CDW Corporation (CDW) Earnings Call Transcript & Summary

Okay, why don't we go ahead and get started. Thanks, everybody, for joining here this morning. My name is Adam Tindle, I cover security infrastructure software against supply chain here at Raymond James. Very happy to have the team from CDW here this morning, CEO, Chris Leahy; CFO, Al Miralles; and Kevin from IR has been working diligently on an updated slide deck that we'll go through this morning. You may know CDW as an industry-leading value-added reseller that touches a lot of different areas of technology, so a great company to start off with. It is a profitable growth story. It's been a great stock for many years, taking a little bit of a breather here near term, which presents the opportunity. And with that, we're going to have Chris do a presentation. We will have a breakout downstairs after this, sort of an open format Q&A down there. For our format here in this presentation, it's largely going to be going through the slide deck and introducing you to the company. So with that, Chris, thank you.

Yes. All right. Thanks very much, Adam. And it is always a pleasure to share the CDW story with all of you, and talk about how excited we are for the future and the opportunity and success. It's particularly exciting today because this is at least my first time back in person and Al and Kevin, so it's just really great to see all of you in person. Thank you for being here. Thanks for showing up. I have to start with just a brief housekeeping item, which is we will -- forward-looking statements and non-GAAP information and metrics is going to be used, but please just view our SEC files for the safe harbor rule and everything that we talk about today will be as of our last earnings call. So I think I did that justice, and we'll move on. All right. So let's just start with a brief, who is CDW. I know many of you know us well, some of you might not. So we are the market-leading technology solutions provider. And we're B2B, we sell to businesses both smaller, larger and at the enterprise space and government, education and health care. We are at about 14,000 coworkers at this point, 2/3 of whom are customer-facing. And that 2/3 number, for those who have held our stock, known us for a while, that has not changed dramatically over the years, if at all, because we really are a people business and a customer-facing business. And actually, I want to take a step back and just mention how we talk about CDW and our purpose. So at CDW, we say that we make technology work so that people can do great things. And I think that's really important because if you ask any coworker at CDW, they will tell you that. And that is a reflection of a really unique connection and commitment to our customers. I think it's unique. I've been at CDW 20 years. And when CDW was founded in 1984, Michael Krasny had 2 simple principles that have held true for 35 years, and I think were very important end drivers of success over the last 2 years. Number one, the customer is at the center of everything we do. Every decision is universally based on the customer. And the second was happy coworkers equal happy customers. That's the service profit chain. And that sounds very simple. It's not easy to implement, but that really is who we are and why we do so well in my mind. What that also means is over the years, our closeness to the customer is all about evolving with them, anticipating their needs and evolving our business to make sure we can meet them, as some of our leaders like to say, at the next intersection of where they're going. So when you look at CDW today, we are a full stack, full life cycle, full outcome provider. And that means we've got over 100,000 brands -- 100,000 products, 1,000 brands. And we are kind of independent advisers to our customers from the front line, let's whiteboard against the problem you're trying to solve all through orchestrating the solution with all of those brands and products in whatever consumption model and then ultimately managing the solution for our customers. Our sweet spot of customers, we've said this for a while, is about 5,000 or less. Several years ago, I said we're inching up to 7,000. We really do have a sweet spot in the medium and large business area. That said, we do very well with some very large, what would be enterprise customers. If you think about government, for example, the federal government is a pretty large enterprise, health care systems, et cetera. And our recent Sirius acquisition, they are incredibly strong, profitably strong in the enterprise space. So we're excited about bringing those capabilities together. So at the end of the day, look, we have an attractive business model that allows us to profitably take share, outgrow the market and provide superior returns to our shareholders. And what I wanted to do today is talk about how we've gotten there and why we're so well positioned to continue to win in the future. Next slide, Kevin. Okay, so let's just start with the market. It is large, and it is growing. So when we look at the market, a $1.2 trillion market that we play in, and then we pair it back to our addressable market, we're very careful about trying to really scope