Hello, everyone, and welcome to the CDW Third Quarter 2021 Earnings Call. My name is Bethany, and I'll be coordinating this call for you day. If you would like to register a question at Q&A, you can do so by pressing [Operator Instructions] on your telephone keypad. If you change your mind, you can press [Operator Instructions.

I will now hand the call over to your host, Kevin White, Director of Investor Relations. Kevin, over to you..

Thank you, Bethany. Good morning, everyone. Joining me today to review our third quarter results are Chris Leahy, President and Chief Executive Officer, and Al Miralles, Chief Financial Officer. Our third 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 would 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 and the Form 8-K we furnished to the SEC today and in Company's other filings with the SEC.

CDW assumes no obligation to update the information presented during the 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 and Form 8-K, we furnished to the SEC today.

Please note that all references to growth rates or dollar amount increases in our remarks today are versus 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.

Replay of this webcast will be posted to our website later today. I also want to remind you that the 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..

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 UK and Canadian operations, each serving public and commercial customers. All of these operations represent meaningful businesses in their own way.

Often, different factors impact these diverse customer end markets. And this quarter we saw that play out as our commercial business in the U.S. are small on corporate channels. And our international operations posted significant double-digit increases, while our U.S. public business posted a mid-single-digit decline.

From a macro perspective, supply remained under pressure this quarter. Demand outpaced supply and lead times extended particularly in several solutions areas.

The team continued to leverage our distribution centers, expensive logistics capabilities, keep vendor partner relationships, and strong Balance Sheet, and liquidity position to navigate the supply environment. They did an exceptional job working with our partners to stay on top of availability status.

Our sellers and technical specialists also worked with customers and whenever possible, found alternative available product and built alternative solutions. These efforts helped mitigate some of the pressure and our backlog increase was consistent with last quarter.

The tight supply environment continued to impact prices, which our teams were generally able to pass along. Let's take a deeper look at third quarter customer and market performance. Commercial customer priorities remain the same as in the second quarter, digital transformation, security, and hybrid and cloud solutions.

Customers continue to prioritize investments to enable the future and add resiliency to their operations to strengthen and secure infrastructure platform and endpoints. Within this backdrop, corporate increased 25% and customer demand remained strong.

While many customers delayed return to office, they continued to prepare as well as invest to facilitate hybrid work. This drove ongoing strong double-digit increases in transactions propelled by notebooks, audio visual, and desktop. At the same time, digital transformation remains a top priority.

While buying sentiment was clearly there, in many cases, the product was not. Writings were strong, but with extended lead time, backlog built during the quarter. Lack of product availability, particularly in Netcom and storage, muted corporate solutions growth. Small business also delivered another exceptional quarter of growth, increasing almost 40%.

The team continued to help customers with remote enablement, security, and video, driving strong growth across both transactional and solutions categories. As we have shared previously, small business customers tend to be more flexible in their technology requirements.

So while they did see some impact from supply constraints, small business did not experience as much at corporate. A great example of the power of diverse end markets. You also see the power of our diverse end markets in our public performance. Net sales for our government channels decreased 33%.

federal declines double-digit in large part due to the overlapping of our devices in Service Solution for the U.S. Census Bureau and other clients advice programs that were particularly strong last year. Security remains robust with net sales up more than 30%.

The gears of Washington were slower than typical at federal year-end, and we had contracting delays in several large contracts. This is not unusual, given the magnitude of federal contracts, timing can influence performance. You've heard us talk about federal lumpy nature in the past.

This will unwind and we expect to see a reversal back to growth in the first half of 2022. State and local posted a mid-single-digit decline. Stimulus funding remained largely unallocated to the local level. This is because access to multi-year American Rescue Plan Act funding with deadlines in 2024, lead to greater focus on multi-year budget planning.

At the same time, state and local customers were focused on digesting last year's meaningful stimulus funded IT investments. We continue to work with our customers, but given the complexity of the various funding opportunities and multiyear phasing, we do not expect to see projects moving ahead meaningfully until early 2022. Education increased by 2%.

Higher Ed delivered high single-digit growth driven by ongoing focus on campus connectivity, and enhancing the dorm room experience with double-digit growth in both security software and servers. The K-12 team did an excellent job and matched last year's record net sales, coming in flat on top of last year's 30% plus growth.

This was consistent with the expectations we shared on our year-end 2020 call, where we looked for strong non-seasonal first-half performance to be followed by a deceleration in the second half.

Chromebook availability continued to improve during the quarter, and client devices increased low single-digits on top of last year's stimulant equity and access driven growth. Overall, transactions increased low single-digits on top of last year's strong double-digit growth.

Solutions declined driven by a double-digit decline in Netcom largely reflecting supply challenges. We continue to expect above historical net sales against some very tough unseasonal fourth quarter compares. Healthcare posted a 31% increase.

By the second wave of COVID, staff shortages and limited ICU bed availability during the quarter, some projects that had been sidelined did resume. This was particularly the case in security as healthcare remains a target for cybercrime.

