CDW Corp (CDW) 2014 Q1 法說會逐字稿

(Technical difficulties) Tom Richards. Mr. Richards, you may begin the conference.

Good morning everyone. It's a pleasure to be with you today and to report another quarter of record results. Joining me on the call today is are Ann Ziegler, our Chief Financial Officer, Chris Leahy, our General Counsel, and Sari Macrie, our Vice President of Investor Relations. I'll begin today's call with a brief overview of our results and key drivers, Ann will run through the financial highlights and then we'll go right to questions but before we begin, Sari will provide a few important comments regarding what we will share with you today.

Thank you, Tom, good morning, everyone.

Our first-quarter earnings release was distributed this morning and is available on our website 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 with 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 today. Please note that all references to growth rates or dollar amount increases in our remarks today are versus the comparable period in 2013. The number of selling days in the first quarter are the same for both 2013 and 2014 so there is no difference in growth rates for average daily sales and reported sales. A replay of this webcast will be posted to our investor relations website, investor.cdw.com, by this time tomorrow. I also want to remind you this conference call is the property of CDW and may not be recorded or rebroadcast without specific written permission from the Company.

So with that I'll turn it back to Tom.

Thanks Sari. We started the year off strong with sales increases well above forecast for the US IT market and excellent profitability. Net sales were $2.65 billion, up 10%, adjusted EBITDA increased 8.5%, and non-GAAP earnings per share increased 43.7%.

This quarter's results reflect three key drivers: our balanced portfolio of channels, our flexible business model, and focus on productivity and cost control. The first driver of our results, our balanced portfolio of sales channels, contributed to a 7.2% increase in Corporate and a 14.5% increase in Public. Corporate performance was led by continued momentum in our largest customer channel -- medium and large business, which increased 8%. Our small business channel, which is largely focused on customers with 20 to 100 employees, delivered its third consecutive quarter of improvement up 3.3%. We are cautiously optimistic that we will see continued improvement in small business results as confidence in the economy builds.

Public results were powered by our Education channel, which delivered robust growth up 38.5% for the quarter. K-12 performance accelerated off of last year's rapid growth driven by continued success delivering digital curriculum and Common Core testing solutions. Higher Ed delivered strong results, up high single-digits. State and Local continued its success delivering public safety solutions, offsetting lower sales in our federal channel and overall government performance was up 0.7%. While federal budgets were approved last year, the allocations process continued into the quarter. We are encouraged by increased activity as funds are released and procurement offices are processing orders, especially in the Civilian side of our business.

The environment in Healthcare continued to improve in the quarter, and our sales were up 8.8 percent, driven by both client refresh and infrastructure. While it is too early to call a full recovery, we remain confident that Healthcare will be an important contributor to growth in 2014.

Our "Other" results, Canada and ATS combined to deliver 9.8% growth. Canadian operations continued their momentum and grew nearly twice as fast in local currency Just last month, we were ranked number one on the 2013 Top 100 Solution Providers list from Computer Dealer News, one of Canada's leading news sources for IT service providers, a short seven years after we entered the market. At that time we're ranked number 29. And this quarter, just one month of sales in Canada surpassed total 2007 annual sales. We believe we still have plenty of headroom in Canada with an estimated 4% market share.

The second driver of our results was our agile business model, a business model underpinned by our market segmentation including industry-specific verticals and our broad product portfolio backed by deep technical resources. These two elements work together to enable us to quickly identify and capture profitable growth opportunities, and most importantly, they enable us to make our customer priorities CDW's priorities. This quarter, customer priorities were on client devices across the entire suite, notebooks, laptops, tablets, and desktops.

Revenue mix for the quarter reflected this focus. On a net sales basis hardware grew 13% and services increased 8%, while software declined 3%. Hardware sales were driven by client devices, as both notebooks and mobile devices including Chromebooks and desktops increased well into the double-digits. Clearly a driver of this growth was the expiration of XP operating system support, but we also saw pent-up demand unleashed as customers focused on replacing an aging install base of client devices. Although client products captured the majority of our customers' mind share this quarter, net comm products were in the high single-digits and telephony grew in the mid teens.

Enterprise storage was flat as exceptional growth in emerging technologies offset softness in more traditional storage. Servers were down year-over-year as they continued to be disproportionately impacted by federal sales performance. Software performance was also driven by a disproportionate impact in federal, where software sales declined at twice the rate of total federal sales. Although net software revenues were down, gross profit from software increased, reflecting higher contribution from sales that are [booked at like 4Gs, cloud and commission revenues]. Our business model is underpinned by market segmentations which drives focus, customer intimacy, and knowledge.

