CDW Corporation

Good morning, ladies and gentlemen, and welcome to the CDW first quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After today's presentation, we will conduct a question and answer session, and instructions will be given at that time if you would like to ask a question. I would now like to hand the conference over to Brittany Smith, Vice President of Investor Relations and Financial Planning and Analysts. Please go ahead.

Thank you. Good morning, everyone. Joining me remotely today to review our first quarter results are Chris Leahy, our President and Chief Executive Officer, and Colin Kibo, our Chief Financial Officer. Our first quarter earnings release was distributed this morning and is available on our website, investor.cdw.com, along with supplemental slides that you can use to follow along during the call. I'd like to remind you that certain comments made in this presentation are considered forward-looking statements under the private securities Litigation Reform Act of 1995. 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 in Form 8K reference to the SEC today and in the company's other 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 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. You'll find reconciliation charts in the slides for today's webcast and in our earnings release in Form 8K we furnished to the SEC today. Please note that all references to growth rates or dollar amount increases in our remarks today are versus a comparable period in 2020, unless otherwise indicated. In addition, all references to growth rates for hardware, software, and services today represent U.S. net sales only and do not include the results from CDW UK or Canada. Also, there was one fewer selling day in the first quarter of 2021 as compared to 2020. 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. Thank you, Brittany.

