CDW Corp (CDW) 2014 Q4 法說會逐字稿

Good morning, my name is Amanda, and I will be your conference operator for today's call. At this time, I would like to welcome everyone to the CDW 2014 full year and fourth-quarter earnings call.

(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, Amanda. Good morning, everyone, and thank you for joining us today to discuss CDW's fourth quarter and full-year 2014 results. With me in the room are Ann Ziegler, our Chief Financial Officer; Chris Leahy, our General Counsel; and Sari Macrie, our VP, Investor Relations. I'll begin our call with an overview of our fourth quarter and full-year performance and share some thoughts on our strategic progress and expectations for 2015. Then I'll hand it over to Ann who will take you through a more detailed review of the financials. After that, we will open it up for some questions. But before we begin, Sari will present the Company's Safe Harbor disclosure statement.

Thank you, Tom, good morning, everyone. Our fourth quarter and year-end 2014 earnings and first quarter dividend release were distributed this morning and are 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 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 including non-GAAP earnings per share. 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. 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 for the fourth quarter and full-year are the same in both 2014 and 2013. So there is no difference in growth rates for average daily sales and reported sales.

Our 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, let me turn the call back to Tom.

Thanks, Sari. We had a strong finish to a great year of both financial and strategic performance. For the year, we significantly outpaced our medium-term annual target of growing 200 to 300 basis points above the US IT market delivering a 2014 net sales increase of 12.1%, well above estimated market growth rates with excellent profitability. Adjusted EBITDA increased 12.2% and earnings per share increased 29.7%. Our performance in 2014 demonstrates the strength of our business model and highlights the power of our balanced channel portfolio, diverse product suite, and variable cost structure.

Let me walk through each of these and how they contributed to performance. First, our balanced portfolio of five channels, each with nearly $1 billion or more of annual sales. This balance has served us well in the past when we've been confronted with challenges outside our control like the closing of the federal government in 2013. In 2014, instead of working together to offset macroeconomic or exogenous factors, our balanced portfolio worked together to fuel top line growth with each channel growing high-single-digits or better.

Second, our diverse product suite of more than 100,000 products from over 1,000 leading and emerging brands, which ensures we are well-positioned to meet our customers' needs whether transactional or highly complex. In 2014, this enabled us to meet strong client device demand for both PC refresh and meeting Common Core curriculum digital testing requirements. Client device demand drove significant growth throughout the year. While initially dominating customer mind share, as we moved through the year and refresh projects were underway, our solutions business bounced back growing high-single-digits in the second half of the year.

Even with this strong performance, transactional products grew faster than solutions throughout the year, and represented 53% of our 2014 sales compared to 49% in 2013. Faster growth in client devices fueled our top line, but also pressured our gross margin. And that leads us to the third element of our growth performance this past year, our variable cost structure. For those of you unfamiliar with our cost structure, after our cost of sales, our largest cost element is sales compensation. Sales compensation is highly variable for two reasons. First, it is tied to gross profit not revenue, second because solutions sales involve technical resources who are also paid, transaction sales are less expensive to serve. In 2014, a higher mix of transaction sales pressured our gross margin, but the variable nature of our sales compensation helped to mitigate this impact.

And finally, we would not have been able to deliver the exceptional results we did had it not been for the efforts of our dedicated and talented team of over 7,200 co-workers. They are a true source of competitive advantage in a highly competitive market and are a key reason why our business model is successful in delivering industry-leading performance year after year.

Let's briefly turn to the fourth quarter performance. Net sales were up 12.4%, substantially above market estimates. Adjusted EBITDA growth was 11.1% and EPS growth was 8.6%. Corporate was up 8.9% with balanced performance across both small business, which was up 8.7%, and medium-large which was up 8.9%. Public increased 18% led by government's 35% increase reflecting both strong year-over-year growth in federal, as we lapped the shutdown of federal government last October and excellent state and local growth. Without the distraction of a government shutdown, sequestration or debt ceilings to contend with, we saw more normal federal buying behavior. Federal customers not only had their FY14 budget in hand, but felt more confident that they would have a 2015 budget.

