CDW Corp (CDW) 2013 Q2 法說會逐字稿

Good morning. My name is Stephanie and I'll be your conference Operator for today's call.

At this time I would like to welcome everyone to the CDW second quarter 2013 earnings conference call. All lines have been placed in a listen-only mode to prevent any background noise. After the speakers remarks there will be a question-and-answer session.

(Operator Instructions)

I'd like to remind you that today's conference is being recorded. If you have any objections, please disconnect now.

It is my pleasure to turn the call over to CDW's Chairman and Chief Executive Officer, Tom Richards. Mr. Richards, you may begin your conference.

Thanks, Stephanie. Good morning everyone. It's good to be with you today and report strong results after the close of our successful IPO in July.

Joining me today is CFO, Ann Ziegler, and Chief Legal Officer Chris Leahy. Also joining us for the first time is our new VP of Investor Relations, Sari Macrie.

For those of you who are new to our calls, we will follow our usual format where I provide a high level overview of results and strategic progress and Ann provides a more detailed review of our financial results. After that we'll open up for some questions. But before we begin, Sari will read the Company's Safe Harbor disclosure statement.

Thank you, Tom. Good morning everyone. Our second quarter 2013 earnings release was distributed this morning and is available on our website at investor.cdw.com, along with supplemental slides that you can use to follow along with us during the call.

I'd 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 Form 8-K we furnished to the SEC today and in the Company's other filings with the SEC. CDW assumes no obligation to update the information presented during this Webcast.

Our presentation also includes certain non-GAAP financial measures. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You will find reconciliation charts in the slides for today's Webcast, as well as in our press release and the Form 8-K we furnished to the SEC.

All references to growth rates or dollar amount increases in our remarks today are, unless otherwise indicated, versus a comparable period in 2012. I'd also like to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast without specific written permission from the Company. And with that, let me turn the call back to Tom.

Thanks, Sari. The profitable top line growth at CDW has delivered for the past 14 quarters continued into the second quarter of 2013. We also continued what has been a hallmark of our quarterly earnings announcements lately delivering record breaking results. In fact, we broke all of our previous second quarter records in three key metrics. Net sales which rose 7.5% to $2.8 billion, adjusted EBITDA up 6% to $213 million and non-GAAP net income which was $79 million, up 17.8%.

The CDW team was able to generate this strong financial performance because of the strategies we have in place to take advantage of the core strengths of our business. These strengths include first our unique value proposition. Our position between over 1,000 vendor partners and over 250,000 customers provides us with a unique vantage point to provide value to both customers and vendor partners. The choice we provide for more than 100,000 products and service alone creates tremendous value. Yet given the increasing complexity of the IT marketplace, the real value we provide customers is how we guide them through the options to help them realize the fuller value of integrated solutions.

For our customers we are an extension of their IT departments. For our vendor partners we are an extension of their sales and marketing resources.

A second fundamental strength is our business model. Our business model leverages our scale and scope, our variable cost structure and performance driven culture. Our scale and scope delivers national presence and enables our ability to allocate resources to markets and technologies. Our variable cost structure enables us to modulate our hiring to meet market conditions, both up and down.

Our third fundamental strength is our balance. Balance across products, technologies, partners, and customers. There are always puts and takes in terms of which markets are performing better than others or which products or technologies are performing better than others. Our balance helps us deliver consistent performance by mitigating macroeconomic and product or technology risk. The power of our balanced portfolio was front and center once again this quarter, both across and within our segments.

Our 7.5% net sales increase was driven by an increase in corporate of 10.3% and public of 4.1%. Our corporate increase was fueled by excellent momentum in our medium and large business which increased 13%. Small business was down just under 2%. Customer buying in this space, which we define as less than 100 employees, continues to be impacted by the low confidence small business owners have in the economic recovery.

Public segment growth was lead by education which increased 20% to more than $420 million in the quarter. Education sales were driven by exceptional results in K through 12. Sales to government entities decreased 7%.

Declining sales to the Federal Government due to the combination of sequestration and ongoing issues with the release of approved budget dollars, which are being held up in process and were not fully offset by strong mid-teens growth in State and local government. The State and local team continues to do a great job finding pockets of budget availability, particularly in the area of public safety and mobility.

