Aperam Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2022

There are 12 speakers on the call.

Operator

Welcome to the CDW First Quarter 2022 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I'd now like to hand over the conference to your speaker today, Stephen O'Brien, who is VP, Investor Relations.

Operator

Thank you, and please go ahead.

Speaker 1

Thank you, Daniel. Good morning, everyone. Joining me today to review our Q1 results are Chris Leahy, our President and Chief Executive Officer And Al Morales, our Chief Financial Officer. Our first quarter earnings release was distributed this morning and is available on our website, investor. Cdw.com along with the supplemental slides that you can use to follow along with this 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 Litigation Reform Act of 1995. Those statements are subject to a number of risks and uncertainties that could cause actual results to differ materially. Additional information concerning these risks and uncertainties is contained in the earnings release and Form 8 ks We furnished the SEC today in the company's other SEC filings with the SEC. CDW assumes no obligation to update the information Presented during this webcast, our presentation also includes certain non GAAP financial measures, including non GAAP operating income, non GAAP operating income margin, non GAAP Net income and non GAAP earnings per share. All non GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules.

Speaker 1

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 our financial results today include results from our acquisition of Sirius Computer Solutions, which closed on December 1, 2021. All references to growth rates or dollar amount changes in our remarks today are versus the comparable period in 2021, unless otherwise indicated. References to growth rates for hardware, software and services today represent U. S.

Speaker 1

Net sales only and include Sirius. They do not include the results from CDW UK or Canada. References to growth rates for specific products And solutions, including cloud and security today represent U. S. Net sales only and exclude Sirius.

Speaker 1

Historical combination information of CDW and Sirius discussed herein is for illustrative purposes only and is not necessarily indicative of results that would have been achieved had the acquisition occurred at the beginning of the periods presented. Replay of this webcast will be posted to our website later today. I also want to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast without specific written permission from the company. With that, let me turn the call over to Chris.

Speaker 2

Thank you, Steve. Good morning, everyone. I'll begin today's call with a brief overview of our results, strategic progress and outlook. And Al will run through the financials and our capital allocation priorities, and then we'll move right to your questions. We had an outstanding start to the year.

Speaker 2

The teams continued to execute well in a challenging supply environment and delivered exceptional top line growth and profitability. For the Q1, net sales were $5,900,000,000 23% higher than last year. Non GAAP operating income was $462,000,000 up 26% and non GAAP net income per share was $2.20 up 26% on a reported basis. These exceptional results reflect our ability to address customer priorities with Solutions across the full spectrum of IT and the inclusion of Sirius. Customer continue to evolve as we move ahead into the new normal.

Speaker 2

Digital transformation, agility and security remained top concerns, with return to office driving collaboration, networking and endpoint solutions. Customers want to manage costs while meeting or exceeding co worker and customer service level requirements. At the same time, customers across our diverse end markets Seeking ways to supplement technology resources in today's war for talent environment. Our ability to meet all these needs led to a broad based And balanced performance. There were 3 drivers of our performance during the quarter.

Speaker 2

The first driver was our broad and diverse portfolio of customer end markets. As you know, we have 5 U. S. Sales channels, corporate, small business, healthcare, government and education. Each of these channels is a meaningful business on its own with 2021 annual sales ranging from $1,800,000,000 to over $6,000,000,000 Within each channel, teams are further segmented to focus on customer end markets, including geography and verticals.

Speaker 2

We also have our U. K. And Canadian operations, which Together delivered US2.6 billion dollars in 2021 sales. This scale and balance across customer end markets positions us to perform when external factors impact certain sectors or geographies. This quarter, our commercial markets, corporate and small business, Along with our healthcare and international markets, all delivered strong double digit growth.

Speaker 2

As expected, education and government growth was depressed as they lapped Strong prior year stimulus and large deal driven results. Our corporate team delivered a 46% increase. Growth was strong and balanced across transactions and solutions. The team did an excellent job addressing customer demand for return to work solutions, Digital transformation and the need for agility and security. Unit growth coupled with ASP increases resulted in another quarter of Strong double digit growth in client devices and cloud spend was excellent.

Speaker 2

Small Business posted a 21% increase. Performance was broad based across both transactions and solutions. Return to office strategy and modernizing workspaces drove strong collaboration, Networking and security growth for hybrid work environments. Remote enablement drove another strong quarter of client device growth, up double digits both in unit and Please. Security performance was up mid teens and cloud spend was robust.

Speaker 2

Public posted a 6% increase on to offset higher costs from staffing shortages and other acute care needs led to double digit solutions growth. Cloud adoption was strong, driven by the Speed and efficiency cloud solutions can deliver. Government posted a mid single digit increase. State and local delivered a High single digit increase driven by client devices and security. As we shared last quarter, we continue to help our customers as they work through the various funding opportunities and multiyear phasing and expect projects to continue to be implemented as we move through 2022.

Speaker 2

Federal performance played out as expected and was balanced across both the Department of Defense and Civilian, while lapping tough compares. As we shared last quarter, we continue to experience the lumpiness the lumpy nature of government contracts and contracting changes. There is no change to our expectation that growth will return later in the year. Higher Ed's strong double digit Performance was offset by the expected decline in K-twelve and overall education sales decreased 4% off the Q1 of 2021's remarkable 101 percent growth. The higher ed team continues to help customers implement student Success programs using technology to give an institution an edge with comprehensive endpoint solutions, improved security, campus connectivity and enhanced The team delivered excellent client device growth and school systems tapped our capabilities to address the war for technology talent, which drove Increased usage of CDW services to fill the gap in staffing needs.