A great example of this is our continued success in providing Common Core curriculum solutions. Inside our Education channel, we have two segments: K-12 and Higher Ed. Back in late 2012 our K-12 team identified the need for a comprehensive solution to meet Common Core curriculum testing requirements being adopted across the country. With more than 15 years in the education market we knew that school district have no interest in being in the IT business. Their focus is on educating so we developed a solution that includes network and wireless assessments to ensure adequate bandwidth, asset tagging and configurations to speed delivery, and training to equip users with the skills needed to master new tools. This solution has driven exceptional education results now for four quarters.

Common Core testing is set for the spring of 2015 and we remain dedicated to helping our customers get ready for this important initiative. For CDW, Common Core is much more than providing devices. I have spoken before about how our Common Core solution is fueling excellent increases in the infrastructure necessary to use digital devices in schools, including networking, and that was the case once again this quarter. But our efforts to help facilitate Common Core compliance are also leading to other business. Let me share a recent example of a school district that is doing just that.

A school district in Northern California with more than 10 schools and close to 10,000 students recently launched a project with us. While it includes Common Core testing solution it also includes a complete data center overhaul. We just completed the data center, standing up racks and installing power storage, new servers, and migrating to new equipment. In addition to the data center the project also calls for the installation of a new digital phone system, wireless network nodes, and even new cloth speakers systems in each school. This $4.8 million sale is a great example of the benefits we derive from deeper market segmentation.

As we have shared with you last quarter, we moved two of our incubator verticals, financial services and legal services, from our small business channel to our medium-large channel. For us, the key measure of success of incubation efforts is whether they deliver revenue growth at a faster pace than overall sales. This quarter, verticals inside of our med-large channel grew at a substantially higher rate than the overall business.

To make customer priorities your priorities you must have the products and solutions they need and the skill set to deploy them. That's why the second element of our business model, our broad product portfolio backed by extensive technical resources that help us stay best-of-breed across the technology platform is so important. Being best-of-breed enables us to meet our customers' needs today while we lead the way of the adoptive technologies. This ability to help customers evolve as the market evolves is one of the fundamental reasons for our consistent performance for the past 30 years. Just last quarter we remained VMware's vCloud Hybrid Partner of the Year and growth in emerging technologies like convert infrastructure in our cloud portfolio far outpaced first quarter-consolidated growth.

All in all we delivered excellent top-line, driven by both our balanced portfolio of sales channels and our agile business model. While the mix of business was skewed toward lower product margin client devices we maintained excellent profitability, achieving first-quarter records of gross profit, adjusted EBITDA, and non-GAAP net income per share. And that leads me to the final driver of our performance for the quarter: our focus on productivity and effectively managing our expenses while still investing in our future. As you have heard me say before, an essential element of our long-term success has been our ability to consistently deliver profitable growth.

First-quarter results provide an excellent example of the levers we have to help us deliver this goal. Sales compensation is one of our largest expense components. Because it modulates with gross profit, both up and down, we have a highly variable cost structure. This quarter we experienced expense leverage since gross margin compressed. Operating profitability also reflected tight management of expenses, including advertising expenditures.

While we continue to make strategic investments in building our brand and March Madness continues to be an excellent vehicle for us, we made a change to our advertise mix this quarter, which resulted in lower spend. This year our campaign was once again that around Charles Barkley in the fictional Gordon & Taylor company, and included TV, radio, and digital. But we dialed back TV and added a new social media component in partnership with Reddit. This mix was designed to deliver comparable results for less investment, and based on our metrics, campaign impressions were equal to last year's at lower cost.

Delivering long-term sustainable, profitable growth is part of our constant focus on the balance between expense management and investment. This quarter we continued our investment in enhancing our capabilities to deliver a broad spectrum of IT solutions that includes product, mobility, virtualization, collaboration, network, and security. We added 56 customer-facing coworkers, on target with the plan we shared with you last quarter that calls for us adding between 150 and 200 customer-facing coworkers during 2014.