our addressable market. We look at the U.S., the U.K. and Canada, where we have scaled physical presences. We absolutely serve 150 countries, but that's really where our customers are grounded in centered. It's a growing market. So if you look at the addressable market, it's about $400 billion. That was our look in 2021 and CDW is 20 -- almost $21 billion in that market, so a very small share. According to IDC, we look at the market over the last several years, 7% growth. And of course, CDW has consistently outgrown that market between 200 to 300 basis points. Now the other thing I want to point out because it's very important is the composition of the market, highly fragmented. We still, to this day, compete against tens of thousands of value-added resellers out there. So there is plenty of room for us to take share. And when I look forward, I see a lot of headroom for us to continue to grow and continue to take that share. Onto the next page. Okay, strategy. Our strategy, you've heard this. It's pretty straightforward. It's about acquiring new customers and deepening our relationship with our current customers. It's about enhancing solutions in high-growth areas, and it's about extending our services in the areas where we're needed. Each of these pillars, and we'll talk about this a little more, each of these pillars are integrally related and critically important to the ability to continue to deliver for our customers now in the future and outgrow the market. Now the thing that I would say, and you all know is strategy is only as good as execution. And our execution has allowed us to, as you can see on the right side of the chart and as I said a minute ago, outgrow the market profitably and in a superior return way over whatever period you look at. If you want to go back to before the Great Recession, and look forward or after the Great Recession. So we don't try to play with the numbers to make them look good. It has just been a constant drumbeat for years and years. Kevin? Okay. This is a little bit of a busy slide, but it's an important slide because it's -- it reflects one of the things that's critical to our ability to execute and win, and it's our balanced customer end markets. So as you know and you can see, we have in the U.S., we have 5 customer channels, all of which are over $1.9 billion in their own right. Plus we have our Canadian and U.K. operation, and that sits in other. As I said, they are each meaningful size in themselves, multiples of many of the VARs out there. The scale enables us to further align these customer markets, for example, when we talk about government. We have a team that focuses only on the federal government, a team only on state and local. And then within federal, we have a Department of Defense and civilian. Same thing in education. We have a team that focuses on K-12 and a team that focuses on higher education. And even within higher education, you'll have private institutions and you'll have large state institutions. So a derivative of the scale is the ability to get very intimate with the customer and focus resources on the solutions that they need and what they need. The other thing, and you look to the right here, you absolutely saw this in the Great Recession in these last 2 years, when exogenous factors impact these various markets, macro events, technology events, whatever it might be and in the last 2 years, it's COVID obviously. The diversity allows us to continue to deliver growth and superior returns. And so if you look at the top there, the Great Recession and the bottom chart there, you'll see that during the downturn, our small business and commercial segments were the first to respond to a negative GDP environment, okay? Our public sector was more resilient during that period. And then coming out of the Great Recession, and if you just think about what we announced for our 2021 results coming out of the COVID environment, small business is leading the pack and corporate and international and health care and public is less robust now, but enormously robust over the last couple of years. So the point of this slide, even though it's a bit busy, is scale, diversity of customer end markets and that balance creates incredible resiliency in our business model. Okay. I really like this picture because it's a reflection of a very straightforward value proposition. We have 2 constituencies. We have our partners, and we have our customers. And how do we consistently grow share? Well, it's pretty straightforward, as I said. Not easy to implement, but pretty straightforward. What's our value to the vendor partners? 