Education delivered excellent growth, up 21%, led by a 20%-plus increase in K-12 with low-double-digit increases from higher ed. K-12 activity continued strong into year-end as schools worked to be ready for spring 2015 Common Core testing. Healthcare grew just over 1% as projects and initiatives driven by meaningful use and the Affordable Care Act slowed after the rapid pace in the first half of the year and industry consolidation led to more focus on driving out costs and investment. Together, Canada and Advanced Technology Services, which we report as other, posted an 11.8% increase. Canadian sales in local currency were twice the low-double-digits they delivered in US dollars.

Looking at our broad product categories for the quarter, hardware was up 15%, services were up 12%, and software was down just over 1%. Notebooks and mobile devices growth continued strong in the quarter driven by Common Core digital testing devices and ongoing overall client refresh with excellent increases in federal. Defying expectations, K-12 grew notebooks and mobile devices at the same rate as the third quarter, on top of 2013's exceptional fourth quarter results.

Our Solutions business sustained the momentum we had in the third quarter delivering strong increases in categories that support integrated solutions. NetComm was up low-double-digits and storage and servers were both up high-single-digits. A great example of the success we are having in Solutions is the CDW deployed Wi-Fi network at the University of Phoenix Stadium used during the Super Bowl to enhance fan experience. Early data shows that there were 2.5 terabytes of data downloaded and 3.7 terabytes uploaded, more than 6 terabytes of Wi-Fi usage over the network.

Nearly 26,000 unique devices connected to the network on game day. Peak concurrent usage was over 17,000 users, not surprisingly during halftime. We are very proud of the great partnership between CDW Cisco and the University of Phoenix Stadium team. Stadium networking has become an area of expertise for us. We have delivered integrated solutions to the Georgia Dome, Lucas Oil Stadium, Soldier Field, and Reliant Stadium, among others.

On the software side, strong performance in security and virtualization was offset by a higher portion of revenues from SaaS sales and software assurance contracts. While this resulted in a revenue decrease of just over 1%, the higher portion of these revenues, which are recorded as 100% gross margin, led to software gross profit dollars increasing high-single-digits. This helped to mitigate some of the product margin compression we experienced from the higher mix of transactional products.

As you can see, 2014 was an excellent year of financial performance. It was also a year of excellent strategic progress. For CDW, everything we do starts with our customers. What do they need and how can we meet that need? Our customers want to take advantage of all of the productivity and growth benefits integrated IT solutions provide. But given limited IT resources, and the ever increasing pace of IT change, they need help deciding what path to take. Our three-part strategy is designed to make sure that they turn to us as an extension of their IT resources, and their trusted advisor, to help them make the right decision for their business.

In 2014, we made progress against all three of our strategies. Our first strategy is to increase share of wallet and acquire new customers. Two key ways we accomplish this is by enhancing seller capacity and improving seller capabilities. In 2014, we made excellent progress in both areas.

Enhancing seller capacity makes it easier for them to focus on what matters most, meeting the needs of their customers. One way to do this is by reducing administrative burden. In 2014, we introduced new tools that enable sellers to reach customers more efficiently and enhance order processing. In 2014, we also enhanced seller capabilities with new training tools including new programs to build proficiency in cloud and game-based workshops to enhance selling skills.

The game, which we call Negotiations, won nationally recognized awards for excellence in three learning categories; best use of games for learning, best use of social collaborative learning, best custom content for excellence in learning.

To further our sellers' ability to deepen relationships and solve unique customer needs, we established new verticals in finance and legal and refined our geographic segmentation with the establishment of a new south region. This is all about getting closer to the customer.