Our security experts continue to guide hospital systems to find the best solutions that protect their sensitive data and security sales increased strong double-digits. Other, which represents our UK and Canadian operations increased over 30% on a reported basis. Both the UK and Canada delivered mid-20% growth in local currency.

Customer priorities in both markets remain the same as the U.S. Digital transformation, security and hybrid and cloud solutions, as do their investments to enable the future and add resiliency to their operations. Both operations experienced increased back-orders.

Clearly, the 11% plus sales growth we delivered, demonstrates the power of the first driver of our performance, our balanced portfolio of customer end markets.

It also demonstrates the power of the second driver of our performance [Indiscernible] this quarter, the breadth of our products and solutions portfolio, which you can see in our major category performance. Transactions increased low double-digits driven by client device growth in video.

Solutions were flat with double-digit increases in servers and collaboration. Once again, increased [Indiscernible] from double-digit. We saw robust growth across all 3 top cloud workloads, security, infrastructure as-a-service, and productivity. We expect strong customer demand for cloud solutions to continue, and we are well positioned to deliver.

And once again, given [Indiscernible] importance to our customers, our security practice delivered at first [Indiscernible] was up strong double-digits. Our teams continue to guide customers on their security posture. Assess the environment, design the best approach, and deploy and manage the solutions throughout its lifecycle.

Overall, for the quarter, we delivered double-digit growth in hardware, low-single-digit growth in software, and strong double-digit growth in services.

Software net sales increased low-single-digit, strong double-digit increase in security software, database software, and backup, and recovery were partially offset by declines in network management, software storage, and telephony related software.

As I have shared before, services are fundamental to our go-to-market approach and a key enabler of our value proposition. This [Indiscernible] contribution and was driven by both professional and managed services.

And this leads to the final driver of our performance in the quarter, the impact of investments we are making in our three-part strategy for growth. As you know, in October, we announced our planned acquisition of Sirius Computer Solutions. When we announced the acquisition, I shared how it deepens and adds scale to our services capabilities.

Capabilities that will ensure we remain the trusted technology advisor to our customers as they accelerate their digital transformation. Notice EBITDA deepens, Sirius is additive to our existing capabilities. Capabilities we have built for both organic and inorganic investments.

Capabilities that enable us to serve customers as their trusted advisor, whether in a physical, digital, or cloud-based environment in the U.S. and internationally. Why so many investments in services capabilities? Simply put, services are becoming an increasingly larger component of total customer IT spend.

For CDW services position us to enable the whole solution, increase our engagement with customers and stickiness, and provide insight into opportunities to further help our customers across the full IP life cycle.

Today, IT leaders are accountable for both running -- to both run the business and transform it, leaders need to invest resources where they can have the greatest impact. And do so with the greatest speed. Services are critical to making this happen.

To address this full-stack and full lifecycle, our technical organization has grown to more than 3,700 pre -sale specialists and engineers. Today, we can deliver complex digital [Indiscernible] let me share an example of how our services team is helping the global online home retailer transform their business for their next wave of growth.

Experience from [Indiscernible] customer opt is for a combination of [Indiscernible] public cloud technologies and new cloud-native plant -- pattern. This would create the agility they needed [Indiscernible] environment.

A great idea, but accelerating cloud technology requires specialized expertise that is inefficient to keep on staff, and that is for CDW payment. First we leveraged our cloud managed services and offloaded some of the cloud projects from the customer to CDW. Then we pulled in our digital velocity talents orchestration services for DVT.

DVT orchestration supplies customers with talent to work inside the customer's existing team, Talent that is becoming more and more vital in today's environment. Digital velocity, talent, orchestration delivers highly vetted resources, whether already employed by CDW or sourced by us. CDW services, enabled the solution. But it did so much more.

As you can imagine, this level of high touch integration creates customer loyalty with ongoing relationships on the ground, and continued exchange between CDW and the customer, ultimately leading to more business. Great for the customer, and great for CDW.

This is an excellent example of our three-part strategy in action and how M&A enhances our organic investments to ensure we remain our customer's number one choice as a trusted advisor. Solving key business problems for our customer in today's environment requires strong service and solutions capabilities.

Capabilities that when combined with our great relationships and competitive advantages of skill, scope, and disciplined execution, enable us to win in the marketplace and deliver sustainable, profitable growth today and in the future. And that leads me to our expectations for the balance of the year.

We continue to look for growth in 2021 to come in between 9 and 1/4% and 10% in [Indiscernible] report currency. Split roughly between 5% IT market growth and 425 to 500 basis points to CDW market outperformance. This reflects our expectation that supply constraints do not mitigate anytime in the near future, but do not get materially worse.

Remember these constraints don't just reflect component shortages, but also labor and logistics challenges, challenges we do not expect to reverse in the near-term, and challenges that we do not expect to resolve at the flush, but rather gradually.

