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Insight Enterprises Inc (NSIT 0.30%)
Q1 2021 Earnings Call
May 7, 2021, 8:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning. My name is Craig, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Insight Enterprises First Quarter 2021 Operating Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question --and-answer session. [Operator Instructions] Thank you.

I'll now like to turn the conference over to Ms. Glynis Bryan, CFO.

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Glynis Bryan -- Chief Financial Officer

Thank you. Welcome everyone and thank you for joining Insight Enterprises earnings conference call. Today we will be discussing company's operating results for the quarter ended March 31, 2021. I'm calling this Glynis Bryan, Chief Financial Officer for Insight. And joining me is Ken Lamneck, President and Chief Executive Officer.

If you do not have a copy of the press release and the accompanying slide presentation that was posted this morning and filed with the Securities and Exchange Commission on form 8k, you will find them on our website at insight.com and Investor Relations section.

Today's call including the question and answer period is being webcast live and can be accessed by the investigation page of our [email protected] and I'd have a copy of the conference call will be available approximately two hours after completion of the call and will remain on our website for a limited time. This conference call and the associated webcast contain time sensitive information that is accurate only as of today, May 6, 2021.

This call is a property of Insight Enterprises. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Insight Enterprises is strictly prohibited. In today's conference call, we will refer to non-GAAP financial measures as we discuss the fourth quarter and full year 2021 financial results.

When referring to non-GAAP measures, we will refer to such measures as adjusted. Non-GAAP measures to be discussed in today's call, include adjusted selling administrative expenses, also referred to as adjusted SG&A, adjusted earnings from operations, adjusted earnings before interest, taxes, depreciation, amortization and stock-based compensation expense, also referred to as adjusted EBITDA, adjusted diluted earnings per share, including the benefit of the note said on our convertible debt and adjusted return on invested capital.

You will find a reconciliation of these adjusted measures to our actual GAAP results included any of the questions or the accompanying slide presentation issued earlier today. Also, please note that unless highlighted a constant currency, all amounts and growth rates are discussed in US dollar terms. As a reminder, all forward-looking statements that are made during this conference call are subject to risks and uncertainties that could cause our actual results to differ materially. These risks have expectancy and press release in greater detail on our most recently filed periodical fourth, and subsequent filings with the SEC.

With that, I will now turn the call over to Ken and if you're following along with my presentation, we will begin on slide four.

Ken Lamneck -- Chief Executive Officer

Hello, everyone. Thank you for joining us today to discuss our first quarter 2021 operating results. In the first quarter with the launch of COVID-19 vaccines, parts of the world began to awaken from long quarantine and economic pause with renewed optimism for stronger 2021 demand improved in the quarter.

Clients continue to focus on business agility and continuity by leveraging cloud solutions for certain workloads. Our clear strategy and deep expertise delivering digital solutions to clients of all sizes. A lot of to grow our sales of cloud SaaS and Infrastructure as a Service high double-digits in the quarter, which drove cloud gross profit to 21% of our total gross profit of more than 300 basis points year-over-year.

In addition, hardware bookings trends improved throughout the quarter. Given the current supply contains constraints and long lead times, we're working with clients to assess their 2021 device refreshed needs an employee hiring plans to get orders placed in the queue for fulfillment in 2021.

As a result, we exited the first quarter with elevated backlog and are pleased to see the pipeline for future sales build to help healthy levels. I'm happy to report that our business returned to top-line growth year-over-year in the first quarter, fueled by low single-digit growth in corporate and enterprise clients and strong growth in public sector particularly K-12.

Largely consistent gross margins year over year combined with operating leverage drove adjusted earnings from operations up 3%. And the just adjusted return on invested capital to 13.1% up from 12.6% in the first quarter last year. A performance for the quarter sets a good base what we expect will be a strong year.

We're happy with our team's operational execution in the first quarter. And the financial results are on track toward our 2021 commitments. Through a combination of organic investments, strategic M&A and a culture of innovation over the last five years plus we've transformed Insight into a leading global, intelligent technology solution provider with a focus on integrated solutions, which are digital innovation solutions to help customers navigate the digital transformation journey, and improve their business end to end, data center cloud services solutions to help businesses modernize and secure critical platforms transform it, and thirdly, modern workforce solutions that help organizations keep their employees connected, productive and secure. And underpinning these solutions, areas are strengthened supply chain optimization, providing clients with the critical products and services that they need.

The world has gone digitally dependent every successful business and now technology business at its core, just 10 years or even five years ago, the pandemic might have completely cripple communities and markets. Instead, both private and public sector clients are resilient during the past year, quickly adopting and leveraging digital and cloud tools to better manage the business remotely and against the backdrop of increased cyber risk.

