Earnings Call Transcript
INSIGHT ENTERPRISES INC (NSIT)
Earnings Call Transcript - NSIT Q1 2021
Operator, Operator
Good morning. My name is Craig, and I will be your conference operator today. At this time, I would 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. Thank you. I would now like to turn the conference over to Ms. Glynis Bryan, CFO.
Glynis Bryan, CFO
Thank you. Welcome, everyone, and thank you for joining the Insight Enterprises earnings conference call. Today, we will be discussing the company’s operating results for the quarter ended March 31, 2021. I am Glynis Bryan, Chief Financial Officer of 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 8-K, you will find them on our website at insight.com in our Investor Relations section. Today’s call, including the question and answer period, is being webcast live and can be accessed by the Investor Relations page of our website at insight.com. An archived copy of this conference call will be available approximately 2 hours after the 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, and 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 in the accompanying slide presentation issued earlier today. Also, please note that unless highlighted as constant currency, all amounts and growth rates are discussed in U.S. 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 been expounded in greater detail in our most recently filed periodic and subsequent filings with the SEC. With that, I will now turn the call over to Ken, and if you are following along with my presentation, we will begin on Slide 4.
Ken Lamneck, CEO
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 a stronger 2021, demand improved in the quarter. Clients continued to focus on business agility and continuity by leveraging cloud solutions for certain workloads. Our clear strategy and deep expertise in delivering digital solutions to clients of all sizes allowed us to grow our sales of cloud, SaaS, and infrastructure-as-a-service by high double-digits in the quarter, which drove cloud gross profit to 21% of our total gross profit, up more than 300 basis points year-over-year. In addition, hardware booking trends improved throughout the quarter. Given the current supply constraints and long lead times, we are working with clients to assess their 2021 device refresh needs and employee hiring plans to get orders placed and 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 healthy levels. I am 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 the public sector, particularly K-12. Largely consistent gross margins year-over-year combined with operating leverage drove adjusted earnings from operations, up 3%, and adjusted return on invested capital to 13.1%, up from 12.6% in the first quarter last year. Our performance for the quarter sets a good base for what we expect will be a strong year. We are happy with our team’s operational execution in the first quarter and our financial results are on track towards our 2021 commitments. Through a combination of organic investment, strategic M&A, and a culture of innovation over the last 5 years plus, we have transformed Insight into a leading global intelligent technology solution provider, focused on integrated solutions, which are: digital innovation solutions to help customers navigate their digital transformation journey and improve their business end-to-end; data center and cloud services solutions to help businesses modernize and support critical platforms to transform IT; and thirdly, modern workforce solutions that help organizations keep their employees connected, productive, and secure. Underpinning these solution areas is our strength in supply chain optimization providing clients with the critical products and services that they need. The world has become digitally dependent, and every successful business is now a technology business at its core. Just 10 or even 5 years ago, the pandemic might have completely crippled communities and markets. Instead, both private and public sector clients were resilient during the past year, quickly adopting and leveraging digital and cloud tools to better manage their business remotely and against the backdrop of increased cyber risk. Digital transformation is at the heart of what we do for our clients and our track record of innovation over the last three decades marks our own evolution as a solutions integrator, capable of providing end-to-end expertise to envision, 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 in the migration of servers, applications, and data, companies need a partner who can not only get them from Point A to Point B but also 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 and cloud solutions to work on a strategy that simplified data protection and produced tangible benefits. They analyzed their credit union’s landscape, identified dependencies, mapped to migration journey, and integrated a disaster recovery and migration plan. As a result, two data centers were combined, consolidated, and migrated to the cloud. Both recovery point and recovery time metrics showed improvement, and there was increased access and security via the cloud. Furthermore, Insight will also provide ongoing management support for this continued migration to the cloud. The comprehensive methodology recommended by the 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 shift to public cloud and modernize their infrastructure, we are also engaged in improving data security. Whether our clients need to implement new security measures for the business or enhance 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, a professional service provider for the government segment, needed help identifying and implementing a 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 issues like phishing. 