And to make the selling process more effective in 2014, we continued our marketing productivity investments. We evolved our mix of media with a heavy focus on digital to more effectively get our message out. We also improved our ability to identify remarketing opportunities through the use of advanced predictive analytics.

To enhance our sellers' ability to meet US-based customers and prospects international needs, we made a 35% investment in UK-based IT solutions provider, Kelway. We're off to a great start with Kelway. Ann will have more detail on their contribution to our results shortly.

Our second strategy is to enhance our ability to deliver high-growth integrated solutions. This helps ensure that as technology evolves, we have the resources and the capabilities necessary to meet our customer needs. Today we have six solution practice areas -- converged infrastructure, which includes security, unified communications, and network communications; software; cloud, which includes infrastructure as a service, software as a service and platform as a service; mobility; data center, which includes server storage, power and cooling; and our services practice, which includes the field services, managed services, configurations warranties and third-party services.

In 2014, we enhanced our cloud portfolio with migration offerings that help our customers manage the challenging process of moving to new cloud-based solutions. We also gained first mover advantage when we became the first Company authorized to provide Google Apps Productivity Suite to business customers. And we added two new born-in-the-cloud security providers. To make sure that customers and prospects understand the breadth and depth of our cloud portfolio, we launched an awareness campaign around our cloud capabilities which included Wall Street Journal advertising, and Sunday morning talk show commercials.

We enhanced our mobility portfolio with the launch of our innovative mobile app marketplace for developers, a single online destination that connects organizations with vetted proven developers of industry-leading mobile apps for key business functions such as sales support, customer relationship management, human resource systems and more across all industries and job functions.

There were nearly 200,000 visitors to our app marketplace in 2014. We also added to the tool kit of our sellers by helping evaluate customers design and implement solutions with the creation of our dedicated Cloud Client Executive, or CCE teams, as well as the addition of new solution architects to support fast growing practice areas like unified communications and collaboration.

Our third priority is to expand our service capabilities. To support our service initiatives, we added more than 50 service delivery co-workers and opened two new markets. Today we have technical specialist, service delivery and sales co-workers in more than 20 major metro markets across the country. These markets are supported by a national traveling team and a nationwide network of partnerships with OEMs and local service providers to ensure we cover the entire US market. Later this year, we will enhance our ability to operate and manage customer IT infrastructure remotely when we open a new 24 by 7, Level 1 and Level 2 Managed Services command center.

Expanded service delivery capabilities underpin our first two strategies of capturing market share and expanding our solutions suite and enable us to deliver an end-to-end solution. Our sellers develop and manage the customer relationships, identify the opportunities and bring the right combination of products and services to solve the customer problem.

Our specialists work with our customers and partners to whiteboard the design, create a bill of materials for products and services required, and draft a statement of work for the services, and our professional services and service delivery engineers install and maintain the solution. All of these co-workers are customer facing. In total, we added more than 140 customer-facing co-workers in 2014, more than three-quarters of which are in solutions and services. Given the rapid pace of additions in the first nine months of the year, we took a hiring pause in the fourth quarter to digest the nearly 250 new co-workers we were on-boarding, finishing the year slightly below our target of adding between 150 and 200 customer-facing co-workers.

We made excellent progress bringing on our new co-workers. Year end annualized revenue per co-worker was $1.67 million, an 8% increase over 2013. Our 2015 plan calls for hiring between 150 and 200 customer-facing co-workers. As we always do, we will monitor the market conditions and accelerate hiring if we see stronger IT spending than we currently anticipate.

Let me close with a few thoughts on what we see for the market in 2015. Given our current view of economic growth, we are looking for 3% to 4% growth for the US IT market and currently look to achieve our medium-term annual target of exceeding market growth by 200 to 300 basis points. We expect moderation in client device demand both from refresh slowing and the winding down in Common Core activity as spring of 2015 testing is implemented. We also expect federal performance to be more normal.

