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Cdw Corp (CDW) Q3 2021 Earnings Call Transcript

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CDW earnings call for the period ending September 30, 2021.

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Cdw Corp (CDW -0.52%)
Q3 2021 Earnings Call
Nov 3, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 today. [Operator Instructions] I will now hand the call over to your host, Kevin White, Director of Investor Relations. Kevin, over to you.

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Kevin White -- Director of Investor Relations

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 Morales, 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 in 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, growth rates are dollar amount increases and 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 US net sales only and do not include the results from CDW U.K. 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.

Christine Leahy -- President and Chief Executive Officer

Thank you, Kevin and good morning everyone. I'll begin today with an overview of third quarter results and drivers of performance, I will take you then through a more detailed look at our financials, as well as our capital allocation strategy and outlook. We'll move quickly through our prepared remarks as we always try to do to ensure we have plenty of time for questions.

But before I get started, I do want to pause for a moment to honor the life and legacy of our former CEO, Tom Richards, who passed away last week after a valiant fight with cancer. I suspect most of you on this call have likely met Tom, in person. I'm certain that everyone on this call has been impacted by Tom. He was a fierce competitor and equally a kind human being. Tom, had a lot of what we like to call it CDW Tomism. Simple way of getting to the essence of something in a way that stuck. One of my personal favorite is when Tom used to say, at CDW we take what we do seriously, but we don't take ourselves too seriously. That's the essence of who we are. That is our CDW culture. Capture so simply and amplifies so strongly by Tom Richards. Tom, also had an unexpected way of signing off on our earnings call. Usually with the right comment about an upcoming holiday. Like Halloween or Mother's Day or even Valentine's Day. As a result, we always ending the call on a high note and with the chuckle. Some news audience as well.

In honor of Tom, I'd like to kick off this earnings call with the tag line depend on every communication to a coworkers. Tom always signed off with you make a difference. Literally injecting into each coworker, Tom, personal belief in them and their important impact. On behalf of all of our coworkers around the globe, our customers and our partners, our communities and our investors, I would like to say thank you to Tom, you've made a difference.

Let me turn now to the Q3 performance. Once again CDW posted strong top line growth and profitability. Overall demand was strong and the teams did a great job addressing customer needs. For the quarter, we delivered record net sales of $5.3 billion, 11% higher than last year and up 10.7% in constant currency. Non-GAAP operating income of $435 million, up 12.6% and non-GAAP net income per share of $2.13, 15.4% higher than last year on a reported basis and up 15.8% in constant currency.

Our ability to deliver the strong top line and profitability was the result of three key drivers, our balanced portfolio of customer end markets, the breadth of our product and solutions portfolio and our ongoing execution against our three part strategy which is focused on taking share and investing in the solutions and capabilities our customers need and want. Let me walk through each one of these and share some detail about how they contributed to our performance.

First, our balanced portfolio of customer end markets. As you know, we have five US sales channels. Corporate, small business, healthcare, government which include federal and state and local customers and education with K-12 and higher ed. We also had our U.K. and Canadian operations each serving public and commercial customers. All of these operations represent meaningful businesses in their own right. Often different factors impact these diverse customer end market. In this quarter we saw that play out as our commercial business in the US, our small and corporate channels and our international operations posted significant double-digit increases, while our US 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 continue to leverage our distribution centers extensive logistics capabilities deep vendor partner relationship 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 work with customers and whenever possible found alternative available product and build alternative solutions. These efforts helped mitigate some of the pressure and our backlog increase was consistent with last quarter. The tight supply environment continue to impact prices which our teams were generally able to pass along.

Let's take a deeper look at third quarter customer end 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 endpoint. Within this backdrop corporate increased 25% and customer -- customer demand remains 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, audiovisual and desktop.

At the same time digital transformation remains a top priority. While buying sentiment was clearly there in many cases the product would not. Writings were strong but with extended lead time backlog built during the quarter. Lack of product availability particularly in the common storage muted corporate solutions growth. Small business also delivered another exceptional quarter growth increasing almost 40%. The team continue to help customers with remote enablement, security and video driving strong growth across both transactional and solutions categories.

As we've 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 as 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 channel decreased 33%, federal declined double digit in large part due to the overlapping of our devices service solution for the US Census Bureau and other client device programs that were particularly strong last year.