Today coworkers who are primarily focused on helping our account managers deliver solutions, our service delivery coworkers, specialists and field sellers represent more than a quarter of our total workforce. We will continue to invest prudently to ensure we deliver the solutions that our customers need, and take advantage of the opportunity we see the marketplace for a national provider with scale and highly technical resources. But just as we always do, we will monitor the marketplace and adjust our plan up or down is needed.

I hope you can tell from my comments that this quarter's performance reinforced our confidence in the power of our balanced portfolio as a business model, and focus on productivity and expense control. When combined with our ongoing investment in solutions capabilities we think they have a winning hand that helps us both capitalize on the current market conditions and deliver profitable growth well into the future. With 5% market share in a highly fragmented market we have plenty of runway.

Let me leave you with a few comments on the remainder of the year. You'll recall that our last quarter's conference call, we shared our expectations for 2014 US IT market growth in the 3% to 4% range and our target to grow 200 basis points to 300 basis points above that. Given recent market activity and our performance, we've updated our view and expect a higher end for both ranges for the year. Of course we will continue to refine our expectations as we move throughout the year.

Now let me turn it over to Ann, who will share more detail on our financial performance. Ann?

Thanks, Tom. Good morning, everyone.

As Tom indicated, our first-quarter financial results reflect the benefit of our balance, our business model, and our focus on productivity and expense management. They also reflect the progress we are making against our financial strategy to drive strong cash flow, delever our balance sheet, and deliver double-digit earnings growth.

Let me begin with our P&L. If you access to the slides posted online it will be helpful to follow along. I am on slide 7. Top line growth was excellent this quarter with net sales of $2.65 billion -- 10% higher than last year on both a reported and average daily sales basis as we had the same number of selling days in both the first quarter of 2013 and 2014. Average daily sales were $42.1 million. On an average daily sales basis sequential sales were down 2.3% versus Q4 2013, which is well above normal seasonality.

Gross profit for the quarter increased 5.8%, $425.2 million. As expected we experienced gross margin compression for a gross margin of 16%, down 70 basis points from last year Q1. The decline was due to the impact of both mix and pricing pressure from growth in lower margined more transaction products as well as advertising co-op and the impact of inventory adjustment.

Mitigating most of this pressure at the SG&A level, recorded SG&A, including advertising expenses, were $289.4 million, up just 2.7% over last year. This increase reflects sales commissions and other variable compensation costs consistent with our increased gross profit and costs associated with increased coworker count, as well as a reduction in advertising expense of $1.8 million in the quarter, or 5.9% compared to last year. We ended the quarter with 7,040 coworkers, up 76 coworkers since end of 2013, and up 260 coworkers since end of last year's first quarter.

Annualized sales per coworker were[$1.52 million, up 6.7% over Q1 2013. Our adjusted SG&A including advertising was $232.6 million, up 3.5% over last year. As you can see on the next slide, adjusted SG&A for the quarter excludes $3.3 million of non-cash equity compensation, $2.2 million of historical retention costs, and other expenses including litigation and costs related to our March secondary offering. To make it easier to calculate adjusted EBITDA, which is essentially our gross profit less adjusted SG&A expenses we also adjust for $52 million of depreciation and amortization.

As you can see on slide 9 our adjusted EBITDA for the quarter was $193.7 million, up 8.5% which translates to adjusted EBITDA margin of 7.3%, down 10 basis points from last year. So, all in all, on the operating side, between lower advertising expense and our variable cost structure, we were able to offset 60 basis points of the 70 basis points gross margin declined.

Let's look at the rest of the P&L on slide 10. Interest expense was 31% lower than last year, at $50.1 million and included a reduction of $627,000 related to interest equalization from the redemption of our 12.5% Senior Subordinated notes this quarter. Our effective tax rate was 37% versus 36.4% Q1 of 2013. On a GAAP basis we earned $50.9 million of net income. Our non-GAAP income which better reflects our operating performance with $81.1 million in the quarter, up 44.1% over last year.

As you can see on slide 11, non-GAAP net income reflects after tax add backs that fall into four general buckets: the ongoing amortization of intangibles from our going private transaction, any non-recurring costs related to financing including debt extinguishment and interest equalization, ongoing non-cash equity compensation, and other one-time non-recurring income or expenses, which for this quarter, included expenses related to our March secondary offering. These adjustments are tax affected at a statutory rate of 39%. With Q1 weighted average diluted shares outstanding of 172.3 million, we delivered $0.47 of non-GAAP net income per share, up 43.7% over the prior-year.