Digital transformation is the heart of what we do for our clients. And our track record of innovation over the last few decades marks our own evolution into solutions integrator, capable of providing end-to-end expertise to vision, develop, deploy, and manage modern IT solutions at scale.

With stay-at-home policies or hybrid work models in place, companies want the ability to access and secure their data via the cloud with limited internal resources to assist the migration of servers, applications and data companies need a partner who can not only get from point A to point B, but also can provide expert input as it relates to assessments landscape definition, architecture and cloud consumption.

For example, our cloud and data center transformation team was tasked with helping a credit union which faced the challenges of office restrictions migrate to the public cloud. Our team deployed their expertise to cloud solutions want to work on a strategy that simplified data protection and produced tangible benefits. They analyze the credit unions landscape, identified dependencies map the migration journey and integrated disaster recovery migration plan.

As a result, two data centers are combined and consolidated and migrated to the cloud. Both recovery point and recovery time metrics showed improvement and there was increased access and security needs the cloud. Furthermore, Insight will also provide ongoing managed support, and this continued migration to the cloud.

The comprehensive methodology recommended by Insight team on data replication and disaster recovery increased the short and long-term return on investment for the credit union. As we help clients, companies shift to public cloud and modernize their infrastructure, we're also engaged in improving data security whether our clients needs to implement new security measures for the business or enhanced security measures already in place.

Our connected workforce team has the expertise to provide solutions tailored to the needs of our clients. For example, one of our clients who is a professional service provider for the government segment needed help identifying and implementing the security solution to meet new government compliance requirements. In addition to compliance they also wanted to reduce costs and improve their security baselines, including end user awareness to things like fishing

Our team implemented an architecture that included professional services and ongoing managed services that address remediation, management and maintenance of controls to meet security and compliance requirements. The managed services are a holistic solution to address not only technical policy security, and also focus on end-user training and adoption of enlightened security practices.

The important takeaway for this example is that our connected workforce team helps clients develop a technology strategy that provides the best end user experience, execute against it and maintain it to allow the business to reach and sustain their roles. Our team's approach is to focus on providing capabilities that just three major business shifts; anywhere operations, improving employee experience, and empowering it.

At Insight we offer the solutions that propel our clients workforce forward, no matter how they work, because our clients focused approach in the ability to execute a comprehensive portfolio of managed workplace solutions, we are positioned in Gartner's 2021 Magic Quadrant for managed workplace services for the fifth consecutive year. We're proud to be recognized once again by Gartner for the service solutions we're providing to help our clients businesses run smarter.

Our cloud and data center transformation a connected workforce teams illustrate how our client focused solutions are key to achieving our long-term priorities and driving value for our stakeholders. As a reminder, our long-term priorities are to one innovate in order to capture market share and high growth areas. Second to develop and deliver solutions that drive better business outcomes for our clients. Third, expand and scale our business with strategic clients and in markets. And lastly, continue to optimize the client experience and our execution through relentless focus on operational excellence.

These long-term priorities aligned to deliver on our short and long-term financial commitments. We're pleased with the our execution in the first quarter and optimistic about the market recovery, strengthening over the balance of this year. We're maintaining our outlook for 2021 from our previously issued guidance, which reflects continued progress toward these goals, as well as the long-term goals that we outlined at our Investor Day in late 2019.

The last year has reinforced the belief that the IT industry is resilient and demands for IT solutions will continue to evolve during economic downturns and recoveries across the markets where we do business for 2021 industry analysts expect mid single-digit growth across hardware, software and services sales.

Recovery at a macro level has seen positive indicators and global markets. However, we expect the time and extensive recovery to vary across our different clients and then markets. Coming into 2021, we had elevated backlog. And that trend has continued throughout this quarter.

Supply constraints to the chip and displays shortages are now expected to continue to balance in the year. However, we continue to see healthy hardware booking trends that are up significantly year-over-year so far in the second quarter.

When combined with already elevated backlog, we feel confident that we will see seasonally higher hardware sales in Q2, and over the balance of the year compared to the first quarter. The market is going once again and we expect this will accelerate in the back half of this year. This acceleration will drive stronger top-line growth in the back half of 2021 compared to what we expect to see in the first half of 2021.

So typically, we believe we're well-positioned to compete in areas our clients need most namely improve workforce experience, modernizing their data centers and realizing the opportunity to go digital. Organizationally, we continue to try to optimize our resources to best position our solutions in the marketplace, including invested in our sales and technical teams to ensure we can lead with solutions in core end markets and enhancing their scalable IT systems and processes, including our e-commerce platforms targeted and mid-market and those supporting as a service consumption models.

