sirius. I do not include results from CDW UK or Canada. References to growth rates for specific products and solutions, including cloud, Security today represent U.

Speaker 1

S. Net sales only and excludes Sirius. The historic Combined information of CDW and Sirius discussed herein is for illustrative purposes, Omry, and is not necessarily indicative of results that would have been achieved had the acquisition occurred at the beginning of the period presented. A replay of the webcast will be posted to our website later today. I also want to remind you that this 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. Thank you for joining us today. I'll begin our call with an overview of our full year and Q4 performance and share some thoughts on our strategic progress and expectations for 2022. Then I'll hand the call over to Al, who will take you through a more detailed review of the financials as well as our capital allocation strategy and outlook.

Speaker 2

We'll move quickly through our prepared remarks to ensure we have plenty of times for questions. 2021 was a year of both strong financial performance and strategic progress. The team delivered a $21,000,000,000 in net sales with excellent profitability. Margins improved and our 13% increase in sales Translated to a 17% increase in both non GAAP operating income and non GAAP net income. Share repurchases amplified Growth and non GAAP net income per share increased 21% to $7.97 These exceptional results demonstrate the power of our Business model, a model that has enabled us to deliver industry leading performance year after year, including through the past 2 years of a global health crisis, Unprecedented supply interruptions and evolving customer priorities.

Speaker 2

You see the power of our model and the performance across our balanced Portfolio of customer end markets over the past 2 years. As you know, we have 5 U. S. Sales channels: corporate, small business, Healthcare, 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.

Speaker 2

All of these operations represent meaningful businesses in their own right. Often different factors impact customer end markets, sometimes macro and sometimes industry specific. This was the case over the past 2 years as customers across Our diverse end markets experienced the impact of the pandemic very differently. In 2020, public customer spend fueled by education and government offset Commercial and international declines and net sales increased 2%. In 2021, our 13% sales increase was powered By strong commercial and international customer spend, which more than offset flat public sales.

Speaker 2

The past 2 years also highlighted the Power of our business model and our product and solutions performance. With more than 100,000 products and solutions from over 1,000 leading and emerging brands, we are well positioned To meet our customers' needs, whether transactional or highly complex. In 2020, customers prioritized remote enablement and continuity. Transactions increased driven by the ability to deliver endpoint solutions to meet unprecedented work from home and learn from home needs. At the same time, solutions declined as customers focused their spend on addressing critical endpoint projects.

Speaker 2

In 2021, while work from home and learn from home Remains key priorities, customers reprioritized investments to enable the future and add resiliency to their operations To strengthen and secure infrastructure, platforms and endpoints, both transactions and solutions increased. Our ability to help customers address their priorities during 2 years of unprecedented supply challenges is another example of the power of our business model. We leveraged our competitive advantages, our distribution centers, our extensive logistics capabilities, deep vendor partner relationships and Strong balance sheet and liquidity position to navigate the environment. And our sellers and technical coworkers helped customers find alternative solutions from our deep portfolio whenever possible. In 2020, we were able to deliver more than 11,000,000 client devices By meaningful supply shortages in endpoint devices, in 2021, while facing extended lead times for transactions and solutions, we delivered solid growth In both categories.

Speaker 2

As you can see, our resilient business model had a significant impact on our ability to profitably grow during an unprecedented period. Looking at performance over the past 2 years, net sales are up 15% since 2019 and our annual net Sales compound growth rate was 7.5%. Profitability improved at a faster rate with compound annual growth rates for gross profit And non GAAP operating income of 8% 10%, respectively. Of course, our business model is not the only component of our Our success would not be possible without the dedication of our talented team of 14,000 coworkers, Including the more than 2,600 new serious coworkers who joined us in December. During the past 2 years, time and again, CDW coworkers demonstrated why they are so vital to our ability to successfully deliver industry leading performance year after year.

Speaker 2

Let's take a closer look at what the teams delivered for the Q4. For the quarter, net sales were $5,500,000,000 including $197,000,000 of results From Sirius, which closed on December 1. On an average daily sales and constant currency basis, net sales increased 9.6%. Non GAAP net income was $285,000,000 in the quarter, up 8.2% and non GAAP net income per share was $2.08 up 14% from last year. The teams leverage the combination of our broad and deep portfolio, extensive technical knowledge and unique distribution capabilities to advise, design and orchestrate full outcomes to address customers' priorities across all of our customer end markets, Outcomes that deliver 5 key organizational benefits: innovation, lower cost, agility, Risk mitigation and enhanced experiences for customers and coworkers.

Speaker 2

Let's take a look. Corporate delivered a 30 3% increase with excellent performance across both transactions and solutions. Digital transformation, agility and security remained top priorities. Endpoint solutions remained a key focus area and the team delivered another quarter of strong double digit growth in client devices. Small Business delivered another exceptional quarter, up 31%, with strong growth across both transactions and solutions.

Speaker 2

The team continued to help customers with remote enablement. Security performance was up mid teens as the team helped customers address risk mitigation needs, delivering penetration testing and incident response as well as backup and recovery solutions.

Speaker 3

On the public side

Speaker 2

of the business, Excellent performance in both healthcare and higher ed was not enough to offset expected declines in government in K-twelve and total public net sales declined 13%. Healthcare's 20% increase continued to reflect return to projects that had been put on hold. Security remained a top priority. Cloud adoption was strong in part driven by efficiency needs as customers dealt with COVID-nineteen and acute care. The expected decline in federal reflected the lumpy nature of government contracts as the teams face 2 meaningful overlaps in the Q4 of 2020, The wind down of our device as a service solution for the U.

Speaker 2

S. Census Bureau and a large client device program. Results also reflected the impact of Slowness in contracting practices we shared last quarter. We are beginning to see green shoots and there is no change to our expectation that trends will reverse Later in 2022. State and local posted a high single digit decline.