As far as wildcards, in addition to the fluid supply situation and the potential for another wave of COVID, given the slowdown in the third quarter GDP growth, we will keep a watchful eye out for any slowdown in the economy.

As we do, 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. I hope you can tell from my comments that this quarter's performance reinforced our confidence that we have the right strategy in place.

A strategy that serves us well when confronted with macro or customer-specific challenges and positions us for sustainable growth. A strategy designed to continue our evolution as the leading IT solutions provider. And most importantly, a strategy that delivers profitable growth and returns to shareholders.

This confidence underpins today's action by our board to increase our quarterly cash dividend by 25%. I know many of you may be wondering what we expect for next year. We're in the middle of our planning process, and as we always do, we'll provide our outlook for 2022 on our year-end conference call.

And with that, let me turn it over to Al, who will share more detail on our financial performance. Al..

Thanks, Chris, and good morning, everyone. I will start my prepared remarks with more detail on the third quarter, move to capital allocation priorities and then finish up with the 2021 outlook. Turning to our third quarter P&L on slide 8, consolidated net sales were $5.3 billion, up 11.4% on a reported and an average daily sales basis.

On a constant currency average daily sales basis, consolidated net sales grew 10.7% Net sales and channels most impacted by COVID-19 last year, corporate, small business, and international continue to rebound. Posting strong double-digit growth in the quarter and delivering sales above 2019 levels.

This quarter's growth also benefited from strong double-digit performance in healthcare, but was tempered by a slowdown in education and declining government. On the supply side, overall backlog increased several $100 million in the quarter and continues to be elevated year-over-year.

The team did a great job leveraging CDW 's competitive advantages so the backlog did not increase even more. Gross profit for the quarter was $915 million, an increase of 10.8% on a reported basis. Gross margin was 17.3%, down approximately 10 basis points versus last year.

This is primarily driven by lower product margin, partially offset by an increase in the mix of net service contract revenue, primarily in softwares and service, in addition to strong professional and managed services performance. Turning to SG&A on slide 9, non-GAAP SG&A increased 9.2%.

increases primarily driven by payroll costs, including sales compensation, which moves with gross profit growth, and performance-based compensation, consistent with higher attainment against financial goals. Finally, it reflects investments in the business, including increased co-worker counts, focused on execution of our strategy.

Co-worker count at the end of the third quarter was 11,098, up 432 from the second quarter, and 1118 over prior year. The increase in co-worker count reflects organic and organic -- inorganic investments to support high-growth solution areas and our own digital transformation. GAAP operating income was $386 million, up 21.6%.

non-GAAP operating income, which better reflects operating performance, was $435 million up 12.6% And non-GAAP operating income margin was 8.2%. Moving to slide 10, interest expense was $36 million down 9.4%. The decrease was primarily due to savings from last year's refinancing. Our GAAP effective tax rate, shown on Slide 11, was 23.9%.

To get to our non-GAAP effective tax rate, we just taxes consistent with non-GAAP net income add-backs as shown on Slide 12. For the quarter, our non-GAAP effective tax rate was 25.3% up 200 basis points versus last year's rate, primarily due to a onetime impact of state and foreign tax benefits recognized in the prior year.

As you can see on slide 13, the second quarter weighted average diluted shares outstanding of a $139 million, GAAP net income per share was a $1.91, up 43.2%. Our non-GAAP net income was $298 million in the quarter up 12.3%, and non-GAAP net income per share was $2.13, up 16.4% from last year.

Turning to year-to-date results in slides 14 through 19, net sales were $15 billion, an increase of 13.1% on a reported basis, and 13.7% on an average daily sales basis. We had one fewer selling day year-to-date in 2021, which will be made up in Q4, we have one extra selling day compared to the prior year.

On a constant currency average daily sales basis, year-to-date consolidated net sales were 12.6% higher than the prior year. Gross profit was $2.6 billion up 11.3% and gross profit margin was 17% down approximately 20 basis points year-over-year. Operating income was roughly $1.1 billion and non-GAAP operating income was $1.2 billion up 18.7%.

Net income was $773 million and non-GAAP net income was $834 million up 20.7%. non-GAAP net income per share was $5.89, up 23.5%. Turning to the balance sheet on slide 20, at September 30th, cash and cash equivalents were $245 million, and net debt was $3.8 billion.

Liquidity remains strong with cash plus revolver availability of approximately $1.4 billion. Year-to-date free cash flow was $341 million as shown on slide 21. This is lighter than last year's record, $1.2 billion of free cash flow, which benefited from timing and one time items.

Year-to-date, we saw some of the timing reverse as we mixed out of vendors with extended payment terms. Additionally, working capital increased to support our strong year-to-date growth, and we continue to make strategic investments in inventory to support our customers through this choppy supply environment.

Moving to slide 22, the three-month average cash conversion cycle was 25 days, up 9 days from last year's third quarter. Increase was primarily driven by mixing out of vendors with longer payment cycles, in addition to holding customer-driven stocking positions, and the timing of receipts and shipments.