Speaker 2

While K-twelve delivered strong non seasonal results, they posted a year over year on top of last year's exceptional 100 percent growth. Emergency connectivity funding, which was expected to end during the first half of twenty twenty two Was extended and a 3rd wave was announced, adding complexity to an already challenging process. Many school systems are leveraging the extended funding window to digest better options and plans for their IT spend. Other, our combined U. K.

Speaker 2

And Canada results increased 13% on a reported basis. U. K. Grew double digits in local currency And Canada increased high single digits in local currency. Each market saw balanced strength across both commercial and public customers.

Speaker 2

Customer priorities remain similar to those in the U. S. The second driver of first quarter performance was our broad and deep product and solutions portfolio. Our ability to address customer priorities across the entire IT continuum drove excellent performance across both our solutions and transactions portfolios. We continue to leverage our competitive advantages, including our distribution centers, extensive logistic capabilities, deep vendor partner relationships and strong balance sheet and liquidity position to navigate an ongoing supply challenge.

Speaker 2

U. S. Hardware increased high teens. Growth was broad based and included double digit increases in NetComm, servers and server management, client devices and video audio. This exceptional performance was on top of 20 21's Q1 double digit hardware growth.

Speaker 2

Demand continued to outpace supply in several key areas, notably in the networking space and remaining orders built during the quarter. Customers once again placed orders to get in line for second half twenty twenty two projects, especially in NetComm. U. S. Software posted a 40% increase, driven by success helping customers upgrade their edge and secure their IT environment With double digit increases in network management software and security software.

Speaker 2

Cloud was a meaningful contributor to this strong performance with significant double digit increases in customer spend and gross profit, led by productivity, platform, security and collaboration workloads. U. S. Services sales doubled. Growth was broad based and balanced, driven by professional services, managed services and warranties.

Speaker 2

As you can see, excellent, broad and balanced performance across the business. And that leads to the 3rd driver of our Our customer and coworker centric strategy. Over the past 3 years, we have executed against our strategy to enhance our high relevant and iGlow solutions and services with both organic and inorganic investments. 8 acquisitions have deepened and advanced our services capabilities, including automation, Cloud native and DevOps, cybersecurity and our services scale and reach. We welcome nearly 3,000 new coworkers from these 8 acquisitions with more than half in technical rules.

Speaker 2

Since year end 2018, our technical team has doubled in size and at the end of this first Quarter was more than 5,000 strong. Today, technical coworkers comprise more than half of all customer facing coworkers. Together with their other CDW colleagues, they form an amazing high performing team, a high performing team that is a key competitive advantage for CDW, A team that is the most engaged, enabled and energized team in the industry. All our investments, Whether homegrown or inorganic are intended to maximize our key point of differentiation in the marketplace. We are a one stop Trusted partner with capabilities across the entire continuum of IT, capabilities that help customers achieve the outcomes they need from technology, So they can do great things.

Speaker 2

Let me share a couple of recent customer examples that demonstrate how our investments help customers achieve outcomes. A soft drink manufacturer wanted to upgrade their on premise voice system. The customer had 2 desired outcomes for the solution. Number 1, flexibility to expand as their business grew and number 2, an excellent user experience. Since IT staff was focused on other priorities, The solution needed to be managed off premise.

Speaker 2

Leveraging CDW's world class unified communications as a service capability And ServiceNow capabilities, the team designed a flexible and cost competitive integrated full stack managed collaboration anywhere solution. The solution includes the CDW professional services for upfront design, planning, configuration and deployment and CDW managed services To provide ongoing MCA support and integration with our ServiceNow ticketing platform, a great outcome for the customer and for the team who bested large telecom providers to win the deal. They also deepened their relationship with the customer and delivered more than $3,000,000 in licensing and services revenues. The second example of how our investments enable customers to achieve the outcomes they need is the recent adoption of Focal Point Academy by a major technology company. Focal Point Academy is a bespoke training program that delivers workforce development programs that solve today's greatest cybersecurity problems, Finding, training and retaining skilled cyber professionals.

Speaker 2

Focal Point Academy's operationally focused Portfolio, which covers high demand topics like threat hunting and application security, coupled with its ability to train and develop both Senior and junior technical professionals was exactly what the customer needed to achieve its desired outcome of mitigating risk. Prior to our acquisition of Focal Point, we would not have been able to deliver this important global solution and further deepen our relationship with the customer. Investments in our customer and coworker centric growth strategy are integral to our ability to consistently and profitably outgrow the U. S. IT market, And that leads to our expectations for the rest of the year.

Speaker 2

During the balance of 2022, we will continue to against our strategy to deepen our services and solutions capabilities. We are making excellent integration progress with Sirius and that will remain a key focus area for the balance 2022 as will investments in our co workers and our own digital transformation. We will continue to balance investments With our growth and profitability expectations, which are now higher than previously shared at year end. Given our excellent momentum coming into the 2nd quarter And first quarter performance, we now expect to outperform the U. S.

Speaker 2

IT market by 325 basis points to 425 basis points, 125 basis points higher than our view at year end 2021. Our view of U. S. IT market growth has also increased and we now look 2022 growth of 4%, which is 50 basis points above our prior view. Taken together, this equates to Constant currency growth of 7.25 percent to 8.25 percent above 2021 combined CDW revenues of $22,800,000,000 Recall, 2021 combined CDW is calculated as though Sirius had been acquired on January 1, 2021, instead of its actual acquisition date of December 1.