Speaker 2

The team delivered a high single digit increase in solutions driven by helping customers upgrade security. This could not overcome the team's 2020 strong 4th quarter performance when they helped customers take advantage of the year end Use it or lose it Care Funds. As we've shared last quarter, we continue to help our customers work through the planning required to evaluate multiple funding opportunities And multiyear phasing and expect funded projects to begin implementation as we move through 2022. Higher Ed's strong double digit performance was offset by the expected decline in K-twelve and overall education sales increased 9% On top of 2020's 4th quarter remarkable 142% growth. Higher ed growth reflected our ability to meet growing demand for student Success programs.

Speaker 2

These programs use technology to give institutions an edge, including comprehensive endpoint solutions, improved security, Campus connectivity as well as enhancing the dorm room experience. The K-twelve team delivered excellent net sales performance against very tough unseasonal 4th quarter 2022 compares. Consistent with expectations we've previously shared, net sales declined. Although down year over year, 4th quarter client Advice sales were more than double a typical pre COVID Q4. Both the UK and Canada delivered high teens local market growth.

Speaker 2

Combined in our other results, average daily sales for these two markets increased 20% in U. S. Dollars. Customer priorities in both markets were similar to those in

Speaker 3

the U. S. Our

Speaker 2

success addressing customer priorities is evident in our 4th quarter portfolio performance where we delivered balanced growth across transactions and solutions, both increasing mid On the transaction side, client devices increased mid single digits. While client device supply improved in some areas and we were able to help more customers adopt alternative providers, Overall supply remained constrained and we exited the year with an elevated backlog. Tight supply continued to impact prices, which our teams were generally able to pass along. Video and audio delivered another impressive quarter. Solutions growth was driven by strong software and servers performance.

Speaker 2

Writings remain strong as customers turn to CDW for expertise across the full Technology solutions stack and entire lifecycle. Lead times extended in several key solutions areas, notably NetComm, Enterprise Storage and servers. Remaining solutions orders increased at year end. Once again, the team delivered strong double digit growth in cloud driven by robust growth in security, Infrastructure as a Service and Productivity. Security cloud growth was driven by the success of our comprehensive strategy as a security assessment, data Detection and threat mitigation with many solutions delivered via cloud and software.

Speaker 2

Overall security spend in the quarter increased mid teens. Our ability to meet customer needs in the quarter across the IT continuum translated into a mid single digit U. S. Hardware sales, 20% digit increase in software and more than 50% increase in services. Services growth reflected the ongoing success of our strategy and was balanced across professional and managed services.

Speaker 2

Recent acquisitions are paying off contributing meaningfully to this quarter's growth.

Speaker 4

So as you can see,

Speaker 2

our 4th quarter delivered a strong finish to year of financial performance. 2021 was also a year of excellent strategic progress against our 3 part strategy for growth, which is to 1st acquire new customers and capture share 2nd, enhance our solutions capabilities and 3rd, Our services capabilities. In 2021, we made excellent progress against all three of these pillars. Acquisitions made during the year, VocalPoint, Amplified IT and Sirius, as well as integration progress Our 2020 acquisitions of IGNW and Aptris furthered our strategy to bolster our services capability. Deep services capabilities are critical to our ability to deliver full organizational outcomes across the full stack in the entire lifecycle.

Speaker 2

This is an important source of differentiation in the marketplace. Let me share a quick example of how this is showing up in our performance. Our acquisition of Amplified IT in August deepened our already strong offering in the education space, particularly in the Google ecosystem, which is the largest Education platform in the U. S. Amplified IT's expertise as a systems integrator enables us to facilitate end to end solutions for education customers.

Speaker 2

This leads to greater customer engagement and stickiness and provides insights into opportunities to further help our customers across During the Q4, the CDW Amplified for Education team worked closely with Google and Internet to make it easier for institutions to adopt Google Workspace for Education Plus. In addition to ease of Procurement with the Amplified Eye Team on board, we were able to deliver additional value to customers through much needed deep technical expertise and services. Awards in the Q4 was more than $11,000,000 in total contract value over the next several years. This is a great example of how we leverage our powerful business model to quickly deliver customer benefits from newly acquired capabilities. It is also a great example of how our acquisitions Enhance our ability to deliver full outcomes across the full stack in the entire IT lifecycle.

Speaker 2

Internal investments made in 2021 also enhanced our Our ability to deliver on this strategy. These included digital investments and proprietary portals to drive customer and seller productivity. We also added 1,000 new coworkers in addition to the nearly 3,000 coworkers who joined us via acquisition. Just over half of all new coworkers in 2021 are in technical roles. Whether acquired or homegrown, investments in our 3 part Growth strategy are integral to our ability to consistently and profitably outgrow the U.

Speaker 2

S. IT market. That brings me to our thoughts about 2022. In 2022, we will continue to execute against our 3 part strategy with a focus On the recent integrations, a top priority in this area is the disciplined integration of Sirius. Work is moving apace led by dedicated seasoned executive.

Speaker 2

The team's mission is just as it's been with all of our acquisitions to ensure our customers are able to quickly reap the benefits of our combination, and we are making excellent and swift progress in that area. For example, I'm pleased to share that our new series co workers ahead of CDW email address Our outlook is built off a combined 2021 CDW and Sirius net sales figure of $23,000,000,000 which includes $2,200,000,000 of full year Sirius results. Top line performance for Sirius was relatively flat compared to 2020 As they overcame a number of large projects and the impact of supply interruptions, managed services, an area of focus for Sirius delivered Double digit growth. In 2022, as Sirius is integrated into the fabric of CDW, we expect its operations to grow in line with total CDW. Given current market dynamics, our 2022 baseline outlook calls for U.

Speaker 2

S. IT market growth of 3.5 percent plus 200 to 300 basis points in constant currency of CDW outperformance. This outlook reflects our view on 3 key drivers. First, we expect a moderation in U. S.