We plan to continue invest in these critical areas with the goal to deliver a great client experience while also optimizing our infrastructure to scale for future growth. Recently recognized as Forbes as one of the best employers for diversity in 2021, ranking number 140 out of 500. The annual list covers 25 industry sectors and inside is ranked the highest of five Arizona companies making rankings.

We've also been recognized as a great place to work and Best Place to Work in various locations in North America, EMEA and in Australia. We're well-positioned to help our clients solve complex it challenges. We believe that the strategic investments we made in go to market solution areas of the last several years, as well as investments in our solution to technical talent position as well to achieve our business goals.

As you're aware, we announced this morning that I will be retiring. This has been a difficult decision for me as I care deeply about Insight in our incredible teammates. We accomplished a lot in my time at Insight, and I'm excited about our trajectory. We have a strong and talented management team and an engaged workforce who believe and continue to execute the strategy that we outlined in our Investor Day in 2019. And Insight is very well positioned for the future.

The board has hired a top-tier search firm and a company has undertaken a thoughtful process to evaluate internal and external candidates. This is a critical search for insight and I'll be working with the board to identify the new CEO. I commit to continuing to lead this team as CEO until the right successor is appointed.

Thanks to all of you for your interesting insight over the years. And I'll hand the call back over Glynis to cover the details of our financial performance.

Glynis Bryan -- Chief Financial Officer

Thank you, Ken. First Quarter 2021, we executed against mental clarity, getting share and key categories, while also investing in strategic areas. For the consolidated company our net sales in the first quarter were $2.2 billion up 2% compared to the first quarter of 2020 driven by net increases in Software or Services net sale.

Gross margin was 15.1% and SG&A expenses were down 2% in constant currency at 1% in US dollars. As a percent of net sales adjusted SG&A was 12% down 10 basis point year-on-year and in line with recommendations for the quarter. As a percent of net sales SG&A on a GAAP basis was point 4% also down 10 basis points year-on-year.

For the full year, we expect adjusted as SG&A as a percentage of net sales will be 11.7%. Adjusted earnings from operations of $68 million, up 3% year-over-year compared to a 20.7% increase on a GAAP basis and adjusted diluted earnings per share was $30 and $18 per share on a GAAP basis. Adjusted diluted earnings per share exclude among other things separate that restructuring expenses and the gain on the sale of real estate in Q1 2021 of $8 million.

Moving on to the result on operating segments starting with North American slide 13. In North America net sales were $1.7 billion in the first quarter, down 1% year-to-year due primarily to lower hardware sales as a result of supply constraints and extended product lead time driving higher backlog.

Gross profits of $253 million in North America, with down slightly year-to-year and gross margin of 15.3% was flat compared to prior year. North America adjusted SG&A decreased 1% year-to-year due to overall reductions in discretionary spending spree partially offset by increases in executive compensation, as well as variable compensations using new variable compensation plans implemented January one.

SG&A as the percentage of net sales on the gap basis was 12.5% in the first quarter. For the full year of 2021, we expect just as SG&A as a potential net sales will be 11.3%. Adjusted earnings from operations decreased 10% year-over-year to $54 million for the quarter. On a GAAP basis earnings from operations increased 27% year-over-year to $54 million.

In EMEA net sales for the first quarter increased 5% in constant currency. Gross Profit also increased 3% in constant currency, and when combined with the operating leverage from lower SG&A growth. This led to adjusted earnings from operations, which increased 15% in constant currency to $11 million.

Moving on to slide 15 in APEX net sales in $59 million in gross profit of $12 million in the first quarter, increased 2% and 10% respectively year-over-year in constant currency due to higher sales and hardware and services in the region, which lead to adjusted earnings from operations of $3 million in the quarter up 21% in constant currency.

Moving on our tax rate, our effective tax rate for the first quarter of 2021 was 23.8% compared to 20.3% in the prior year quarter. In the prior year, the lower effective tax rate was due primarily to the measurement of acquired net operating losses to be carried that higher tax years

Turning to our cash flow in 2020 -- in the first quarter of 2021, we generated $43 million of cash flow from operations compared to $93 million in the prior year during the same period last year. The decrease year-over-year is primarily due to working capital investments including investments in inventory to support specific client engagements and additional short term demand.

As previously disclosed, we expect cash flow will normalize in 2021. As our business grows, such that for the full year of 2021, we expect cash flow from operations will be between $200 millions and $250 million. In the first quarter of 2021, we invested approximately $8 million in capital expenditures, mainly related to technology and facility investments.

We also receive $27 million in net proceeds from the sale of three buildings in Tempe and our property in Woodbridge, Illinois. Today we have the majority of our $1.2 billion ABL facility available and have ample capacity to fund future growth.