Speaker 2

On a reported basis, our outlook represents a 17.5% to 18.5% increase over 2021 results. This outlook reflects our baseline expectations that given 20 21 second half strong hardware performance, we will mix into more cloud and security in the back half of this year. It also reflects our expectation that supply constraints remain relatively consistent with the first half of the year. As always, we remain mindful of our wildcards, The potential for further disruption to the supply chain, changes in COVID or macroeconomic performance, and we will keep a watchful eye on these and other potential issues. As we always do, we

Speaker 3

will provide an update on

Speaker 2

our view on our next call. In the meantime, we will continue to do what we do best, which is leverage our competitive advantages and out execute We will also continue to invest to ensure we remain our customers' trusted partner who delivers the outcomes they need whether for innovation, Cost management, agility, risk mitigation or user experience. If the past 2 years have shown us anything, it is that our role As a trusted strategic partner to our customers is more important now than ever. Let me turn it over to Al now, who will provide more detail on our financials and outlook. Al?

Speaker 3

Thank you, Chris, and good morning, everyone. I'll start my prepared remarks with more detail on the Q1, move to capital allocation priorities And finish up with our 2022 outlook. Turning to our Q1 P and L on Slide 8. Consolidated net sales were $5,900,000,000 Up 23% on a reported and average daily sales basis in constant currency. On an average daily sales basis, sequential sales increased 7.4% versus the Q4, which is well above historical average sequential decline of 5%.

Speaker 3

This reflected 2 primary factors. 1st, demand for return to work and remote enablement solutions remained strong and drove sequential growth in our commercial channels And international. As Chris mentioned, Corporate and Small Business had broad based and balanced growth across both transactions and solutions. 2nd, Q1 reported results reflected 3 months of contribution from Sirius versus 1 month in Q4, notwithstanding that Sirius' 1st quarter It has historically been the lowest quarter of absolute sales and gross profit dollars for the business. On the supply side, Our overall backlog increased in Q1 at a similar level to the 4th quarter, earning elevated year over year in both transactional and solution categories.

Speaker 3

We continue to make strategic investments in inventory to support our customers through this constrained supply environment, and the team once again did a great job leveraging CDW's Competitive advantage to ensure strong returns on working capital. Gross profit for the quarter was $1,100,000,000 A year over year increase of 38.8 percent. Netted down revenues grew faster than the underlying business and represented nearly 31% of total gross profit, More than 3 points over the last year. The higher mix of net service contract revenue, primarily within software as a service, Favorable product mix and rate and increased net sales and margin on professional services combined to deliver a record gross margin of 18.6%, Up 220 basis points versus last year. Turning to SG and A on Slide 9.

Speaker 3

Non GAAP SG and A totaled $642,000,000 for the quarter. Year over year increase in non GAAP SG and A was primarily due to higher payroll as a result of increased coworkers. Coworker count at the end of the Q1 was 14,005, up over 3,800 from prior year quarter, Reflecting organic and inorganic investments in co workers that support high growth solution areas and our own digital transformation. Recall that Sirius' payroll as a percentage of net sales is higher than our core operations given their higher mix of solutions and services revenues, And this ratio is historically highest in the Q1 due to sales seasonality. The higher level of SG and A also reflects continued investment The training and development of co workers, our return to office efforts and investment in our own digital transformation and technology strategy.

Speaker 3

As Chris mentioned, we will continue to balance investment with our growth and profitability expectations. Investments in our strategy are integral to our ability to outgrow the market profitably and sustainably. GAAP operating income was $387,000,000 up 19.6%. Non GAAP operating income was $462,000,000 up 25.7 percent. And non GAAP operating income margin was 7.8%, Up 20 basis points from the prior year and 10 basis points from Q4.

Speaker 3

Moving to Slide 10. Interest expense was $56,000,000 Higher interest expense is primarily driven by the senior notes issued last year to fund the acquisition of Sirius. Our GAAP effective tax rate shown on Slide 11 was 24.3%. This resulted in 1st quarter tax expense of $80,000,000 To get our non GAAP effective tax rate, we adjust taxes consistent with non GAAP net income add backs as shown on Slide 12. For the quarter, our non GAAP effective tax rate was 25.7%, up 50 basis points versus last year's rate, Primarily driven by higher state taxes as well as taxes on foreign earnings.

Speaker 3

As you can see on Slide 13, With 1st quarter weighted average diluted shares outstanding of 137,000,000, GAAP net income per share was 1.83 Our non GAAP net income was $302,000,000 in the quarter, up 21%. Non GAAP net income per share was $2.20 up 27% from last year. Turning to the balance sheet on Slide 14. At March 31, cash and cash equivalents For $387,000,000 and net debt was $6,200,000,000 Liquidity remains strong with cash plus revolver availability Approximately $1,400,000,000 Moving to Slide 15. The 3 month average cash conversion cycle was 20 days, 2 days from last year's Q1 and reflecting the impact of the Sirius acquisition.

Speaker 3

Free cash flow for the quarter was $466,000,000 As shown on Slide 16, this is higher than a typical Q1 reflecting strong growth in the business and effective working capital management. For the quarter, we deployed cash consistent with our 2022 capital allocation objectives of paying dividends and paying down debt, including $67,000,000 of dividends and $260,000,000 in debt repayments. Turning to capital allocation on Slide 17. Our objectives remain consistent with what we shared last quarter. 1st, Increase the dividend in line with non GAAP net income.