Speaker 2

GDP growth. 2nd, we expect the impact of supply on our results in 2022 To remain fairly consistent with its impact at year end 2021. And third, we expect customer priorities in 2022 will increasingly Acquire integrated solutions that leverage our services, cloud and hybrid expertise. Wildcards Main ongoing supply and macro impacts, particularly in small business. Of course, as we always do, we will update you on our thoughts as we move through the year.

Speaker 2

I'm extremely proud of the excellent financial performance and strategic progress we've made during the past 2 years. In 2022, we will continue to do what we do best, leverage our competitive advantages to help our customers address their IT priorities and achieve their strategic objectives and I'll execute the competition. If the pandemic has shown us anything, it is that technology is essential To all sectors of our economy and will play an increasingly important role in the years ahead. That means our role as a trusted strategic partner to our Customers is more important now than ever, and I remain confident that we have the right strategy in place. And with that, let me turn it over to Al, who will share more detail On our financial performance.

Speaker 2

Al?

Speaker 3

Thanks, Chris, and good morning, everyone. I'll start my prepared remarks with more detail on the 4th quarter, Move to capital allocation priorities and finish up with our 2022 outlook. Turning to our Q4 P and L on Slide 8, Consolidated net sales were $5,500,000,000 including 1 month contribution from Sirius of 196.9 percent on an average daily sales basis As we had one extra selling day. On a constant currency average daily sales basis, consolidated net sales were 9.6 Including 3.9 points of contribution from Sirius. Consistent with the last quarter, net sales in channels Most impacted by COVID-nineteen last year, corporate, small business and international continued to rebound, posting strong double digit growth in the quarter And delivering sales above 2019 levels.

Speaker 3

This quarter's growth also benefited from strong double digit performance in healthcare I was tempered by the expected declines in government and education. On the supply side, our overall backlog increased A few $100,000,000 in the quarter, reflecting constraints similar to last year. Backlog remained elevated year over year. We continue to make strategic investments in inventory to support our customers through this constrained supply environment. The team once again Did a great job leveraging CDW's competitive advantages, so the backlog did not increase even more.

Speaker 3

Gross profit for the quarter was $976,000,000 an increase of 10.8% on a reported basis And resulted in a strong gross margin of 17.6%. Contract revenue primarily and I will now turn the call over to our operator to discuss our financial results. This was more than offset by lower product margin and overlapping high margin configurations from the prior year. Sirius' gross profit margin was consistent With their historical performance and was modestly accretive to the overall gross margin for the quarter. Turning to SG and A on Slide 9.

Speaker 3

Non GAAP SG and A increased 9.2%. This reflected the impact of consolidating 1 month of incremental Sirius expenses. Sirius' sales compensation as a percentage of net sales was higher than our core operations given the higher mix of solutions and services revenues. The overall increase also reflected higher performance based compensation, consistent with higher attainment against financial goals And investments in the business, including increased co worker counts. Co worker counts at the end of the quarter were 13,924, up $2,826 from the 3rd quarter and $3,942 over prior year.

Speaker 3

The increase in co worker counts during the quarter We'll have over 2,600 Sirius coworkers and other organic and inorganic coworker investments to support high growth solution areas and our own digital transformation. GAAP operating income was $339,000,000 up 2.1 Thanks, Dan. Non GAAP operating income, which better reflects operating performance, was $425,000,000 up 12.9%. Non GAAP operating income margin was 7.7%. As we shared on last quarter's call, Investments made in the 4th quarter drove an operating margin, which delivered our full year outlook.

Speaker 3

Sirius' non GAAP operating margin was consistent with Your performance was marginally accretive for the quarter. Moving to Slide 10, interest expense was $43,000,000 Up 16.9 percent. The increase reflected the incremental expense on the $2,500,000,000 of notes issued in December to finance the Sirius acquisition. Our GAAP effective tax rate shown on Slide 11 Was 25.1 percent. 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.

Speaker 3

For the quarter, our non GAAP effective tax rate was 24.5%, primarily due to one time tax benefits Recognized in the prior year. As you can see on Slide 13, with 4th quarter weighted average diluted shares outstanding, Our non GAAP net income was $285,000,000

Speaker 5

in the quarter, up 8.2 and I'm pleased to report that we

Speaker 3

have a strong financial performance in the quarter. Non GAAP net income per share was $2.08 up 14% from Turning to full year results on Slides 14 through 19. As Chris mentioned, 2021 performance reflected exceptional execution Against an effective strategy along with the power of our business model and balanced portfolio. Net Sales were $20,800,000,000 an increase of 12.7% on a reported basis and average daily sales basis. On a constant currency average daily sales basis, full year consolidated net sales grew 11.9%, including 110 basis point contribution from Sirius.

Speaker 3

Gross profit was $3,600,000,000 up 11.2% down approximately 30 basis points year over year. In 2021, Software and services accounted for approximately 41% of Total gross profit, up 100 basis points from last year. The increase reflects investment in our services and solution capabilities And a continued shift in the netted down revenues like Software as a Service. Before moving down the rest of the full year P and L, I want to take a moment to put netted down revenues into perspective. Netted down revenues results from software as a service, Software Assurance and Warranty Solutions as well as agent commission fees.

Speaker 3

We are not the primary obligor for these solutions and thus record gross profit as our revenue and why you sometimes hear us refer to these as 100% gross margin items. In the past, we've shared examples of how this accounting treatment has a dampening effect on our absolute net sales dollars, but is neutral to gross profit dollars And thus results in higher gross margins, all else equal. Over the last 5 years, our netted down revenue streams as a Percentage of total gross revenues or customer spend has increased 10 percentage points. The greater mix reflects increased customer spend on fast growing netted down revenue streams like cloud and security. Long term, as we continue to execute on our growth strategy and invest in the capabilities necessary to ensure we are meeting the Evolving needs of our customers, we expect to mix further in the high growth netted down revenue streams.