At the end of the first quarter, we had a cash balance of $139 million, of which $119 million was residents and our foreign city arrays compared to a prior year cash balance of $63 million. We had $417 million of outstanding debt, including our senior convertible notes at the end of the quarter, down from total debt of $751 million in the current year.

As we exited this quarter with a leveraged position at 1.1 time debt to cash flow or EBITDA, which is well within our comfort our level of comfort. Under our ABL agreements or primary compliance and governance is a fixed charge coverage ratio, which includes trailing 12 months to coverage over capital expenditures, taxes and interest in cash interest. As of March 31, we are four times against the minimum requirement of one time, and we are confident we can support our capital requirements and liquidity needs.

Next, I wanted to notify you that this week, a board of directors approved an authorization to repurchase up to $125 million of our common stock, including $25 million that was previously authorized in February of 2020. Since its market conditions, we will commence this programs in 2021. However, the guidance we're maintaining does not include the impact of this program, as we will monitor market conditions over the coming weeks.

We plan to update you on our second quarter earnings call regarding our progress and expected ups in tech for the year. As Ken mentioned, we're maintaining our previously issued guidance for 2021. We expect to deliver net sales growth between 4% an 8% We also expect diluted earnings per share for the full year of 2021, to be between $6.60 $6.80.

This outlook assumes interest expense between $25 million and $28 million and effective tax rate of 25% and 26% for the full year of 2021, cap expenditures of $75 million to $85 million, including the build out of our new corporate headquarters, and an average account for the year of approximately $36 million. This allocates acquisition related in cash with them approximately $32 million. The non-cash convertible debt discount and issuance costs reported as part of interest expense of approximately $12 million and assumes no acquisition related or severance or restructuring expenses.

So this was your modeling, we posted a schedule on our website on the investor relations page, which shows the expected amortization expense and the non-convertible debt discount issued by quarter for 2021.

I will ask them to call back to Ken.

Ken Lamneck -- Chief Executive Officer

Thank you, Glynis. In addition to the awards mentioned previously, we issued our third annual corporate citizen report in February sharing our environmental, social and governance practices possibly impact our teammates, clients and communities. This year's report emphasizes our continued access to support a team oriented workplace of diversity, equality and inclusion and highlights our values of hunger, heart and harmony aligned with our investments in environmental and sustainable initiatives.

Most importantly, we put people first we don't think of ourselves as individuals, but as teammates. We take care of each other, our clients and our communities. We trusted each other take pride in what we can collectively achieve. Once again, I want to thank our teammates across the world for everything they do for insight. Our clients, partners and each other are proven to be part of such a diverse and talented team. That concludes my comments. Thank you again for joining us today. We'll now open the line up for your questions.

Questions and Answers:


The first question comes from the line of Adam Tindle with Raymond James.

Adam Tindle -- Raymond James -- Analyst

Okay, thanks. Good morning, and congrats Ken earned retirement, the industry will certainly miss you and will miss you as well. I wanted to maybe just start on the comment that you made about expecting acceleration in the back half of the year that will drive stronger top-line growth. And as I go into this question, I'm sure you won't miss this part of our job. But there's a fear from investors that devices are going to slow in the back half of the year. And it's a big part of it spend. So maybe just match that with, you know why you're expecting acceleration in the back half of the year, the categories are vertical, that gives you confidence. And if Glynis wants to weigh in on a sense of magnitude for that for our model is Q3 and Q4 going to be over that four to 8% full year revenue growth, while q2 is under just help us shape our models.

Ken Lamneck -- Chief Executive Officer

Thanks. Yeah, thanks so much, Adam. And thanks for the commentary, and certainly your support and guidance throughout my tenure here. So a couple of the reasons why, of course, we believe the second half accelerate. One is I think, from an economic point of view, as well as of course, as you know, the compares are much, much easier when you get to Q2, Q3 and Q4. So that's certainly just the math that works there. But from a device point of view that you touched on certainly we've experienced, elevated backlog, our backlog is up low single digits from Q3 to Q4, that continued to be up most single digits from Q4 to Q1. And that trend is continuing it now into Q2.

So there is certainly good indications of demand booking rates are up against substantially from where they were a year ago. So I think all those aligned very, very well to the kind of growth that we're seeing now we will see constraints, of course, with the semiconductor chip shortages that we're all experienced in the industry. But I do believe in all the indications we have still the OEMs are still going to ship more units, you know, this year than they certainly did last year. So I think there will be won't be able to get everything we want by any means, but certainly will be acceleration.

We also believe that you know, as clients now start to get back to offices, I do think that definitely impacts how infrastructure spend will be done. So while we did see, you know, improvements, as we talked about, in our corporate and enterprise, a client base, we saw positive growth in the quarter, which was really good news because we hadn't seen that in the death. We think that starts to accelerate even further as we get into the second half of the year.