Turning to capital allocation on slide 23, our 2021 priorities remain the same. First, increased the dividend in line with non-GAAP Net Income, including today's 25% increase to the dividend. The increased annual dividend of $2 is approximately 25% of trailing 12-month non-GAAP Net Income through September.

The Q4 2021 dividend demonstrates our confidence in the earnings power, and cash flow generation of the business. It marks the 8th consecutive year of increases since our initial public offering in 2013. Our dividend has grown at a compound annual growth rate of 36% from its initial level.

We will continue to target a 25% payout ratio going forward, growing the dividend in line with earnings. Second, we ensure we have the right capital structure in place with a targeted net leverage ratio of 2.5 to 3 times. We ended the third quarter at 2.3 times. Third, supplement organic growth with strategic acquisitions.

Sirius, which we announced on October 18th, and our recent Focal Point and Amplified IT acquisitions are great examples. And fourth, we return excess cash after dividends and M&A, to shareholders through share repurchases.

During the quarter, we continued to deploy cash consistent with our capital allocation priorities, returning $505 million to shareholders, including $55 million in dividends and $450 million of share repurchases at an average price of approximately $188 per share.

We continue to expect to return approximately $1.7 billion to shareholders for the full-year of 2021, including $1.5 billion in share repurchases with the balance from dividends. Going forward, we continue to execute against our capital allocation priorities as we have done since 2014.

In 2022, post closing of the Sirius acquisition, we expect to have an initial net leverage ratio of approximately 3.3 times. While our capital allocation priorities will remain the same, we will shift our objectives to focus on paying the dividend and reducing debt.

As a result of this focus, we'll put a lower priority on M&A and share repurchases until our net leverage is in our target range of 2.5 to 3 times, which we expect to achieve by the end of 2022.

We continue to expect to close the Sirius acquisition in December, and we intend to share additional thoughts on the financial impacts of consolidating Sirius into CDW on our fourth quarter call. Moving to the outlook for 2021 on slide 24.

Supply and product lead times remain fluid, making it challenging to comprehensively forecast the high degree of confidence. On the demand side, we continue to see strong activity and momentum, particularly with both U.S. and international commercial customers. On the supply side, visibility remains a challenge.

Constraints continue to notebooks, desktops, video, Netcom, and data center categories, resulting in longer lead times and a higher backlog. With the exception of Chromebooks, the supply environment has not improved since our last earnings call. We do not expect it to improve in the near future.

With that context for full-year 2021, we continue to expect the U.S. IT market to grow approximately 5% and our net sales to grow 425 to 500 basis points faster than the U.S. IT market in constant currency. This assumes a consistent supply chain environment and impact to our backlog.

We feel good about the health of the business, and we continue to navigate the fluid supply environment. We continue to expect currency to contribute in an approximately 80 basis points the full-year net sales growth, assuming exchange rates of a $1.38, the British pound and $0.80 to the Canadian dollar.

Moving down the P&L, we now expect non-GAAP operating income margin to be in the high 7% range for full-year 2021, as you've heard us say, we believe now is the time to invest in the business and expect investments made in the fourth quarter to drive an operating margin which will deliver our full-year outlook.

Putting it all together, we now expect non-GAAP constant currency earnings per share growth in the high teens, call it 18% plus or minus 25 basis points. Currency is expected to contribute an additional 70 basis points to earnings per share growth.

Additional modeling thoughts for annual depreciation and amortization, interest expense, and the non-GAAP effective tax rate can be found on Slide 25. For free cash flow, our long-term rule of thumb remains unchanged at 3.75% to 4.5% of net sales, assuming current tax rates.

However, given the timing impacts that contributed 2020's significant over delivery and ongoing customer-driven stocking positions, as well as the time of receipts and shipments, we expect 2021 free cash flow to come in slightly below the low end of the range.

Additional modeling thoughts and the components of free cash flow, including capital expenditures, and the cash conversion cycle, can also be found on slide 25. That concludes the financial summary. As we always do, we will provide updated views on the macro environment and our business on our future earnings calls.

And with that, I'll ask the operator open up for questions, and we would just please ask each of you to limit your questions to one with a brief follow-up. Thank you..

Thank you. If you would like to register a question, [Operator Instructions] The first question comes from Adam Tindle at Raymond James. Adam your line is open..

Okay. Thank you, and good morning.

Chris, I wanted to start on Sirius to see if you had some early feedback from customers now that the announcement has been out and specifically wondering if those Sirius enterprise customers are perhaps willing to breach the conversation on utilizing CDW's transactional portfolio that Sirius didn't have? And conversely, the CDW mid-market customers more interested in Sirius' services portfolio? So a qualitative view from the customer perspective on potential revenue synergies in this deal..

Good morning, Adam. Thanks for the question. And you know, we're in a little bit of a quiet period here as we go through the various regulatory approvals. That said, one of the areas that we focused very quickly was feedback, and I would just tell you, it's been really, really positive on both fronts.

