Christine Leahy
President and Chief Executive Officer at CDW
Thank you, Steve, and good morning, everyone. I'll begin today's call with a brief overview of our results, strategic progress and outlook, and then Al will run through the financials and our capital allocation priorities. And then we'll move right to your questions.
We had an exceptional second quarter. The teams continued to execute well in a challenging supply environment and delivered all-time record sales, margins and profits. For the second quarter, net sales were $6.1 billion, 19% higher than last year and our first $6 billion quarter.
Non-GAAP operating income was $516 million, up 23% and non-GAAP net income per share was $2.49, also up 23% year-over-year. These exceptional results reflect our ability to address customers' priorities across a broad array of end markets with solutions across the full spectrum of IT.
Digital transformation, agility and security remain top priorities, with ongoing focus on hybrid work and return to office driving collaboration, networking and endpoint solutions. Customers also continue to seek ways to manage costs while meeting or exceeding coworker and customer service level requirements. Our ability to meet all of these needs led to a broad-based and balanced performance and was a result of 3 key drivers: number one, our balanced portfolio of customer end markets; number two, the breadth of our product and solutions portfolio; and number three, our ongoing execution against our customer-centric strategy.
Let's take a look at how each contributed to our growth this quarter. First, the breadth and diversity of our customer end markets. As you know, we have 5 U.S. sales channels: Corporate, Small Business, Healthcare, Government and Education. Each channel is a meaningful business on its own, with annual sales ranging from $1.9 billion to over $8 billion. Within each channel, teams are further segmented to focus on customer end markets, including geography and verticals.
We also have our U.K. and Canadian operations, which, together, delivered sales of USD2.6 billion. This portfolio approach enables us to toggle to the best pockets of opportunity. Each team did an exceptional job this quarter. Our corporate team delivered another record quarter with a 34% net sales increase. Results were balanced and broad-based. Customers continue to invest to stay ahead of the curve to either begin or advance their efforts to address the accelerating pace of change.
Digital transformation drove excellent solutions growth with strong double-digit increases in netcomm, servers, collaboration, cloud and software. Customers are increasingly seeking our advice and expertise in navigating their IT journeys, and this drove strong performance in professional and managed services and warranties. At the same time, corporate customers continue to turn to us to meet their needs for hybrid and return to office solutions, and the team delivered another quarter of double-digit client device growth, reflecting both unit and ASP increases.
Small business performance was in line with our expectation and the team delivered a 4% increase on top of last year's 60% growth. This net sales growth understates demand as customers prioritize cloud and software solutions, which are accounted for on a netted down basis. A better barometer of customer demand in the quarter is the gross profit performance of small business, which increased at more than twice the rate of sales growth.
During the quarter, customer spend increased more than 20% for both security and cloud as customers modernize, optimize and secure the applications running on their endpoint devices. Infrastructure spending is the natural follow-on from remote enablement and return to office demand. Remote enablement remains strong, and the team produced another quarter of double-digit collaboration and client device growth.
Public posted an 8% increase this quarter. The health care team delivered another excellent quarter, up 30%. We continue to help our hospital systems and health care organizations leverage technology to mitigate staffing shortages and wage and cost inflation. A great example of this is seamless patient intake and recordkeeping solutions that use biometric security to improve emergency department throughput.
And while health care has taken a more cautious view towards cloud in the past, the benefits of flexibility and reduced IT support burden are compelling more customers to adopt cloud-based solutions, driving a double-digit increase in cloud customer spend.
Government posted 19% growth. State and local performance reflected continued success helping customers maximize the value of their IT investments, leveraging our expertise in professional and managed services. At the same time, the team is helping customers navigate through the complexities of funding programs and the impact on their long-term planning efforts.
While customers generally have until 2024 to 2025 to spend stimulus, data continues to proliferate, and we delivered excellent cloud and storage performance. Remote collaboration continues to be a priority, driving double-digit growth in devices and audio/video.