At the same time, we expect solution categories to continue their second half of 2014 momentum into 2015 and anticipate a more balanced split between transactional and solution sales. You should expect us to refine our views both for the market and our growth premium as we move through the year. In 2015, you should also expect us to continue to execute our three-part strategy to ensure we can help our customers navigate their options and maximize the return on their IT investment. As we do, we will further penetrate our core customers and acquire new customers.

This in turn will strengthen our relationship and importance to the leading and emerging IT brands. By strengthening our value proposition to both customers and partners and leveraging our business model, we intend to continue to profitably grow faster than the market while generating superior returns today and in the future. And with that, 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 fourth quarter and full-year financial results demonstrated the strength of our business model as we captured market share and delivered excellent profitability and cash flow while continuing to invest in our future. As I review our financial results, I'll highlight some of the ways the results demonstrate one of the key strengths of our business model, our variable cost structure.

Turning to our P&L, if you have access to the slides posted online it would be helpful to follow along. I am on slide 8. Top line growth was excellent this quarter with net sales of $3.05 billion, 12.4% 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 fourth quarter of 2014 and 2013. Average daily sales were $48.4 million. As expected, on a sequential average daily sales basis, sales were down 5.1% versus Q3 2014, below recent Q4 seasonality due to exceptionally strong Q3 performance.

Gross profit for the quarter increased 9.7% to $491.9 million. Gross margin in the fourth quarter was 16.1%, 40 basis points below last year, primarily reflecting the ongoing mix impact from growth in lower margined, more transactional product. Given our strong sales growth, margin was also negatively impacted by vendor funding, which, while increasing in absolute dollars, represented a lower percentage of net sales. And as expected, the higher mix of federal sales also negatively impacted gross margin. Partially offsetting these decreases were an increase in net service contract revenue, which includes software assurance warranties, and netted down software as a service revenue, all booked at 100% gross margin, as well as positive inventory reserve adjustment.

Reported SG&A, including advertising expense, was $327.6 million, 7% higher than last year, attributable to higher co-worker count and attainment-based compensation consistent with our year-to-date adjusted EBITDA performance. Advertising expense increased by 5.4% or $1.8 million in the quarter versus last year. We ended the year with 7,211 co-workers, up 244 co-workers since the end of 2013.

As you can see on the next slide, slide 9, our adjusted SG&A including advertising was $269.3 million, up 8.5% over last year, 390 basis points lower than our net sales increase of 12.4%. Here is where you really see the power of the variable nature of our cost structure, the combination of the lower cost to serve transactional sales, and our compensation model that pays on gross profit resulted in lower sales compensation as a percentage of sales compared to last year's fourth quarter delivering significant SG&A expense leverage.

Adjusted SG&A for the quarter excludes $4.9 million of non-cash equity-based compensation and $2.2 million of historical retention costs and other adjustments. To make it easier to calculate our adjusted EBITDA, which is essentially our gross profit less adjusted SG&A expenses, we also adjust for depreciation and amortization.

Slide 10 shows our adjusted EBITDA for the quarter of $223.6 million, up 11.1%. Adjusted SG&A leverage partially offset gross margin pressure and we ended the quarter with an adjusted EBITDA margin of 7.3%, down 10 basis points versus last year.

Looking at the rest of the P&L, on slide 11, interest expense was 5.5% lower than last year at $48.6 million as we continued to benefit from redemption and refinancing activities completed this year. Continuing down the P&L, you see our other income net line, which is where we will be reporting our Kelway minority interest income. Kelway delivered $1.2 million of equity investment income in the quarter. Other income net also includes some other very minor items such as foreign currency transaction gains and fixed asset gains and losses.

As a reminder, on November 10, 2014, we completed the purchase of a 35% stake in Kelway. All-in we paid $86.8 million including fees and expenses. We structured the Kelway transaction to provide CDW the right but not the obligation to acquire up to 100% ownership in Kelway. The price we paid in November reflected Kelway's capital structure at that time. Our call option includes agreed upon valuation multiples that adjust within a narrow range with Kelway's performance.