Speaker 3

This mix dynamics will pressure net sales While remaining neutral to gross profit and expanding gross margins. This, of course, is subject to hardware refresh cycles And other mix components of the business. While much of what I've described is tied in the accounting treatment, it is also a reflection of our success of our strategy to capture share, enhance capabilities and high growth solutions and expand services. Returning to the full year of $17,000,000,000 of 17.1 percent. Net income was 9 $89,000,000 non GAAP net income was $1,100,000,000 of 17.2%.

Speaker 3

Non GAAP net income per share On December 31, cash and cash equivalents were $258,000,000 and net debt was $6,600,000,000 Liquidity remains strong with cash plus revolver availability of approximately $1,200,000,000 I'm 7 days from last year's Q4. In addition to our strategy of holding customer driven stocking positions, increase reflected mixing out of vendors With longer payment cycles and the timing of customer receipts. This was partially offset by the timing of payments at the end of the year. Full year free cash flow was $477,000,000 as shown on Slide 22. This is lighter than last In 2021, our free cash flow was also impacted by increased working capital to support our strong full year growth.

Speaker 3

We also leverage our strong balance sheet and distribution capabilities to make strategic investments in inventory, Support our customers in this unprecedented supply environment. As a result, 2021 free cash flow was below our rule of thumb of 3.75% to 4.25 percent of sales. Timing differences, one time items and noted investments Resulted in asymmetrical free cash flows across 2020 2021. In aggregate, 2020 In 2021, free cash flow is balanced out and equated to 4.3% of net sales, slightly above the high end Our free cash flow rule of thumb. In 2021, we delivered on our capital allocation objectives We deployed more than $1,700,000,000 of cash to shareholders, which included $235,000,000 of dividends and $1,500,000,000 of share repurchases at an average price of approximately $172 per share.

Speaker 3

Turning to 2022 capital allocation priorities on Slide 23. Our objectives remain consistent with what we Shared last quarter. 1st, increase the dividend in line with non GAAP net income. Last November, we increased the dividend 25% $2 annually. To guide future increases, we will continue to target a dividend at approximately 25% Non GAAP net income is to grow in line with earnings.

Speaker 3

2nd, ensure we have the right capital structure. We have a net leverage ratio of 2.5 We ended this year at 3.4 times above our range due to the financing of the Sirius acquisition. We intend to optimize the use of cash flow after paying dividends to focus on to our net leverage range. We continue to expect to achieve this by the end of 2022. As a result of this focus, We'll put a lower priority on our 3rd and 4th capital allocation priorities of M and A and share And so net leverage is in our target range.

Speaker 3

Moving to the outlook for 2020. As Chris mentioned, our outlook is built off the combined 2021 results, which presents Let me walk you through how this looks. And I'm pleased to report that we're seeing in the market now, our baseline outlook assumes U. S. Market growth 3.5%.

Speaker 3

We currently expect combined net sales To grow 200 to 300 basis points faster than the market in constant currency. On a combined basis, CDW's net sales would have been $22,900,000,000 in 2021, including $2,170,000,000 from Sirius. We expect Sirius to grow in line with total CDW. Right now, 2022 feels like a normal demand environment We expect it will reflect a greater mix in the netted down revenues as we overlap strong client device sales. Our baseline outlook assumes that supply does not materially impact net sales beyond what we've been experiencing.

Speaker 3

We would expect it to be at the lower end of our premium range if we mix more into netted down revenue streams than expected And or experienced elevated levels of supply constraints. We would be at the higher end if hardware growth is strong and Moving down the P and L, we expect non GAAP operating income margin to be in the low 8 Kent, we're

Speaker 6

pleased to report that we're in

Speaker 3

the range. Our non GAAP earnings per share would have been $8.49 In 2021 on a full year combined basis compared to the prior year period. We expect non GAAP earnings per share to grow We will now begin the call to call it 9.25% to 50 basis points in constant currency on a combined basis. This equates to approximately 16% to 17% growth in constant currency on a reported basis. As Chris mentioned, the integration work with Sirius is progressing.

Speaker 3

And given the nature of the integrated sales, We will not be breaking out Sirius results going forward. Please remember, we hold ourselves accountable for delivering Our combined financial outlook on an annual constant currency basis. Slide 24 provides our expected net sales split We expect net sales in the first half of the year to be in line with our historic norm of 48% to 49%. Sirius' sales split is slightly higher in the second half than historic CDW. Historically, we see a sequential decline From Q4 to Q1.

Speaker 3

This year on a reported basis, we expect 1st quarter sequential growth in the low single digits, reflecting 3 months of contribution from Sirius versus 1 month in Q4. We expect 1st quarter And currency non GAAP earnings per share growth relative to Q1 2021 to be in the low mid teens, Reflecting seasonality and channel mix. Modeling thoughts for annual depreciation, amortization, interest expense And the non GAAP effective tax rate can also be found on Slide 25. In addition, you can see our long term free cash flow Rule of thumb remains unchanged at 3.75% to 4.25% of net sales, assuming current tax rates. We expect CapEx to run approximately 70 to 75 basis points as a percentage of net sales, reflecting our continued view that now is the time to continue to accelerate investment in our own digital transformation, Enabling us to further fortify our competitive position makes CDW the trusted partner of choice for customers And vendor partners.

Speaker 3

That concludes the financial summary. As we always do, we will provide updated views on the macro environment And our business on future earnings calls. And with that, I'll ask the operator to open it up for questions. And can we please ask each of you to limit your questions to one with a brief follow-up? Thank you.

Operator

Thank you. For Amich. Please go ahead.

Speaker 7

Thanks for taking my question. Good morning, everyone.