And I think as the semblance of people start to come back to their work environments in a hybrid fashion. I do believe that that will definitely help accelerate a lot of the private infrastructure that has definitely been much more muted -- over the past you know, four quarters a lot of that's because you know, people now in place to be able to, look at the equipment, test the equipment and so forth.

So a lot of those things, I think factored, but I think the you know, the economic backdrop certainly favors that certainly the vaccines coming out of certainly what the UK in the US is experienced already on, that starts to course really evolve into Canada, and in EMEA of here in the coming months, so. So I do think that the the economy's and it spend will certainly improve in the second half. But Glynis, let me throw it over to you to see if you want to add anything.

Glynis Bryan -- Chief Financial Officer

I think Matt, sorry, Adam. Sorry about that. So I think that if you look at we grew Q1, we anticipate that we're going to be growing in the 40 cent range for the full year. The statistics now coming out from the various agencies would indicate, you know, mid single digit growth for the sector we anticipate will be slightly better than that. But comparisons can mention are lower in the second half of the year.

And we also, as Ken outline, anticipate that there's going to be easing of some of the constraints, and we'll have more access to products as we go through the year. So yes, we expect that in the second half of the year, we will see higher than the at least 8%, the four to 8% range, in terms of growth. And the second side is not necessarily better, the second half.

Adam Tindle -- Raymond James -- Analyst

Understood that that's helpful. And this is a follow up I wanted to ask on gross margin is down year-over-year for the first time in a while, albeit slightly, and certainly weathered better than others out there, in terms of your main competitors. But I want to ask about vendor rebates and incentives can maybe the state of builders right now, it seems like they wouldn't need incentives much, because there's no supply anyway. And I'm wondering if you're seeing that? And secondly, how you think about those wants supply comes back to those returned to normal rebate levels? Or could we potentially hit a new normal on gross margin for the company?

Ken Lamneck -- Chief Executive Officer

Yeah, so I'll come in, like bonus added. Adam. So yeah, we were down 10 basis points, as you saw, for gross margin, a lot of that, again, driven by, you know, the acceleration that we talked about with hardware, carrying more, you know, lower gross margin and the rest of our business. So some of the acceleration there, I think drove that. The, you know, I think that's that's the certainly main factor that we're going to but Plus, I don't know if you wanted to add anything toward that or not?

Glynis Bryan -- Chief Financial Officer

No, I think well, what we had said back in February, and I think we maintain now is that margin or gross margin will be roughly flat for 2021. Partly because we anticipate that hardware as a percentage of the total will be greater than it was in 2020, when we had more cloud based 100% margin business as a greater percentage of our total. So with the improvement in hardware that we anticipate, in the second half of the year, we believe that our gross margins will be in flattish on a year over year basis. I was he wanted the implant.

Adam Tindle -- Raymond James -- Analyst

Got it. Okay, maybe just one final one bigger picture can what are the key attributes that you and the board are going to be looking for and successor if you can maybe stack rank a couple things? Is it vendor experience global experience? Large acquisitions cloud?

Ken Lamneck -- Chief Executive Officer

Yeah, I mean, I think all of those are pieces. First and foremost, of course, we're looking for a very solid leader. That's, you know, first on top of the list, we think we've got the right elements in place, we have the right strategy in place. So I think, you know, all of the above type of experiences that you mentioned, of course, are going to be important ingredients to that. So, you know, we're excited about that. I think it'll be a very thoughtful process. And we have, as I mentioned, a few really good internal candidates and a good slate thus far of external candidates that we're just in the process of starting to engage with so nothing, I think, added norm of what you'd expect. It'll be big shoes to fill.

Adam Tindle -- Raymond James -- Analyst

It'll be big shoes to fill. Congrats again. Thank you.

Ken Lamneck -- Chief Executive Officer

Thanks, Adam.


The next question is from Matt Sheerin with Stiefel.

Matt Sheerin -- Stiefel -- Analyst

Yes, thanks. So good morning. It's a follow up. Question just regarding your URL look for acceleration in the second half. In the second quarter, it looks like you're gonna have pretty easy times I think, last year, you were down like, you know, mid teens on a pro forma basis year over year 8% sequentially, and you're typically up sequentially at least a little bit in the June quarter. So is there anything preventing you from from growing at least modestly sequentially, constraints or that outlook in terms of the infrastructure span is at work skewed toward the back half.