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, but also focus on end-user training and adoption of good 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 their businesses to reach and sustain their goals. Our team’s approach is to focus on providing capabilities that address three major business shifts: anywhere operations, improving employee experience, and empowering IT. At Insight, we offer solutions that propel our clients’ workforces forward, no matter how they work. Because of our client’s focused approach and 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 are proud to be recognized once again by Gartner for the service solutions we are providing to help our clients’ businesses run smarter. A cloud and data center transformation and 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: innovate in order to capture market share in high growth areas; develop and deliver solutions that drive better business outcomes for our clients; expand and scale our business with strategic clients and end markets; and lastly, continue to optimize the client experience and our execution through a relentless focus on operational excellence. These long-term priorities align to deliver on our short and long-term financial commitments. We are pleased with our execution in the first quarter and remain optimistic about the market recovery strengthening over the balance of this year. We are maintaining our outlook for 2021 from our previously issued guidance, which reflects continued progress towards these goals as well as our long-term goals that we outlined at our Investor Day in late 2019. The last year has reinforced a belief that the IT industry is resilient, and demand 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. The recovery on a macro level has seen positive indicators in global markets. However, we expect the time and extent of the recovery to vary across our different clients and their markets. Coming into 2021, we had elevated backlog, and that trend has continued throughout this quarter. Supply constraints due to chip and display shortages are now expected to continue through the balance of the year. However, we continue to see healthy hardware booking trends that are up significantly year-over-year so far in the second quarter. We believe that, combined with already elevated backlog, we will see seasonally higher hardware sales in Q2 and over the balance of the year compared to the first quarter. The market is growing 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. Strategically, we believe we are well positioned to compete in the areas our clients need most, namely improved 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 investing in our sales and technical teams to ensure we can lead with solutions in core end markets and enhancing those scalable IT systems and processes, including our e-commerce platforms targeted at the mid-market and those supporting as-a-service consumption models. We plan to continue to 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, we were recognized by 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 Insight is ranked the highest of 5 Arizona companies making the rankings. We have also been recognized as a great place to work and best place to work in various locations in North America, EMEA, and Australia. We are well positioned to help our clients solve complex IT challenges. We believe that the strategic investments we made in our go-to-market solution area for the last several years, as well as investments in our solution and technical talent, position us well to achieve our business goals. As you are aware, we announced this morning that I will be retiring. This has been a difficult decision for me as I care deeply about Insight and our incredible teammates. We accomplished a lot during my time at Insight, and I am excited about our trajectory. We have a strong and talented management team and an engaged workforce who believe in continuing to execute the strategy that we outlined in our Investor Day in 2019. Insight is very well-positioned for the future. The Board has hired a top-tier search firm, and the company has undertaken a thoughtful process to evaluate internal and external candidates. This is a critical search for Insight, and I will 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 interest and insight over the years. I will now hand the call back over to Glynis to cover the details of our financial performance.
Glynis Bryan, CFO
Thank you, Ken. In the first quarter of 2021, we executed well against our financial priorities, gaining share in key categories while also investing in strategic areas for growth. 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 and services net sales. Gross margin was 16.1% and SG&A expenses were down 2% in constant currency and up 1% in U.S. dollars. As a percent of net sales, adjusted SG&A was 12%, down 10 basis points year-over-year and in line with our expectations for the quarter. As a percent of net sales, SG&A on a GAAP basis was 12.4%, also down 10 basis points year-over-year. For the full year, we expect adjusted SG&A as a percentage of net sales to be 11.7%. Adjusted earnings from operations was $68 million, up 3% year-over-year compared to our 27% increase on a GAAP basis, and adjusted earnings per share was $1.30 and $1.18 per share on a GAAP basis. Adjusted diluted earnings per share exclude, among other things, severance and restructuring expenses and the gain on the sale of real estate in Q1 2021 of $8 million. Moving