Healthcare sales were down just under 2% as healthcare providers slow decision-making as they dealt with the impact of Medicare-Medicaid reductions and focused their attention on preparing for new service quality mandates. We remain confident about healthcare as a driver of our ability to overall outperform the market, the US IT market. Our other net revenues which represent our advanced services and Canadian operations increased 6%.

While advanced technology services delivered low teens increases, Canadian sales were more muted, increasing mid single digits. The year-over-year comparison for Canada was impacted by an unusual large shipment of hardware orders to the Federal Government in last years second quarter. When we look at the first six months, year-over-year growth is low double digits. So we view this quarters performance as temporary and feel good about our results for the remainder of the year.

Our portfolio of over 100,000 products contributed to a balanced product performance in the quarter. On a net sales basis hardware grew 8%, software grew 5% and services grew 14%. We saw especially strong results in product and services that support solutions such as Netcom, enterprise storage, and telephony, as well as security software. Notebooks delivered growth in the low 20% range, desktops were up solid single digits. PCs, which includes desktops and notebooks, notebooks were up mid-teens for the quarter, confirming our view PCs remain an important part of corporate and public entity IT strategies.

Our second quarter performance clearly demonstrates the power of our portfolio and the strength of our strategy. We have been leveraging our core strength and executing against three strategic priorities for several years now.

Our strategic priorities include strategy one, increase penetration in our core business. Two, expand our solution suite and vertical offerings. And three, enhance our service capabilities. We made progress against all three priorities during the second quarter. Increasing penetration in our core business remains our greatest near term growth opportunity and our market segmentation plays a large part in our ability to continue to drive growth in our core.

The success we had this quarter in K through 12 market is just a great example of this. Inside of our vertical that is focused on education, we further segment by K through 12 and higher Ed. When many K through 12 administrators started to deal with how they would prepare for the new common core testing requirements and digital curriculums, our specialized sellers with a deep understanding of education were ready with a solution that not only provides the devices necessary to meet the requirements but also helps school districts build capabilities needed for digital curriculums.

Today, the majority of states have adopted the common core. School districts across the country are working hard to implement digital testing requirements of common core before the Fall of 2014. And we are providing many of them with solutions they need to comply with the requirements.

It's not just the devices needed for testing. It's the solution wrapped around it. Schools need wireless infrastructure, server, storage, and security to protect their students and their networks.

Our solutions enable schools to deploy scale and centrally manage their entire fleet of notebooks. Schools can pre-install or block applications, extensions or URLs for different grade levels of students and unfetter access for teachers. They can manage user access and control network access, making it easy for users to get up and running while insuring students and their networks are protected by web filters and firewalls. And they can do all this with very little management overhead and sleep better at night knowing the security protections and protocols are in place.

The profitability of these solutions is enhanced by products and services wrapped around devices like software networking and configuration. Let me give you just one example. Working with a school system in New Jersey, we provided not only 5,000 notebooks loaded with all of the management software they needed to be secure, we are now helping them deploy an outdoor wireless system that provides the coverage to the community around the buildings, across the district.

Our second strategy is to continue to expand our solution suite. For CDW, solutions is a broad area that includes technologies such as virtualization, networking, security, unified communications and collaboration, cloud computing and mobility. Providing solutions to customers improves their return on IT spend, as well as improves our competitive position, increases our loyalty and expands the customers value. It also enhances partner relationships by providing a strong pathway to market.

To further our success in solutions we have created practice areas with dedicated resources to help customers capitalize on emerging technologies. For example, our security practice has more than 50 dedicated workers and more than 100 billable engineers to work on security offerings. This focus is driving excellent results. In 2011, when we first unified our security practice, customers spent about $500 million in hardware, software and services. This year we expect customers will spend nearly $0.75 billion.

Security is on everyone's mind these days and we believe there are three reasons why. First, increased regulation, in a payment card industry and also healthcare both mandating protections are put in place to safeguard private information. Second, the proliferation of mobility which wallet drives productivity also exponentially increases vulnerability to data breaches. And third, the cloud. When it comes to putting sensitive information in the cloud, they understand the need to protect it.