Let's turn to slide 12 and look at our balance sheet which had a number of changes since our last call, some that impacted current results and some that will possibly impact results going forward. During the quarter, we had two redemptions, the January 22 redemption of $30 million of our 12.535% Senior Sub Notes, and February 21 redemption of an additional $20 million of these Senior Sub Notes. We also had a March private purchase of $25 million of our 8.5% Senior Notes due 2019.

In addition, tomorrow we will close on our redemption of the last outstanding $42.5 million of our Senior Sub Notes. This will result for our second quarter in a $2.2 million loss and extinguishment of debt, and a $0.5 million reduction in our interest expense related the impact of interest equalization. I am pleased to say with this final redemption, I will no other have to share the impact on interest equalization.

On slide 13 you can see that on March 31, we had $370 million of cash and cash equivalent, including monies pending for tomorrow's redemption. We had less than $3 billion in net debt for the first time since we went private, finishing the quarter with $2.87 billion of net debt, $197 million less than our December 31, 2013 balance. Our cash plus revolver availability was $956 million. Net debt to trailing twelve month EBITDA at the end of Q1 was 3.5 times, 0.3 times less than the end of 2013.

Pro forma for tomorrow's redemption, our weighted average interest rate on outstanding debt is 5.9%. In this potentially increasing interest rate environment, I'd like to remind you that our $1.53 billion term loan facility is subject to a 1% LIBOR floor that we have in place $1.5 billion principal amount of interest rate cap at a weighted average rate of 2.4% which expires in Q1 of 2015. The remainder of our outstanding debt fixed rate was 88% of outstanding debt thst is effectively fixed or hedged and rates would have to move significantly before they had a material impact on our interest costs.

Free cash flow for the quarter, which we calculate as operating cash flow plus the net change in our flooring agreement, less capital expenditure was $231 million compared to $203 million in Q1 of 2013. Cash taxes for the quarter were $9.5 million, and cash interest was $16 million.

Our ability to drive returns in the business is tied to our working capital management. We continue to deliver strong working capital metrics and the details by component are provided on slide 14. Using a rolling three-month calculation, our cash conversion cycle was 22 days for the quarter, flat from last year's first quarter. We expect to continue to maintain our cash conversion cycle within our target range for the remainder of the year.

Turning to the rest of 2014, as Tom mentioned for our top-line we currently expect to grow at the higher end of our target of 200 basis points to 300 basis points faster than the US IT market. We also continue to target three key medium-term financial measures you see on slide 15. Adjusted EBITDA margin in the mid 7% range, mid-teens non-GAAP earnings growth per share which we expect to exceed again this year, likely hitting high teens, and delevering one-third to one-half times per year until we hit our target leverage of 3 times. Keep in mind that we view the medium-term as the next two years, and hold ourselves accountable for delivering these targets on an annual basis, not quarterly.

Let me provide you with a few additional comments for those of you modeling our 2014 financials. As you can see on slide 16, the realignment of our financial services and legal verticals at the beginning of the year resulted in a shift of approximately $150 million of revenue inside of our Corporate segment from small business into med-large. For the first quarter of 2013, the impact was $34 million.

When modeling our free cash flow in 2014, keep in mind that 2013 free cash flow reflected the benefit of lower cash taxes, primarily due to deductions associated with our IPO and refinancing-related expenses. Also keep in mind that our free cash flow tends to be very front-end loaded. We expect our cash interest to be approximately $180 million for the remainder of 2014 and our book interest for the remainder of the year to be in $145 million range.

Remember that our cash interest expense is "lumpy" through the year as interest payments on our 8% and 8.5% notes are paid on April 15 and October 15. For the full-year 2014, we continue to expect a cash tax rate of 39% to be applied to pre-tax income before acquisition-related intangible amortization, which is approximate $40 million per quarter. In addition, we will pay $21 million to $22 million of taxes related to the cancellation of debt we incurred in 2009.

Timing will impact cash flow here as well, as we pay our first quarterly estimated tax payment in Q2 and then move to more normalized cash tax payments in Q3 and Q4. We continue to expect our 2014 effective tax rate to be higher than last year, in the 37% to 38% range. Keep this increase in our effective tax rate in mind if you model our business quarterly, [as the phasing of our taxes this year will impact our year-over-year EPS growth rate. Given the overlap of the 27.5% tax rate we had in Q4 of 2013, we'd expect 2014 non-GAAP net income growth to be significantly stronger in the first three quarters of the year than in Q4.