Glynis Bryan -- Chief Financial Officer

We will grow sequentially going into the tissue didn't mean to suggest that we would not be growing sequentially. We're going into q2 We still have some supply constraints as it relates to more devices, as opposed to the infrastructure stuff. But we will continue to grow our q2 is normally a heavy software quarter for us, because there's a Microsoft year ends. And that's in June. Some of that gets kneaded the kind of meets the top line growth, but we would anticipate that we're going to perform well, from an overall software perspective, hardware will be a little bit more muted just because of supply constraints. But we still expect to expand to see sequential growth from on the first quarter.

Matt Sheerin -- Stiefel -- Analyst

Okay, that's helpful. And then, as you talk about the opportunities with on the infrastructure side, the hybrid side, in the bookings could you quantify I think you said your backlog was up a little bit, but that's on the client device. But in terms of the real solutions, projects, could you quantify you know, how strong that's looking?

Ken Lamneck -- Chief Executive Officer

Yeah, I would say that we're certainly seeing we certainly had growth in first quarter in that space. But again, we we anticipate with the projects we're seeing with the backlog and bookings that we're we're starting to see come to reality that that's that's certainly increases. And again, more favorite toward the second half of the year, as people come again, back more in a hybrid work environment back on site, we think that helps the acceleration.

And of course, the economic aspects do improve, certainly in the second half. And the comparison, of course, as you mentioned, get easier as well. So, so we're definitely seeing good activity in that area. And as we talk to you, and as you talk to the the OEMs, you know, Cisco and Dell, EMC and NetApp, and Pure Storage, I think you'll see a similar sort of story in that in that vein as well. So that's why we come to that conclusion that the second half will be certainly stronger from an infrastructure point of view, meaning hybrid infrastructure point of view in the second half of the year.

Matt Sheerin -- Stiefel -- Analyst

Okay. And then lastly, on the public sector, you talked about strength there in the education market, we've seen multiple strong quarters of demand. Is there still legs left there in terms of that cycle? In the education and public sector markets?

Ken Lamneck -- Chief Executive Officer

Yeah, I think there definitely is, of course, you know, we're, we're not nearly as heavily skewed toward that segment of our business as one of our competitors is is, so it's a much smaller part of our business. We need to, you know, continue growth. But I think, you know, the main aspect, I think, what we're all seeing, of course, with a pandemic drove medicine zombies is that, you know, I think on average, it used to be there was, you know, for the average household, one PC per household, I think now you're seeing, of course, it's one PC per person per household, due to the education requirements that are necessary for distance learning so.

So I do think that there's a huge proliferation as we've seen with Chromebooks primarily in that market set. And I think that's going to continue now that you're going to have refresh cycles, that will be probably, you know, certainly more accelerated with the, with the numbers that you're seeing out there. And the fact that there's a lot of wear and tear on those with students. So I do think that that's a that's going to continue. Now, is there a surge going on now and last quarter and the next and this quarter and maybe into q2? Yes. There's no question that won't continue at that accelerated pace. But the baseline is improved pretty dramatically when you look at the numbers of units. So if you just take the refreshed sort of cycles of that, that's going to certainly increase the base pretty substantially for the education market.

Matt Sheerin -- Stiefel -- Analyst

Okay, great. All right. Thanks a lot, Ken.


Your next question is from Anthony key.

Anthony -- Key Bank -- Analyst

Yesterday morning, and congratulations on your pending with Amanda. My first question is in regards to these pie chain constraint that are out there just wondering, you look at the the issues that are going up now, versus quarter end, have things improved or gotten worse or about the same. Can you just give us some more color on that, please?

Ken Lamneck -- Chief Executive Officer

Yeah, Anthony, thanks for your question. Yeah, I would say they're about the same. We were very close to this, as you can imagine. So we're very, you know, on top of this with the likes of Apple, Lenovo, Dell, you know, HP, of course, we're most of that is occurring. So I would say that they're, they're managing as they're getting better visibility's. So I would say it's, it's pretty much basically about the same. And we anticipate that those constraints will certainly occur through the rest of this calendar year. And then they'll certainly be you know, there's obviously capacity coming online, but that typically takes a few quarters to three quarters to really start, you know, being fulfilled. So I think, you know, we'll see that into certainly the rest of this year and into the first part of next year potentially.

Anthony -- Key Bank -- Analyst

Okay, thanks. You gave us some copper on the public sector. Just wondering if you could give us some additional color on some of your other vertical markets. What are you seeing there?

Ken Lamneck -- Chief Executive Officer

Yes, again, as we said, we're seeing you know, that our enterprise and corporate and commercial clients, that's really we did see positive growth for the first time in a while, and those in those sectors. So that was really good news to see, from a business point of view, and again, we continue to see, you know, booking rates improve very nicely. As well as, of course, as we talked about backlog improving. So that's what gives us the confidence with the ongoing sort of trajectory that we see in the business.