on to the results of our operating segments starting with North America on 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 times driving higher backlog. Gross profit of $253 million in North America was down slightly year-to-year and gross margin of 15.3% was flat compared to the prior year. North America’s adjusted SG&A decreased 1% year-to-year due to an overall reduction in discretionary spending, partially offset by increases in executive compensation as well as variable compensation due to new variable compensation plans implemented on January 1. SG&A as a percentage of net sales on a GAAP basis was 12.5% in the first quarter. For the full year of 2021, we expect adjusted SG&A as a percent of net sales to be 11.3%. Adjusted earnings from operations decreased 2% 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 in the first quarter increased 5% in constant currency. Gross profit also increased 3% in constant currency. And combined with the operating leverage from lower SG&A growth, this led to adjusted earnings from operations, which increased 50% in constant currency to $11 million. Moving on to Slide 15, in APAC, net sales of $59 million and gross profit of $12 million in the first quarter increased 2% and 10% respectively year-over-year in constant currency, due to higher sales in hardware and services in the region, which led to adjusted earnings from operations of $3 million in the quarter, up 21% in constant currency. Moving on to 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 re-measurement of acquired net operating losses to be carried back to higher tax years under the CARES Act. Turning toward cash flow, in the first quarter of 2021, we generated $43 million of cash flow from operations compared to $93 million during 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 demands. 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 million 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 received $27 million in net proceeds from the sale of 3 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 resident in our foreign subsidiaries, compared to a prior 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 prior year. As we exited the quarter with a leverage position at 1.1x EBITDA, which is well within our level of comfort. On our ABL agreement, our primary compliance with the covenant is a fixed charge coverage ratio, which includes trailing 12-month EBITDA coverage over capital expenditure, taxes, and cash interests. As of March 31, we are at 4x against the minimum requirement of 1x and we are confident we can support our capital requirements and liquidity needs. This week, our 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. Subject to market conditions, we will commence this program during 2021. However, the guidance we are maintaining does not include the impact of this program as we will monitor market conditions over the coming week. We plan to update you on our second-quarter earnings call regarding our progress and expected EPS impact for the year. As Ken mentioned, we are maintaining our previously issued guidance for 2021. We expect to deliver net sales growth between 4% and 8%. We also expect diluted earnings per share for the full year of 2021 to be between $6.60 and $6.80. This outlook assumes interest expenses between $25 million and $28 million and an effective tax rate of 25% to 26% for the full year of 2021, capital expenditures of $75 million to $85 million, including the build-out of our new corporate headquarters, and an average share count for the year of approximately 36 million shares. This outlook excludes acquisition-related intangible expenses of approximately $32 million, the non-cash convertible debt discount and issuance costs reported as part of interest expenses of approximately $12 million, and assumes no acquisition-related or severance or restructuring expenses. To assist with your modeling, we have posted a schedule on our website, on the Investor Relations page, which shows the expected amortization expense and the non-cash convertible debt discount and issuance costs by quarter for 2021. I will now turn the call back over to Ken.
Ken Lamneck, CEO
Thank you, Glynis. In addition to the awards mentioned previously, we issued our Third Annual Corporate Citizen Report in February, sharing how our environmental, social, and governance practices positively impact our teammates, clients, and communities. This report emphasizes our continued access to support a team-oriented workplace and diversity, equality, and inclusion, and highlights how our values of Hunger, Heart, and Harmony align 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 trust in each other and 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. I am privileged to be part of such a diverse and talented team. That concludes my comments. Thank you again for joining us today, and we will now open the line up for your questions.
Operator, Operator
Your first question comes from the line of Adam Tindle with Raymond James.
Adam Tindle, Analyst
Okay, thanks. Good morning and congrats, Ken. Well-earned retirement. The industry will certainly miss you, and we’ll 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 am sure you won’t miss this part of your job, but there is 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 why you are expecting acceleration in the back half of the year, the categories or verticals that give you confidence. And if Glynis wants to weigh in on a sense of magnitude for that for our model as Q3 and Q4 are going to be over that 4% to 8% full year revenue growth, while Q2 is under, just help us shape our models? Thanks.