Operator

I guess my first question really

Speaker 7

is around this EPS guide for 'twenty two. I think you talked about 16%, 17% EPS growth for 'twenty two. Can you just talk about What are you really assuming out of the Sirius acquisition in that EPS number? And really the 2 parts I'd love to kind of get some clarity on is, A, do you have any cost synergies from the transactions embedded in that number? And then secondly, Chris, I'd love to understand, How do you think about the sales synergies narrative from Cirrus as we go forward?

Speaker 3

Good morning, Amit. This is Al. So just a couple of things to note. So I think we've given you Some component parts to get a sense for EPS. So number 1, obviously, our reported EPS for 2021 was 7 That includes 1 month of contribution for Sirius.

Speaker 3

We've also provided you what would be a combined CDW and Sirius results for 2021 as if they were together for the quarter, it was $0.49 So The way you should think about it is if you walk forward from that 8.49% to our outlook there of 9.25 And what they contribute. The other data point I would just From a top line perspective, we'd expect that Sirius same rate as we provided in that To your question on synergies, So here's what I would say. Look, we're very focused on the integration of the combined entities, and we expect Through that, we're going to find value in terms of synergies on the revenue front. We're certainly looking hard at procurement efficiencies, systems consolidations, those components, and we expect we're going to get value. But Amit, I would just mention that it's critically important as we talk about our strategy and I would say as it pertains to synergies, Reinvest.

Speaker 3

And so while we expect we're going to see value, we expect that a lot of those the values we get from the synergy that you reinvested in

Speaker 7

Perfect. And then, as I think about the balance between transactional versus solution, How do you think that stacks up in calendar 12 months at least, Q22? Or how do you think about the mix and then supply environment?

Speaker 3

Sure, Amit. This is Al. Look, I would say comments on the Supply environment, Q4 looked very similar to the prior quarter's performance. Our backlog increased with those previous quarters, call it, of backlog increase. Look, there are some puts and takes in terms of what supply chain looked like in Q4, and I would say probably A bit more challenge on the solution side of the business.

Speaker 3

And I think that's natural As these efforts forward into 2022, we don't really see any meaningful I would say as we hear and observe from a partner, Maybe there's silver lining there that some of the transparency has improved, so there's a better line of Consistent similar outlook with respect to

Speaker 5

Welcome. Thank you.

Operator

Next question comes from Adam Tindle. Please go ahead.

Speaker 8

I just wanted to start on 2022 guidance and the revenue build up implies around 6% growth for the full year, but it Looks like you're going to be starting at about half that level based on the Q1 guidance. And as we think about compares getting tougher as Along the device ecosystem tailwinds are going to last as the year progresses, maybe you can double click on those fears and why you built in Acceleration in year over year growth as the year progresses to start with. Thank you.

Speaker 3

Sure. Thanks, Adam. Yes, I think you hit a lot of the right points. So look, on the full year, we're confident in our growth expectations. There certainly is a timing and effect and there are a few puts and takes in that regard.

Speaker 3

So number 1, in terms of sequentially from Q4 to Q1, we've got the positive that we'll have 3 months of contribution from Sirius. So that certainly helps from a top line perspective. With Q1, so that has a bit of an offsetting effect. So Kind of our 48, 52 split in terms of season. There's the wildcards.

Speaker 3

And there's wildcards of product throughput are we And will it be more hardware focused versus services and solutions? And then I would And that will certainly change the shape and direction of timing by quarter. You onboarded over I have 2,500 employees from Sirius and

Speaker 8

I just had a question on integration, Chris. You talk about the CDW culture, how it permeates and customer facing co Workers' compensation metrics are generally aligned with key metrics like gross profit dollar growth and returns on capital. As you think about the Sirius employees that you're taking on, maybe you can touch on their comp metrics and any potential plan changes to that. And now if you could touch on the systems integration piece of this, that would be helpful. Thank you.

Speaker 2

Good morning, Adam. Sure, I'd love to. Integration It's going really quite well and it's disciplined as you know, but we also understand moving with the appropriate amount of speed To make sure that our customers are benefiting from the combined organizations is critically important. You also know the lenses we look through when we potential acquisitions and cultures right up there on the list. This is so important to us.

Speaker 2

And the Sirius coworkers, now CDW coworkers are fully aligned with our culture, customer first, Coworker First and Collaborative, I would say. And we're already seeing benefits of us coming together, winning deals together, Going to meet customers together. In terms of the comp schemes, this is what I would tell you, Adam. They are similarly performance Based with similar metrics. From an integration perspective, we are taking the 2022 year Very methodically, because we of course want to get compensation right, but from a cost and incentive lens, very similar to CDW And again, the team is getting referrals across to each other and it's I'm really pleased with how it's going.

Speaker 3

This is Al. I just add a couple of things. So number 1,

Speaker 2

Just from

Speaker 3

a compensation perspective, Chris hit the key points there in terms of alignment. Just keep in mind because their business As a higher proportion of services solutions, That variable fixed component of the business looks a little different. They have a higher cost to serve with Their technical staff and so immediately, we'll see that over time as we integrate. Question on systems consolidation down the foundation of kind of the initial evaluation of systems. And I think we're pleased to see that There's really strong infrastructure from a Sirius perspective.

Speaker 3

And so we're really lining up for an approach of best in breed. From a systems perspective, we think there's going to be opportunities to take on some of the technology tools they have as well as vice versa. So we'll share more as we have that, but we're making good progress on that front.

Speaker 8

Very helpful. Thanks and congrats on the results.

Speaker 9

Thanks, Adam.

Operator

Thank you, Adam. Our next question comes from Matthew Sheerin from Stifel. Matthew, please go ahead.