So our customers at CDW are delighted about the acquisition, and really looking forward to the combined entity and the capabilities that they helped bolster CDW, given their reputation in the market and the quality of their services and the reciprocal is true as well.

I talked to Joe Martin late in the day of the announcement, and he had made his way through a lot of customers as had their front-line sellers, and it was for the most part all positive.

So again, we think that -- I said the word before, a home-run deal and we're going to make it work really well, and our customers seem to be excited, our partners equally are thrilled. It 's exactly what they were looking for us to do and they are thrilled..

Right. And I think that aspect of home-run deal has some investors wondering a little bit more on Sirius recent performance. The purchase price was very attractive, all cash in nature, and there's some skepticism on what's been going on with the business in 2021.

I know you gave us color based on 2020, but maybe you could help to spell any of that concern by talking about what you've seen out of Sirius ' performance in 2021?.

Well, you know, look, they're doing just fine and there are customers like us in areas like Federal, which we talked about today, or enterprise customers. And as you know, that can be a lumpy business.

So when we did our diligence and looked at the pipeline and the types of programs they're running with customers they were having a similar impact that we were having with regard to our larger customers.

Some things being delayed, some things being planned yet not -- not yet rolled out necessarily, particularly in terms of delays in going back to the office, etc.

But I would tell you that we feel very confident, Adam, in the health of the business, in the prospects of the business in the pipeline for the business and in the opportunities for Sirius and CDW, the combined entity..

Very helpful. Thank you very much..

Thanks, Adam..

The next question comes from Shannon Cross at Cross Research. Shannon, your line is open..

Thank you very much.

I wanted to take a bit more into backlog composition, if you're seeing any order cancellations or how it -- how it developed over the quarter, maybe linearity just to get an idea of how sustainable and sticky do you think the backlog will be?.

Yeah. Good morning Shannon. This is Al. So a couple of things that I would note. So going in in the quarter, we maybe would have expected that there would be a bit of a kind of a modest view of backlog. I'd say overall for the quarter was a bit more than modest. And let's call it, in terms of just all characteristics, similar to Q2.

A couple of variants or components that maybe looked a little different, and I think Chris touched on this in your prepared remarks, is that we saw a bit more of an effect from a solutions perspective and that would have included notably Netcom and storage. Notwithstanding that similar to Q2.

And look, I would just note the -- all things considered, the team did an exceptional job navigating through that and delivering on the results..

Okay, so you -- but you don't -- you're not seeing double orders? You're not worried about any kind of loss of backlog?.

We are not. I would just note the look. I think there's component in the backlog that there's likely some pull-forward, right? It's been a tenuous environment and so there are customers that I think probably have a perspective that knowing that this doesn't have an clear end date.

[Indiscernible] maybe get in front of some of their projects, and so there's probably component that's pulled forward. We're not feeling the effects, or seeing the effects of either double bookings..

Okay. Thank you. And then just a quick question on -- Chris, maybe, how are you thinking about inflation? And clearly you can pass through higher product costs.

But I just sort of in general, as you go through your budgeting and planning for 2022, you know, are you thinking more transitory or are you sort of planning for some of these cost increases to be here for the long term. Thank you..

Yeah, I understand. And we'll share more with our -- about our planning next year as we think about it. Look, it feels like the perspective out there is maybe a little worse than transitory. And so we will just keep our eye on the economy and how this could impact in particular different segments of our business.

For example, when you think about small business, they are really doing a terrific job right now, but we're keeping a very close eye on that segment of the market to understand how the economy might be impacting them, where their optimism is, their ability to hire, etc. So as we always do, we'll keep an eye on it.

It feels a little worse than transitory but again, we think that technology is an A1 priority, and our customers will continue to invest in technology if in fact, it becomes a little more extent that we think they'll keep the priority there.

And look, if we can keep the economy coming out of the pandemic with the momentum we seem to be building and positive nature in the economy, we're feeling pretty good..

Thank you..

The next question comes from Ruplu Bhattacharya of [Indiscernible]..

Hi, thanks for taking my questions. Chris, I wanted to ask about the education market. In 3Q '20, 4Q '20, you had two billion dollar quarters. And again, this year in June and September, you've again had two billion quarters.

So there's a year-on-year headwind from the Mississippi Department of Education project that you had in December and your headwinds, you've had from a stronger year-ago quarter..

Good morning Rupplu and thanks for reminding the team of the great performance, they will appreciate that. Look, you know, we called this out earlier in the year and I mentioned it again, in our prepared -- my prepared remarks.

But it's really been unseasonal and we expected to see the first half of this year be quite [Indiscernible] we're lapping a big back half of the year, that we would expect to still continue to see, I'll call it solid performance, and it's a bit unseasonal because it's the end of the year.

But if we need to [Indiscernible] in our view, and it's going to be -- it'll be difficult to overcome the level of growth that we saw last year.