Ken Lamneck, CEO
Yes. Thanks so much, Adam, and thanks for the commentary and certainly your support and guidance throughout my tenure here. A couple of the reasons why, of course, we believe the second half will accelerate. One is, I think from an economic point of view, as well as, of course, as you know, the comparisons are much, much easier as you get to Q2, Q3, and Q4. So, that’s certainly just the math that works there. From a device point of view that you touched on, certainly we have experienced elevated backlog. Our backlog is up low single-digits from Q3 to Q4. That continued to be up low single-digits from Q4 to Q1. And that trend is continuing now into Q2. So, there are certainly good indications of demand. Booking rates are up significantly from where they were a year ago. I think all those aligned very, very well to the kind of growth that we are seeing. Now, we will see constraints, of course, with the semiconductor chip shortages that we are all experiencing in the industry. But I do believe in all the indications we have will still, the OEMs are going to ship more units this year than they certainly did last year. They won’t be able to fulfill all orders by any means, but it certainly will be an acceleration. As clients now start to get back to offices, I do think that definitely impacts how infrastructure spend will be done. While we did see improvements in our corporate and enterprise client base, we saw positive growth in the quarter, which was really good news because we hadn’t seen that in a bit. We think that starts to accelerate even further as we get into the second half of the year. I think this return to office environment will lead to increased infrastructure spending, as companies will now be able to evaluate and test the equipment and solutions they need. That’s why we come to that conclusion that the second half will be stronger from an infrastructure point of view. Glynis, let me throw it over to you to see if you wanted to add anything.
Glynis Bryan, CFO
I think, Adam, if you look at it, we grew 2% in Q1. We anticipate that we are going to be growing in the 4% to 8% range for the full year. The statistics now coming out from the various agencies indicate mid single-digit growth for the sector. We anticipate we will do slightly better than that. The comparisons Ken mentioned are lower in the second half of the year, and we also anticipate that there will 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 at least the 4% to 8% range in terms of growth in the second half of the year, not necessarily in Q2 but in the second half for sure.
Adam Tindle, Analyst
Understood. That’s helpful. And just as a follow-up, I wanted to ask on gross margin. It was 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 wanted to ask about vendor rebates and incentives. Ken, maybe the state of those right now, it seems like they wouldn’t need incentives much, because there is no supply anyway. I am wondering if you are seeing that? And secondly, how you think about those once supply comes back, do those return to normal rebate levels or could we potentially hit a new normal on gross margin for the company?
Ken Lamneck, CEO
Yes. So, I will comment and like Glynis said, Adam. We were down 10 basis points as you saw for gross margin. A lot of that was driven by the acceleration that we talked about with hardware, carrying lower gross margins than the rest of our business. Glynis, I don’t know if you wanted to add anything towards that or not.
Glynis Bryan, CFO
No, I think what we had said back in February, and I maintain now, is that 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, higher-margin products in there as a greater percentage of our total. With the improvement in hardware that we anticipate in the second half of the year, we believe that our gross margins will remain flat on a year-over-year basis. You should want to see it be flat.
Adam Tindle, Analyst
Got it. Okay. Maybe just one final one, bigger picture, Ken, what are the key attributes that you and the board are going to be looking for in a successor? If you could maybe stack rank a couple of things, is it vendor experience, global experience, large acquisitions, cloud?
Ken Lamneck, CEO
Yes. I think all of those are pieces. First and foremost, of course, we are looking for a very solid leader. That’s first on top of the list. We think we have got the right elements in place. We have the right strategy in place, so I think all of the above type of experiences that you mentioned are going to be important ingredients. We are excited about that. I think it will be a very thoughtful process, and we have a few really good internal candidates and a good slate thus far of external candidates that we are just in the process of starting to engage with. So nothing, I think, out of the norm of what you would expect.
Adam Tindle, Analyst
Got it. It will be big shoes to fill. Congrats again. Thank you.
Ken Lamneck, CEO
Thanks, Adam.
Matt Sheerin, Analyst
Yes, thanks. Good morning. Wanted a follow-up on a question just regarding your outlook for acceleration in the second half. In the second quarter, it looks like you are going to have pretty easy comps. I think last year you were down like mid-teens on a pro forma basis year-over-year, 80% sequentially. And you are typically up sequentially at least a little bit in the June quarter. So, is there anything preventing you from growing at least sequentially in Q2? Is that more skewed towards the back half?
Glynis Bryan, CFO
We will grow sequentially going into Q2. I didn’t mean to suggest that we would not be growing sequentially going into Q2. Our Q2 is normally a software quarter for us because of the Microsoft year ends in June. Some of that gets netted, so it 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 the supply constraints, but we start to see sequential growth from the first quarter.
Matt Sheerin, Analyst
Okay. That’s helpful. And then, Ken, as you talk about the opportunities with, on the infrastructure side, the hybrid side and 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 how strong that’s looking?