One final note, returning cash to shareholders an important component of our commitment to build shareholder value, and I am delighted to report that our Board of Directors declared our third quarterly cash dividend since our returned to the public market. We will pay a dividend of $0.0425 per share on June 10 to shareholders of record on May 27. We intend to revisit our dividend policy annually, and once we achieve our current target leverage ratio of 3 times, we will look at our overall strategy to return cash to shareholders, which depending on tax policy and other factors at that time, could include share repurchase.

This concludes the financial summary. Let's go ahead and open it up for questions. Can we please ask that each of you limit your questions to one question and one follow-up? Operator please provide the instructions [for asking] a question.

(Operator Instructions)

Bill Shope, Goldman Sachs.

So you were able to nicely counter some of the gross margin pressure with OpEx discipline, but how should we think about the mix in margin dynamic as we head into the second quarter and the remainder of the year, if you could give us a bit more color on that? Is it more of the same or should we assume gross margins begin to normalize somewhat?

I think, Bill, as a starting point, a lot of it's going to depend on how long the client refresh continues. As you heard Ann talk about, that was one of the drivers when you have that kind of, just, growth in the marketplace. People ask me what inning are we in, or how long is it going to last, and we do expect it to continue, not necessarily though as intense as it was in the first quarter through the remaining part of the year. And, as it goes back to our more normal distribution, we would expect to see gross profit to follow that.

And then, looking at the -- I guess the flipside of that would be thinking about the revenue growth side of the equation, obviously, a boost to the outlook for the year. But if we dig down into the strength in the growth this particular quarter, the education segment was obviously the key source of upside. How are you thinking about the sustainability of the underlying drivers in that particular segment as we model out the rest of the year?

As we've said, education is the gift that continues to give, so to speak. And, while we would expect it to continue to grow, obviously, Bill, it's not going to grow at that rate because we start to lap some pretty amazing performance last year. But with the date still off into the 2015 timeframe, we still have school districts that are in the mode of getting ready. So, we do expect it to continue, but I think it would be a little unrealistic to continue at 38%. I would love it, but I think the realist in me says that probably won't happen.

Okay, great. Thank you.

Ben Reitzes, Barclays Capital.

Thanks. Nice quarter, guys. Wanted to talk about PCs and the sustainability of that, given the XP situation. Does that continue throughout the year? It seems like it would, based on your guidance now raised for IT spend and your own revenue growth. And, outside of education, what gives you -- and PCs, what also gives you confidence in that forecast? Because you just answered the education question, so maybe if we could talk about other areas -- maybe servers, storage, anything that also helps drive that higher-than-expected outlook that you just gave for revenues.

Couple of things: one is, let's take the PC part first, we do expect there'd continue to be uplift from the refresh and the expiration of XP. I think the reality that it was going to happen hit people. I think there are people in the marketplace who wondered whether it would happen and so we still have customers that are in the process of refreshing their client devices.

As I alluded to with Bill's question, I don't know that it'll keep the same intensity that it had that first quarter, but I do believe it'll continue to be a growth driver for the remainder of the year. And, if you look at it, it wasn't just in education where we had strong PC growth. It really was across the spectrum, which kind of gets at this notion of the balance and having multiple channels -- we saw strong growth in our corporate segment, we saw strong growth in our public segment, with the exception of federal.

So, we think that it's going to continue from a growth perspective. As far as other -- then you kind of dipped into what other categories. As you saw in the quarter, we continue to see strong growth in network, which I think kind of fit as people are upgrading their client devices and expanding -- you're going to drive traffic and traffic's going to drive upgrades for networking -- we would expect that to continue.

And, in some of the other -- I think you asked about servers or storage. We see some interesting dynamics going on in storage. And you heard me say that, on the whole, it was flat. But we see this really incredible transition happening where the growth rate of the newer storage technology is happening at an exponential rate as people transition to some of the new storage capabilities. I don't know if I got it all, because there was a lot in that question, so (multiple speakers) --

No, that was great, and my apologies. My follow-up is simply on pricing. Ann mentioned there were some pricing dynamics that impact gross margin. What's going on in pricing and what's embedded in your guidance for how pricing plays out as we go throughout the year? And that's it. Thanks.