Having the ability to deliver services is critical to providing integrated solutions. That's why our third priority is to broaden our service capabilities. A great example of how service capabilities not only draw professional services revenues but also solutions is a recent integrated solution we provided a mid sized manufacturer. This customer wanted to outsource all of their IT management.

The first thing we implemented for them was a remote managed services solution that takes care of their internal system including Windows, AIX, and P-series and their network and unified communications devises. But to outsource everything, we also needed to have a way to handle their dealer support network for over 6,500 dealers across the US. So we implemented a hybrid cloud solution that leveraged our infrastructure as a service offering to run their proprietary applications. To ensure the right level of security, our solution included a dedicated piece of security hardware, something we were able to do because of our full suite of solution capabilities.

By providing the hardware we delivered a customized solution, hardware, infrastructure as a service and managed services. Altogether, this hybrid cloud and managed service solution is generating $140,000 in monthly recurring revenue over the next three years or more than $5 million total.

All-in all, we delivered excellent top line results within the second quarter's continuing soft North America IT market and we did so without sacrificing profitability, achieving a second quarter record of adjusted EBITDA. These results reflect the power of our focus on execution, align compensation programs from the front line to Senior Management around profitability, ongoing cost control, as well as a more cautious approach we took to bringing on new co-workers.

As I mentioned earlier, one of our core strengths is the ability to match co-worker resources to market conditions. This is a key reason we have been able to sustain our industry leading growth and profitability. Consistent with what we shared with you last quarter, we monitor the market and given the uncertainty we continued our cautious stance on hiring during the second quarter. With the improvement we are beginning to see, we are ramping up our hiring and expect to finish the year with 100 to 125 additional customer facing co-workers. As always, we will monitor the market conditions and adjust our hiring plans accordingly up or down.

Overall, this quarter was a continuation of the themes from the recent past. The benefit of our balanced, combined execution is allowing us to profitably take share. We feel good about where we are right now and particularly good about the momentum we are seeing in medium and large business, our largest channel. As we've said before, we intend to profitably grow in 2013 at least 200 basis points to 300 basis points faster than the overall US IT market which we currently expect to continue to grow in the low single digits.

Now I'll turn the call over to Ann for further detail on our financial highlights. Ann?

Thank, Tom. Good morning, everyone. It's great to be here with you discussing our earnings as a public company. Its been a busy time since our last call.

As you know, on July 2, we completed our IPO. We issued 23.25 million shares and raised $373.5 million after commissions and underwriting discounts and before costs. Our underwriters exercised their over allotment option last week, raising an additional $56 million. We also executed a number of debt transactions, all while we continued to execute against our plans. So let's start with our results.

As Tom indicated, top line growth was excellent this quarter with net sales of $2.779 billion, 7.5% higher than last year on both the reported and average daily sales basis as average daily revenues grew to $43.4 million. We had fairly typical seasonality so on a sequential basis, average daily sales in Q2 2013 increased 13.4% versus Q1.

Gross profit for the quarter increased 5.8% to $451.6 million. Gross margin was down 30 basis points to 16.2%, primarily due to the overlap of last years reversal of a reserve accrual and lower product margin. These impacts were partially offset by increased sales of higher margin to advanced services and increased contribution from 100% gross margin revenues.

Tight focus on costs helped deliver SG&A, including advertising expense, of $298 million, up only $7.5 million or 2.6% over last year. This increase was driven by increased sales commissions and other variable compensation costs consistent with increased sales in gross profits, partially offset by the timing of co-worker hirings. Adjusted EBITDA for the quarter was an all-time record $212.6 million, up 6%. Our Q2 adjusted EBITDA margin was 7.6%, down 20 basis points from last year as cost control helped mitigate some of the impact of product margin compression.

As Tom mentioned, we ended the quarter with essentially the same number of co-workers as the beginning of the year which helped drive annualized sales for co-worker of $1.64 million, up 9% over Q2 2012. Interest expense, which came in at $70.3 million, was 8.6% lower than last year. Our effective tax rate was 36.2% for the quarter versus 38.4% in the second quarter of last year.