Security remains robust with net sales, up more than 30%. Security of Washington were slower than typical at federal year end and we had contracting delays in several large contract. This is not unusual. Given the magnitude of federal contract timing can influence performance. You've heard us talk about federal's lumpy nature in the past. This will unwind and we expect to see a reversal back to growth in the first half of 2022. It local posted a mid single-digit decline.

Stimulus funding remained largely unallocated to the local level. This because access multi-year American rescue plan Act funding with deadlines in 2024 led to greater focus on the multi-year budget planning. At the same time, state and local customers were focused on digesting last year's meaningful stimulus funded IT investment. We continue to work with our customers. But given the complexity of the various funding opportunities and multi-year 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 look for strong non-seasonal first half performance to be followed by a deceleration in the second half.

Chromebook availability continue to improve during the quarter and client devices increased low-single digit on top of last year's stimulus equity in 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 net, largely reflecting supply challenges. We continue to expect above historical net sales against some very tough on seasonal forth 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 have been sidelined did resume. This was particularly the case in security and healthcare remains the 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 U.K. and Canadian operations increased over 30% on a reported basis. Both the U.K. and Canada delivered mid 20% growth in local currency. Customer priorities in both markets remain the same as the US 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 this quarter, the breadth of our product 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 tools offset by declines in Netcom and enterprise storage. Drilling further down into key solution categories cloud customer spend once again increased strong double digits. We saw robust growth across all three 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 its ongoing important through our customers, our security practice delivered excellent results. Customer spend was up strong double digit. Our teams continue to guide customers on their security posture assess their environment, design the best approach and deploy and manage the solutions throughout its life cycle. 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 digits. 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've shared before services are fundamental to our go-to-market approach and a key enabler of our value proposition. This quarter's nearly 30% growth with the product of both organic, performance and inorganic 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 add 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, I said deepen, Sirius is additive to our existing capabilities. Capabilities we have built through 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 US and internationally. Why so many investments and 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 IT lifecycle.

Today IT leaders are accountable for both running the business and using technology to transform the business and deliver strategic outcomes. To both run the business and transform that 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 need we have built engineering services capability [Technical Issues] our technical organization has grown to more than 3,700 presale specialists and engineers. Today we can deliver complex digital transformation solutions from [Technical Issues] them quickly.

Let me share example of how our services team is helping a global online home retailer transform their business for their next wave of growth. Our transformation that was hindered by [Technical Issues] to accelerate their transformation [Technical Issues] customer opted for a combination of public cloud technologies and new cloud native patterns. This would create the agility they needed essentially [Technical Issues] and on-demand environment. A great idea but accelerating cloud technology require specialized expertise that is inefficiency keep on staff and that is where CDW came in. First, we leveraged our cloud managed services and offloaded some of the projects from the customer to CDW, then we pulled in our digital velocity talent orchestration services or DVT. DVT orchestration customers with talent to work inside the customer's existing team [Technical Issues] talent 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 continue to 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 customers 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 scale, 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 nine and a quarter and 10% in constant currency. But roughly between 5% IT market growth and 425 to 500 basis points of 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 logistic challenges. Challenges we do not expect to reverse in the near term and challenge that we do not expect to resolve at the flush rather gradually.

As far as wildcards in addition to the fluids 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 outexecute our competition.

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

Albert Morales -- Chief Financial Officer

Thanks, Chris, and good morning everyone. I'll 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 quarter P&L on Slide 8. Consolidated net sales were $5.3 billion, up 11% 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 hosting 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 and was tempered by a slowdown education and declining government.

On the supply side, average overall backlog increased several hundred million dollars 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 $115 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 software as a service, in addition to strong professional and managed services, performance.

Turning to SG&A on slide 9. Non-GAAP SG&A increased 9.2% increase is 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 coworker count focus on execution of our strategy. Coworker 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 coworker count reflects organic -- and organic -- inorganic investments to support high growth solution areas in our own digital transformation. GAAP operating income was $386 million, up 26%. 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 is $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% up 200 basis points versus last year's rate, primarily due to one-time impact of state and foreign tax benefits recognized in the prior year. As you can see on slide 13 with second quarter weighted average diluted shares outstanding of $139 million GAAP net income per share was $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 on 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 when 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. Growth 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 30, 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 onetime items. Year to date we saw some of the timing reversed as we mixed out of vendors with extended payment term. 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 nine days from last year's third quarter. Increase is primarily driven by mixing out of vendors with longer payment cycles. In addition to holding customer driven stocking positions in the timing of receipts and shipments.