We've been clear for several quarters that there continues to be pricing pressure in more transactional products, and that continues. And you see the impact of both the mix shift to transactional products and the continued pricing pressure. We don't expect to see that ameliorate in the short term -- that end of the IT market has always been subject to pricing pressure. And, part of our strategy with a balanced portfolio is to make sure that we continue to invest in the higher-margin solutions business to attempt to offset that on a total portfolio basis.

Thanks a lot.

Brian Alexander, Raymond James.

Tom, it sounds like you're a little bit more confident in the overall IT market this year, as you referenced 4% growth in your prepared comments and it was 3% to 4% previously. Is that primarily because the first quarter came in better than you expected and you're basically flowing that through the year? Or do you actually think the balance of the year will be better than you previously thought?

I think it's more of the former than the latter, Brian. When you come out of the quarter like this, it has an impact on what you think the annual's going to be. But, I don't think it was just a first-quarter phenomenon. As I alluded to earlier, I think you're going to have carryover and people doing the upgrade in the process. So, I think that is really the main driver.

We are seeing, as you heard in my comments, increased confidence in small business, which we always kind of look at as kind of an insight as to how people are feeling about the economy. And I think the last comment I'd make, is when I talk to my sales executives about what was driving the client refresh, the easy answer is to go right to XP. But they will quickly tell you that some of this is customers having a little more confidence in the general economy and, therefore, taking advantage of a refresh opportunity.

Okay. And then, just on the data center part of your business -- servers down, storage flat -- to what extent did you see things slow down at the end of the quarter and perhaps pick up in April? There's been some discussion from distributors and other solution providers that things really did slow down at the end of March, but they've recovered thus far in Q2. So I'm just curious if you've seen a similar pattern.

We've been pretty constant. If you look at our performance, we didn't see kind of a peak and valley, if you want to put it that way, or valley and peak would be, maybe, a better way to say it. It's been pretty constant. And, the interesting thing for us, Brian, I think is -- a big differentiator is -- and then it comes back to the balance issue.

We saw a pretty different performance across data center technologies in the different segments. Even though our server revenues were down, we saw three or four segments that had really strong server growth. And, when you go to storage, I think it was actually four or five segments. So, it really seems to be, for us, very segment driven relative to where people are, what are they focused on. And, the last thing I would tell you is, I think in our small business it's as much a mind-share issue as anything else.

It's -- how many different IT projects can a small business person manage at one time? And, if the client issue is staring them in the face because of the expiration of XP, they're going to deal with that first. And so I think that will dominate some of the mind share for a while in the small to mid market.

Great. That's really helpful, thanks a lot.

Tien-Tsin Huang, JPMorgan.

Great quarter here. Just wanted to ask about seasonality in the advertising spend, I heard some of the comments there, but how should that play out through the balance of the year?

We look at adjusted SG&A in total as we look at the balance of the year. And we would expect our adjusted SG&A to grow more in line with sales as we move through the remaining three quarters than you saw in the first quarter.

Got it. I did like the Barclay commercials, for what it's worth, but I guess -- (laughter). Let me just ask one more on the balance sheet, sorry. Obviously we did, deep in, see a lot of value in the Senior Notes, that makes sense. Will you take a pause here in the short term with debt retirement, given the note redemption, the cash interest, and the tax payments, and the dividend that you talked about?

Actually, the next time we have any debt that's callable is our 8% notes, and those do not become callable until December. And then the 8.5% notes become callable in April. There was opportunistic opportunity to purchase a little bit of the 8.5% notes, and we did that. But, absent some other opportunistic buys, we would expect to begin calling notes when they become callable in December and then in April.

Got it. Thank you.

Matt Sheerin, Stifel.

Question on small business -- you talked about relative growth there and above-market trends, but are you starting to see customers begin to migrate to the public-cloud strategy, and how are you working with customers through that transition, and how does that affect your model going forward in terms of services versus hardware?

We have seen the work we've done with small business on clouds. That's been happening for multiple quarters now, so it's not a new phenomenon for us. Our cloud portfolio is at, really, exponential growth rates. Now, it's still a relatively small business. But the growth rates are just amazing, which suggests that we're doing a pretty effective job of helping them sort through what different options they have. And then, we've got such a broad portfolio of cloud-based solutions, both in the SaaS- and IAS-managed services -- and even in our aggregation services -- that it gives the customers the ability to pick and choose how they want to construct a cloud-based solution.