Net income increased 26.7% to $46.7 million. Non-GAAP net income was $79.2 million, up 17.8% over last year. The adjustments we make to non-GAAP net income generally fall into three buckets, amortization of intangibles from the going private transaction, costs related to our refinancing activity and our non-cash equity compensation.

If we assume that the shares issued for the IPO and related transactions, including the exercise of the underwriters over allotment option, occurred at the beginning of this year, we would have had approximately 172 million fully diluted shares outstanding for Q2. This would equate to roughly $0.46 per share of non-GAAP net income.

Quickly looking at the first half of the year, revenue was $5.191 billion, an increase of 5.9% on a reported basis and was one less selling day in the first half of this year, up 6.7% on an average daily sales basis. Gross profit during the first half of 2013 was $853.6 million, up 5.2%. Gross profit margin was 16.4% versus 16.5% last year.

SG&A including advertising expense increased by $8.4 million, or 1.5%, again constrained by tight cost control and the timing of co-worker hiring. Our adjusted EBITDA for the first half was up 6.6% to $391.2 million and our adjusted EBITDA margin was 7.5%.

Interest expense for the first half of the year was $142 million and our effective tax rate was 36.3%. Net income was $75 million in the first half, compared to $47.7 million in the first half last year. Non-GAAP net income was $135.5 million, compared to $113.1 million, an increase of 19.8%. Let me switch gears and talk about our balance sheet which has had a number of changes since our last call, some that impact current results and some that will effect our results going forward.

Let's start with the balance sheet at the end of June. We had $179 million of cash and cash equivalents and we had $3.545 billion debt net of this cash, which is $188 million less than our December 2012 net debt balance. Our cash plus revolver availability was $811 million. Net debt to trailing 12 month EBITDA at the end of Q2 was 4.5 times, 0.4 turns less than December 2012.

In April, we refinanced our $1.3 billion term loan with a new $1.35 billion facility, extending the term and reducing the interest rate spread. Actions we have taken that will further positively impact ongoing results include the completed July 2 redemption of $175 million of our 8% senior secured notes with proceeds from the IPO. And the August 1 redemption of $324 million of our 12.535% sub notes which was funded from the proceeds of the IPO, and an add-on to our incremental -- an add-on to our term loan which we completed this week.

Reflecting these transactions, our pro forma debt on a GAAP basis net of cash at the end of the quarter would have been $3.24 billion. On a blended basis, reflecting the impact of redemptions and refinancings, our current interest rate is approximately 6.5%. Assuming a further redemption in October of approximately $150 million of our senior sub notes, the weighted average interest rate on our then outstanding debt dropped to 6.2%, resulting in an expected weighted rate of approximately 6.4% for our second half.

Cash interest expense for the remainder of the year is projected to be approximately $125 million. And due to certain IPO and refinancing related deductions, State tax credits and overpayment credits, we now expect to pay cash taxes at a combined State and Federal rate in the range of 25% of pre-taxable income before our acquisition related intangibles amortization. Keep in mind that when you're modeling our cash taxes that our approximately $40 million per quarter of intangible amortization expense is for the most part not deductible for tax purposes.

Our ability to drive returns in this business is tied to our working capital management. This quarter we continued to deliver strong working capital metrics, the details by component for which are provided on the slide posted for the call. All-in, our cash conversion cycle remains at 21 days, flat versus last year. We expect to continue to maintain our cash conversion cycle within our target range of the low to mid 20s as we move through the year.

Turning to the remainder of the year, given that we exceeded plans in the second quarter for adjusted EBITDA, we intend to incrementally invest $2 million to $3 million in the business over the balance of the year. And this is in addition to the hiring of the between 100 to 125 customer facing co-workers that Tom talked about. We look for second half booked interest expense of approximately $110 million, again assuming we redeem an additional $150 million of our sub notes earlier in the fourth quarter. This approximate $110 million does include the benefit of the book interest equalization created by our sub debt redemptions.