Speaker 3

Last November, we increased the dividend 25% to $2 annually. To guide future increases, we will continue to target the dividend at approximately 25% of non GAAP net income and to grow in line with earnings. 2nd, ensure we have the right capital structure in place with a targeted net leverage ratio of 2.5 to 3 times. We ended the quarter at 3.1 times, down from 3.4 times at the end of 2021, demonstrating strong cash generation And progress towards returning to our targeted net leverage ratio. We continue to expect to achieve this by the end of 2022.

Speaker 3

While we continue to temporarily put a lower priority on our 3rd and 4th capital allocation priorities of M and A and share repurchases until net leverage In our target range, we are on a path to delivering on these priorities. Moving to the outlook for 2022 on Slide 18. Starting with sales. As Chris mentioned, the Q1 was a great start to the year. We have excellent momentum entering Q2.

Speaker 3

We are cognizant of potential market variables as we look further out. Recall that on a combined basis, CDW's net sales would have been $22,800,000,000 in 2021, including $2,170,000,000 from Sirius. With that in mind, our Updated outlook for the full year 2022 is now U. S. IT market growth of 4%, plus 3 25 to 4 25 basis points CDW outperformance in constant currency on a combined basis.

Speaker 3

On a reported basis, our full year net sales outlook Equates to approximately 17.5% to 18.5% growth in constant currency. Our baseline outlook assumes that supply does not materially impact net sales beyond what we've been experiencing. We would expect to be at the lower end of our premium range if we mix more in the netted down revenue streams than expected and or experience elevated levels of Supply constraints. We bet the higher end of hardware growth is stronger and supply improves. Our outlook also assumes neutral currency impact for the full year.

Speaker 3

Moving down the P and L. We continue to expect full year non GAAP operating income margin to be in the low 8% range. For non GAAP earnings per share, Recall that 2021 would have been $8.49 per share on a full year combined basis compared to a reported $7.97 per share, which included only 1 month of Sirius. We now expect full year non GAAP earnings per share growth to be approximately 13%, Plus or minus 50 basis points in constant currency and on a combined basis. This equates to low 20% Full year growth in constant currency on a reported basis.

Speaker 3

Please remember that we hold ourselves accountable for delivering our financial outlook On an annual constant currency basis. Slide 19 provides additional modeling thoughts, including our updated net sales split for the year. We now expect the first half of the year to be approximately 25 basis points above the high end of our historic norm of 48% to 49%. This reflects our over performance in the Q1 and strong momentum coming into Q2. It also reflects that it's Too early to update our expectations for the second half of the year.

Speaker 3

We continue to expect the back half of the year will reflect a greater mix in the netted down revenues As we overlap 2021 strong client device sales, recall that the accounting treatment for netted down revenues Has a dampening effect on our absolute net sales dollars, but is neutral to gross profit dollars and thus results in higher gross margins all else equal. Our expectations for the first half split assume a low single digit sequential increase from Q1 Q2 on an average daily sales basis. This equates to close to 20% year over year reported net sales growth in the 2nd quarter, which is roughly 230 basis points above our Q2 implied growth rate expectations from last quarter. We expect Q2 non GAAP earnings per share to grow in line with the 2nd quarter reported sales. Finally, as you know, timing has a meaningful impact on free cash flow and it may ebb and flow by quarter.

Speaker 3

But over the continuum, We continue to expect to be within our long term free cash flow rule of thumb of 3.75% to 4.25% of net sales assuming That concludes the financial summary. As we always do, we will provide updated views on the macro environment And our business on our future earnings calls. With that, I'll ask the operator to open it up for questions. And can we please ask each of you to limit your questions to 1 A brief follow-up. Thank you.

Operator

Thank you.

Speaker 4

My first question is just regarding the strength you're seeing across corporate and SMB customers in terms of the remote Enablement, it seems like there's a second wave of work from home trends and could you elaborate on that? And then also Just in terms of the back to office trends, how long do you see that playing out? And due to the backlog and the Supply constraints, do you see this playing out through the year?

Speaker 2

Yes. Good morning, Matt. It's Chris. Yes. We are what we're seeing is customers across our commercial segments kind of, as we mentioned last time, getting on with it, meaning, Living within the current environment and making decisions about their back to work strategy, which means They're bolstering their capabilities in offices.

Speaker 2

They're bolstering their capability in home environments because they're really focused on their co workers' ability to be productive and deliver seamlessly moving from remote to in office. And as we expected, We continue to see very strong endpoint solution performance this quarter, and we're also seeing what usually Typically follows that and what was delayed a bit over the last couple of years, which is an investment in the hybrid infrastructure to support all the needs of the co workers and the expectations both at the workload and application level and everything required to create, a stronger and more robust infrastructure for those devices. So we will continue to see those two dynamics play out through the course of the year would be our view. It's different in different But in the commercial segment for sure, we'll continue to see that.

Speaker 4

Okay. Thank you for that. And the education market seems to be holding up Better than most expect, you talked about some of the dynamics there, higher ed spending offset by weakness in K through 12, although it seems like That next round of or the extended funding period at least helps that market near term. Should we expect a fall off there, you're following that funding period or just general expectations for the K-twelve market?

Speaker 2

Yes. So Matt, here's how I think about it. The extension and the new the little bit of an added round of funding for ECF, Just this timing, right? So it gave the schools a little bit of a breather to reflect on their planning and not be rushed to buy. So that's just an So we'll see that play out over the next 18 months.