That said Rupplu, if the stimulus funding, for example the emergency connectivity [Indiscernible] is yet another source of funds for education institutions to be able to fortify their classrooms since hybrid environment. The one thing with that funding is schools are able to use it for orders that are placed that we're working our way through.

What of that money relates to orders that have been placed? We're confident that there is a large portion that are additive to the base. And again, the team, as they always do, has done a phenomenal job helping our k-12 customers work through that funding. So as you've heard me say before, I feel very confident in education over the long term.

It is a growth area. The education market has inflection points and we have always been ahead of those inflection points.

Whether it's how the classroom itself changes, whether it's going to hybrid, whatever those are, we are usually there and I'll tell you, Amplified IT, which we just added is taking us to yet another [Indiscernible] level with their cloud-enabled capabilities and their IT developed technology that they offer for classrooms.

So I'll pass you [Indiscernible] here, but the team is doing very well, a long-term growth area..

Thanks for all the details there, Chris. Maybe for my follow-up, if I can ask Al about operating margins. So you had another good quarter, another quarter of above 8% operating margin and you're guiding, and an increase for the full-year to high 7s. If we just look at core CDW and not consider Sirius right now, which is accretive to the Company.

But if we just look at core CDW, do you think that having a high 7s operating margin is a sustainable level going forward, what are the puts and takes that we need to keep in mind?.

Yes. Sure. And thanks for the question, Rupplu. So I think you just hit it at the end there. Look, there are -- there are lots of puts and takes in any given quarter, and I will just start, if you just put aside the supply chain environment, right? Mix does really matter.

So if we think about components, what's transactional, what solutional from a mix perspective that matters, channel mix matters, all those things have an impact, I'll say to start on your gross margin and obviously then the kinda, the dropdown from an operating margin perspective. So let's just keep that in mind.

And again, kind of supply chain will matter as well. In the case of this particular quarter and maybe as an example. So there -- in terms of mix there, that is a little bit less public mix from a channel perspective. And then you have got -- you've got transactional solution [Indiscernible].

And then very notably Rupplu, I will just note the fact that your 100% gross margin items will have an impact in this quarter. Our 100% gross margin items grew faster than our net sales. So that's going to have an impact as well. And so again, all of that steeped in focus on gross margin.

Then finally, if we walk that down operating margin, it 's been just a matter of the -- at what pace are -- is our non-GAAP [Indiscernible] SG&A spend happening. In the case of this quarter, I would say our non-GAAP SG&A spend lagged some of that growth in gross profit, and so we dropped more to the operating margin for the quarter.

And when you look to our outlook relative to what that operating margin was for this quarter, we're up and it's going to balance this back up to a high 7s on the operating margin.

As you look forward, look, I think you've got a good sense for this strategy and the movement in where we're going longer-term in terms of mixing into services and mixing in on a 100% gross margin. But all those mix components will manner as we go forward..

Okay. Thanks for all the details. Appreciate it..

The next question on the line comes from Jim Suva at Citi group. Jim, your line is open..

Thank you. Probably a question for [Indiscernible] Chris, but when we think about stimulus, you know, the timing of it, the political nature of it is a little bit hard to pinpoint.

But then when we layer in the supply chain challenges and deal with schools, and local governments, and smaller size governments and municipalities who may not be as tech savvy as the Fortune 50 or 500.

Can you talk a little bit about the visibility? Are they starting to place smart orders or starting to say, hey, if this gets approved and if we get this amount, here's what I want because it seems like with the long lead times, if they say they want to implement something in the summer for education, we're getting to a point of window where you won't be able to procure the items so you need talk..

There's many different segments so let me start. I think where -- you were going there. Yeah, It's complicated, right. We've got the supply ecosystem that is -- it has some impact to it right now so we're trying to manage through all of that. Here's what I'd say about K-through-12.

You know, we have a lot of experience understanding funding, stimulus funding, and other types of funding for educational institutions.

So we sit side-by-side with our customers to make sure they understand both where the dollars can be used, for what products in particular, or for what outcomes, because sometimes it's outcome-based? And what the deadlines are, and what those deadlines mean? Do you have to have the product in-house, do you have to have the product order placed? So there's a lot of navigating that's going on, and I feel highly confident that the team is doing a phenomenal job with our customers and that our K-12 customers are not going to lose out on any funding.

That's really clear. in the state and local space where we've got stimulus funding coming down. It's been a bit complicated because the funding packages, there were 3 of them as we've talked about before, the CARES Act package, for example, had a deadline at the end of this coming year, that was for March of last year.

The end of last year, it was -- there was nothing for state and locals in the stimulus package. And then this March, there was a hefty amount. But as we all know when it comes to state and local, it's about budget cycles and it's about funding deadline.

So the spending that's taken place in 2021, is primarily from the CARES package with a deadline this year. What we're seeing now is -- I don't want to call it slowing down, but I'm going to say a moderating and planning, and state and local governments now have that funding where they don't have to spend it till the end of 2024.