We currently expect our effective tax rate for the full year to be consistent with our first half rate of 36%. The 172 million fully diluted share count I mentioned as a pro forma number for Q2 is also a good number for the remainder of the year.

In thinking about Q3, keep in mind that there will be one more selling day this year than last year and that this will affect reported revenue. In addition, we estimate one-time IPO and debt transaction costs in the third quarter of approximately $115 million pre-tax, with about $75 million of this hitting SG&A and the remainder being debt extinguishment costs.

Finally, in addition to our target to continue to profitably grow at least 200 to 300 basis points faster than the US IT market in 2013, I would like to share our medium term targets with you. We view the medium term as the next two to three years and hold ourselves accountable for delivering them on an annual basis, not quarterly. These include adjusted EBITDA in the mid 7% range, mid-teens non-GAAP net income growth and de-levering one third to one half turn per year until we hit our target leverage of three times.

That concludes the financial summary. Operator, can you please provide the instructions for asking a question and can we please ask that you limit your questions to one question and one follow-up. Operator?

(Operator Instructions)

Mark Moskowitz, JPMorgan.

Yes, thank you. Good morning. Your Q2 revenue definitely exhibited some nice revenue acceleration on the year-over-year basis. I was just curious if you could give us a sense in terms of how much of that acceleration was driven by penetration of existing customers versus market share gains and how sustainable do you think those factors are?

Good morning, Mark. Look, as we talked about during the road show, we think more than a significant portion came from penetrating existing customers but there was some portion, we don't really share the percentages but it was more heavily weighted to penetrating existing customers than it was acquiring new customers just in total.

Okay, thank you and the follow-up relates to the new hiring plans for the second half. Can you give us any sense in terms of the focal points, where those new hires will be most focused? Is it a certain sector, certain product type, service type? If you could just elaborate that would be great. Thank you.

Okay, so it will be, as I said, the 125 are what we call customer facing co-workers, it will be spread across some of our specialist organization and particular areas where we're seeing strong growth. And we'll also be adding a fair amount of new sellers, both inside sellers and field sellers. So it will really be across those three disciplines. And the fourth one is service delivery, expanding out our national services footprint. So it will be in those three groups.

Ben Reitzes, Barclays.

Hi. Good morning. I wanted to ask about gross margin trends. You talked about how the notebooks, it seemed like the notebooks maybe even surprised to the upside. I would assume they might be on the lower margin side, but I wasn't sure, and I wanted to kind of get your view of how gross margins may play out for the year given the trends you saw in PCs in the quarter. Thanks.

Good morning, Ben. I would say that what we saw in general was gross margin pressure in what we would call more the transactional products. It was pretty consistent across the whole product suite. We anticipate that, that's going to continue. We think it's a function of just kind of the economic climate and some of the pressure and headwind it's putting on the business. So it was kind of a constant pressure across that group of products specifically.

Got it, and you think that's going to last throughout the year, given the industry dynamics that are perhaps going on with some large competitors and are planning that way?

Yes, that's exactly -- we are anticipating that it is going to continue. I'll be thrilled if it doesn't but we're kind of counting on it continuing to happen.

Got it. But it's in the plan, it sounds like and that the margin can stay in this range?

Well we are going to hold ourselves accountable to delivering the profitability Ann articulated. So the answer is, we're going to deliver it.

Thanks a lot, I appreciate it.

Thanks, Ben.

Bill Shope, Goldman Sachs.

Okay, great thanks. My question is on the sub segments. Could you dig in a bit more to the growth acceleration in the medium and large business segment and how you're thinking about the pace of business there in the second half?

Okay, yes. Thanks, Bill. As I said, we're thrilled with what we've seen. That momentum started to pick up at the end of last year and we've just seen it continue. I think part of it has to do with, as you know, the market segment that is our sweet spot and we focus on within MedLar. We're seeing what I would call businesses continuing to invest in infrastructure and we saw that in the solutions part of our Business that's tied to MedLar.

I would tell you also that as we identified, we also had strong transaction growth, so it wasn't just a one trick pony as far as what's driving that, and we are anticipating that we'll continue throughout the rest of the year. Its been two or three quarters of good momentum now.