Speaker 10

Yes. Thank you and good morning. Chris, I was hoping you could expand a little bit on your outlook And I'll

Speaker 6

now turn the call over to the

Speaker 10

operator for the year. In terms of end market, What should we be thinking about on the commercial side of the business, which has been accelerating versus the public sector, which you talked about tough and I'm

Speaker 5

going to take a look at the corporate and small We have

Speaker 2

a very strong positive signs of recovery and solid growth, but At a decelerated rate from 2021, we talked about education in the unseasonable on seasonality there. The one thing I would say about The emergency connectivity funds goes through the middle of the summer. So the One would expect some nice uplift there, but then growth will be a little muted for the rest of the year. Doing great work in Higher Ed and expect to continue to see solid growth throughout 2 years. So solid growth there.

Speaker 2

Government, we are not changing our

Speaker 6

We're going

Speaker 3

to see a little

Speaker 2

bit more into the state and local, but certainly going to see a return to growth in government in our view. And then international, that will be continue to be solid again if but at a decelerated rate very similar to what I said about the Commercial space. Now, of course, the key wildcards are supply, and that obviously can be a plus or a minus. And then the macro environment You know and what we see happen both with the virus, but equally inflation, employment and all of that. But right now, we feel look, we feel like there's very good momentum going into the year.

Speaker 2

There's strong demand and we're feeling very positive about where we're positioned to meet that demand.

Speaker 10

Okay, great. That's very helpful. And just regarding your commentary just about the product And component constraints, we're hearing from other resellers that some customers are moving We're accelerating the move toward our off prem cloud based, computing storage, etcetera, because of those constraints. Are you

Speaker 2

Conversation, seeing acceleration to the cloud, but We've said this before, our clients are being very thoughtful about the strategy and what Technology best serves their organizational needs, whether it is agility, whether it is And the great news is with the breadth of our expertise, our customers are really appreciative of the marketplace. But they're not they're making the decisions, I would say, with the right amount of discipline, and not just wholesale lift and ship because they can't get the product. They are being patient, they are being

Speaker 6

patient, they are being patient, they are being patient, they are being patient, they are being patient, they are being patient, they are being patient, they are being patient, they are being patient, they are being patient, they are being patient, they are

Speaker 3

being patient, they are

Speaker 2

being patient, they are being patient, they are Thoughtful as they go and on prem is also a

Speaker 5

significant on prem this year.

Speaker 2

As customers return to the office and infrastructure refresh continues

Speaker 10

Okay. Thanks very much.

Operator

Thank you, Matthew. The next The next question comes from Rupu Bhattacharya from Bank of America. Please go ahead.

Speaker 4

Hi. Good morning. Thank you for taking my questions. I wanted to ask a couple of more questions on the revenue growth guide for both the fiscal 2022 as well as for the Q1. Al,

Speaker 2

is there

Speaker 4

a way to quantify What you've baked in, in terms of headwind from supply shortages in the full year guide, so either on a dollar basis or on a year over Your growth headwind basis and are you assuming that PC demand sustained throughout the full year?

Speaker 3

Let me start with that and see and Chris may have something to add there. So we are assuming no change in the supply environment relative to what we experienced in 2021. So Just recall, if you look back the last three quarters, we've quoted that our backlog has increased several $100,000,000 through 2021. Written demand continue to be extremely strong. So if you look at our actual Printed results, there are times we look at it and say you can't really see the effect of the significant backlog.

Speaker 3

So I think our expectation would be that supply chain will continue to work as it has. And I think you may have some pluses and minuses through that in terms of solutions versus transactions and by product. But lo and behold, I think that Supply and Shame and Assumption. Can you give me

Speaker 4

your thoughts on how that sustains throughout the year?

Speaker 2

Yes, Ruplu, I'll take Good morning. Yes, on PC demand, look, I think we will see Q1 is It's going to be a tough quarter because of the overlaps for sure. And as we move through the year, We expect to continue to see corporate, commercial, small business, international continued strength there, Provided that the recovery that we're seeing continues and provided the macro environment continues, when you think about the puts and Takes across 2022, supply can be a plus or minus. I mentioned the emergency Connectivity funds for K-twelve, that will be a plus. Macro can be a plus or a minus.

Speaker 2

But generally speaking, here's what I'd say about PCs and it's consistent with our Your commentary of the past, we really do see client devices as a tool for employees, as a for people generally and expectations of using them for productivity have increased And the demand for client devices for remote and then as people frankly come back to the office and are working in the office and remote also add demand to the market. The other thing we've talked about is technology cycles and technology innovation and upgrades happening more quickly. And when you think about remote And virtual, think about breakage. And so you've got a couple of pressure points putting cycle times. We continue to see endpoint devices And new use cases in the digital transformation.

Speaker 2

So I guess think about PCs this year as still solid performance, Moderating growth, especially compared to last year. And by the time we get to the end of the year, when you look at where we are And you think about the refresh opportunities from 2017 2018, those are going to be opening up and then we've got Win 10 end of life coming. So We people are buying PCs. We are in a very good position to make sure that we get our fair share of inventory to supply them. And while we see moderating growth, we don't see we just see it as a positive contribution to our overall performance.

Speaker 4

Okay. Thanks for the details there, Chris. Can I just ask a follow-up on the Q1 revenue guide? I think you're guiding low single digit year on year growth. I mean, to me, it seems a little bit lower than normal seasonality on a quarter on quarter And that's with the fact that you have the Sirius acquisition layered in as well for 3 months.

Speaker 4

So Al, can you just how much of that would you say is because you have more netted down items, which are impacting the sales versus other year on year headwinds. So any way to quantify that sequential decline in revenues on a daily basis Between 4Q and 1Q.

Speaker 3

Sure, Rupul, let me address it. So first, just on a year over year basis, The growth is not muted. It's in the teens in terms of growth. I think just on the comment on The sequential is the one obviously coming off of a very strong Q4, but The comps for education much more there and so that mutes the impact. You get a bit of a kind of contra going the other way with again Serious, but there are some of the puts and takes.