Given this and the fact that Kelway's leverage may change, should we move ahead with our call option, the $86.8 million we paid for the 35% stake will not be directly comparable to the price we would pay for the remaining stake, which would likely be higher due to improving performance and debt pay down. The option to repurchase the remaining stake in Kelway runs from June 2015 through June 2017. We continue to expect Kelway to be slightly accretive to earnings this year.

Turning to taxes, our effective tax rate was 35.4% compared to 27.5% in last year's Q4 which resulted in tax expense of $28.3 million versus $22.6 million. On a GAAP basis, we earned $51.8 million of net income. Our non-GAAP net income, which better reflects our operating performance, was $102.2 million in the quarter, up 9.3% over last year. As you can see on slide 12, non-GAAP net income reflects after-tax add-backs that fall into four general buckets, the ongoing amortization of acquisition-related intangibles, any non-recurring costs related to financing including debt extinguishment, ongoing non-cash equity-based compensation, and other one-time non-recurring income or expenses. These adjustments are tax effected at a statutory rate of 39%.

Our Q4 weighted average diluted shares outstanding were 173.2 million. We delivered $0.59 of non-GAAP net income per share, up 8.6% over the prior year. As discussed on our Q3 earnings call, our high-single-digit non-GAAP EPS growth rate in Q4 reflects the overlap of the lower tax rate we had in Q4 of 2013 and lower interest savings compared to the first nine months of the year.

Quickly turning to full-year results on slide 13, revenue was $12.1 billion, an increase of 12.1% on both a reported and average daily sales basis, and average daily sales grew to $47.5 million. Gross profit in 2014 was $1.9 billion, up 9.1%. Gross profit margin was 15.9%, down 40 basis points from 2013. Here, again, you see the power of our variable cost structure.

The largest component of our SG&A, sales payroll, increased only 3.9% in 2014 compared to a gross profit increase of 9.1% and net sales increase of 12.1%. Adjusted SG&A including advertising increased 6.6%, enabling us to maintain our adjusted EBITDA margin and deliver adjusted EBITDA for the year of $907 million, 12.2% higher than last year. Non-GAAP net income for 2014 was $409.9 million versus $314.3 million in 2013, up 30.4% as operating results were amplified by lower interest expense which was down $52.8 million. Non-GAAP net income per share was up 29.7% at $2.37.

Turning to our balance sheet, on slide 14, on December 31, we had $344.5 million of cash and cash equivalents, and net debt of $2.8 billion, $217.6 million less than at the beginning of the year. Our cash-plus revolver availability was $1.3 million. Net debt to trailing 12-month EBITDA at the end of Q4 was 3.1 times, 0.7 turns less than the end of 2013. During the quarter, we issued a new $575 million senior note facility at 5.5% and redeemed $541 million of our 8.5% senior notes. With this new issue, our weighted average interest rate on outstanding debt is 5%. We did incur an extra $2.5 million of interest in the quarter on the amount redeemed as the redemption required 30 days notice.

As mentioned on our last call, we have started the process of rolling over interest rate caps which expired in mid-January. We have now replaced the $1.15 billion of caps that expired on January 14 with $1.4 billion of new caps that went into effect in mid-January. Currently, over 96% of our outstanding debt is effectively fixed or hedged and rates would have to move significantly before they had a material impact on our interest costs.

As you can see on slide 15, we maintained strong rolling three-month working capital metrics during Q4. For the quarter, our cash conversion cycle was 21 days, down two days versus last year's fourth quarter. Free cash flow for the quarter, which we calculate as operating cash flow plus the net change in our flooring agreement less capital expenditures, was $96.3 million compared to $10.4 million in Q4 of 2013.

Cash taxes paid in the quarter were $51 million and cash interest was $69 million. Our full-year free cash flow was $455.5 million, or 3.8% of net sales. Free cash flow was higher than expected as we benefited in Q4 from approximately $100 million of one-time items and timing which will reverse in Q1. This approximately $100 million of cash flow was a result of three things.