Anthony -- Key Bank -- Analyst

Got it? Okay. And last question for me, as far as overall, there's more discussion if the company's about inflation. Just wondering, are you seeing that whether aging relation to other costs increasing and how you're doing a managing that?

Ken Lamneck -- Chief Executive Officer

Yeah, we've not seen that yet. Anthony, of course, there's a tremendous amount of talk about it, there has been for the last couple of months, but we're not seeing that impact the business yet at this stage, but certainly mindful of that, and what that could mean, you know, there's no question we will see price increases on devices, because of the, the semiconductor shortages as obviously, those prices are increasing for the OEM. So those will be passed through now for us. That's, that's a positive situation, because it's higher is these for us. And we do have systems to make sure that it's immediately pass through to our clients. So but I don't think that's, you know, that's an that's a, basically an increase in pricing that might be viewed inflationary. But that's really just due to the constraints. And more than anything else. But so to your main question, inflation, not really seeing that impact. Any sort of clients or any discussion around that? Yes.

Anthony -- Key Bank -- Analyst

Got it. All right. Well, thank you. Thank you.

Ken Lamneck -- Chief Executive Officer

Thank you.


Your next question is from Paul Coster with JP Morgan.

Paul Coster -- JP Morgan -- Analyst

Hi, this is Paul Chung on for concert. Thanks for taking my questions. And, you know, Ken, congrats on your retirement, you've seen a material amount of, you know, shareholder value creation under your leadership, So congrats on that. And now, just on a competitive landscape, are you gaining market share, particularly, you know, against the smaller players, as your size kind of enables you to work relatively better through supply constraints? And then just how do you think the industry evolves from kind of lessons learned during the pandemic? And do you expect kind of more consolidation in space?

Ken Lamneck -- Chief Executive Officer

Yeah, a lot in that question there, Paul. So first of all, thanks for the thoughts there. Yeah, I would say from, you know, a couple areas that that we're seeing from, you know, the smaller or smaller competitors. They're very resilient group of people, there's no question so their businesses are pivoting. But there's no question that I think the trends that we've seen in some of the datasets, we've seen where the larger players, the top sort of, you know, 10 15, players in the industry are certainly growing significantly faster, almost to what the smaller players are growing.

And that's just the data that would show that doesn't mean they're going away, that means the smaller players are pivoting to becoming more meta service providers and looking at different parts of the business. But I do think that it's becoming more and more difficult, you know, for smaller players to continue to play. You know, in the supply chain aggregation game, I think the systems, the tools that are required now are much different than they were a few years back. So I think that does play to the the larger companies who can invest in really strong IoT platforms, strong e commerce engine, strong digital marketing, type capabilities.

So I think that's been playing out. And I think that will continue. I think that is leading, of course, to more consolidation. I think you're seeing that across the landscape in many, many facets. And I think that's only going to continue. And that's a very natural thing that occurs as industries continue to mature and grow. So I think that's, that's definitely happening. As far as you know, lessons learned, I think they're, you know, I think they're the obvious ones.

For us. I think, companies are realizing that, you know, at the heart of the heart of the pandemic really was the reliance on it, it was the solution for them. Right. As we said their script 510 years ago would have been really difficult. For this woman, you look at, you know, the advent of the level of machines that we have, for devices that are relatively inexpensive to allow people to work remotely.

The scalability of the networks, that's occurring, the application of things like Cisco, WebEx and teams, which really helped the collaboration front, you know, all play really strongly. So I think, for it, I think overall, it's you know, the pandemic has been a good thing and the fact that more and more companies realize that, at the heart of it, they've got to become much more digital, you know, as a company in order for them to succeed. I think we'll see some of the remnants of this, of course, continue. Right, I don't think I think we all agree that the workforce won't be the same.

Going forward. There will be leaders that will be hybrid, but they'll certainly be more work from anywhere type of activities that will continue to migrate. So I think those are some of the obvious lessons learned. But I think overall, you know, it just shows how resilient people are to get the job done.

Paul Coster -- JP Morgan -- Analyst

Thank you for that. And then Glynis, as we think about free cash flow for the year, I assume we should expect pretty strong seasonal FAQ, as similar to last year, and then some drag in the second half. What are some of the presentations we navigate kind of through the year? And that could drive some upside to maybe your cash from operations? Thank you.

Glynis Bryan -- Chief Financial Officer

So that's, that's a tricky question, Paul. So part of it, I think, is that as we navigate in the second half of the year, we will have more, we anticipate that we're going to have more more hardware purchases. And that typically is, would be a drag on our cash flow performance in the second half of the year, we do anticipate that we will have better performance around software, which typically helps us from an overall cash flow perspective.