Ken Lamneck, CEO
Yes, we’re certainly seeing growth in that space. We anticipate with the projects we’re seeing with the backlog and bookings that we’re starting to see come through reality that that’s certainly increasing as well. More favorable towards the second half of the year as people again come back more in a hybrid work environment, and the economic aspects do improve certainly in the second half. The comparisons, of course, as you mentioned, also get easier. We’re definitely seeing good activity in that area. And as we talk to the OEMs, Cisco, Dell, EMC, NetApp, and Pure Storage, I think you’ll see a similar sort of story in that vein as well. That’s why we come to that conclusion that the second half will be certainly stronger from an infrastructure point of view.
Matt Sheerin, Analyst
Okay. And then lastly, on the public sector, you talked about strength there and the education market, and 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, CEO
Yes, I think there definitely is. We are not nearly as heavily skewed toward that segment of our business as one of our competitors is. So it’s a much smaller part of our business. We did see continued growth, but I think the main aspect is that the pandemic drove demand home, is that I think on average it used to be that there was one PC per household; I think now you’re seeing, it’s one PC per person, per household due to the education requirements for distance learning. So I do think that there is a huge proliferation we’ve seen with Chromebooks primarily in that market set. We will likely see refresh cycles accelerate with the increased numbers, given that there is a lot of wear and tear on the devices with students. So I do think that will continue. There is no question there won’t be a surge going on now, last quarter, and next quarter but that baseline has improved pretty dramatically.
Matt Sheerin, Analyst
Okay, great. Alright. Thanks a lot, Ken.
Anthony Lebiedzinski, Analyst
Yes. Good morning, and congratulations on your pending retirement. So my first question is in regards to the supply chain constraints that are out there. Just wondering, look at the issues that are falling out now versus quarter-end; have things improved, gotten worse, or are they about the same? Can you just give us some more color on that, please?
Ken Lamneck, CEO
Yes, Anthony, thanks for your question. I would say they are about the same. We are very close to this, as you could imagine. We’re very on top of this with the likes of Apple, Lenovo, Dell, and HP, where most of that is occurring. So I would say that they are managing it. They are getting better visibility. I think we will see those constraints continue through the rest of this calendar year. There is obviously capacity coming online, but that typically takes a few quarters to be really fulfilled.
Anthony Lebiedzinski, Analyst
Okay, thanks. You gave us some color in the public sector. Just wondered if you could give us some additional color on some of your other vertical markets. So what are you seeing there?
Ken Lamneck, CEO
Yes, again, as we said, we were seeing good growth in our enterprise and corporate and commercial clients; we saw positive growth for the first time in a while in those sectors, which was really good news from a business point of view. We continue to see improving booking rates, as well as our backlog improving as well. That gives us confidence regarding the ongoing trajectory we see in the business.
Anthony Lebiedzinski, Analyst
Got it. Okay. And the last question from me is, although there has been more discussion from the companies about inflation, I’m just wondering if you are seeing inflation or other costs increasing and how you’re managing that?
Ken Lamneck, CEO
Yes, we are not seeing that yet, Anthony. There is a tremendous amount of talk about inflation over the last couple of months, but we’re not seeing that impact the business yet at this stage. We’re certainly mindful of that and what that could mean. There is no question we will see price increases on devices because of the semiconductor shortages. Those prices are increasing for the OEM, so those will be passed through. However, that’s a positive for us, as it results in higher average selling prices, and we do have systems in place to ensure the costs are immediately passed on to our clients. To your main question of inflation, we are not seeing any significant impact on clients or discussions around that yet.
Anthony Lebiedzinski, Analyst
Got it. Alright. Thank you. Best of luck.
Ken Lamneck, CEO
Thank you.
Paul Coster, Analyst
Hi, this is Paul Chung on for Coster. Thanks for taking my questions. Ken, congrats on your retirement. You’ve seen a material amount of shareholder value creation under your leadership, so congrats on that. And just on a competitive landscape, are you gaining market share, particularly against smaller players as your size enables you to work relatively better through supply constraints? And just how do you think the industry evolves from lessons learned during the pandemic? Do you expect more consolidation in that space?