Speaker 2

At the same time, schools are working very hard on ensuring that they don't lose ground In what they're trying to do, which is teach students and learn. And so when you think about the dynamics of the classroom and the infrastructure needs to support the classroom, including audio visual, Interactive, monitors and kind of the new generation of the classroom, we're starting to already help our customers with that. So look, We look at this as a kind of steady, eddy, long term growth opportunity for CDW. At every time there's been an inflection point in K through 12 in Classroom learning space, CAW has been at the absolute tip of the spear in helping customers get there, and we've seen growth as a result.

Speaker 4

Okay, great. Thank you.

Operator

Thank you very much. Our next question comes from Eric Woodring from Morgan Stanley. Eric, your line is now open. Please proceed with your question.

Speaker 5

Great. Thank you very much. Good morning, guys. Congrats On the results, maybe as we sit here 90 days since you last reported or roughly 90 days, maybe can you just help us understand Where some of the supply challenges you've been facing have either worsened or where some have improved? And then I have a follow-up from

Speaker 2

Yeah. I guess, what word would I use? I think I'd say kind of unchanged. Meaning the we're not seeing a lot of change in the challenges that we're all facing. When we think about the supply chain environment, I'd say 2 things.

Speaker 2

Number 1, It's an opportunity, but it's also frustrating. It's an opportunity for CDW because we know what's happening. We have more visibility with our partners, I think, than anybody. When you think about our competitive advantages, our ability to take on inventory to support our customers with our balance sheet, having the distributional logistics capabilities that's put us in a great position to manage the supply chain issues, I think again better than anybody in the market. But it's frustrating for customers.

Speaker 2

And we're helping customers get through that because we can help them choose alternatives, which they're a little more open minded now to, which we have A pretty good path to get to. But the short answer is supply chain is what it is and it's not getting better, it's not getting worse. Some pockets are getting better, some pockets are getting More difficult, but net net, we're going to be living with this through 2022, if not into 2023. And again, it's a matter of who manages it the best. I think we're doing a really good job of that.

Speaker 5

Great. Super helpful. And then maybe my follow-up would just be, you beat the Q1 by a healthy amount, Call it $280,000,000 $290,000,000 You raised the full year guide by $400,000,000 And then your guide implies 2Q needs to come up by, let's call it, dollars 115,000,000 So most of the raise comes from 1Q and 2Q. Is that just you guys taking the view here that perhaps visibility into the back half might not be as clear as Perhaps any other year given the supply challenges and what's going on in the market? Or is there anything else that we should be thinking about just as we think about The second half, mixing netted down revenue, those types of factors?

Speaker 2

Yes. No, Eric, it's a fair question. Look, it's CDW's typical approach, which is we'll call it when we're ready to call it and when we think we have a good visibility. And it's just too early to call that in the back But that said, outstanding start to the year as you know. And we see absolutely excellent momentum going into Q2 And expect what a robust 20% profit growth in the second half of twenty twenty two.

Speaker 2

So we look at this and see a really aggressive but achievable goal in front of us. So we're feeling very optimistic about the year and we'll call the back half of the year when we get a little closer to the back half of the year.

Speaker 5

Great. Thank you so much. Congrats again.

Speaker 2

Thanks very much, Eric. Appreciate it.

Operator

Our next question is from Samik Chatterjee from JPMorgan. Samik, your line is now open. Please go ahead.

Speaker 6

This is Joe Cardoso on for Samik Chatterjee. So my first question is a follow-up on The full year guide question prior. Can we dissect that a little bit, particularly as it relates to the raised outlook For the underlying IT market and CDW's outperformance to it, what are you seeing as the main drivers or contributors to the raised outlook for both? And then I guess how much of that rate outlook is being driven by recent acquisitions like Sirius tracking better than expected as opposed to kind of the traditional CDW business? And then I have a follow-up.

Speaker 2

Yes. So let me start with the LastPass part first, which is our premium to market. When we look at The areas that we've outperformed in Q1, let's take Notebook, Overall Solutions, several areas Where we just our view is, look, we're really outperforming the market. It's pretty clear. So that goes into the premium.

Speaker 2

In terms of Whether or not Sirius is contributing, here's how I think about it. On a combined basis, We're responding to customer needs in the current environment and seeing healthy business across both the underlying and Sirius segments. In terms of the underlying IT industry, yes, we brought that up because We're starting to feel real momentum in the business. The demand is there. The writing is there.

Speaker 2

So it just feels to us Like the market is growing a little faster than we would have thought at the beginning of the year. So the IT market generally is kind of the written and demand that we're seeing. The premium is the categories that we're delivering in and looking at what we triangulate The growth rates to be in the market, we just think we're outperforming by a wide margin.

Speaker 6

Got it. And then Just quickly for my follow-up, can you help me understand what you guys are seeing from a pricing perspective versus 90 days ago and whether that's translating into a tailwind or headwind for CDW?

Speaker 2

Yes. We are look, pricing is pricing continues to be fairly dynamic and fluid, I guess, I'd say, and we are continuing to see pricing increases given What's happening out in the macro environment. That said, we are a cost plus model, as you know, and Seeing we're not seeing constraints in IT budgets. Our customers are still buying. They're not cutting IT budgets because of pricing.