So I think that combination is really what's going to drive the cash flow performance that we would see in the second half of the year, as well as the improvements that we're seeing in our collections from our overall AR perspective and reductions in our DSO and we've done a good job of expanding on the payables side with the facilities and the inventory financing facilities that we use. But I think continued use of those will also drive to the cash flow performance that we're anticipating in the second half of the year.

Paul Coster -- JP Morgan -- Analyst

Okay, great. Thank you.


Next question comes from Vincent Alexander with Barrington Research.

Vincent Alexander -- Barrington Research -- Analyst

Yeah, Ken, what areas of your business? Are you experiencing? market share gains?

Ken Lamneck -- Chief Executive Officer

Yeah, thanks for the question. No question on the software side where we get good datasets, you know, from the publishers and so forth. No question. we're gaining share, when you look at clouds, when you look at Azure consumption from Microsoft, when you look at what we're doing with the likes of companies like VMware, no question that, that we're certainly gaining, that's an area big area of focus for us as a company. So certainly good data sets that point to the fact that we are, you know, companies like Adobe, we're definitely doing well, on the software front.

On the hardware front, it's it depends upon the the specific situation a little bit hard in these kind of very constrained environments to gain share. And your goal really, is to make sure you don't lose any share during these environments, and that you're getting the right allocation of products to support your client needs. And then, of course, the other big segment, of course, is on, you know, server storage, networking side of the business. So networking is going well for us, some areas of focus for us, and server and storage, where I think we've given up a little bit of share in those areas. So that would be sort of a summary of how we see the business.

Vincent Alexander -- Barrington Research -- Analyst

And what are you assuming that your people get back to the office and your guidance?

Ken Lamneck -- Chief Executive Officer

Yeah, good question. We haven't, you know, we told our teammates that, of course, we'll give them you know, a month's notice for that. And, of course, it's depends upon where you are in the world. So certainly in Australia, New Zealand, our people are, you know, the offices are fully open and have been for a while. And certainly we're seeing that in Hong Kong and Singapore, certainly China are offices in China have been open for a long, long time. Europe is a different situation, UK, of course, looking much more positive than the rest of Europe.

So I think that's going to take a few more months, I wouldn't expect Europe to really get back to more of the offices until sort of late summer, maybe or, you know, September timeframe, based upon what we're seeing. The US, you know, we've got our offices open their little sort of voluntary basis.

But we do believe that as we get into July that that will become a much more sort of hybrid sort of situation where we will be having our main larger offices, you know, open, but again, we'll follow all the CDC guidelines and so forth, Canada, similar to Europe, right, a little bit more constraints, certainly with lockdowns, but vaccines coming out pretty quickly.

And so anticipation again, would be that sort of in the July timeframe that we'd see certainly much more activity back to offices, and we're hearing the same sort of situation with our clients, as well. When you look at what their plans are, certainly you've been in the finance committee know the finance committee meeting. That's right. You've seen what Goldman and JP Morgan have said in regards to offices opening in June and a lot more activity. So we think that's you know, that's Positive as we get back to more of a hybrid sort of environment.

Vincent Alexander -- Barrington Research -- Analyst

Thanks for answering my questions.

Ken Lamneck -- Chief Executive Officer

Yeah. One other question. Adam, I apologize, I missed your question on the rebates, I wrote it down but didn't get to it in the verbal response. On the rebate front, we're actually not seeing any degradation there. We're seeing great support continued from our partners, and the investments and how important our activities are to their portfolios. So we are not seeing degradations in regards to any of the rebate, sort of programs that we have in place. So and we think obviously, as we come out of that kind of, you know, the economy gets stronger, and lines go up, that doubles, those will always be very similar what they were, but during the pandemic, we didn't see any of our partners really retract from that situation at all. So that continues to be pretty stable for us.

Glynis Bryan -- Chief Financial Officer

Can I just clarify one question that I thought we would get that we didn't get? So I do think about SG&A. We've given guidance out there that says we anticipate we will get to 11.7%, as soon as percentage of sales adjusted SG&A percentage of sales for the year, but in the first half of the year, or SG&A, higher the year, slightly lower than that. So you should anticipate in q2 that FEMA will be higher than 11.7% and it will come down in the second half of the year to get to that aspect.

Ken Lamneck -- Chief Executive Officer

Okay, so thanks, everybody for joining. We appreciate it.


[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

Glynis Bryan -- Chief Financial Officer

Ken Lamneck -- Chief Executive Officer

Adam Tindle -- Raymond James -- Analyst

Matt Sheerin -- Stiefel -- Analyst

Anthony -- Key Bank -- Analyst

Paul Coster -- JP Morgan -- Analyst

Vincent Alexander -- Barrington Research -- Analyst

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