And so they are now looking at a multiyear approach. Pretty unusual, this multiyear approach but that's what they're doing. And we're helping them with it, there's a lot of complexity. It's very solutions based in my view in terms of what customers are trying to do, but we don't really expect that to meaningfully come to fruition until early next year.

But there's just a lot of tentacles and they're all different based on the stimulus package, and on the actual market that we're talking to. But again, I would just reiterate that this is something we do. It's frankly a core capability like working with partners.

It's a core capability to understand in the federal, state and local, education, healthcare spaces where the funding is, what it means, what the deadlines are, and how to use it and then to basically walk our customers through it. But I know that was a long answer. I hope it was helpful..

That was exactly where I was looking for. Thank you so much..

You're welcome..

The next question on the line comes from Katy Huberty at Morgan Stanley. Katy, your line is open..

[Indiscernible] backlog commentary. Can you talk about the gap between net sales growth and orders or writing growth in 3Q and maybe how that compared to the second quarter? Then I have a follow-up..

Sure. Hi, Katie. Good morning. This is Al. Look, we won't quote the exact delta there, but I think it's safe to say that we continue to see strong written demand and that continues to show up and that's part of what bolsters our confidence. Certainly shipments have lagged that. And again, I'll go back to my comment.

I would say the mix looks like second quarter did, and that would be consistent across products with the one caveat. That, as we mentioned, Solutions was a little bit stronger, a little worse than it was in Q2..

Okay. Thank you. And then maybe a follow-up for you. The ending cash balance of $245 million is lower than your typical buffer. Can you just talk about your term to rebuild that buffer and also defund the Sirius acquisition? Thank you..

Sure. So first on the Sirius acquisition, I think we mentioned on the previous call, we have committed financing in place. So we expect that we are going to finance the acquisitions fully. From a cash balance perspective, I think Katy, if you compare it to where we were at the end of the year and maybe a year ago, certainly we would look lower.

And a couple of things there. 1. We had debt refinancing or financing, I should say, in 2021. So that bolstered that cash position. And then notably for 2021, we've used a fair amount of cash for the existing acquisitions we've had, as well as share repurchases.

So I think the combination of where we sit from a cash balance and our revolver availability perspective, we feel quite good with where we stand. And then we feel quite good about our ability to create and generate free cash flow in 2022..

That's great. Thank you..

The next question comes from Matthew Sheerin, Stifel. Matthew please go ahead..

Yes. Thanks and good morning. Chris I wanted to ask about the strong cloud growth that you're seeing, particularly infrastructure as a service.

And I'm wondering if some of that is positively impacted by the fact that customers maybe moving or accelerating towards the cloud because of the product in -- and infrastructure, you know, on - prem product shortages.

Are you seeing any of that in terms of customers saying maybe now is the time to move because we don't want to wait?.

Yeah Matt. Great question. We've been asking ourselves that as well and talking to customers about it, given the kind of pervasive and persistent nature of the supply chain and the fact that It continues to extend.

I would say -- I would characterize it this way, customers are rethinking and considering accelerating some movements to cloud and potentially re - architecting some of their solutions and more -- in a public cloud like environment versus, for example, on prem cloud. But what I wouldn't -- what I wouldn't characterize it as is just a wholesale shift.

Customers are still very strategic in how they think about both flexibility obviously and scalability but also cost. And if you combine all of those things together, they're still looking for the absolute best solution and therefore, not just doing the wholesale shift. So I guess the answer would be, we are having this conversations.

We're seeing some decisions made around accelerating to public cloud, but I wouldn't say that it's [Indiscernible] and wholesale, if that helps..

I got it. Okay. Thanks for that. And then on the PC shortages, particularly on the commercial side.

What are your thoughts there in terms of the PC cycle? Are you seeing any early signs of adoption of Win 10, and do you see that as a driver going forward?.

Well, look, I wouldn't say that, I've seen necessarily early adoption just yet, but as is always the case, there will be early adopters and there will be later adopters. And they will be our customers, so we'll help them through that.

You all are familiar with the end of life for Win 10 and then the timing for Win 11 around the 2024, 20-25 time period. So it will be a driver, it's not been a driver yet. I think PCs generally, you've heard me say, I continue to believe in PC s.

I think that we have more PC density now we're going to see sort of replacement cycles of PCs for a couple of reasons. Wear and tear, but also the technology improves at a faster pace and client devices are more and more important to the productivity of the people using them. You also have used cases that are expanding.

And the hybrid work model obviously is really driving PCs. And so we will -- we feel good about PC growth and win 11 will certainly be a driver of that at some point over probably a couple of year period..

Okay. Thanks a lot..

And the next question comes from Samik Chatterjee at JPMorgan. Samik, your line is open..

Great. Thank you. Chris, I just wanted to start off and go back to your comments. You mentioned this a couple of times now about monitoring the SMB segment for economic activity just given the increase in cases, etc. and you mentioned you haven't seen any sizable impact yet.