And, I think part of the reason that, as you've seen the growth rates improve in small business, one of the reasons that the margin has held up really well is because a lot of what Jill and her team have been selling to small business customers are cloud-based solutions, which, as you know, are a 100% margin business for us, in a lot of cases. So, we continue to feel really good about our ability to help customers navigate through that

Okay, thanks. That's helpful. And then, on the federal, you mentioned a more stable demand and pipeline, but do you have confidence that you're going to see a recovery in that market at all this year, and do you see any growth coming there?

Well, I think what I said was, we're seeing the funds flow now, and the allocation process and procurement offices starting to put out contracts. And we did see some pick-up in activity in civilian. I do think it's still going to be a multiple-quarter process until we see federal government begin to be back on an upward trend.

We are encouraged by activities, because in the federal market, until you see a contract being let, until you see dollars being specifically allocated to a project, the sales process can't kind of -- the flywheel doesn't fly, so to speak. So, and we are seeing that now. If you said to me, I would expect -- you know, if you look at the federal sales process, normally, it's very back-end loaded. It's heavy in the third and fourth quarters and, I would say, if we're going to see a recovery, that's when we'll see it.

Got it. Thanks a lot.

(Operator Instructions)

Jayson Noland, Robert Baird.

Tom, just a clarification question on storage -- your ability to offset weakness in the traditional storage market with emerging technologies, is that basically a function of your early engagement with companies like Nimble and Nutanix, or is there something else there?

The answer is, yes, and also some of the converged infrastructure projects that we had been working with, the more traditional vendors. But you're on the right track.

Do you see that more as a secular shift than something that's product cycle driven?

It feels product cycle driven. I think everybody -- a lot of the OEMs are moving to develop those kinds of solutions. And so, I think, if you look at a customer's -- this is kind of the second iteration, as I would describe it, of efficiency. The first was, we did virtualization, we virtualized storage, we virtualized servers, and customers then created incremental capacity by doing that. And now, as they get to the next phase, they're looking at these more efficient storage capabilities to, again, create greater capacity as much is possible. I think it's just the nature of the technology beast, so to speak.

Okay. And then, a follow-up question on the healthcare vertical, good quarter. You've got easy year-on-year compares the next couple quarters. Do you see better visibility in that vertical, specifically?

Well, it's getting better. They're a little bit covered with some of the federal budget issues when it comes to Medicare and Medicaid reimbursement. But I was encouraged, quite honestly, in addition to the client refresh, to see the networking business grow. Because I think that's an indication of people making what I'll call investments they're driving themselves versus responding to, maybe, an expiration of XP, and I think that's a good sign. But, again, it's just a couple quarters here, so we're going to remain cautiously optimistic on healthcare, but do view it as a growth driver this year.

Great. Thank you.

Jerry Liu, Morgan Stanley.

Good morning, guys, calling in for Katy here. Just wanted to ask about Chromebooks. It's obviously been really strong in recent quarters, but even including accessories and other services you provide, do those products put extra pressure on margins versus traditional notebooks and desktops?

I think they do, if you just sell them in isolation. And one of the things that I think has been great about our education result is it was part of a broader solution. And, I think as I've alluded to, as you deploy the Chromebooks, it drives and pressures things like your network, it drives the need for increased security, it drives the need for network management. And all of those kind of things, Jerry, bring higher margins with them.

Got it. Same question on, just the CapEx this quarter. I think it was -- the $30 million was maybe doubled recent quarters. What drove that? Does it have to do with any data center or cloud build-out? And, do you expect the expense to continue at this level?

Our CapEx was in line with our normal spending in the quarter. I think you may be picking up a investing cash flow relating to a charitable contribution that was triggered, that tied back to the original LBO. And the cash flow for that contribution went out this quarter, and that was picked up in a financing cash flow. But CapEx was normal in the quarter.

Got it. Thanks.

Thank you, and I'm not showing any further questions at this time. Mr. Richards, please proceed with any further comments.

Once again, really proud of the team's performance this quarter, again, on our ability to help our customers with what's important to them, at any given time in their IT lifecycle. And, as I always say, if any of you need help with your IT inside of your companies, CDW is absolutely the person you ought to be calling. And, let me leave with this: for all you mothers out there, Happy Mom's Day. All right. Thanks, everybody.

Thank you, ladies and gentlemen, for participating in today's conference. This does conclude the programming. You may all disconnect. Everyone have a wonderful day.