Turning to capital allocation on slide 23. Our 2021 priorities remain the same. First, increase the dividend in line with non-GAAP net income including today's 25% increase to the dividend. The increase 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 and marks the eight 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, the return excess cash after dividends and M&A to shareholders through share repurchases.

During the quarter we continue to deploy cash consistent with our capital allocation priorities returning $505 million to shareholders, including $55 million of 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 2021 including $1.5 billion in share repurchases with the balance from dividends.

Going forward, we continue to 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 will 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 in the CDW on our 4th 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 US and international commercial commercial customers. On the supply side, visibility remains a challenge. Constraints continue to notebooks, desktops, video, Netcom and data center -- 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 and we do not expect it to improve in the near future.

With that context for full year 2021, we continue to expect the US IT market to grow approximately 5% and our net sales to grow 425 to 500 basis points faster than the US 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 an approximately 80 basis points for the full year net sales growth, assuming exchange rates of $1.38 to 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 driving operating margin which will deliver our full-year outlook. Putting it altogether, 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 three and three quarters to four and a quarter percent of net sales. Assuming current tax rate. However, given the timing impacts that contributed 2020 significant over delivery and ongoing customer driven stocking positions as well as at the time of receipts and shipment -- shipments, we expect 2021 free cash flow to come in slightly below the low end of the range. Additional modeling thoughts on 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 to 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.

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question comes from Adam Tindle at Raymond James. Adam, your line is open.

Adam Tindle -- Raymond James -- Analyst

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 CDW mid-market customers more interested in Sirius' services portfolio? So kind of a qualitative view from a customer perspective on potential revenue synergies in this deal.

Christine Leahy -- President and Chief Executive Officer

Yeah, good morning, Adam. Yes, 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 focus 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 help bolster CDW given their reputation in the market in the quality of their -- of their services. And the reciprocal is true as well I talk to Joe Mertens, late in the day of the announcement he made us wait for a lot of customers and had their front line sellers and it would for the most part all positive. So again, we think I said the word before 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 in there as well.

Adam Tindle -- Raymond James -- Analyst

A little bit more on Sirius recent performance. The purchase price was very attractive all cash in nature and there was 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 dispel any of that concern by talking about what you've seen out of Sirius performance in 2021?

Christine Leahy -- President and Chief Executive Officer

Well, you know, look they -- they're doing just fine and their customers like us in areas like federal which we talked about today are 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 are 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 [Technical Issues] 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.

Adam Tindle -- Raymond James -- Analyst

Very helpful, thank you very much.

Christine Leahy -- President and Chief Executive Officer

Thanks, Adam.

Operator

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

Shannon Cross -- Cross Research -- Analyst

Thank you very much. I wanted to take a bit more into backlog composition, if you're seeing any order cancellations or 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?

Albert Morales -- Chief Financial Officer

Yeah, good morning, Shannon, this is Al. So a couple of things that I would note, so going in the quarter we maybe would have expected that there will be a bit of a kind of a modest view of of backlog. I'd say overall for the quarter was a bit more and modest and let's call it in terms of just all characteristics similar to Q2. A couple of variance or components that may be it looks a little different and I think, Chris, touched on her prepared remarks is that we saw a bit more of an effect from a solutions perspective and that would have included notably net common storage. Notwithstanding that similar to Q2 and look I would just note that all things considered the team did an exceptional job navigating through that and and delivering on the results.

Shannon Cross -- Cross Research -- Analyst

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

Albert Morales -- Chief Financial Officer

We are not. I would just -- I would just note that, look, I think there's component in the backlog that there is 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 does not have a clear end date 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 you're seeing the effects of either double bookings or order cancellations.

Shannon Cross -- Cross Research -- Analyst

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. Are you thinking more transitory or are you sort of planning for some of these cost increases to be here for the long -- long-term? Thank you.