250,000 well-established customers and an efficient way to reach those customers. That's pretty powerful. Given the depth and experience that our sales folks have and our technical teams, we'll talk about that in a minute, our partners trust CDW to bring their technologies to market in a way that they would want those technologies brought to market. So they literally see us as an extension of their sales and marketing arms, a much more efficient, but as effective. That's how they view us. And it's very powerful when you've got that size and scale and number of customers. From a customer perspective, what do they value? Well, we'll get into how complex technology has become. But basically, it's the breadth, it's the depth, it's the expertise, it's the access when you're a business that doesn't have the kind of return phone calls from the partners, CDW plays a really important role. So they, the customers see us as an extension of their IT team. So we're really extending the partners into the customers and vice versa. And what's the beautiful thing here is it's a virtuous cycle. So the more important we are to our partners, the more we get access to technology, the more resources they put behind us in way of investment in people and the more important we therefore, we come to our customers. The more important we are to our customers, the more importantly we are to our partners. And so it really is a virtuous cycle. And this is the value proposition that has been enduring for literally 35 years, back to the evolution and our ability to evolve with the market. We still make this absolutely applicable to our customers. Kevin? Okay, so on this page, I'd like to think of this page as the customer's windshield, like this is what they're looking at and trying to make decisions. And it's just a small spec because this is lots and lots of providers and lots of lots of technologies and options regarding consumption models, et cetera. But it really is a visual depiction of how complex and interrelated technology has become. I mean if we take a step back, I think we can all agree, technology is now more essential than ever to every walk of life, to every industry to operate, to compete, to win, to grow. Absolutely essential. But it's also more complex because of the choices, because of the brands, because of how it has to work together. Our customers are looking to make the infrastructure and endpoint experience, if you will, work seamlessly together. So they're building hybrid infrastructure, they're building on platforms, they're building on endpoint solution devices, they're building security across, but it's all been worked in a seamless way because that's the expectation, and that's frankly that's the imperative to be able to survive in today's world. and to deliver whatever that mission might be. So from an education perspective, certainly, it's surviving higher ed and making sure the revenue streams are going to continue. But how do you do that? It's competing as the best educational institution out there. So -- did you go forward a slide? You did? Yes, I just wanted to -- on this one, I just wanted to stop for a second because I know if we've met over the past 3 or 4 years, one of the things that I like to convey is what our customers tell us they like about us, why they look at us as a trusted adviser. And it has remained remarkably consistent. And I think it's because we evolve to make sure we're addressing those 3 things. The first thing is customers really appreciate that we understand the industry they're in, back to our vertical segmentation. We understand their business because we ask questions. And we understand their IT environment. So just that understanding of who they are, and what their needs are is critically important. The second thing is the breadth, depth and experience that we bring to bear. They trust that because it's not just a particular brand or solution. It's focused on an outcome and the best technology to get to that outcome. The third thing is, and I'm just going to say it straight, they don't like to be sold. And they look at CDW and don't feel like we're selling. They feel like we bring a point of view and are agnostic, frankly, as to the brand, as to the technology or the consumption model. Our customers are long-time customers. I like to think about them as enduring, expanding relationships. And if you look at customers today, on average, they're 11-, 12-, 13-year customers. Obviously, that number doesn't go up too quickly because we're always adding customers. But over a sustained period of time, to have that as your average and it's really reflective of the value we bring and the way that we do it. Okay, next. Okay, this slide, this is really a, how do you choose and use technology, that's how I think about this slide. So back to the transformation and the evolution, we really have evolved from a technology product reseller to an integrated solutions provider. And let me just pause here for a second to talk about full stack and full life cycle. In the middle, you'll see that's what we talk about when we mean full stack. Why? Because customers don't buy a piece of cloud, they don't buy a piece of hardware. They buy an infrastructure solution that is typically comprised of a component of services, component of cloud, component of software, component of hardware. So that's how we sell, we sell in an integrated way across the full stack because that's how our customers buy and that's how they think about the solution. Now the circle that's going around, that's really the IT life cycle and how we come at it. So you see listen at the top. I think that's one of the most important things we do. We're very good listeners, and we always are playing back to our customers, what we heard, ultimately what they're trying to accomplish and make