Ken Lamneck, CEO
A lot in that question there, Paul. First off, thanks for the thoughts there. Yes, I would say from a couple of areas that we’re seeing from our smaller competitors. They are a very resilient group of people, there is no question. Their businesses are pivoting. However, the trends we’ve seen and data show that the larger players, the top sort of 10 or 15 players in the industry are certainly growing significantly faster, almost 2x what the smaller players are growing. That doesn’t mean they are going away; it means those smaller players are pivoting to become more managed service providers, looking at different facets of their business. It’s becoming more difficult for smaller players to continue to play in the supply chain aggregation games. The systems and tools required now are much different than they were a few years back. It plays to the larger companies that can invest in strong IT platforms, e-commerce engines, and digital marketing capabilities. That’s been playing out and will continue to drive consolidation forward. As far as lessons learned, I think the obvious ones are that companies are realizing their reliance on IT. IT was the solution for them. Five to ten years ago, it would have been daunting to work during a pandemic. The availability of inexpensive devices allowed virtual work, and advancements in networks facilitated support, so IT firms learned that they must adapt and increase digital commitment. We expect that the hybrid workforce will become the norm going forward.
Paul Coster, Analyst
Got it. Thanks for that. Glynis, if you think about free cash flows for the year, I assume we should expect a strong seasonal uptick similar to last year and some drag in the second half. What are some of the puts and takes as we navigate through the year that could drive some upside to maybe your cash flow from operations? Thank you.
Glynis Bryan, CFO
That’s a tricky question, Paul. As we navigate in the second half of the year, we anticipate more hardware purchases, and that typically would be a drag on our cash flow performance at the same time. However, we do anticipate better performance from software, which typically helps from a cash flow perspective. That combination is really what’s going to dictate our cash flow performance in the second half of the year, as well as the improvements we’re seeing in our collections from an overall accounts receivable perspective and reductions in our days sales outstanding. We’ve done a good job of expanding on the payable side with the facilities and the inventory financing facilities that we use. I think the continued use of those will also drive cash flow performance in the second half of the year.
Vincent Colicchio, Analyst
Yes. Ken, what areas of your business are you experiencing net market share gains?
Ken Lamneck, CEO
Thanks, Vincent, for the question. No question on the software side, where we have good datasets from publishers and so forth. No question, we’re gaining share when you look at cloud, Azure consumption from Microsoft, and companies like Adobe. That’s a big focus for us. On the hardware front, it depends upon the specific situation. In a constrained environment, the goal is to not lose any market share and to ensure a satisfactory allocation of products to meet client needs. On the server storage networking side, networking is going well for us. There are some areas in server and storage where we think we’ve given up share. That would be the summary of our business performance.
Vincent Colicchio, Analyst
And why are you assuming that your people get back to the office in your guidance?
Ken Lamneck, CEO
Good question. We haven’t assumed our people will return to the office. We told our teammates we would give them a month’s notice for that, and it depends upon the region. Our offices in Australia and New Zealand have been open for a while. Our offices in China have been open for a long time. In Europe, it’s a different situation; the UK looks more positive than the rest of Europe, so I think that will take a few more months. I wouldn't expect Europe to really return to office until late summer or September timeframe. In the U.S. we’ve opened offices on a voluntary basis, but we believe that as we get into July, that will evolve into a hybrid situation. We think it’s positive as we return to a hybrid environment.
Vincent Colicchio, Analyst
Thanks for answering my questions.
Ken Lamneck, CEO
I apologize for missing Adam’s question about the rebates. We are actually not seeing any degradation there. We’re seeing great support from our partners and their current investments. Our rebate programs remain stable, as they have continued through the pandemic without retraction from partners. We expect that as the economy strengthens and demand rises, these will be normalized. Thank you for your understanding.
Glynis Bryan, CFO
I want to clarify one question I thought we would get but we didn’t. As you think about SG&A, we’ve provided guidance indicating that SG&A will reach 11.7% adjusted SG&A percentage of sales for the year. But in the first half of the year, our SG&A will be higher than 11.7%, and then the second half of the year will be slightly lower to reach that target. You should anticipate in Q2 that SG&A would be higher than 11.7% and it will come down in the second half of the year to achieve that.
Ken Lamneck, CEO
Thanks everyone for joining. We appreciate it.
Operator, Operator
This concludes today’s conference. You may now disconnect.