I'll begin this morning with an overview of first quarter results and drivers of performance and share our updated thoughts on 2021. Colin will then take you through a more detailed look at our financials, capital allocation strategy, and outlook. We'll move quickly through our prepared remarks to ensure we have plenty of time for questions. We had a strong first quarter. Our results demonstrate the balance and strength of CDW's business model and strategy. For the first quarter, net sales were $4.8 billion, 12% above last year on an average daily sales basis, adjusted for the impact of one fewer business day in the first quarter of 2021 than 2020, and up 10.9% in constant currency. Gross profit increased 5.1% to $795 million. Non-GAAP operating income was $368 billion, an increase of 21%. And non-GAAP net income per share was $1.74, up 26.2% on a reported basis and up 25.3% in constant currency. The diversity of our end markets and solutions portfolio continue to serve us well, providing balance and driving our strong results as we overlapped last year's end of quarter surge in demand for remote solutions. During the first quarter, we saw early signs of recovery as customers became more optimistic about the macroeconomic environment due to lower COVID case counts, higher vaccination rates, and new government stimulus. Customer spending in channels most impacted by COVID last year rebounded. We continue to help customers with remote enablement, resource optimization, security, hybrid and cloud solutions, and digital transformation. This past quarter, customers allocated more technology spend to infrastructure needs, driving growth for our solutions portfolio. Customers were focused on investments for the future, reconfiguring how they interact with customers, strengthening hybrid environments, industrializing remote enablement, and restarting projects that had been delayed due to COVID. We combined our services and broad solutions portfolio with our extensive technical knowledge and unique logistical and distribution capabilities to advise, design, and orchestrate the best outcomes for our customers. Customers choose CDW for three simple reasons. First, customers want a partner who know their business and their industry. Second, customers want a partner with broad and deep technical capabilities. And third, they want a partner who is focused on the optimal outcome, one who is agnostic across brand, technology, and consumption model, and has an informed opinion. These reasons are fundamental to why CVW outperformed in the first quarter and will continue to win in the marketplace. During the first quarter, we remain focused on executing against our strategy and investing in high relevance and high growth solutions and services capabilities, including our acquisition of Amplified IT. Amplified IT is a Google premium education partner and a leading provider of cloud-based services, solutions, and software for education customers, and has been a partner of CDW since 2016. We share a similar culture that puts customers first, and together we will accelerate our work to help customers' schools achieve great educational outcomes through technology. Last quarter, we leveraged our distribution center's extensive logistics capabilities Deep vendor-partner relationships and strong balance sheet and liquidity position can navigate supply challenges. Supply constraints and availability for client devices and some infrastructure products have been more challenging since the first quarter ended. Disruption has been caused by both component availability issues and supply chain logistical issues. The supply situation is fluid. Constraints will likely continue through the second half of the year and potentially into next year. Now let's take a deeper look at first quarter customer and market performance. Corporate declined 4% as customer spend continued to recover. Customer expectations that a hybrid environment will become the future work model drove investments in notebooks and other remote enablement tools, while desktop and video sales declined. Solutions performance was flat, a significant improvement versus the previous quarter, as NetComm and data center projects returned. Small business delivered strong growth, increasing 12% as optimism improved. Our teams helped customers with remote enablement, netcom, and data center projects, leading to solid growth in both transactional and solution spend. Net sales for our government channel decreased high single digits. Federal declined mid-single digits. However, excluding our devices of service solution for the U.S. Census Bureau, federal grew high single digits. led by engagements for the Department of Defense across both transactional and solutions categories. The state and local channels decreased high single digits. Customers paused their spending as they took a wait-and-see approach during the quarter for stimulus support under the new administration. Education again grew triple digits, achieving over 100% growth powered by K-12. K-12 customers continued to focus on equity and access as well as ways to address learning loss, which drove strong transactional and solutions performance. Customers turned to us for holistic capabilities and expertise to help schools enable a variety of learning models, remote, hybrid, blended, and in-person. Higher ed increased low single digits. Growth slowed versus prior quarters as customers assessed their plans to invest stimulus funding to prepare for returning students. Healthcare declined 2%, a meaningful improvement to prior quarters. Customers were more optimistic due to increased income generated from the return to elected procedures and the accelerated vaccination pace. Solutions returned to growth driven by customers refreshing and updating their data centers. Other, which represents our UK and Canadian operations, increased over 20% on a reported basis. In local currency, the UK team increased net sales double digits, and the Canada team drove high single-digit growth. Strong results for both markets were driven by fiscal year-end government spending, as well as continued investment by healthcare and education customers. Our first quarter performance benefited from the diversity of our customer base and from our deep and broad product portfolio. We continued to meet the critical demands of our customers. Transactions increased strong double digits and solutions returned to growth, increasing low single digits. Hardware was up strong double digits driven by excellent notebook growth across all channels, leading to 26% client device growth. Software declined high single digits due to a decline in software licenses, but software gross profit growth remained solid. While services decreased low single digits, when adjusted for overlapping the contribution from the Census project last year, services grew strong double digits, driven by strength in our professional and managed services. Services are fundamental to our go-to-market approach and a key enabler of our value proposition. We also delivered excellent growth in our cloud practice. Cloud customer spend increased strong double digits across all customer end markets, driven by robust growth in infrastructure as a service, security, productivity, and collaboration. We expect strong customer demand for cloud solutions to continue, and we are well positioned to deliver. Our first quarter operating and financial performance reflects the combined impact of our balanced portfolio of customer and market, our full suite of solutions and services across the IT landscape, and our ongoing success executing our three-part strategy for growth. They are important drivers of our past and future performance. The diversity of our customer and market serves us well when macro or other external challenges impact various industries and customers differently. Our extensive product, services, and solutions portfolio positions us to meet our customers' total needs across the spectrum of IT. The balance of our customer and market and our offerings are especially relevant in the current environment. And the final driver of our performance is our three-part strategy for growth, which is to first, acquire new customers and capture share, second, enhance our solutions capabilities, and third, expand our services capabilities. Each pillar is crucial to our ability to profitably advise, design, orchestrate, and manage integrated technology solutions our customers want and need today and in the future. Let me share two examples of our strategy in action and how we helped customers last quarter. Our small business team helped a customer that enables digital platforms to utilize natural language processing and machine learning to upgrade its technology infrastructure after it had been postponed due to COVID last spring. In early 2020, our account manager was working with the customer's technology team on a server upgrade at its primary data center. COVID hit and the customer froze all capital expenditures. Our account manager did a great job nurturing the relationship so that CDW was well positioned to help our customer when the project resumed. Last quarter, the customer was more optimistic about its future prospects and ready to proceed. He got access to capital and wanted to take advantage of its employees still working remotely. The project scope was expanded to upgrade all infrastructure, security, networking, storage, servers, and software at its headquarters and its primary data center. The customer relied heavily on our team for its expertise to design and implement the complex solutions. In 2020, customers had to react quickly to the impact of COVID. In 2021, we see that our customers are being strategic and proactively looking to technology to be more effective and efficient in a post-COVID world. As I shared earlier, we acquired Amplified IT at the end of the first quarter. We are excited about the opportunity to go to market together with our combined strengths and to orchestrate complete hardware, software services and cloud solutions that leverage our full stack capabilities and drive full outcomes for and deep engagement with our education customers. We started to execute against this vision immediately. CDW's relationships and extensive contract vehicles with the State Department of Education enabled the customer frictionless access to Amplified IT's portfolio. The school system needed to enhance its communication and collaboration tools to serve its community in different learning formats. So it centralized and standardized its technology with the help of Amplified IT and CDW to provide the right tools and support to its teachers and students across approximately 250 schools. We are excited about the addition of amplified IT and see significant opportunity ahead. These examples highlight CDW's three-part strategy for growth and demonstrate our relentless focus on customer service, the importance of M&A to add solutions and services capabilities to best serve our customers, and how we leverage our competitive advantages to win in the marketplace. I'm so proud of the way that our teams continue to deliver for our customers. Our distribution and configuration centers remain fully operational. We expect our office coworkers to continue to be remote until at least this fall, with plans underway by our Reunite team to reimagine our future of work to continue to serve our customers and partners better than anyone else can. Let me now share our updated thoughts on 2021. We are increasing our outlook for both US IT market growth and CDW's net sales premium to market. We now expect the US IT market growth to be about 4% and our top line to grow 300 to 400 basis points faster than the market in constant currency. For the second quarter, we are encouraged about customer demand to date and how our teams are executing. That said, we are cautious about the supply environment, which, as I mentioned, has become more challenging since the end of the first quarter. While there are other wild cards, such as new COVID variants, vaccine rollout, return to office, and potential policy changes, including infrastructure and taxes, our confidence in the prospects of the business have never been higher. Technology will be more essential to all sectors of the economy and will play an increasingly important role in the years ahead. We have confidence that we have the right strategy to best serve our customers and partners, enhance our competitive position, and deliver sustainable, profitable growth. CDW's role as a trusted, strategic partner to our customers is more important now than ever. 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 out-execute our competition. Before I turn the call over to Colin for his comments on the quarter, I want to say a few words about the CFO transition plans we announced earlier today. First, I want to thank Colin for his contributions to CW over the past 13 years and his strong leadership as our CFO since 2018. Colin has played a significant role in our evolution and consistent market-leading growth as a public company, and he has established a truly best-in-class finance team. On a personal note, it's been wonderful to be a close colleague of Colin's over 13 years, and I've greatly appreciated his partnership. We are also appreciative of Colin's commitment to support CDW in the search for his successor and to remain on the board to ensure a smooth transition. With that, I'll turn it over to Colin.