Christine Leahy -- President and Chief Executive Officer

Yeah, Shannon 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 -- 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, and you think about small business, they're 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 and transitory, but again we think that but technology is in A1 priority and our customers will continue to invest in technology, if in fact it becomes a little more expensive we think that will 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 then positive nature in the economy we're feeling pretty good.

Shannon Cross -- Cross Research -- Analyst

Thank you.

Operator

The next question comes from Ruplu Bhattacharya of Bank of America. Ruplu, your line is open.

Ruplu Bhattacharya -- Bank of America -- Analyst

Hi, thanks for taking my questions. Chris, I wanted to ask about the education market in 3Q 20, 4Q 20, you had $2 billion quarters. And again this year in June and September you've again had $2 billion quarters. So how do you balance, I mean what are your thoughts on the stimulus package and the benefit you can get there versus your headwinds you've had from a stronger year ago quarter?

Christine Leahy -- President and Chief Executive Officer

Well good morning Ruplu, and thanks for reminding the team of the great performance, they will appreciate that. Look we called this out earlier in the year and I mentioned 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 strong as it has been, but we have, we are lapping a big back half of the year. So we would expect to still continue to see I'll call it solid performance and it's a bit unseasonal because at the end of the -- end of the year. But it's, we need to accelerate in our view and it's going to be, it will be difficult to overcome the level of growth that we saw last year. That said, Ruplu, is the stimulus funding for example the emergency connectivity is yet another source of -- another source of funds for education institutions to be able to fortify their classrooms in hybrid environment.

The one thing with that funding is schools are able to use it for orders that are placed. So we're working our way through what of that money relates to orders that have been placed but were confident that there's a large portion that are additive to the -- 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 point 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 to yet another another leg of growth for K-12 with their cloud enabled capabilities and their IP developed technology that they offer classrooms. So the past year, the team is doing very well in long-term a growth area.

Ruplu Bhattacharya -- Bank of America -- Analyst

Okay, 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 an increase for the full year to high sevens. If we just look at core CDW and not consider Sirius right now which is which is accretive to the company. But if we just for the core CDW, do you think that having a high sevens operating margin is a sustainable level going forward? What are the puts and takes that we need to keep in mind?

Albert Morales -- Chief Financial Officer

Yeah, sure. Thanks for the question, Ruplu. So I think you just hit it at the end there. Look, there are lots of puts and takes in any given quarter. And I'll 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 solution or 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 kind of the drop down 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 on a sequential basis, our gross profit margin increase from a channel perspective and then you have got -- you've got transactional solution. And then very notably, Ruplu, I would just note the, the fact that you're 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 the gross margin. Then finally if we walk that down, operating margin, it's been just a matter of the -- what pace our is our non-GAAP SG&A spend happening. In the case of this quarter, I would say growth in gross profit and so we dropped more to the operating margin for the quarter. And when you outlook relative to what that operating margin was for this quarter. We're giving an outlook of high-sevens and that reflects that we would expect in the fourth quarter that spend is going to pick back up and it's going to balance us back out to to a high sevens on the operating margin.

As you look forward, look, I think you get a good sense for the strategy and the movement and where we're going longer term, in terms of mixing into services and mixing on 100% gross margin, all of that was mix components will matter as we go forward.

Ruplu Bhattacharya -- Bank of America -- Analyst

Okay, thanks for all the details. Appreciate it.

Operator

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

Jim Suva -- Citigroup -- Analyst

Thank you. [Technical Issues] you pinpoint but then when we layer in the supply chain challenges in deal with schools and local governments and smaller sized government 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 orders are 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 item? So any talk or color on the discussions you're having around these topics?

Christine Leahy -- President and Chief Executive Officer

Yeah, good morning, Jim. There is a lot packed in there. Stimulus was across many different segments, so let me start with education, which is I think where you going there. Yeah, it's complicated, right. We've got the supply ecosystem that is, has got some impacts to it right now. So we're trying to manage through all of that. Here's what I'd say about K-12. You know we have a lot of experience understanding funding, stimulus funding and other types of funding for educational institutions. So we side by side with our customers to make sure they understand both where the dollar can be used for what products in particular or for what outcomes because sometimes 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 is a lot of navigating customers and then 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 -- it's been a bit complicated, because the funding packages, there were three 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 from March of last year. The end of last year, it was -- there is nothing for state and local. But as we all know when it to state and local, it's about budget cycles and it's about funding deadlines. So the spending that taken place in 2021 is primarily from the CARES package with the 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 in planning and state and local governments now have this funding where they don't have to spend until the end of 2024 and so they are now looking at a multi-year approach. It's pretty unusual that multi-year 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 with frankly a core capability like working with partners in the 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. So I know that was a long answer, I hope it was -- it was helpful.