Speaker 2

And as I think I mentioned in our prepared remarks, we're seeing some of the growth kind of split between unit increases and ASP increases. So they're both contributing to growth Across the board

Speaker 3

really. Thanks, Alex. I would just add in and I think we've mentioned this before. Now one thing we see in the supply environment is, more creativity and agility, both ourselves and with our partners In terms of where do we pivot to different products, where do we pivot to different solutions and finding customers are accommodating that and working with us to try to get Got it. Thanks.

Speaker 3

Appreciate the colors.

Operator

Thank you very much. Our next question comes from Rupaul Bhattachary

Speaker 7

Chris, for my first question, I'd like to ask something which is a high level question. Some investors are concerned that we may be into a recession in the U. S. Because the rates are going up or we might see a slowdown in Europe because of the war there. So can you maybe talk to us about how CDW as a company is different from what it was in the 2008, 2009 timeframe.

Speaker 7

And do you think the company is better prepared now to face a downturn? And in the same vein, you've raised your guidance for the full year. Can you talk about what are some of the things that are giving you confidence to do that given all of the macro and supply chain headwinds that are continuing. Thanks.

Speaker 2

Yes. Good morning, Ruffalo, and thanks for the comment. Let me start with 2nd part first, what's raising our what's feeding our confidence, it's what we're seeing with our customers. It's the demand, it's the momentum, it's the Criticality of IT in every walk of every industry to drive competitive advantage, experience, etcetera. So we just See technology as absolutely central, and really it's an investment in innovation.

Speaker 2

It's no longer viewed as a cost to the business as much as an asset of innovation. And we're seeing that and feel very confident that that will continue, possibly at the Some other investments that organizations make, but technology is top of the list. As far as the macro environment, what might happen, here's what I would tell you. First of all, we have, our broad and deep portfolio is the best it's ever been at any point in time. Secondly, our flexible business model has allowed us in any challenging time has allowed us to outperform the market and deliver results.

Speaker 2

And if you look actually at the Great Recession, We did outperform the market. And if you think about the last 3 years, significant delivery of great performance versus the market. So, and in those cases, we also emerge stronger. So you've got our portfolio, which is better than it's ever been. You've got our flexible business model, which has a track record of working and having us deliver performance in downtimes.

Speaker 2

And when you think about our value propositions, the 3rd thing I would say, the value proposition for our customers and our partners becomes even more important to them. They become even more Reliant on our stability, on our scale, on all the things that we deliver. And at the end of the day, That allows us to be opportunistic in helping them and gaining share in the market. So I point you to our Track record and our model and our portfolio and our value proposition, which has over 35 years, reflected the fact that CDW is a different company, performs in Times and in good times. And typically in tough times, we come out even stronger than when we enter them.

Speaker 7

Okay. Thanks for all the details there, Chris. Maybe for my follow-up, if you can talk a little bit about the government segment. It was good to see revenues grow 5% year on year after several you've been facing tough comps and several quarters of year on year declines. Last year, you talked about some projects that were delayed.

Speaker 7

Do you think those come back in the first half? And Do you think government revenues can continue to grow year on year over the next couple of quarters? Thank you.

Speaker 2

Yes. No problem. On the government side, the federal side, we've been saying now for a couple of quarters that we expect growth To see growth in the second half of the year and that expectation has not changed. So, the projects we've talked about, the green shoots we've talked about, we expect to be taking hold in second half of this year, as expected. As far as state and local, that's playing out as we thought it would as well.

Speaker 2

If you remember, The funding was coming in a multiyear fashion, the federal funding, and that was extending Customers buying patterns a bit and we've been really helping them on the planning phase of spending those, that funding, the federal funding and we're starting to see that come to fruition and you see that results this quarter, which is those projects starting to flow out now, which is a very positive thing and reflective of what we expected to happen.

Operator

Our next question comes from Adam Tindle from Raymond James. Adam, your line is now open. Please go ahead with your question.

Speaker 8

Okay, thanks. Good morning. I thought I would just maybe start with a question on margins. If I remember right, when you closed the Sirius acquisition, you talked about it Adding just over 100 basis points to gross margin and about 20 basis points to operating margin based on 2020 numbers with no synergy assumption. If you look at this quarter, gross margin was up over 200 basis points, so double of that.

Speaker 8

The operating margin is still up just about 20 basis points year over year. Maybe you could give us some color on the better mix on gross margin, the growth metrics being healthy overall, but seeing minimal leverage on the operating line. And I imagine you're going to talk about investments, so more specifics on the nature of those investments and expectation for return would be helpful. Thank you.

Speaker 3

Sure, Adam, and good morning. This is Al. So on gross margins for the quarter, I would comment on a few things. Certainly, you had the Impact from Sirius for the quarter, and I would say that accretive benefit was as expected. We had a couple other things that benefit our gross margin For the quarter, number 1, stronger netted down revenues actually grew 2 times the level of our sales.

Speaker 3

Product margin, mix and rate were strong and so they were important components on the gross margin front. So down to your NGLI margin question. So yes, NGLI margin, 20 basis points better than prior year, 10 basis points better than prior quarter, certainly had the benefit of Sirius. Just the one call out I would give you in terms of the Accretive benefit there for Sirius is that given the seasonality of their business, Q1 is typically lower on the scale of the full year. And therefore, Some of the fixed cost leverage we get from Sirius is more on the latter half of the year.

Speaker 3

So that has a bit of a dilutive effect for the quarter, but still we're able Turning really strong 7.8 for the quarter.

