CDW Corporation

Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. © transcript Emily Beynon Hello and welcome to today's CDW fourth 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. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to Kevin White, Director of Investor Relations. Kevin, please go ahead.

Thank you, Bailey. Good morning, everyone. Joining me today to review our fourth quarter and full year results are Chris Leahy, our President and Chief Executive Officer, and Al Morales, our Chief Financial Officer. Our fourth quarter 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. 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 risk and uncertainties that could cause actual results to differ materially. Additional information concerning these risks and uncertainties is contained in the earnings release in the Form 8-K we furnished to the SEC today and companies' 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. 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 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 is one extra selling day in the fourth quarter of 2021 compared to the fourth quarter of 2020, and net sales growth rates are provided as an average daily sales. References to growth rates for hardware, software, and services today represent U.S. net sales only and include serious. They do not include results from CDW-UK or Canada. References to growth rates for specific products and solutions, including cloud security, today represent U.S. net sales only and exclude Sirius. The historic combined 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 period presented. 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. With that, let me turn the call over to Chris.

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 fourth quarter 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. We'll move quickly through our prepared remarks to ensure we have plenty of time for questions. 2021 was a year of both strong financial performance and strategic progress. The teams delivered a $21 billion 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 this growth, and non-GAAP net income per share increased 21% to $7.97. These exceptional results demonstrate the power of our resilient business model, a model that has enabled us to deliver industry-leading performance year after year, including through the past two years of a global health crisis, unprecedented supply interruptions, and evolving customer priorities. You see the power of our model and the performance across our balanced portfolio of customer and markets over the past two years. As you know, we have five U.S. sales channels, corporate, small business, healthcare, government, which includes federal and state and local customers, and education, with K-12 and higher ed. We also have our U.K. and Canadian operations, each serving public and commercial customers. 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 two 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. The past two years also highlighted the power of our business model in 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. In 2021, while work-from-home and learn-from-home enablement remained 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 two years of unprecedented supply challenge 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 million client devices, despite meaningful supply shortages in endpoint devices. In 2021, while facing extended lead times for transactions and solutions, we delivered solid growth in both categories. 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 two 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% and 10%, respectively. Of course, our business model is not the only component of our formula to profitably outgrow the U.S. market. 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 two years, time and again, CDW coworkers demonstrated why they are so vital to our ability to successfully deliver industry-leading performance year after year. Let's take a closer look at what the teams delivered for the fourth quarter. For the quarter, net sales were $5.5 billion, including $197 million of results from Sirius, which closed on December 1st. On an average daily sales and constant currency basis, net sales increased 9.6%. Non-GAAP net income was $285 million 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 logistical and distribution capabilities to advise, design, and orchestrate full outcomes to address customers' priorities across all of our customer and markets. Outcomes that deliver five key organizational benefits, innovation, lower cost, agility, risk mitigation, and enhanced experiences for customers and coworkers. Let's take a look. Corporate delivered a 33% 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. 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. On the public side of the business, excellent performance in both healthcare and higher ed was not enough to offset expected declines in government and K-12, 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-19 and acute care. The expected decline in federal reflected the lumpy nature of government contracts as the teams faced two meaningful overlaps in the fourth quarter of 2020. The wind down of our devices of service solution for the US 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. 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 fourth quarter performance when they helped customers take advantage of the year-end use-it-or-lose-it care funds. As we shared last quarter, we continue to help our customers work through the planning required to evaluate multiple funding opportunities and multi-year 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-12, and overall education sales increased 9% on top of 2020's fourth quarter remarkable 142% growth. Higher ed growth reflected our ability to meet growing demand for student success programs. 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-12 team delivered excellent net sales performance against very tough, unseasonal fourth quarter 22 compares. Consistent with expectations we've previously shared, net sales declined. Although down year over year, fourth quarter client device sales were more than double a typical pre-COVID fourth quarter. Both the U.K. and Canada delivered high-teens local market growth. 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 the U.S. Our success addressing customer priorities is evident in our fourth quarter portfolio performance where we delivered balanced growth across transactions and solutions, both increasing mid-single digits. 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. Writings remained strong as customers turned to CDW for expertise across the full technology solution stack and entire lifecycle. Lead times extended in several key solutions areas, notably netcom, 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 of security assessment, data protection, and threat mitigation with many solutions delivered via cloud and software. 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. Recent acquisitions are paying off, contributing meaningfully to this quarter's growth. So as you can see, our fourth quarter delivered a strong finish to an excellent year of financial performance. 2021 was also a year of excellent strategic progress against our three-part strategy for growth, which is to first acquire new customers and capture share, Second, enhance our solutions capabilities. And third, extend 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 for our 2020 acquisitions of IGNW and APTRAS, furthered our strategy to bolster our services capabilities. Deep services capabilities are critical to our ability to deliver full organizational outcomes across the full stack in the entire lifecycle. 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 US. Amplified IT's expertise as a systems integrator enables us to facilitate end-to-end solutions for education customers. This leads to greater customer engagement and stickiness and provides insights into opportunities to further help our customers across the full IT lifecycle. During the fourth quarter, the CDW Amplified for Education team worked closely with Google and Internet2 teams to make it easier for institutions to adopt Google Workspace for Education Plus. In addition to ease of procurement, With the amplified IT team on board, we were able to deliver additional value to customers through much needed deep technical expertise and services. Expertise and services that deliver organizational outcomes, enhanced collaboration, streamlined instruction, and a secure learning environment. This joint campaign generated more than 30 net new awards in the fourth quarter with more than $11 million 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 life cycle. Internal investments made in 2021 also enhanced our ability to deliver on this strategy. These included digital investments in 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 three-part growth strategy are integral to our ability to consistently and profitably outgrow the US IT market. That brings me to our thoughts about 2022. In 2022, we will continue to execute against our three-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 a dedicated, seasoned executive. 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 Sirius coworkers had a CDW email address on day one, a seemingly small accomplishment but with really big impact. Turning to 2022 financial performance, our outlook is built off a combined 2021 CDW and Sirius net sales figure of $23 billion, which includes $2.2 billion 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.S. IT market growth of 3.5% plus 200 to 300 basis points in constant currency of CDW outperformance. This outlook reflects our view on three key drivers. First, we expect a moderation in U.S. GDP growth. Second, 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 require integrated solutions that leverage our services, cloud, and hybrid expertise. Wildcards remain 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. I'm extremely proud of the excellent financial performance and strategic progress we've made during the past two 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 out 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.