CDW Corporation (CDW) Earnings Call Transcript & Summary

Good morning. Welcome, everyone. The next session we have is with CDW, and we have the pleasure of hosting both the Chief Executive Officer and the Chief Financial Officer here. Chris and Albert, thanks for making it to the conference. Thanks for coming in person, and thank you to everyone in the audience as well.

Chris, one of the things we've been doing and asking all our companies to share their opinion on before we get into anything more specific to the company is some of the top investor concerns that we're hearing at this point, the biggest one being are we going into a recession. And you have a great insight on this given that you work with a lot of enterprise customers and you're sort of hearing day-to-day in terms of their priorities about IT spending. So maybe share your insights of based on the customer demand that you're seeing, how do you think sort of we go from here? How likely is the recession?

Samik, great to be here. Thank you for having us. And I guess I'd start by saying that predicting past and present into the future is challenging. And if I just zoom out a little bit and think about where we are, certainly, we have lots of customers asking us that question given the fact as you mentioned that we operate in a broad spectrum of industries across basically the whole of the economy. And so people are interested. And of course, we're thinking about that as we're planning for the next several quarters and beyond. And let me start by saying the first quarter was very strong and created great momentum going into Q2. When we think about our broad and deep portfolio of solutions and services, we've never been better positioned to help our customers in whatever environment we're talking about. Our competitive advantages, including our scale, and we've seen this over the past few years, along with our flexible business model, have really helped CDW perform well during any difficult economic environment. So our history illustrates that when times get tough, CDW does very well in helping our customers and delivering growth well above market. Thinking forward in this notion of predicting the future, I'd say a couple of things. First of all, coming into Q2, we mentioned this on our earnings call, we continue to see strength in writing, and strength in demand, and strength in all of the indicators that suggest continuing robust IT environment -- spend environment. The second thing is we would typically -- I mean, history tells us and intuitively small business changes would be an early indicator for us of changes in the macro level. And we continue to see strength with our small businesses. So at the end of the day, whether or not the challenges get tougher, number one, we're preparing for it. But number two, our customers need us now more than ever as a trusted adviser. And so we will be there to help them weather the storm. And again, history has reflected the fact that our positioning with our customers even in downturns have helped them to remain resilient. The other thing -- the last thing I would just say is, coming out of the last 2 years, my observation in talking with customers has been, I'd say, a bit of a shift in attitude towards technology. We talk about the criticality of technology, how essential it is to every walk of life and every part of operating and competing. I think that's really become deeply ingrained in our customers now and the notion of even in a challenging environment, the need to continue to invest in and progress their technology environment and modernization is very high priority. I know it is for us at CDW.

Okay. Now Chris, we'll obviously get into some of those as well in a bit. But let me just -- yes.

Just want to make sure I get in the kind of forward-looking comments are as of the first quarter earnings call, May 4, and non-GAAP reconciliations are on our website. So thanks. Just want to make sure I get that in.

Great. Just on the broader industry questions before we get into more company-specific drivers here, supply constraints industry-wide. I mean what are the partners that you work with telling you in terms of the impact of the China COVID shutdowns? Is it going to be material in terms of already strained supply chain gets worse? Or is it just something a bit more incremental, but not material? What are you hearing from your partners? And what are you seeing as well on a day-to-day basis?

Yes. Let me take it in piece parts. First, I would say there's positive and there's negative with regard to the supply chain. On the positive side, we've had backlog building for some period of time that absolutely tells us there's demand for IT in the market. That's a positive. On the negative side, there are sometimes that we're not able to get to our customers, the technology solutions that they're needing as quickly as we'd like to be able to, and that's frustrating. But on the positive side, also for CDW, given our size and scale and relationships with partners and where we sit with partners, #1 or 2 for most of our large partners. Number one, typically for emerging partners, we do get to the front of the line, frankly, when it comes to supply chain allocation. And as we think forward, the pockets that have loosened up have been really sitting in the client space. The areas where we've seen added pressure over the last couple of quarters has been in the solution side. And it's broadly across solutions with, I'd say, more of an emphasis on NetComm. What does that mean to our customers in CDW? Look, all of our partners have different strategies regarding supply. And we have been very proactive with our customers, helping them toggle to brand availability and product availability, to ensure that they're getting their solutions completed on a timely manner and in a way that integrates well into their system. So we will -- we, like everybody, are impacted by the specific supply challenges that you've mentioned. But I think we're extremely well positioned given our broad portfolio of partners and our strength within those partnerships and our depth of relationships with our customers to help identify alternatives as needed and potentially shift time and focus across their whole spectrum of technology projects. So if we've got some issues with certain pockets of supply right now, and we're working on large projects with customers, we can certainly shift our time, professional services, engineers, et cetera, elsewhere in the kind of longer-term plan.