sure we understand it before we move into the advise, design, orchestrate and manage. So I was going to say on the advise, design, orchestrate and manage -- I think I'll talk on the next page. Yes, let's go to the next page because what I would say is very few competitors have that. But this page, I want to just hover on for a minute and double-click on. The reason is this is a good kind of view of go-to-market when it comes to solutions and services. And let me just orient you. If you look across the top, you see on-prem, hybrid multi-cloud. Why do we do that? Because where technology sits and how it's consumed for every one of our customers is in motion. Nobody is on-prem, hybrid or multi-cloud. Everybody, maybe aside from cloud natives, is in all of those buckets. And we have to talk to our customers in a way that addresses the dynamic and fluid nature of what they're doing. Nobody gets from A to B in terms of changing technology debt end of the year or 2 years or 3 years, frankly, because technology is changing. So we talk to our customers with that framework. And then if you go down the side there, design, orchestrate and manage, that is the life cycle I was talking about. So design is really architecting, choosing, planning across the on-prem hybrid or multi-cloud. Orchestrating is exactly as it sounds. It's harmonizing it. It's really just that simple. It is purchasing, deploying, integrating, implementing, managing, migrating, making sure it's harmonized together, so it does what it is supposed to do, coworker experience, mobile app, easy to use, whatever it's supposed to do. That's what orchestrating is. Manage. We've built our managed services over the years dramatically. Why? Because, number one, it takes off the plate of our customers' work and it allows them to spend their time on what they want to spend their time on, which is strategic initiatives. Number two, think of it as eyes and ears everywhere. When you're engaged in managed services with your customers, you're doing the day-to-day monitoring, you're observing, you're optimizing, you're doing all of those things. You have eyes and ears everywhere. You understand even more deeply what's happening in the IT environment, so we can be very proactive in going back and pursuing opportunities with the customer, and it's incredibly sticky. Okay, all right. Well, it's always good to have a slide that's up and to the right. You all are likely familiar with the last several acquisitions that we've done. These acquisitions are really driving what I would call speed to scale, which is speed to success. And this chart here just really shows you some of the organic ways we've invested in the company to build out those verticals along the way. And then more recently, the decision to acquire really was about bolstering certain of our capabilities and creating more scale in certain areas that are high growth and high demand like security is a great example. But if we tick -- if you look at the top, and we tick across -- I don't want to miss anyone. If we tick across the last 2 years, we've got Aptris. Aptris, remember, delivers automation and ServiceNow, which is a critical component of every conversation we're having. Scalar was a pure play up in Canada. And what was nice about that is it really balanced out our portfolio in Canada with solutions and services. We were a little more a deficit up there. IGNW has accelerated our digital velocity practice. And as you can imagine, that is just on fire. Amplified IT has enabled us to provide cloud management services to the K-12 market, very interesting things we're doing there, including some of our own IP work. Focal Point enhanced our cybersecurity and again, on fire, won't surprise you. And then most recently, Sirius. We were just at the serious kick off this past Sunday, Monday, Tuesday. It was fantastic, a lot of excitement going back and forth. They accelerate our capabilities in hybrid infrastructure, digital capabilities, security and managed services. And it's really -- what's wonderful is to see the sales teams, frankly, and the technical teams just organically coming together and starting to plan on their own to drive successes within their customers. So look, these investments provide the capabilities as I've said, that we need, and it's the implementation, it's getting the execution right that allows us to bring to bear the value to our customers as quickly as possible and in a way that the customer feels like they're dealing with one CDW. This notion of being joined up is never more -- has never been more important. It's too complicated, there's too much going on, there's -- people's jobs are on the line. So the feeling that CDW is a single customer who can do this all for me, the customer, and I have like 1 gateway in, not people trying to sell me, knocking different doors, but CDW, 1 gateway and can do it all, has been incredibly successful. And of course, for those of you who know us well, we're really disciplined. So the M&A that we did, went through our rigorous process as it always does, and it checked all the boxes from a strategic fit to an operating cultural fit to financially compelling. Okay, so people, we often say, if you want to know