Speaker 8

Understood. And maybe as a follow-up for Chris Claude, you've previously talked about feathering in over multiple quarters versus a big bang in 1 quarter. Just wondering if you can maybe revisit this since We saw such a strong quarter here on Growth Metrics. I think you did say remaining orders built in the quarter. So I just wanted to clarify that.

Speaker 8

And certainly any color on the size and composition of backlog today versus 90 days ago would be super helpful. Thank you.

Speaker 2

Yes. Good morning, Adam. I'd say, look, in terms of backlog building, it was in line with what we saw in Q4. So that would give you kind of characterizes The size. In terms of what we're seeing, it is a feathering out.

Speaker 2

So I think I said we're seeing pockets of improvement yet new pockets of So we've seen notebooks free up a little bit, Chromebooks free up a little bit over the course of time, but solutions Products really more constrained now than they were before, in particular NetComm, and I'm sure you're hearing that a lot. So look, We're in a we still expect it feathering out. We're not seeing anything in our results, frankly, or in, our conversations with partners that Suggest anything than the way we've already described it to you.

Speaker 8

Understood. Thank you.

Operator

Our next question comes from Amit Dhanari from Evercore ISI. Amit, your line is now open. Please ask your question.

Speaker 9

Thanks. It's Amit Darianani, just to be clear. But Chris, I'm hoping you could talk about Yes. So you've seen this increased complexity of IT operations, I think, especially with return to work, and there seems to be a sustained and acute labor shortage, especially in the skilled worker side. I'm wondering if that combination of those two factors is resulting in fees that we've seen that TAM suddenly expand, if you're starting to see that you're engaging with more Mid and even larger enterprises were so you typically would.

Speaker 9

And I'm just curious, AI using this enabled ATAM expansion And what could that do to your growth rate as you go forward?

Speaker 2

Yes. Good morning, Amit. In terms of the I want to make sure I could having trouble hearing you a little bit. But you were asking about TAM expansion due to servicing enterprise sized customers and in particular Technology talent supply shortages, did I get that right?

Speaker 9

Yes, essentially yes. Given the labor shortages, IT is getting more complex. Are you getting pulled in by bigger enterprises that you typically wouldn't? And does that expand your time? Does that alter your growth rate as you go forward?

Speaker 2

Yes. Okay. I got it. Fair question. Yes.

Speaker 2

When you look at a couple of things, you look at Sirius' Customer segment and it's heavily enterprise oriented. So yes, we are focusing on the enterprise. If you look at CDW's customers, well, We have typically said our sweet spot is customers with up to 5,000 end users. We have a very large number of enterprise customers that we service and have serviced Extremely well in the past 5 years, given the increase in complexity. So yes, we are in the enterprise space.

Speaker 2

We're continuing to grow in the enterprise We have not done the calculation regarding the TAM, but we certainly expect to be able to continue to Be successful in that space now more than ever. It used to be, you think about enterprise and one of the reasons they might not have Turn to CDW was because they would have and could afford the technology talent within their organization to handle that they needed. But now given the speed and complexity, even the larger organizations can't keep up with the changing nature of technology. And our ability to supplement and address that problem has really become a very interesting value proposition for those organizations. And boy, did we see it play out in the during the pandemic.

Speaker 9

Thank you. And then, I guess, Al, you About gross margins and sort of the levers that led to the better performance in March.

Speaker 2

Could you just talk about

Speaker 9

the durability of these gross margins? Because I think you talked about mix getting better in the back half of the year with more cloud and security. So could we run-in the mid-eighteen percent to 19% gross margins For the remainder of the year or what are the puts and takes as you go forward?

Speaker 3

Sure, Amit. So first, let's just start with Our expectation, our outlook of low 8 percent on NGLI margin, right? So that is what we guide on in that regard. But just back to your comment your question on gross margin. Look, if we look at our strategy and the execution, I think that that has played out over time in terms of expansion of our gross margin.

Speaker 3

I think this quarter is a great example of that, really bringing the power of all of that, right? Strong netted down revenues, Product margin was a factor. Siri is coming online. So a lot of those variables are playing out. We would anticipate that that would In particular, we talked about the second half.

Speaker 3

We expect a higher level of netted down revenues, which certainly is a theme. So If you get back to that NUI margin, we believe that execution of the strategy and follow through on that will deliver the outcomes we're expecting.

Operator

Our next question comes from Jim Suva from Citigroup. Jim, your line is now open. Please go ahead with your question.

Speaker 10

Thank you and congratulations. Chris, earlier in the call, you had mentioned that the supply situation Largely hasn't changed from say 90 days ago when the investors last spoke to you on such a call. Have you seen some shifts there? Because there's been indications of things like Chromebooks seeing actually a big deterioration, Well, maybe others seeing higher demand. So I'm wondering if you take it to the device level, have you seen some material puts and takes and shifts?

Speaker 2

Yes. Jimmy, here's what I would say. I would characterize the supply environment As pockets of improvement and pockets of Pressure. The pockets of improvement over the past several months have been in the notebook and Chromebook, the transactional side of our business. And the pockets of pressure have really showed up in the solution side.

Speaker 2

So we did see a shift, if you will. So we saw some feathering out on the client devices. And but we've seen backlog grow in the solution side of the business. And it's complex because the solution side, what happens is if you're, you know, you've got an integrated solution, if you're missing one part of that, You can't get the software out if you don't have the hardware. So it gets pretty complex.