As we expected, Federal returned to growth in the quarter. Federal customers prioritized services, tied to solution inception and ongoing management. Similar to state and local, remote collaboration led to double-digit transactions growth.
After the past 2 years of unusual spending patterns, we anticipate a return to more normal season patterns for Federal, including fiscal year-end September budget activity. Higher ed's strong performance was offset by the expected decline in K-12, and overall education sales decreased 6% off of last year's excellent second quarter performance. The higher ed team continues to help universities enable student success and student access programs using technology to give institutions an enrollment edge. This includes deploying comprehensive endpoint solutions, security and campus connectivity to deliver enhanced dorm room experience.
K-12 posted a healthy seasonal increase, but remained below last year's exceptional stimulus-driven results. During the quarter, a third wave of emergency connectivity funding, ECF, was announced, which opened July 1 and extends through December 2023, adding complexity to an already broader way of funding. We continue to work with school systems to help identify how to maximize available funding to maintain equity and access IT advancements into the future.
In the near term, the team also continues to help educators implement connected learning spaces and to enhance security. Other, our combined U.K. and Canada results increased 24% on a reported basis. Both regions delivered excellent growth. U.K. was up significantly in local currency and delivered balanced growth across both public and commercial with excellent remote enablement activity. Canada increased double digits in local currency, primarily driven by commercial customers with excellent solutions growth.
The second driver of our performance was our broad and deep portfolio. Our ability to address customer priorities across the entire IT continuum resulted in excellent performance across our solutions and transactions portfolios. Solutions grew twice as fast as transactions. U.S. hardware increased low double digits. Growth was broad-based and included double-digit increases in server and server management and video/audio. We also continue to see underlying strength in notebooks across our commercial business.
Client devices, netcomm, enterprise storage and printing and scanning increased at a healthy single-digit rate. This exceptional performance was on top of 2021 second quarter double-digit hardware growth. Demand continued to outpace supply in several key areas, notably in networking and enterprise storage. Customers once again placed orders to get in line for second half 2022 projects, especially in netcomm.
While overall backlog ticked down slightly from last quarter, we exited the quarter with backlog at nearly twice last year's second quarter level. And once again, we leveraged our competitive advantages, including our distribution centers, our extensive logistics capabilities, deep vendor partner relationships and our strong balance sheet and liquidity position to navigate an ongoing supply challenge.
U.S. software increased nearly 40% compared to the prior year. Strength was broad-based as we continue to help customers manage data, enhance productivity and secure their IT environment with strong double-digit increases in storage and network management software, application suites and security software.
Cloud was an important driver of performance across the business and was a meaningful contributor to profitability, with customer spend and gross profit increasing by double digits. Infrastructure-as-a-Service, productivity, security, application delivery and connectivity were key growth workloads during the period.
U.S. Services performance was excellent this quarter. Growth was broad-based and balanced driven by professional services, managed services and warranties. Services net sales were roughly twice last year's level and represented 8% of total sales, up from 5% in 2021 and 2020.
And that leads to the third driver of our performance this quarter, our customer and coworker-centric strategy. Over the past 3 years, we have relentlessly focused on executing our strategy to enhance our high relevance and high-growth solutions and services fueled by organic and inorganic investments. Eight acquisitions have deepened and advanced our services capabilities, including automation, cloud-native and dev ops and cybersecurity, capabilities necessary to ensure we remain the trusted adviser to our customers as they accelerate their digital transformation. Capabilities that enable us to best serve customers, whether in a physical, digital or cloud-based environment in the U.S. and internationally.
Through our acquisitions, we welcomed nearly 3,000 new co-workers with more than half in technical roles. Since year-end 2018, our technical team has doubled in size. Today, more than 5,400 presales specialists and engineers work alongside our world-class sellers to deliver the complex digital transformation solution from code to cloud and data center to database that our customers want and need.
All of our investments, whether homegrown or acquired, are designed to maximize our key points of differentiation in the marketplace and ensure we continue to help customers achieve the outcomes they need from technology so they can do great things.