where we're going, see where we're investing in our people. And we have been investing in our people. And really, the way I would characterize it is investing in how we go to market, investing in how we serve our customers. Let me start with our sales team. I'm not shy or afraid to say we have the best in class. I think we're the best-in-the-world sales organization. And we continue over the years to invest in those individuals. They're highly productive, 50% of our sales come from our sellers who are with us over 7 years. I mean we have sellers who have been here for a very long time, they make a very good living. But we continue to make sure that they are -- they have the tools, the arrows in their quiver to go to market. Not just the products and solutions, but the how, how to talk to customers about outcome-based, how to have smart conversations in data. So where we've been investing more heavily recently with our sellers is with the digital capabilities. And digital, we call it a digital companion almost, a way to make sure sellers can work seamlessly, work more simply with the customers, provide smart advice. And again, stickiness is essential in terms of having customers be able to use digital tools and have them really mirror what the sellers are using. And then the second one, which really important is, today, we have -- our solutions are sold by highly specialized technology specialists and services delivery engineers who always often get involved at the front end. And if you look at the numbers there, that includes our international and our recent acquisitions. You'll see that we now have over 5,500 coworkers in our technical organization. And that's more than double since 2018. That's a number we're really proud of. We're proud of it not just because it's a number, but because we have organically grown those teams, supplemented by integration in a way, again, that has been executed incredibly well and has brought value to our customers. So that's a great snapshot of who we are, 2/3 customer-facing technology, teams growing, but we're still investing across the entire spectrum of our customer-facing coworkers. International. Some of you know international is near and dear to my heart. I was deeply involved in this years ago. But this picture is just really to illustrate something that we have that a lot of people don't have, which is the international and national footprint. So we've got a large presence in the U.K., a large presence in Canada. We've got an Amsterdam location which was phenomenal help during Brexit. And we delivered to 150 countries because we do have a smaller presence in a number of other countries. But the key thing here is this strategy, as all our strategies was implemented as a follow the customer, back to customers at our center. 2015, '14, '13 is when it started really customers saying, like CDW is great, what you do for me is great, and I have 9 other folks I have to deal with around the world, can you help me deal with you? And that's when we went looking and that's when we bought Kelway at the time, CDW U.K. today, and we've had great success. Kelway, when we bought them in 2015, about 10% of their sales came from outside the U.K. So they're multinational customers and delivering outside the U.K. We're now, that number, delivery outside the U.K. is closer to 25% and on occasion, we hit 30%. And that's a testament to both the growth within the U.K. of those multinationals but also our U.S.-based multinationals using those capabilities. Kevin? Okay, so I really like this slide because it's -- I think it's really powerful showing our sustainable competitive advantages, but not just listing them, but the way that they're integrated, okay? Having all of these capabilities is unique, having them at scale, there's only one of us. And they're integrated together. It's kind of like the whole is greater than the sum of the parts. All of these together create incredible value for our customers. And if we look at this, I'll tell you, much of what we do is actually a derivative of 2 things: the scale that we have; and the culture that we have. So when you think about scale, think about vertical segmentation. We already talked about that. The power with our partners, that is real and it's meaningful. Our logistics capability and our distribution centers, over 1 million square feet of U.S. distribution capability and a center in the U.K. And a real recent testament to that is how we've done during COVID, in this incredibly unusual supply chain environment. The scale has allowed us really to get the supply, get our fair fares, what I'd like to share with from our partners. And then also use our balance sheet to hold it for our customers and deliver it to them. That scale also drives the scope. We already talked about international and national footprint, which is a real benefit. And then culture. I know a lot of people talk about their culture. I believe our culture is a differentiator, I really do. Early on, as I mentioned, Michael Krasny, happy coworkers equal happy customers. We are all about engagement. We are all about being the best place for the best people. What does that mean? It means when people come to CDW, they know that