Speaker 2

So that's what we're seeing. And I think I mentioned also net With a particular networking is a particular area, a pressure area, I guess, I would say, within the solutions categories.

Speaker 10

Okay. That makes a lot of sense. And then as my follow-up, probably more appropriate for Al. When we think about cash flow and uses, am I correct that kind of 2022 should be kind of a debt pay down year? Or is there sufficient cash flow because component costs are going higher and high growth That inventory will need to be cash flow consumed to support the inventory or you guys looking at Strategically adding in more software services, security skill sets to your portfolio.

Speaker 10

Thank you.

Speaker 3

Sure. Thanks, Jim. So first, just on the quarter and free cash flow. We had a strong free cash flow Quarter and above our rule of thumb, you'll recall prior quarter we were somewhat below that rule of thumb. And so, I would just note to you, we're seeing some variability in this environment.

Speaker 3

And some of that, Jim, is a function of us making those investments Really leveraging our working capital. For the full year, we still expect to be within our rule of thumb for free cash flow, Albeit there may be some variability quarter to quarter. All of that intended really to go to number 1, our capital priority of Dividend payment and in tune debt repayment. And you I will note that for the quarter, we had pretty meaningful repayment of our debt and we got our net leverage Down from 3.4 to 3.1, and our expectation is we'll continue to make that a priority, and Our goal is to get back in our net leverage range for the full year by the end of the year.

Speaker 10

Thank you so much for the details, Chris and Nel.

Operator

Our next question comes from Keith from Northcoast Research. Keith, your line is now open. Please go ahead.

Speaker 11

Good morning, guys. Hey, Alice, let me hopefully give a little more color on the 23% growth. I understand it was a good Very good quarter for demand. But can you provide a bit more breakdown between the 3 different elements? Because I think I'm hearing is the serious Growth in the volume and growth in price increases.

Speaker 11

Can you provide a bit of context about the contributions of each?

Speaker 3

Yes. Sure, Keith. Happy to weigh in and Chris may have something on the back end of that. So 23% Is the all in, as we mentioned prior quarter, our focus is on integrating the companies and just the nature of Integrating our sales, we're looking at it on a combined basis. So that 23% is inclusive of Sirius.

Speaker 3

And I would just note, Notwithstanding my comment about seasonality at Sirius, the business is operating as expected and things are moving apace on the integration. Otherwise, I would just point back to our comments about end channels in contribution as well as Product portfolio and I'd say for the quarter we fired on all cylinders and really contributions came From many of the key spots in the investment areas that we've been focused on.

Speaker 2

Hey, Keith, and it's Chris. Just to add on to what Al said, I think he really coined it with hitting on all cylinders. So the business is hitting on all cylinders, the customer end markets, the portfolio And the integration, I know you asked a question about integration. I guess what I would say is number 1, Sirius, the integration is going outstanding. I could not be more pleased with the pace Integrating the businesses and bringing them together and going to market as 1 CDW and not really parsing out dollars and assigning creditors as we like to say.

Speaker 2

So I would just tell you that it's going great. Our focus this Q1 has been all about our customers and our partners And our coworkers in particular and creating the roadmaps and the support and the tools they need to be successful. And at the end of the day, I think we said a quarters ago, we expect 1 plus 1 equal more than 2, and there's absolutely nothing that is making us doubt that. We're very excited about What we're bringing to the market and in particular excited about how our customers are responding to the value add in the combined entity.

Speaker 11

Okay. I appreciate that. As a follow-up to that, in terms of like the turnover of the co workers and I guess the inflationary environment, can you Guys provide a little bit of color in terms of how is the turnover of the co worker right now and in terms of the compared to prior years? And then In terms of what you guys are forced to do in terms of salary adjustments, perhaps the impact that we have on operating expenses?

Speaker 2

Yes. Look, it's a great question. And we're facing the same tight labor market that everybody does. The good news is we've been an employer of choice For a very long time and we've focused on investing in our coworkers since our founding. And so the unique environment, the unique Culture is a real draw for coworkers.

Speaker 2

The ability to grow one's career, the interesting work we do, that all is Important as important as compensation to coworkers staying with CUW. We've seen some tick up, a little bit of tick up in attrition in certain But nothing that I would say is kind of worth noting. We're working harder To bring in the talent, it takes a little longer to get new talent in. But we're, of course, very focused on keeping our talent and that potential for attrition. In terms of the cost and adjustments to our Compensation, look, again, we think about total rewards to coworkers and that includes the work, the people, the benefits, Everything combined and not just the compensation per se.

Speaker 2

So we haven't had to make major adjustments. And then don't forget The large section of our organization is variable comp. And so it's all about driving growth and the more growth they drive, the more they make. And as you can see from our results, we should have a pretty happy team.

Speaker 11

Got it. Thanks.

Operator

Thank you very much. We have no further questions. Yes. And there's no further questions. So I'd like to hand back to Chris, the CEO, for closing remarks.

Speaker 2

Well, thank you, Daniel. I appreciate it and appreciate everybody's time today. I just want to emphasize that CW has never been more well positioned To support our customers in a fast paced and changing technology environment, we're very excited about the future. So I want to close by Recognizing the incredible dedication and hard work of our more than 14,000 co workers around the globe, it is their ongoing dedication to serving our customers, which is key and will continue to be key to profitably outperforming the IT market going forward. Thank you to our customers for the privilege and opportunity Thank you.

Operator

Thank you. You may now disconnect your line.

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Aperam Q1 2022
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