But is there something more on a regional basis when you look at -- across the U.S. or maybe in some international markets on a more regional, specific places you're seeing any changes in activity from your customers where maybe there is a stronger correlation to how cases are trending. Any insights on that, and I have a follow-up, please..

Yeah, sure. Here's what I would say about the current environment. We're watching it, as is everybody, and we're cautious about it.

And we put it in the category of wildcard because I don't know that anybody knows what's going to happen, but we all also know there has been more momentum around that vaccination availability at lower ages, antivirals, the rate of vaccine, particularly when we think of our location [Indiscernible].

We're thinking and investing for getting back to a robust environment and economy, and we're thinking forward. So I think a little bit unlike going into last year's winter months where there -- the cautiousness I would say was on a really high level. We're just feeling customers saying, we've got to invest.

And so until early next year or work from [Indiscernible] that is I would say ubiquitous. So we -- in 2020, we talked about the uneven [Indiscernible] certain industries, etc. I just feel like the tone has really changed to the platform of "We got to get back. We got to get back. We got to build for the future. " So that's what we're seeing..

Okay. A quick follow-up for that. I think you're indicating that the operating margin 3Q doesn't repeat in 4Q any incremental spend coming through.

How much of [Indiscernible] mentioned some of the catch-up on SG&A versus [Indiscernible] what you outlined as is the right time to spend, and I'm just trying to think of what portion of that incremental spend should I be annualizing for the next year? Thank you..

So look, in fourth-quarter, we'll get more guidance with respect to what that looks like for 2022 and reflective of our combination with Sirius, right? So but let me focus my comments on fourth quarter. I would say the non-GAAP SG&A spend is just an unevenness or a timing effect of that spend. in Q3. That probably lagged a bit in Q4.

We'd expect that to pick up. There's probably a component there, as we think about the Sirius combination, we're thinking more broadly about what that combination looks like, and how does that ultimately impact our investment spend.

That being said, we're going to continue forward in Q4 with the efforts that we've been focused on, notably our own digital transformation, as well as to continue invest in the high-growth Solutions and Services areas..

Okay. Thank you..

Welcome..

The final question comes from Keith Housum of Northcoast Research. Keith, your line is open..

Thank you. Good morning, guys.

Hey, Chris, I'm just kind of thinking here through the investments that companies make -- are making in technology based on the supply chain insurers that they are, is there a willingness of your customers to move to another solutions that are hardware solution that can be fulfilled by the end of the year? Because the thinking is, a lot of these companies have IT budgets they want to spend anyways.

So there's always a project wish that they want to do.

Are people willing to convert to other projects in order to spend that money? Or are they holding onto the products available?.

Yeah. Good morning, a great question and I think it really depends frequently on the customer set. Small businesses have always been more nimble and less tied to particular requirements, and we have seen success there.

And I think in my prepared remarks, supply chain constraints didn't impact them as much as in corporate because we could help them find alternatives. When you really don't want to shift off of them, it creates more work, frankly, within the organization. What we've [Indiscernible] We have worked with our customers to get in-line earlier.

So a lot of customers are -- have been working very hard [Indiscernible] you typically would in hope s that they will get the product by year end. All that said, anywhere that there are I'll say mission less than mission-critical, by technologies that we can help them find alternatives.

Whether it's a brand, whether it is the Cloud, whether it's something else that they can be using, you can bet we're doing it. But you're absolutely right, there's going to be a lot of pressure as we go into the back end of the year to get that product out. And we expect we'll be able to help them do it..

Got you. There is a follow-up here.

In terms of the shortages that you're experiencing, are you finding that those shortages over this quarter, I guess sort of previous solution sets or is it really kind of game of whack-a-mole where it gets fixed in one area but a new [Indiscernible]?.

Well, here's -- I said this before, you get this kind of supply chain ecosystem. And so you've got -- you have capacity, you got components, you got logistics, you got labor, you've got all of this impacting the ability to get product. And it has kind of shifted through the course of the year.

What we've had on the transactional side, notebook and video and monitors and things like that, that have been constrained. Chromebook have started to ease up a little. That's planning a good 13 months ago to get -- get to that point by the OEM.

What we saw [Indiscernible] this year in the past quarter and a little before was solutions product now being more constrained. And we mentioned Netcom in particular and storage in particular.

So that is a problem when things are moving around, particularly when what customers need are comprehensive and holistic solutions, not just piece [Indiscernible]. So whack-a-mole is a good word for -- or a good term for it..

Great. Thank you..

We have no further questions registered on the lines. We'll hand the call back to Chris Leahy to conclude the call..

Bethany, Thank you. I want to recognize the incredible dedication of our co-workers around the globe and [Indiscernible] all of CDW stakeholders. And thank you to our customers for the privilege and opportunity to serve you.

And to our investors and analysts [Indiscernible] attending this call, we appreciate you and your continued interest in and support of CDW, and we look forward to talking with you again next quarter. Have a good day..

This concludes today's conference call. Thank you for joining. You may now disconnect your lines..