Let me share a couple of recent examples that demonstrate how our investments are making a difference for customers. In the federal space, the power of bringing 3 winning teams from CDW, Sirius and Focal Point together is evident in the cybersecurity solutions we are delivering to the intelligence community. Together, the focus is on enhancing our scope across the Department of Defense and civilian agencies. To gain traction in this space, you must deliver proof of concept, which we do with our dedicated Advanced Solutions lab. You must provide training and support and you need agency-to-agency endorsement.
While the CDW government team already had both expertise and scale, Sirius' federal team brings a track record of success and solution configuration, technical integration and managed services. And our cyber experts at Focal Point Academy deliver the professional training these agencies need. Our relevance to federal customers has never been greater.
The second example of how our investments enable customers to achieve great outcomes comes from our small business team. A provider of Software-as-a-Service solutions to pharmaceutical and life sciences companies needed to address their aging data center infrastructure. Their customers' workloads and data were being run on service that were well beyond end of life. The servers clearly were not capable of supporting their existing business, let alone growing their SaaS offerings. The CTO initiated a competitive bidding process for a very small-scale professional services contract to provide proof-of-concept on cloud migration, starting with a couple dozen servers. CDW and our competitors all utilize the same public cloud provider, but CDW won based on our experience with migrations, our proven post-migration support and our long-standing trusted relationship with the customer, serving their transactional product needs.
The CDW team bolstered by technical support from our IGNW Digital Velocity professional services team built a secure landing zone in the public cloud and the proof-of-concept proved so successful the customer is now migrating hundreds of servers. Seeing the huge burden CDW lifted off the customers' engineering team who are having trouble balancing their day-to-day operations while trying to expand their cloud footprint, the customer contracted CDW for ongoing managed services of their rapidly growing cloud environment. The current annual services opportunity is at $750,000 run rate and is on a path to $1.5 million. By staying close to the customer, CDW once again had the opportunity to help make IT work, allowing the customer to improve the scalability and performance of their software offering.
Investments in our customer and coworker-centric growth strategy are foundational to our ability to consistently and profitably outgrow the U.S. IT market, and that brings us to our expectations for the rest of the year.
Our teams' terrific execution and relentless focus on the customer delivered significant outperformance to our baseline outlook in the first half of 2022. Given this excellent performance, we continue to expect to outperform the U.S. IT market by 325 to 425 basis points, 125 basis points higher than both our long-term average level of outperformance and our original view at the end of year 2021. Our estimate of U.S. IT market growth in 2022 remains 4%. Taken together, this equates to constant currency growth of 7.25% to 8.25% above 2021 combined CDW revenues of $22.8 billion. Recall 2021 combined CDW is calculated as though Sirius was acquired on January 1, 2021, instead of its actual acquisition date of December 1.
On a reported basis, our outlook represents a 17.5% to 18.5% increase over 2021 results on a constant currency basis. Our outlook continues to reflect our baseline expectations that we will mix into more sales of solutions in the back half of the year, notably cloud and security. Given this expected change in second half mix, we also expect to deliver profit growth faster than sales growth, even as we continue to invest in our future. Our outlook also continues to reflect our expectations that supply constraints remain relatively consistent with the first half of the year.
While we're cognizant of economic headlines, to-date we have not seen a change in behavior that would impact our view on the second half of the year. Of course, we remain mindful of economic risks as well as other wild cards, including the potential for further disruption to supply and changes resulting from COVID incidents rates. We will keep a watchful eye as always on these and other potential issues. And as we always do, we will provide an updated view on customer activity and our annual outlook on the next call.
In the meantime, we will continue to do what we do best: leverage our competitive advantages and out-execute the competition. We will also continue to invest to ensure we are remaining our customers' trusted technology partner of choice, helping them deliver the business outcomes they need.
Now let me turn it over to Al, who will provide more details on our financials and outlook. Al?
