CDW and Insight report full-year results
Monday, February 15 2021
CDW and Insight Enterprises both released their fourth-quarter and full-year results. The two companies are strong barometers as to how the IT channel is performing in the US, and the picture is mostly a positive one. Revenues are up, as are profits (gross, operating and net). Both companies’ share prices are at five-year highs, fueled in part by a strong stock market overall. The channel is benefiting from a strong tech sector.
The results also reveal some trends affecting the channel – some positively and some that are more challenging.
Cloud and SaaS sales are changing partners’ revenue and margin mix. If CDW and Insight were reporting gross sales, top-line growth would be higher. As they are only able to report the netted-down portion of those sales, essentially their earned margin, the overall revenue growth appears somewhat deflated. Conversely, it has a positive impact on gross margins. Insight reported that cloud now represents 20% of its gross profits in 2020. So while the impact of cloud in the channel is less visible in the revenue line, it has in fact become a critical part of the channel.
Recognizing netted-down cloud revenue for channel partners affects them both operationally (budgeting, financial reporting) as well as culturally (stated growth ambitions, sales commissions structure). Broadly speaking, the channel is unhappy when having to make this shift. For public companies such as CDW and Insight, these issues had to be tackled in 2017 (due to ASC 606). For privately-owned channel partners, which represent the majority of the industry, this will be a challenge to start working on this year if not done already, as the same accounting rules applied to public companies will begin to apply to them in 2021. It is a scenario where software business models and accounting standards are converging in a way that affects the channel top-line.
Supply chain constraints are inhibiting full growth potential. Hardware is still vital for the channel, and has been a strong industry driver, particularly as demand for notebooks ramped up during the pandemic. For Insight, North American hardware sales increased 12% in 2020. For CDW, hardware grew double digits in Q4, led by notebook sales driving the client device business up 30%. This growth would have been higher had there not been supply constraints across the industry. The impact of manufacturing closures in Q1 2020, combined with ongoing logistical challenges and surging demand means the channel is still trying to play catch up. CDW cited greater supply impacts in Chromebooks and other low-end notebook categories – understandably, components are being diverted to premium products. The good news is that pent-up demand will carry through to the first half of 2021, ensuring sustained growth, assuming supply can keep up.
2020 was difficult for SMBs, though conditions improved in the second half. The COVID-19 pandemic has been harder on certain industries and market segments, including SMBs. For CDW, this segment declined 7.5% for the full year. But much of this impact occurred during the second quarter of 2020 when lockdown shocks were permeating through the United States. Improvements started to show during the third and fourth quarters, and SMBs were quick to resume working on IT projects and deploying technology to support continued home-working. But those SMBs with particularly tight IT budgets would have found it challenging to get hold of entry-level products due to the supply constraints mentioned above.
The public sector is buoying channel partners. Looking at CDW’s full-year results, growth was driven entirely by the public sector, specifically its government and education sales. Education spending soared as schools invested in equipment to support home-based learning. Meanwhile, CDW also benefited from supporting the US Census in 2020, specifically with a large device-as-a-service roll-out – a major use case study for the business model. While Insight does not break out a public sector segment, CEO Ken Lamneck highlighted good growth in that area in Q4 during the earnings call.
Around the world, channel partners have benefited from government spending in 2020. In efforts to combat the economic impact of the pandemic, governments have provided relief as well as ongoing investment in infrastructure projects. Those channel partners that have developed government practices benefited from those relationships in 2020.
International expansion is not bearing fruit. Both CDW and Insight Enterprises have embarked on international expansion efforts, focusing mostly on the UK and Western Europe. They are part of a small group of large channel partners that are striving to become more global. But 2020 showed the limitations that still exist for partners operating outside of their domestic markets. CDW saw its international business (Canada and the UK) decline 3.3% in 2020, while Insight saw slight growth in EMEA of 1% (though Q4 declined 5%), and a 4% decline in Asia Pacific. Meanwhile, local channel partners are performing a little better in their own domestic markets. The COVID-19 pandemic will make international acquisitions more challenging, which will inhibit partners’ ability to accelerate geographic growth outside of their core markets.
Services capabilities are increasing in the channel. Like cloud, services account for increasingly larger portions of channel profitability. For example, in 2020 Insight indicated that services accounted for 48% of total gross profits, an increase of 130 basis points on 2019. Meanwhile, CDW acquired two small ServiceNow practices in Q4 to ramp up its capabilities in this area. This makes three acquisitions of ServiceNow-focused companies in the past two years, highlighting its emphasis on building out more IT management capabilities.
Overall, both CDW and Insight forecast growth in 2021, pinning that expectation on GDP expansion. Historically, IT spend has followed GDP performance, but there was a divergence in 2020. As global GDP contracted, the tech sector has still grown. Still, the channel can be optimistic that it will have a strong 2021 as the overall economy starts to recover.
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