Jim Suva -- Citigroup -- Analyst

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

Christine Leahy -- President and Chief Executive Officer

You're welcome.

Operator

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

Katy Huberty -- Morgan Stanley -- Analyst

Yes, thank you. Good morning. Just given the backlog commentary can you talk about the gap between net sales growth and orders or in growth in 3Q and maybe how that compared to the second quarter? Then have a follow-up.

Albert Morales -- Chief Financial Officer

Sure. Hi, Katy, 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 continue 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 delta there, mimics 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.

Katy Huberty -- Morgan Stanley -- Analyst

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 the drivers of cash outflow in the quarter and the financing needs near term to rebuild that buffer and also to fund the Sirius acquisition? Thank you.

Albert Morales -- Chief Financial Officer

Sure. 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 acquisition 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 -- we look lower and a couple of things there. One, we had a 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 on our revolver availability perspective, we feel quite good with where we stand. And then we feel quite good about our ability to create, generate free cash flow in 2022.

Katy Huberty -- Morgan Stanley -- Analyst

That's great. Thank you.

Operator

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

Matthew Sheerin -- Stifel -- Analyst

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 you're moving or accelerating toward the cloud because of the product and infrastructure 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?

Christine Leahy -- President and Chief Executive Officer

Yeah, Matt, it's a great question. We've been asking ourselves that as well and talking to customers about it. Given the pervasive in persistent nature of the supply chain and the fact that it continues to expand. I would say, I would characterize it this way. Customers are rethinking and considering accelerating some movement to cloud and potentially rearchitecting some of their solutions in more -- in a public cloud like environment versus, for example, on-prem cloud. But what I wouldn't -- but I wouldn't characterize it as it 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 those conversations. We are seeing some decisions made around accelerating to public cloud, but I wouldn't -- I wouldn't say that it's, it's [Technical Issues] and wholesale if that help.

Matthew Sheerin -- Stifel -- Analyst

Okay, got it. Okay, thanks for that. And then on the PC demand that you're seeing, which, it sounds like that continues to be strong. You've talked about shortages, particularly on the commercial side. What are your thoughts there in terms of the PC cycle and are you seeing any early signs of adoption of Win 10 and do you see that as a driver going forward?

Christine Leahy -- President and Chief Executive Officer

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 will help them through that. You all are familiar with the end of life for Win 10 in the timing for when 11 around the 2024, 2025 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 PCs. I think that -- I think that we have more PC density now. We are going to see sort of replacement cycles of PCs for a couple reasons wear and tear, but also the technology -- the technology improved at a faster pace and client devices are more and more important to the productivity of the people using them. You also have use cases that are expanding and 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.

Matthew Sheerin -- Stifel -- Analyst

Okay, thanks a lot.

Operator

The next question comes from Samik Chatterjee at J.P. Morgan. Samik, your line is open.

Samik Chatterjee -- J.P. Morgan -- Analyst

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 US or maybe in some international markets on a more regional kind of specific basis 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.

Christine Leahy -- President and Chief Executive Officer

Yeah, sure. You know, here's what I would say about the current environment. We are watching it as is everybody and we're cautious about it and we put it in the category of wild card because I don't know that anybody knows what's going to happen, but we also know there has been more momentum around vaccination availability at lower ages, antivirals the rate of vaccine, particularly when we think of our locations, the U.K. and Canada, the US is a little lower, but that's obviously to dispersed geographically. All of that said, I'll tell you the sentiment of our customers is we're moving forward. We are thinking and investing for getting back to kind of 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 customer saying we got to invest. And so if we're not going to be going back to work until early next year or work from anywhere, we've got to invest. And that I would say ubiquitous across the markets that we serve. So we in 2020 we talked about the unevenness in the impact of certain geos, certain industries, etc. I just feel like the tone has really changed to this 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.

