CDW: Big Growth In Services To Continue With Aptris Acquisition

CDW CEO Christine Leahy tells investors on the company's quarterly earnings call that the company's acquisition of Aptris will mean a strong expansion into the IT services management space, particularly with ServiceNow.

CDW Thursday reported across-the-board growth in revenue and earnings, and said growth is due to continue as it expands its services business with the acquisition early this month of Aptris.

Christine Leahy, CEO of the Lincolnshire, Calif.-based global solution provider, said her company's third fiscal quarter results featured both strong sales growth and profitability.

"These excellent results reflect the combined power of our balanced portfolio of customers and markets, our full suite of offerings that address customer priorities across the IT landscape, and our ongoing success executing our three-part strategy for growth," Leahy said during the company's quarterly financial analyst conference call.

[Related: CDW Plans Huge Canadian Expansion With Scalar Decisions Buy]

CDW ranked No. 5 on CRN's 2019 Solution Provider 500.

CDW's three-part strategy includes acquiring new customers and capturing share, enhancing its solutions capabilities, and expanding its services capabilities.

The expanding services part is being helped along with CDW's acquisition this month of Aptris, a Loves Park, Ill.-based IT service management company and ServiceNow elite channel partner, Leahy said.

IT service management and digital workflow platforms are rapidly becoming a cornerstone of IT, she said.

"IT service management implementations and integrations are typically very complex," she said. "Aptris is a leader in IT service management solutions helping customers simplify the end-to-end process. Aptris' talent and expertise further expanded our capabilities in this fast-growing segment of the IT market and enhanced the value we can deliver to our customers."

CDW and Aptris have been partnering since 2017, Leahy said.

"Aptris presents an exciting growth opportunity for our business, our customers, our partners, and our co-workers," she said. "It brings the right talent and strategic capabilities we want to deliver to our customers. We welcome Aptris' newly 100 co-workers to the CDW family."

CDW is continuing to explore additional mergers and acquisitions activities as part of its growth strategy, even as it invests organically in new employees and processes, she said.

CDW in its third fiscal quarter succeeded in part because of a balance across customers and markets via five sales channels: corporate, small business, healthcare, government, and education, Leahy said. Four of the five channels saw double-digit year-over-year growth in the quarter. The fifth, education, was flat as growth in higher education was tempered by a decrease in K-12 spending, she said.

"Each of these channels are meaningful businesses generating annual sales of more than $1 billion," she said. "This scale enables us to further align sales teams into vertical customer end markets, including Federal government, state and local government, K-12, and higher education"

CDW's Canadian and U.K. operations also contributed over $2 billion in net sales in the last 12 months, she said.

In the U.S., a big part of the sales growth came from customers looking for client devices due to a growth in employment and the need to refresh older equipment for new use cases and security features, Leahy said.

"At the same time, customers continued to modernize their IT infrastructures and adapt more flexible architectures," she said. "The teams did an outstanding job helping customers address these priorities."

Corporate customers continued to grow their business with CDW despite uncertainties in the macroeconomic environment, Leahy said.

CDW also did well in both the civilian and military parts of the government sector, and saw good revenue growth from sales of devices as part of a large project involving products, services, and logistics for the upcoming 2020 U.S. Census.

"Census is a great example of the power of the breadth of our offering and our technical capabilities," she said.

CDW is keeping an eye on potential impacts if the U.K. pulls out of the EU as part of "Brexit," Leahy said.

"As we have previously shared, our recently established presence in the Netherlands supports our broader opportunities in the EU and, if needed, serves as a Brexit contingency plan,” she said.

Third fiscal quarter 2019 growth was also driven by the breadth of CDW's offerings, with over 100,000 products, services, and solutions from over 1,000 vendor partners, Leahy said.

U.S. transactions grew by the mid-teens lead by a 20-plus-percent growth in sales of client devices, while U.S. solutions increased by mid-single digits, which was the main driver of the company's gross margin improvements.

In the U.S., hardware sales grew 10 percent thanks to higher growth in device sales. The company saw minimal impact from tariffs and supply constraints. However, she said, because of variable timing of infrastructure projects, sales of data center hardware, including storage, server, and networks and communication equipment, declined by single digits for the quarter. On the other hand, hyper-converged infrastructure and all-flash storage sales showed double-digit growth in the quarter. Meanwhile, software sales grew 12 percent over last year.

On the services side, CDW saw a 16-percent increase in sales thanks to warranties, professional services, and configurations, Leahy said. The company also saw customers increase spending on the cloud by double-digits. "Growth was driven by productivity, collaboration, security, and mobility workloads," she said.

For its fiscal third quarter 2019, which ended September 30, CDW reported net sales of $4.91 billion, up 12.2 percent over the $4.37 billion the company reported for its fiscal third quarter of 2018.

CDW reported GAAP net income of $207.1 million, or $1.37 per share, up from last year's $183.7 million, or $1.20 per share. On a non-GAAP basis, CDW reported operating income of $380.4 million, with a non-GAAP net income of $1.70 per share, up from last year's $333.9 million, or $1.42 per share.

Looking forward, CDW expects fourth fiscal year-over-year constant currency organic growth of between 625 basis points and 675 basis points above the market as a whole, and roughly 200 basis points above CDW's prior view.

For the full year 2019, CDW expects earnings-per-share to grow in the mid-teens, which is meaningfully higher than prior guidance.