Great. Any predictions on when supply normalizes?

Predictions, you're asking me for a crystal ball. Look, we've said supply has really been impacted by such a confluence of factors. You all know what they are. I mean, whether it's COVID, whether it's just logistics. There's just so many things that have impacted supply. It's been pervasive and persistent. We said we expect it to continue through the end of the year, we do. Whether it continues into 2023, we'll have more visibility as we get to the second half of the year. But at the end of the day, if you asked a word for describing the supply chain vis-a-vis CDW, I would just say, it's kind of unchanged, meaning it's been tough for over 2 years now, and CDW's just managed through it. So I would just say we're great at managing through it, and we'll continue to do that.

Okay. Great. Thanks for bearing with me on those questions. Now just to sort of get into more company-specific drivers, and I'll put the recession and all the supply to the side for a bit. You started the year with a enterprise underlying IT industry growth expectations of somewhere in the 3 handle, 3.5, I think, which, to me, at that time, looked conservative. You subsequently had a great first quarter, raised the number. What are you seeing customers spend on? Because what I'm hearing over the last 2 days as well as some of the OEMs are saying, customers are spending on something totally different from the pre-pandemic time. They now are very focused on something that's either digital transformation or something else, but the equipment going in is not for the same purpose of the use cases in some cases. So maybe just shed your insights on what's driving that strength for CDW? And what are you seeing customers really focused on spending on over the next sort of 3 to 5 years?

Yes. Sure. Yes. So we did -- we did have a very strong first quarter, and we raised our outlook, obviously, as you know. In terms of where customers are spending, look, it's -- digital transformation is still very top of the list, areas across hybrid cloud, multi-cloud, security, in particular, collaboration. I think those have been areas where customers have really been focused through the pandemic in terms of planning and now coming out of the pandemic, really spending against the plans that they were -- that we were helping them put in place. And when I say security, I mean, across the whole ecosystem, securing platforms, infrastructure platforms, endpoint solutions platforms, et cetera. In terms of CDW and helping our customers a couple of things to keep in mind. Over the years, when you look at the acquisitions, where we've invested both organically and inorganically, I would say that we are so well positioned to help customers across the full spectrum of IT. From full stack cloud security services, hardware, software, full life cycle, advice, consult, design, build, procure, integrate, manage, that our relationship with our customers during the pandemic and coming out of it has become even deeper. And so that our ability to talk holistically about their hybrid infrastructure needs and their endpoint solutions need is stronger than it's ever been. The depth of our technical expertise is stronger and deeper than it's ever been. So where customers are spending depends on where they are in their cycle. But wherever they are in their cycle, we're there with them. And as I said before, technology is really more critical than ever before in every organization.

You mentioned helping customers with solutions as well as their solutions related with hybrid cloud, solutions related to endpoint systems. I think it's fair to say investors have looked at hardware, the hardware ecosystem and have been for a while concerned about public cloud and the adoption of that and the implications on the hardware ecosystem. So how are you really positioning CDW for that? What are you seeing in terms of impact? How do you as a solution provider sort of help your customers in that migration, while sort of remaining very, very relevant to the partners that they look for in this migration?

Yes. So I'd say a couple of things. First of all, let's start with the building of our capabilities. When you look at both organic investment along with acquisition, let me just remind you of some of the acquisitions we've made, Aptris, which is about ServiceNow; IGNW, which is digital velocity; Amplified IT, which is managed services -- cloud managed services for [ K-312 ] and Focal Point, which is bolstering our cybersecurity. These are all capabilities from a professional services advisory consulting perspective that puts us in a great position to be supporting our customers at the, I call it, the front end of the IT value chain. And that has really been additive to our relationship with our customers. Does that answer the question?

And how does it really pertain to their migration to the public cloud and the...