Speaker 3

If you just focus on that year over

Speaker 4

Okay.

Speaker 5

Thank you. I'm sorry.

Speaker 2

It's Chris here. I would just add that as we think about 2022 And 2020 1 generally, I think we would call 2022 a more We had the Q1 and client demand. And we've said that and we are our strategy is around building our services and cloud capabilities. And we do We expect that additional services and cloud capabilities, which net down, Okay.

Speaker 4

That makes sense. Congrats on the strong execution in

Speaker 5

the quarter. Thank you.

Speaker 2

Thank you.

Speaker 3

Thank you

Operator

for your question. The next question comes from Eric Woodring from Morgan Stanley. Eric, please go ahead.

Speaker 11

Hey, good morning, everyone. Congrats on the quarter. Nice speaking with you guys. Just given your commentary around supply chain headwind,

Speaker 10

Just curious

Speaker 11

to get your take on how you think inventory will trend in 2022 and if you need to continue kind of growing your strategic pre purchases or if that I can become a tailwind for you in 2022. And then I have a follow-up.

Speaker 3

Good morning. Eric, this is Al. So first, again, just backdrop. Our expectation is that As we sit here now, supply chain looks similar to 2021. I think we've mentioned before, there is a component pull forward of business.

Speaker 3

And I think as our partners became clarity of lead times and so forth, they've encouraged us and encouraged customers And I think through 2021, that has happened. And we would expect that will continue to happen. In terms of how that plays out and what that might look like, I think that now I think we could look at our pull forward business as well as Karen Businesses. We don't believe that the backlog will ultimately Play out as a full flush or a big bang, if you will. It's going to feather in over time.

Speaker 3

So I think it's going to be probably a bit episode of continued progress from individual partners and products in terms of how that plays out And how fast it moves. But again, as we sit here now, we would say we would not expect that to be anything that happens near term and

Speaker 11

Okay. Thank you. And then maybe just a quick look back. Organic growth of call it 8 points in 4Q was pretty strong and ahead of I think what your annual guidance would have implied. So Just as you look across segments, maybe some commentary on where you believe you've outperformed your expectations versus 3 months ago.

Speaker 11

And then maybe Was that a product of share gains? Was that product of stronger market growth? Just any way to decipher some of the outperformance in 4Q? But again, thanks.

Speaker 2

Sure. Yes, happy to do that. As we look at the strength across the The nice thing is it was balanced across transactions and solutions. And I do think I'm not going to go back into supply chain, but

Speaker 3

I do think supply chain And

Speaker 5

we ended up impacting growth in

Speaker 2

some categories across But that said, look, I think in every element, whether it was client devices or infrastructure or cloud, I feel confident that the team has really been outperforming the market in a very balanced way. When you think about the acquisitions we've made in our And the speed that we're growing there or our digital velocity practice in our 54% growth in our services category. So I feel very good that we are out in those high growth areas where we are investing.

Speaker 11

That's awesome. Thanks, Chris.

Operator

Thank you, Eric. The next question comes from Jim Suva from Citigroup. Jim, please go ahead.

Speaker 12

Thank you. And I only have one question. It's probably K-twelve and then in 2021. So Chris, I'm just kind of asking as we look into, say, 2020, The end markets, what strength or maybe is it cloud? Is it services or type of products that you see maybe Being stronger in, say, 2022 versus 20

Speaker 2

Customers are still So solutions that address those And I think Likely going to impact our customers in a slightly different way as we think about 2022, because we're all more prepared to So we are seeing customers absolutely pivot Or enhance their investment portfolio and focus on infrastructure, both On prem refresh, on prem new technology, particularly software driven, As well as cloud options to drive resiliency, to drive agility, to drive So 2022, as we think about the products, what we're seeing from customers suggests a very balanced year across the portfolio. That's really how I describe it going into 2022.

Operator

The next question comes from Shannon Cross from Cross Research.

Speaker 9

Thank you Thank you very much. Chris, can you talk a bit about what you're hearing from your customers in terms of their willingness to absorb price Increases, just sort of in general what you're hearing with relation to the inflationary environment, because obviously that's going to be Thank you to the industry, frankly, being able to offset some of the other pressures. And I have a follow-up. Thank you.

Speaker 2

Yes. Sure, Shannon. Here's what I am hearing. Nobody likes price increases, but virtually all commercial Customers, technology is the number one investment, people and technology. So if there's a budget to spend, they're not cutting back on budgets at all.

Speaker 2

In fact, they might be expanding them, but having to Be very disciplined about cost containment. So again, our expertise across the full spectrum allows us with our customers to Customers have conversations that can drive cost reduction, cost management in a way that makes us even more valuable. But we're not finding commercial customers or other customers for that matter who are reducing technology investments at all. So that's been educating to do all the things that companies are trying to do and organizations are trying to do. So we're not seeing any material impact at this point and we're obviously, we're passing prices along.

Speaker 2

Al, I don't know if you'd add anything.

Speaker 3

Yes. Just a couple of comments. Supply chain environment. I would say that in pockets, customers are getting more creative. They're willing to accept substitutes in terms of different products and they're willing to kind of think about the solutions in different ways.

Speaker 3

And that's certainly helped to free up some capacity. I'd say our part is doing the same. So There definitely is that largely customers are getting And after that, written demand continues to be extremely strong. And then just for us, right, Our job is and what we're focused on is how do we serve our customers best and bring them the best solutions. And as it pertains to financial impacts, obviously, I think we've done a really nice job making sure that we can pass Through this price increases where they happen and insulate ourselves from a gross profit perspective.

Speaker 9

Okay. Thank you. And then you're guided to low 8% for operating margin, which obviously is higher than you've done in the past. Is that absolutely all from the acquisition? Or Are there any mix issues or benefits actually we should take into account as we think about the core business?