Samik Chatterjee -- J.P. Morgan -- Analyst

A quick follow-up, I think you're clearly indicating that operating margin 3Q doesn't repeat in 4Q and you have incremental spend coming through. How much of that is, as you mentioned some of the catch-up on SG&A versus what you outlined as the right time to spend. And I'm just, I'm going to think of what portion of that incremental spend should I be annualizing for the next year? Thank you.

Albert Morales -- Chief Financial Officer

Sure. Thanks, Samik. So look, in fourth quarter we'll give more guidance with respect to what that looks like for 2022 and reflective of our combination with Sirius,right. So but let me just focus my comments on fourth quarter. I would say the non-GAAP SG&A spend -- that spend in Q3 that probably lagged a bit. In Q4 we'd expect that to pick up. There is probably a component there and 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 and notably, our own digital transformation as well as to continue invest in the high growth solution solutions and services areas.

Samik Chatterjee -- J.P. Morgan -- Analyst

Thank you.

Albert Morales -- Chief Financial Officer

Welcome.

Operator

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

Keith Housum -- Northcoast Research -- Analyst

Thank you, good morning guys. Hey, Chris, I'm just kind of the thinking here through the investments and companies are making in technology based on the supply chain shortages that they are. Is there a willingness of your customers to move to and are solutions that are hardware solutions that are -- that can be fulfilled by the end of the year. I'm thinking is a lot of these companies have IT budget they want to spend anyways, 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 on until the products are available?

Christine Leahy -- President and Chief Executive Officer

Yeah, good morning it's great question. And I'd say, it really depends frequently on the -- on the customer set. The small businesses have always been more nimble and less kind of tied to particular requirements and we have seen success there and I think in my prepared remarks, we indicated, the supply chain while they were impacted supply chain constraints, didn't impact them as much as in corporate, because we could help them find alternative. When you get to larger organizations it becomes harder because those organizations have specific requirements and they really don't want to shift off of them that create more work frankly within the organization. What we've seen there and I think Al, mentioned it is, we have worked with our customers to get in line earlier. So a lot of customers are -- have been working very hard to get the orders in earlier than they typically would and hopes that they will get -- get the product by year-end.

All that said anywhere that there are I'll say mission -- less than mission critical type technologies that we can help them find alternative, 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 -- we expect we'll be able to help them do it.

Keith Housum -- Northcoast Research -- Analyst

Got you. And as a follow-up here. In terms of the shortages that you're experiencing, are you finding that those shortages over this quarter and I guess over the previous quarters. Are they consistent with specific product set or solution sets or is it really kind of game of whack a mole where I guess fixed in one area but a new product shortage comes up and in other areas?

Christine Leahy -- President and Chief Executive Officer

Well, here is. I've said this before you've got the kind of supply chain ecosystem. And so you've got, you have capacity you get components you got legit if you've got labor, you got all of this impacting the ability to get product and it has kind of shifted through the course of the year. So what we've had on the transactional side notebooks and video and monitors and things like that that have been constrained. Chromebooks were very much constrained, OK. Chromebooks have started to ease up a little that planning a good 13 months ago to get -- to get to that point by the OEMs.

What we saw this year in this past quarter and a little before was solutions product now being more constrained. And we mentioned that comment particular in 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 part. So whack a mole is a good word for or good term for it.

Keith Housum -- Northcoast Research -- Analyst

Great, thank you.

Operator

We have no further questions registered on the line so I'll hand the call back to Chris Leahy, to conclude the call.

Christine Leahy -- President and Chief Executive Officer

Bethany, thank you. I want to recognize the incredible dedication of our coworkers around the globe and their extraordinary commitment to serving our customers, our partners and all of CDW stakeholders. And thank you to our customers for the privilege and 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.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Kevin White -- Director of Investor Relations

Christine Leahy -- President and Chief Executive Officer

Albert Morales -- Chief Financial Officer

Adam Tindle -- Raymond James -- Analyst

Shannon Cross -- Cross Research -- Analyst

Ruplu Bhattacharya -- Bank of America -- Analyst

Jim Suva -- Citigroup -- Analyst

Katy Huberty -- Morgan Stanley -- Analyst

Matthew Sheerin -- Stifel -- Analyst

Samik Chatterjee -- J.P. Morgan -- Analyst

Keith Housum -- Northcoast Research -- Analyst

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