Yes, the cloud. Yes. So we've got the cloud capabilities that we've added at the front end, number one. Number two, I would say, have to remember that cloud options create complexity and complexity is CDW's brand. It always has been. The more complexity in the marketplace, the more important our role to sort through that complexity. And there are options now, whether it's technology, whether it's brand, whether it's consumption, whether it's procurement, those are all questions to be answered that we help with. The second -- the third thing I would say is, when you think about the IT ecosystem of any of our organizations, you've got some that are cloud native and that might be a different -- a slightly different approach. But for the most part, we're talking about organizations that have to really get their return on technology investment out of the new wherever they're going, but also out of where they've already invested. And many -- all companies have technology debt that they're dealing with. So as companies are moving and incorporating cloud into their infrastructure, there is still an ecosystem that includes on-premise and cloud. So we have built our capabilities where our history shows that we are about helping with the complexity and ultimately delivering the outcomes that our customers look for.

And maybe just one add to that, Samik. So obviously, you hear us consistently talk about key themes, digital transformation, but also cloud. So just first quarter, as a proof point, cloud spend, customer spend was again strong double digits and across really top 3 workloads, Infrastructure as a Service, productivity and security. So those themes persist, and we continue to be there for our customers as they continue to navigate through the cloud.

Okay, perfect. Sort of on the same theme, but I wanted to delve into the Sirius acquisition. And how should we think about that the acquisition enabling more value-add services, more solutions and services that you can provide to your customers and help them essentially on their digital transformations. Maybe just delve into that acquisition and the capabilities that it brings.

Yes. Sirius is really -- it's proved to be a really great coming together of 2 companies. And first, I'd just say that the integration is going extremely well. Second, I'd say that the acceptance in the marketplace is going equally well. And that's really how we measure ourselves from day 1, which is, are we delivering more value to our customers immediately. And the answer to that has been, yes. So what does that look like? Well, imagine a customer meeting that includes 2 service engineers from Sirius talking about cloud opportunities. A security specialist from Focal Point and one from legacy CDW. And a couple of our top engineers from IGNW, all coming together to discuss a 12-month road map on modernizing infrastructure and experience for customers and coworkers, employees. That was a recent meeting with the customer last week of meeting with the customer, and that's the type of meeting we probably would not have been able to take 3 years ago. Because we didn't have, what I would call as, the depth and breadth across that the entire spectrum of services that create the IT stack. And we won the business, and we beat out some very large global systems integrators as a result. And that is what Sirius has brought to CDW in conjunction with the other acquisitions that we've done. I don't want to forget about those acquisitions, because they all really enhance those areas that are high growth, high relevance, and complete the ability to have a solutions conversation and put together road maps for customers that then we can implement against. So it's really created the depth of trusted adviser that customers really need today and going forward because IT is so important to what they do.

Great. One of the questions I'm getting from investors is following the Sirius acquisition, particularly is, is this a new sort of a road map for CDW to think in terms of M&A, in terms of delving more into services sort of capabilities, and start to think about sort of solutions, but more with the services sort of inclination to it? And is that -- is this more -- maybe to ask it another way, is this more about now organically investing in Sirius and scaling it up? Or is this more of let's try and consolidate this space a bit more to have greater capabilities on a more sort of national footprint?

Yes. I think the way I'd answer that is our shifting investment to be a services-led solutions provider is pretty clear from the acquisitions we've done. Our internal investments against that services-led muscle has also been a focal point for us. So I don't want to lose sight of the fact that we continue to invest in our relationship, sellers, in particular, and tools for them, but it really is heavily focused on the ability to provide professional services at the front end and managed services at the back end, and ultimately, ensure that our customers understand and see us as that services-led technology provider.

And maybe just one add to that, just lifting up from Sirius. Look, we've been on this journey with respect to expanding our services, right, and a number of our acquisitions have hit in the space. So Q1, our U.S. services doubled in terms of growth, so really significant. That was a reflection of definitely Sirius and contributions from professional services, managed services, warranty, but also from several other acquisitions we had that's really expanded our service offerings.

Okay. Good follow-up to that. I mean as you invest more in these integration capabilities and services sees that stronger growth, you have historically provided investors an outperformance to the underlying industry sort of goal. How should we think about revenue outperformance to the underlying industry spend as you sort of invest more in that capability as well as margin expansion. Like where does it take you in terms of your margin progression?

I'll start with the margin, and then Chris can add on there -- from there. So traditionally, we've been a variable shop in terms of variable comp, and that will continue and that will continue to be the case. As we've expanded into services, surely that mix variable to fix does change much. And really, that's a function of us continuing investing in technical staff, right, ala Sirius, but also organic investments. I think the takeaway from that, beyond just shift in our expense structure there, is expanding our stickiness of business, certainly contributing higher margin business, and sustainability and really kind of bringing full stack, full life cycle solutions. I would point to Q1 as a great example of that, right? You think about traditional CDW and what we brought, and you think about all of our expansion in services. And I would say we fired on all cylinders, so it's a reflection of that strategy.