Okay, great and then as a follow-up, on the other side of that, some of the weakness you saw in healthcare. How are you thinking about that in the back half? Should that weakness continue? Is there a possibility that you get some growth there in the back half?

Well I think they are going to continue to see some of those headwinds that I alluded to. Those will continue. But as I also said, we do still view healthcare as a strong component of our growth profile, and so we're going to expect that they will get back into the positive side of the ledger. We just aren't exactly sure when that is and when some of the, what I'd describe, ambiguity tied to House sequestration trickles down into Medicare Medicaid, so that's going to continue to be a headwind for them.

Okay, great. Thanks a lot.

Thanks, Bill.

Brian Alexander, Raymond James.

Okay, thanks, good morning. With, Tom, the sales momentum building in the second quarter, especially for medium and large, and with the comparisons overall for revenue easing in the second half, should we expect the second half growth to be greater than what we saw in the first half? I think you were at about 5.8% in the first half. Should we see that accelerate? And where would you expect to see that acceleration if you believe that?

Brian, I think we're going to continue to kind of meet our commitment to be 200 to 300 basis points at least greater than the IT market. There are some wild cards in the second half. What happens in the federal market with sequestration and how that plays out with the budgeting process, which I wish I had enough clairvoyance to predict. I don't, but we are anticipating a strong mid single digits growth over the second half of the year, assuming the IT market continues to grow in low single digits.

Great and just to follow-up on the gross margin and the pricing pressure that you talked about. Is that a function of where you saw the sales strength? In other words, medium and large business maybe a little bit more competitive than some of your other customer segments or are you suggesting it was really transactional products across customer segments?

Brian, it was the latter. It was really we saw it across the segments, and it was transactional products in general.

Okay, thanks a lot.

Thanks, Brian.

Chris Whitmore, Deutsche Bank.

Thanks very much. Just to follow-up on that last question, I wanted to ask if it was specifically related to one competitor that's instigating the pricing? And to what extent are you getting support from your vendors to take that competitor on?

No, I don't think I could point to a single competitor that was driving the pricing pressure in the marketplace. And we constantly get support from our partners to build solutions and to grow the business. But the direct answer is no, it wasn't a single competitor.

Okay thanks, that's helpful. And then secondly, I wanted to ask about sales productivity. The sales force looked incredibly productive or revenue per co-worker is the highest its been in several years. Do you see more room to drive productivity higher over the next 12 to 18 months? And any color around that would be helpful, thanks a lot.

I think my team would tell you they could answer that question with a yes. We do see opportunities to grow productivity on a per sales basis and also revenue per co-worker. We think there's -- despite our excellent execution and our focus on process improvement, we have a number of initiatives under way right now which we think are just going to continue to enhance the productivity of that sales organization.

Thank you.

Okay, thank you.

Katy Huberty, Morgan Stanley.

Thanks, good morning. You've talked a lot about the acceleration in hardware, PCs, Netcom, storage, but can you talk about the deceleration in software, were there particular offerings or categories that drove that deceleration?

I don't really think it was unique to a particular category, as much as it was just tied to there were some deals that didn't repeat that were pretty significant, and that ends up being a one quarter kind of phenomenon. But I wouldn't say there was anything, Katy, that would say there's weakness in a particular software category. We've had some surprising growth from new players in part of the software market that's been encouraging, and so nothing that I would say, here is a systemic weakness in a particular part of the marketplace.

Okay and as we think about OpEx into the third quarter, given that it sounds like hiring was maybe back end loaded in Q2, you still plan to add heads in the back half, and there's $2 million to $3 million of incremental investments. Should we think about OpEx growing faster than revenue sequentially in the third quarter?

Not so much faster, but more in line with, is how I would think about it.

Okay, thank you.

Thanks, Katy.

Jayson Noland, Robert Baird.

Tom, any sense for the divergence between MedLar and small business here?

Yes, good question, Jayson. We think, kind of as I alluded to in the script, that there is still more of a cautious nature and I suspect it's just the nature of the beast and the financial flexibility that a small business has versus a larger corporation that might have more resources with which to allocate to making IT investments.