Speaker 9

And then again, I know you talked a little bit about synergies, but I'm just kind of curious if you can bucket what's really driving the margin improvement.

Speaker 3

Sure. So first, notwithstanding Sirius, we would expect that we would have made Progress on our gross margins and our NGLI margins. You add Sirius and that's obviously accretive as well. And we I think the power of the organizations coming together that's going to make that really meaningful. Just keep in mind, so we are providing outlook to that low 8s and it's the combination of that inorganic and organic.

Speaker 3

Just keep in mind, there are wildcards, right, that will be influenced by things like supply chain. It will be influenced by how much of the business is transactional Verses Solutions. But again, as we sit here today, we feel really good about our prospects to continue to make progress on our margins.

Speaker 9

Great. Thank you so much.

Operator

Thank you, The next question comes from Samik Chatterjee from JPMorgan. Please go

Speaker 13

ahead. Hi, thanks for taking my question and squeezing me in here. I guess Couple of quick ones. First one for Al, really. I think if I go back to the time that you announced the Sirius acquisition, the pro form a gross profit margin was Expect to do 18.5%.

Speaker 13

So I was just looking if you can give me some color on how gross margins trend through 2022 and how should I think The exit rate for the gross margins relative to the pro form a number that you had talked about? And I have a

Speaker 3

Sure. So yes, really pointing back to what we provided on the Investor meeting for Sirius. We noted that their gross margins are higher than ours. And so we would Certainly expect that that accretive effect is going to come through. And again, in addition to Our progress otherwise.

Speaker 3

Now look, we don't provide outlook, so I'm not going to quote for you specifically what our gross margins would be. But I think if you Apply the math on where we're coming out from an NGLI margin outlook perspective, you get a good sense of the progress we expect we're going to make.

Speaker 13

Okay. Got it. And so a follow-up on Sirius again, which is I think you talked about flat In 2021, you're expecting growth in 2022 to look more in line with the rest of CDW and you talked Reinvestments in that business as well. So how should we think about this is this more of a reinvestment into accelerating growth in cereals, which would then contribute More towards your content outperformance with the industry, is that the purpose of driving the reinvestment? How should we think about

Speaker 2

We are actively and swiftly bringing them together. So when you think of our some of the other acquisitions we've recently done, They've really been practice areas that can tuck into our technology groups in a holistic way. Sirius, we are going to bring the organization Into CDW and literally integrated. So as we think about growth in the future, when we say we expect Sirius to drive At least 200 to 300 basis points above market, what we mean is we expect the teams to perform as CDW has always Performed with the benefit of our competitive advantages and outperforming the market. So we think about it on a combined basis as opposed to a standalone Sirius contribution.

Speaker 3

And maybe just one thing I would add there in terms of your comments about Value we add and the synergies. So look, I think we've talked about the more immediate impacts That can be made from an accretive perspective on margin. And we do fully believe that putting the combined entities together We'll be powerful and we'll lead to value. Look, if we think long run, certainly short run, that's going to provide benefits. When we think Long run, taking those synergies and those values and saying let's continue to put them back into the business from a long run perspective, that's where The real upside in reinvestments will further We're pleased to reinforce that build towards the future.

Speaker 13

Thank you. Thanks for taking my questions.

Operator

Thank you. Our final question It comes from Keith Housum from Northcoast Research. Keith, please go ahead.

Speaker 14

Great. Thanks. I appreciate it. Good morning, guys. In terms of the price increases in the industry, I

Speaker 11

guess I was hoping a little bit

Speaker 14

of color in terms of how you guys are thinking about How price increases are impacting, I guess, the U. S. GDP growth that

Speaker 11

you guys expect as well as the

Speaker 14

contribution to your top line?

Speaker 3

Yes, Keith, this is Al. So look, I don't know if I have one single answer in terms of the impact. I will say that and reiterate the written demand continues to be super strong. So as we think about the growth of prices, Which have been meaningful in different pockets across our product set, it is not a stop demand. And I think that is, like Chris said, a testament to the power of technology and the importance of technology and the fact that our vast customer base Looking to go forward and continue to invest in their own efforts in digital transformation.

Speaker 3

And so really if you look from a top line perspective, In terms of revenue, we don't think it's had a meaningful impact. Screent demand is definitely still there. And our belief is that we'll largely continue. Yes. I guess what I'm trying

Speaker 14

to unpack a little bit further is that it's consistent across a lot of the

Speaker 11

people that we could talk to is that there's a lot of

Speaker 14

demand out there, prices have increased. But yes, it seems like U. S. IPO forecasts are in this 3.5% to 5% growth. I'm just kind of questioning why that number is not perhaps higher.

Speaker 2

Let me just add, we will obviously, as we always do update as we go through the course of the year. But right now, what we're seeing is a moderation in For GDP, inflationary trends uncertain where those will be and the wildcards in the macro environment, labor Shortages, etcetera. I think you're hearing people at the beginning of the year, taking a clear eyed view Of what you expect in 2020. Look, ASPs could drive it up, but we'll know more as we start to move through the year on all of these things.

Speaker 14

Okay. All right. Thanks, guys. Appreciate it.

Operator

Thank you. Thank you. There are no additional questions waiting at this time. So I'll pass the conference over to Chris Leahy, CEO and President. Chris, please go ahead.

Speaker 2

Thank you, Bailey. I want to recognize the incredible dedication of our coworkers around the globe And their extraordinary commitment to serving our customers, our partners and all CDW stakeholders. And thank you to our customers for the absolute privilege and opportunity to To our investors and analysts participating in this call, we appreciate you and your continued interest and support of CDW, and we look forward talking to you again next quarter. Thank you. Have a great day.

Operator

This concludes the CDW 4th Quarter 2021 Earnings Call. You may now disconnect your line.

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CDW Q4 2021
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