they can grow, they can win and they can earn better than they can anywhere. And that's all important. People want to grow, they want to win, but they also want to earn. And at CDW, that's where we do it. Our sellers are paid by gross profit growth. So we make it pretty easy to drive growth and earnings potential and make sure those are completely aligned to what we're trying to do to deliver ultimately, shareholder returns. So these together, as I said, the whole is greater than the sum of the parts, have really enabled us to deliver superior service to our customers and ultimately outgrow the market profitably. Okay, and you see it in our returns. So again, we do like, up and to the right. Our target, as we say all the time is to deliver market-leading profitable growth and superior returns. And so if you look in the upper left, I think it is, we grew the top line from 2012 to 2021 at a CAGR of 8%. If you look at the top right, which is our gross profit, that grew at a CAGR of 9%. And then we move down the P&L and you look at the non-GAAP operating income, that grew at 10%, and NGOI grew at 18%. And certainly, the NGOI benefited from some years of deleveraging after the IPO and also some tax changes. But it also benefited greatly from our NGOI growth. Interestingly, also, I'll tell you in gross profit, when we look at the mix of gross profit, which has evolved over the years, commensurate with the change in our strategy and what customer needs. higher-margin solutions, services capabilities, about 59% of the total gross profit is hardware, okay? That's different than net sales because we have things that are netted down; 41% was software and services. So when you think about where our business is going and what is actually driving that gross profit, you can't just think hardware even though you see it as part of the net sales line, what that represents, really got to look at the mix and gross profit to understand. Okay, next slide. So working capital is our biggest investment, and I think this slide states it really well. Look, we are highly focused on working capital management to support customers while generating attractive returns. And I said it before, but our customer relationships is one of our greatest assets. And we know it's important, and we found it to be true during the Great Recession. We know being there for our customers in tough times matters. And we did -- we've seen it now with COVID. And using our balance sheet and liquidity to support our customers during tough times has been absolutely instrumental in their -- I was going to say continuing loyalty, but what I mean is actually amplified loyalty. The value of appreciation that comes when you're helping a customer in a tough time, it almost can't be quantified. And look, if we look ahead, we think we will continue to use our strong balance sheet and liquidity to help customers along the way. Five minutes? Okay. Good, we're almost there. Our capital allocation priorities, look, it's -- our intent has always been to drive shareholder value through these priorities. And if you go top to bottom, number 1 is it's, first and foremost, to increase the dividends. Second, to ensure that we have the right capital structure in place. We're a bit above our target for leverage because we just took on more debt because of our Sirius acquisition. So when you think about our third and fourth strategies there in terms of M&A, growing through M&As, share buybacks, those are going to be a lower priority in 2022 as we continue to delever and get into our target, which we expect to do by the end of the year. All right, the outlook for 2022. We've discussed this on our call. It is the beginning of the year, and there's a lot that we have to kind of still -- there's a lot to unfold in front of us when it comes to COVID, that looks like it's moving in the right direction, supply chain yet to be seen. But just the macro environment generally has been -- we're going to learn more as we go. But right now, we think the IT market will grow about 3.5% with CDW outperforming as we usually do. We're going to hit the low 8% for our NGOI margin. And if you look at the company on a combined basis, meaning a pro forma combined and assumed we bought Sirius at the beginning of last year, that's what the red side there is telling you from a growth perspective. I tend to focus on the right side on the very bottom there and look at the EPS growth on a reported basis of 16% to 17%. I think that's really exciting. All right, I've got 2 more slides. Since our IPO, we've returned 5.2 billion to shareholders. We're really proud of that. And I hope you've -- I hope many of you have held stock since then because it's been a really good stock. And then the last is just -- let me just end on the investment highlights. Look, you can read through these. We compete in a large and growing market. We're the leading provider in that market. We have plenty of headroom, we have a proven track record, we're well positioned to take share into the future and to continue to deliver those returns. So thank you for being here and the time must be up. Yes, okay, appreciate it. And we're going to go take questions in the other room. So thank you very much.