On market outperformance, we always start with the -- our expectations for the IT market rate of growth. And then we commit to 200 to 300 basis points above market rate of growth. We're an outperformance company and feel that, that's a pretty aggressive start to the year. That said, we do reflect throughout the year. And based on the mix of what we're seeing customers purchase as well as how well we're doing, we will adjust that. I get the question often, why 200 to 300 basis points, why not 300 to 400 or higher. And really, there are 2 reasons. One is that mix, that netted down versus not issue that we deal with. And if we're selling more consumption-based services, cloud-based services that puts pressure on the top line, we still see strong GP growth, but there's pressure on the top line, which is going to contract that overperformance a little bit versus hardware, which is going to increase that performance. The second thing is what we do at CDW is we take our goals, our outperformance goals, and rolling them out into the organization, we roll them out with higher numbers into the sales organization. So at the end of the day, we want our sales teams to feel very much be -- like we're all being stretched and we've got really aggressive goals, but they're achievable. So it just feels like a good starting point for us, and it's worked well for us over the years.

And in relation to maybe more a bit more near term there is when you're investing, you are quite serious, investing in it, you have to scale that business up. How are you trying to balance investments to drive outperformance or top line growth relative to balancing the outcomes that you want on margins in the near term? I do get in the longer run as margins improve that sort of helps itself, but in the near term, how are you thinking of balancing it?

Yes. It's very much like taking the mirror, using what we use for customers and turning the mirror on ourselves and what the expectations are for ourselves and our own digitization of our business and our own digital transformation of our business. So ensuring that we are operating our business through improvements that are freeing up investment opportunity for us to investment capacity to invest back in the business. So we hold ourselves accountable for freeing up investment dollars to drive back in the business. That comes from return on organic investment. It also comes from acquisitions we're doing like Sirius, which -- where we get synergies. And as we've said, we're going to invest some of those synergies back into the business. So it's an accountability to create the capacity to invest in technology and people, in particular, because we know in the long run, that's going to drive success.

I think of it as really the intersection of journey of our strategic progress, right? We know that's a long game. We've made great progress, making good on our financial commitments. We put an outlook. We think that aggressive but attainable and how do we bring that together.

I'll come back to the outlook in a bit, but let me open it up to the audience to see if there are any questions. Okay. Let me continue then. Just before I move to the outlook, every OEM or partner that you work with has taken multiple price increases over the last 12 to 18 months. How are you seeing customers respond to that? Like are they talking about constraints in their IT budgets, in terms of sort of easily flowing all that price increase through? Or is, again, digital transformation is such a big priority that the price increases are not making as much of an impact, they're still willing to sort of keep up with their demand?

Yes. Well, nobody likes price increases, obviously, but -- and we have been having more conversations with customers around how to get ahead of price increases. And given CDW's position with our partners and the breadth of partnerships, and the level of partnerships, we have pretty good visibility, better than most, in terms of what's coming down the pipe. So we've been very proactive in working with our customers to determine how best to get ahead of price increases. But I'll reiterate what we said on the Q1 earnings call, the technology investments are a priority, and we're not seeing customers backing away from technology investments at this point, notwithstanding price increases. And we've been able to pass our -- pass price increases along.

Okay. Great. Getting back to the outlook here. You had a strong 1Q. You gave a guide for 2Q as well, which was stronger than expected. And you raised the full year outlook, but that essentially implies that the second half remained largely in line with where investors were already expecting it to be heading into the quarter. I mean is there something that's concerning you still related to the demand momentum sustaining in the second half? Is that, again, like supply, how -- like what's driving the second half or your conservatism relative to the second half?

Yes. No, there's not a concern lingering out there. We continue to be very optimistic. And the momentum going into the second quarter was quite strong, as we mentioned on the earnings call. Holding off on the second half is really more about just our own prudence and there's so much happening on a macro level, that we wanted to get more data before we provide a further outlook for the second half. But I feel very, very optimistic. We're just being prudent.

Okay. Okay. I have a follow-up here on the webcast that's more specific to the services growth that you outlined. The question is, can you break down 1Q services growth into organic and inorganic?

We don't disclose specifically the acquisitions versus organic. I will just say that contribution was significant on both, right, and doubling of service is obviously very prominent.

Yes. Okay. Got it. The other near-term concern that investors have is that you're lapping tough comps in relation to client devices. And I was hoping you could give us an update on what you're seeing in latest order trends there as well as sort of -- I know you talked about a bit on supply on that front, but latest on orders and supply there?