One, early payments from a few major public sector customers, two, a higher mix into vendors which provide longer payment terms to us, and, three, inventory shipments earlier than expected due to accelerated customer rollout. Normalizing for this, free cash flow as a percentage of sales for the full-year would be at the high end of our target range of 2.5% to 3%. Our priorities for uses of this cash flow remain consistent with our capital allocation strategy and will depend on market conditions and opportunities. Our capital allocation strategy is comprised of the following four components which you can see on slide 16.

First, to increase dividends annually. To guide these increases, we have set a target to achieve a dividend payout ratio of 30% of free cash flow over the next five years. For this quarter, we will pay a dividend of $0.0675 per share on March 10 to shareholders of record February 25, up 59% from a year ago. Second, to ensure we have the right capital structure in place, and we have set a target to generally maintain net debt to adjusted EBITDA leverage in the range of 2.5 to 3 times. We ended the quarter at 3.1 times. Third, to supplement organic growth with tuck-in acquisitions. Our Kelway investment is an excellent example of this. And, fourth, to return excess cash after dividends and M&A to shareholders via share repurchases for which we currently have a $500 million authorization.

These capital allocation priorities support our medium-term targets, which you see on slide 17. Through 2015, we continue to target top line growth of 200 to 300 basis points faster than the US IT market. We also continue to target our other two key medium-term financial measures, adjusted EBITDA margin in the mid 7% range, and mid-teens non-GAAP earnings growth per share. Reflecting the conclusion of our initial refinancings and absence of earnings amplification from lower interest expense, starting in 2016 through 2018, our new medium-term targets call for low-double-digit EPS growth. We intend to use share repurchases and accretive acquisitions to amplify earning results and help achieve this target. Keep in mind that we hold ourselves accountable for achieving our current and refresh medium-term targets on an annual, not a quarterly, basis.

Let me provide you with a few additional comments for those of you modeling 2015 financials. I am on slide 18. Based on the seasonality and rhythm of our business, first half of the year net sales are typically lighter than in the second half and first quarter sales are typically sequentially below our fourth quarter. As a result, adjusted SG&A as a percentage of sales typically runs higher in the first half of the year than in the second half, and our adjusted EBITDA margin will likely be below our full-year target range in the first quarter.

As discussed in our last call, we intend to refinance the balance of our 8.5% senior notes due 2019, no later when they first become callable in April 2015, so you should expect to see additional interest expense savings beginning in the second quarter of 2015. For 2015, our book interest expense is expected to be in the range of $160 million to $170 million. Between lower interest expense savings and higher SG&A as a percentage of sales, both due to seasonality and a more balanced mix of solutions and transactional sales, we expect first half EPS growth to be below 2015 full-year growth. We expect our 2015 book tax rate to be in the [37% to 38% range] (corrected by company after the call). And, as previously mentioned, we are targeting annual mid-teens EPS growth.

Finally, a few notes for those of you modeling cash flow. First, our Q1 cash flow will be lighter than normal due to the impact of the approximate $100 million of working capital timing that will reverse in Q1. Second, our capital expenditures, which tend to run 0.5% of net sales on an annual basis, will be a bit higher in 2015 at approximately 0.7% of net sales as a result of gross capital investments we are making relating to consolidating leased buildings for our offices north of Chicago. Adjusting for the approximately $100 million of free cash flow timing in 2014, we expect 2015 free cash flow to be at the high end of our target range of 2.5% to 3% of net sales. We also expect to continue to maintain our cash conversion cycle within our target range of the low- to mid-twenties.

For the full-year, we expect a cash tax rate in the 39% range to be applied to pre-tax book income before acquisition-related intangibles amortization which is approximately $40 million per quarter. In addition, we continue to pay approximately $20 million in tax annually related to the cancellation of debt income we occurred in 2009. That concludes the financial summary. Let's go ahead and open it up for questions. Can we please ask each of you to limit your questions to one question and one follow-up. Operator, can you please provide the instructions for asking a question.