I don't know that it's anything more than just the different views of the economic climate they're operating in and who has more flexibility and, therefore, who can make greater investments. That would be just my thesis at this point.

Okay, understood and last question, any additional color or growth rate you can provide for Netcom and storage?

Well we don't provide actual forecasts by product category, but I can tell you that it seems like every one of these earnings calls I do, Netcom and storage is highlighted as an area that's growing faster than overall CDW. So I think it's just a function of as people have been moving data, enhancing data center that the movement has to be -- the data has to be stored and you just see those two technologies kind of working in a step function together.

Thank you.

Okay.

Bhavan Suri, William Blair & Company.

Hi, guys. Just a couple quick questions, but first on the solutions business which saw some strength, what sort of emerging pieces or what's driving the strength there in terms of specific solutions in the emerging space?

Well, I alluded to one which is security has been just kind of a really significant growth engine for us. We've been adding additional resources to support that growth.

Also in the area of networking and Netcom in general as people are expanding their networks to deal with the proliferation and movement of data. And in storage, as I just alluded to, again it's I don't know how many quarters in a row we continue to have strong storage growth. So those, I think, are three categories that seem to be the biggest consistent drivers of our Solutions business.

I'd add one other. We have a category called converge infrastructure. It includes security, mobility, networking, collaboration and those have been strong growth areas for us.

And then what was utilization in that business?

Well, we measure utilization across the Company and let's just say it was in the mid 60s range which is a good utilization rate for us.

And then one last one for me. As you look at the MedLar business and you look at the solution sale into that, are you running into different competitors there rather than the typical sort of distributors or VARs that you might have run into just, say, selling hardware or PCs or something?

No, not yet. If you're kind of asking are we beginning to see the systems integrators down market? No, I would say -- I can't say never, but I would say for the most part we're competing with the people that we traditionally have competed with, which is local VARs.

Okay, that's helpful. Thank you for taking my question.

Thank you.

Matt Sheerin, Stifel.

Yes, thank you. Just wanted to talk again on the gross margin and as you look to the September quarter in terms of seasonality, I know in the past due to the strength in federal that you've seen some modest margin erosion in the September quarter. Are you expecting that, as well? And in line with that, you did talk, Tom, about cautious outlook on government due to the sequester. Are you expecting normal seasonality and budget flush in the Federal business this quarter?

So those are kind of related actually. Let me see if I can come at it, Matt, and see if I answer the question. I think, as I said earlier, it's a wild card. I think we're in a little bit of a territory that we haven't been before. But based on the volume of work and planning and activity our government organization is seeing, we would expect to see, I don't know if I'd call it a full flush, but kind of improvement and increase in activity. We just don't know the degree at this point. And so I think that will influence both your question on top line growth, and then just as importantly, your question on margin. So it is a bit of a wild card as we go into some unchartered waters here.

Okay, fair enough and as my follow-up, on the hardware side, you did talk about strength in notebooks. Is that coming from both the corporate and government and education markets? And then related to that, you didn't mention tablets. Has that continued to be strong? We've seen some distributors talk about some weakness there, so what you're seeing in tablets, and how does that affect your margins?

Okay, so let me make sure I've got both of those. The first one is we saw the notebook growth pretty much across the spectrum when it comes to the different segments and we did see some tablet softening, if I can say it that way, which I think kind of demonstrates the growth of the portfolio, the benefit of having such a broad portfolio.

Okay, and are the margins on tablets for you in line with notebook margins?

The tablet margin is by nature going to be not as strong as a notebook, but it isn't anything that isn't kind of in the normal rhythm of the Business, if I can say it that way.

Okay, great. Thanks a lot.

Okay.

(Operator Instructions)

I'm currently showing no further questions. At this time, I'll turn the call back over to management for closing remarks.

Okay, thanks, Stephanie. I'd like to thank everybody again for taking the time this morning and joining us. Thank you for your interest in CDW. And as I always end these calls, if you or your company needs some help with technology, we would be more than happy to help and you guys know how to find me. So thanks again for joining.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect and have a wonderful day.