Yes. We mentioned that supply had opened up on notebooks and Chromebooks, which was good to see. In our perspective, our view has been and it continues to be that there will be essentially solid growth in client devices through the course of the year. Now, decelerating growth perhaps, because we're overlapping some big compares. But we see client devices as integral to organizations and employee productivity. And employee experience and expect them to continue to be a really important part of the technology strategy. Equally, we've talked about use cases and how endpoint devices are so important in many new use cases, whether it's telehealth, whether it's curbside pickup, they're just across every industry, endpoint devices are critical to the overarching mission of the organization. So we continue to feel positive on PCs.

Okay. And supply improving as well?

Yes, supply has improved a bit over the last couple of quarters. And again, I would just say for CDW, we are very mindful. We watch it and stay informed with our OEMs and then we manage it. It's hard to have a prediction about what's going to happen aside from, I think we're still going to have a lot of lumpiness in supply, and we'll just manage through it as we've been doing.

Okay. Okay. On the other side, I think in relation to networking demand, you had mentioned that demand was outpacing supply on the last earnings call. I mean how do you still sort of reassure the question we get often is, how much of that is customers just ordering ahead? Like how do you really reassure when you just talked about like trying to work with your customers to get them to order ahead of price increases? How do you necessarily get a good view into demand that it's not really just a lot of pull forward, because of the supply situation or price increases coming down the line?

Yes. I'll start and Al, if there's anything you want to add. I would say, look, we have really good clarity on what our customers are buying for. So we know when our customers are pulling forward. And certainly, forward demand is reflected in some of our backlog. That's why when we talk about how we expect the backlog to perform on a go-forward basis. We talk about it feathering out and so it will kind of feathering out over time, because we know what's been pulled forward. But notwithstanding that, the demand continues to be strong and writing continues to be strong even as we're flushing some areas of backlog out.

Yes. I would just add, and we did say it on the earnings call that networking definitely is the biggest variable or sticking point from a backlog perspective notwithstanding really strong written demand there. And to Chris's point on feathering out, certainly the case. I should just note just one thing, too. The watch out for us, and we've talked about this is double orders, cancellations. We have not seen that. So while there is a component, like Chris said, we have transparency into it, in terms of some pull forward, not double orders, not cancellations.

Yes, it's hard to imagine ordering with CDW and then canceling, because you can get the product someplace else. I don't see that happening.

Yes. No. There's a question here. I don't know whether you can answer this, but the question is, curious to know about headcount, what is the plan for 2022, I guess? I mean, or 2023, I mean, it doesn't have the right year in the question, but.

Yes. So here's -- I can -- we don't give specifics, but I'll tell you, we're standing at about 14,000 coworkers now. And I think a great stat is when you look back over the last 3 years, we've increased our coworker facing -- customer-facing coworkers by close to 60%, and we've literally doubled our technical team. So that's a pretty -- so we're now running about 9,000 strong on our customer-facing coworkers and over 5,500 of those are technical folks, service engineers, frontline technical architects, and actually now outpacing our sellers. So we are continuing -- 3,000 have been added in the last year from our acquisitions of Sirius, but we are continuing to invest in our frontline sellers and our technology organization very heavily.

Okay. Last question, and Chris, this goes back to what you started with. CDW does well when things get tough. So in that framework, how do you think about capital allocation now if things -- if things do get tougher from here, how -- what opportunities does it open up for you?

Well, look, I'll just mention, look, when things get tough, you just said it. When things get tough, it creates need from our customers for CDW's advice and access and ease and agility. And we have that in space and the last 2 years has really reflected that quite well. And so if the environment gets tougher, we will be able to leverage our balance sheet. We'll be able to leverage our distribution centers. We'll be able to do all the things that we do to help our customers, not just weather the storm, if there's a storm, but really make sure they're preparing to come out of it thriving and actually get through it in a thriving way.

And I would just add, look, our capital allocation approach is dynamic, and we do pivot where we need to. Notwithstanding our focus for 2022 is on Sirius, is on the integration of Sirius, and we're making great progress on that. I talked about on the first quarter, our cash flow was extremely strong. So one of our objectives from a capital perspective is reducing our debt and getting back to a path where we can be rethinking M&A share repurchases, and I'd say we're on the right path.

Great. Thank you. Thank you for coming to the conference, and thank you, everyone, for listening.

Thank you.

Thank you.