Thank you. (Operator Instructions) Benjamin Reitzes with Barclays.

Good morning, team.

Hey, Ben.

A couple of things, just in terms of how we think about demand and revenue throughout the year. Tom, you mentioned clients slow and solutions pick up. Can you just give us a little more detail there? How much are you expecting clients to slow and a little more detail on what's going to pick up the slack, and potentially maybe some verticals that pick up the slack, as well?

I think, Ben, my expectation for 2015 is we'll return to what I would describe as a more normal rhythm that we had had in previous years. We had a pretty strong tailwind, as you know, with the Windows XP and what that caused on the refresh cycle. I think I'm getting out of the business of predicting when cycles end because I'm like zero for the month.

Look, it lasted longer than I thought, and, obviously, it into the fourth quarter, but what we did see, which I think is important, is beginning in the third quarter the solutions business began to really come back and really hit a nice rhythm during the second half of the year. And we would expect that to continue. Look, K-12, I think, on this call, you guys have asked me so many times when are they going to run out of the Common Core digital testing client device business.

I've missed that one a bunch of times. They keep defying logic, so I would tell you I think they're going to continue to find ways. We have some new things happening in K-12. Some E-Rate opportunities which kind of go hand in glove with putting in the networks that are going to help take advantage of digital testing. Then you have the one-to-one initiative. So we think there's a number of things there that will keep that momentum.

We think federal is back on a normal rhythm again. Hopefully, we don't have any exogenous factors like the shutdown, so we think that continues to be strong. You saw a nice year and a really nice end to last year by our corporate gang, both MedLar and small business. And we expect that group to continue to grow going forward. So we feel pretty good about heading into 2015. And it's just a little bit of a shift in where the business comes from.

All right. And then, just sneaking in a follow-up. Healthcare, it looks like in my model you really beat public, but healthcare looks like it was slow, and I was wondering if that's going to pick up? And I also wondered what your repurchase plans were for 2015? And that's it for me.

Well, that sounds like three, but let me sneak in the second one and then I'll flip it to Ann. Healthcare this year for us, if you look at the whole year, grew about high-single-digits, 9.5% We would expect healthcare to continue to be a mid- to high-single-digit growth. I think it is going to have some lumpiness just because of the Affordable Care Act and what it's doing to drive out cost, causing consolidations.

Now I think that would tend to play in our favor because of the breadth of our footprint. But any time you have consolidations going on it causes people to pause, try to take cost out. And I think you saw that in some of the lumpiness this year. But I think, on the whole and on the average, we still expect healthcare to be a good growth segment for us. I'll let Ann answer the third one.

Yes, on the repurchases, Ben. What we've committed to is that we will buy back enough shares to offset dilution from our equity plans, and that would be roughly two million shares in the year. I would say that's a minimum commitment. The repurchase is structured to permit us to buy along any secondaries that our sponsors may do. But that will depend on market conditions and timing.

Thanks a lot, good execution.

Thanks, Ben.

Matt Sheerin with Stifel.

Yes, thanks, and good morning, everyone. Just a question regarding your commentary on growth this year. Perhaps more momentum on the solution side versus the transactional side. Would that, in theory, boost your gross margin through the year, and might you finally see a reversal in gross margin throughout 2015 versus last year?

Well, if you think about our model, it will impact a couple of different things. I would argue that part of the reason we saw a little bit of improvement in gross margins in the fourth quarter versus the third quarter was the continued improvement of our solutions business, which you're accurate, Matt, in that it's got a higher margin profile.

But there is a double-edged sword to everything in life. The downside of that is that we -- they tend to be more complex, require technical resources, as I said in my formal comments, and, therefore, tend to maybe drive up your sales compensation. So where that worked this year, in the reverse, so to speak, because transaction business doesn't require that, then next year, while we will benefit from, hopefully, maybe having some pressure to grow, if I can use that analogy, gross margin, you'll have the offsetting fact of having to pay more people.

Got it. So the EBIT margin, in theory, wouldn't be impacted that much then?

Yes, that is exactly why we focus on the EBIT margin because it's really the things that we can control most, and you'll hear us talk about the EBIT margin most frequently because of that very reason.

Okay, and just my second question regarding the potential server upgrade cycle that a lot of suppliers and distributors are talking about. Are you having conversations with customers there? And it seems like it may not be a one-for-one replacement where customers opt for alternatives, either a cloud solution or another platform. How does CDW play in that scenario?

Matt, that is very accurate. Fortunately, we're having more than just conversations, we're actually having success. We started in the middle of last year a pretty aggressive and thoughtful Windows 2003 server initiative. We are finding, as you might expect, some different kind of feedback from customers. There are many customers that we've been able to already help.

And I would suggest that was a small part of why you saw some of the positive growth in servers. But the other thing that we are hearing is that many customers, either through virtualization, have created capacity, and so they're not necessarily automatically adding new servers, but maybe expanding the capacity of existing servers in addition to looking at cloud-based solutions, which has turned out great for us. It's one of the reasons our cloud businesses has had such exceptional growth. I think it will be, look, I hesitate to use the word tailwind because of what a big tailwind XP was, but I think it will be a mild tailwind for 2015.

Okay, thanks very much, and best of luck this year.

All right, thanks, Matt.

Tien-tsin Huang with JPMorgan.

Great, thanks, good morning, good results here. Just first on the transactional mix versus solutions being higher, is that a function of budget flush or is there something else? And what's going to drive the mix higher or towards solutions in 2015?

Thanks, Tien-tsin. I would say it was more a function of the Windows XP expiration as the kick starter, but I think once people got into the mode of doing that, they were -- they took advantage of it and started to just expand it beyond just Windows XP and did a refresh cycle.

Makes sense. Makes sense. And then, for Ann, just a clarification on the 2015 guidance, the through 2015. So are we using that as a compounded annual growth rate, meaning the average through the period for 2015, or is that an annual growth expectation for 2015? Do you follow me?

Yes, that's an annual growth expectation for 2015.

Terrific, 2015 over 2014. Thanks, again.

Thank you.

Brian Alexander with Raymond James.

Okay, thanks. Ann, you mentioned vendor funding in the minus column, if you will, this quarter as it relates to gross margin, but you also said that you had higher funding dollars. So I'm just curious if the margin rate decline, was that more mix driven or are there more holistic changes that your vendors are making in terms of how they approach vendor funding?

Brian, it was mix. That was what I was alluding to because the revenues grew so much and vendor funding is a little bit more of a fixed dollar. So while the dollars were higher, just as the mix impact, it had a negative margin effect.

Okay, and then just the follow-up is on software, Tom. I understand it was influenced, it was down 1%, influenced by a higher mix of net sales and SaaS sales and that depresses revenue but it increases gross margin. I think you said gross profit dollars up high-single-digits. So I'm curious, in the situations where your software vendors are converting from a licensed model to a SaaS model, do you think CDW is at least holding its own in terms of market share? And when you look at the economics to CDW, over the life of a SaaS agreement are you generally making similar, more, or less profit dollars than you were under the old model?

So, Brian, I think your description is accurate, although I would probably change it. I feel like we're actually not holding our own. Based on the success of our cloud business and the SaaS growth rates, it feels, although it's a pretty complicated comparison truthfully, trying to compare the two, but I would think as far as just pure market share and helping customers, I think holding own would be the minimum.

As far as the financial model, it's a little bit premature, I think, and here's why. As you make the conversion to, in some cases subscription, that becomes a monthly payment process and extends, can extend over multiple years. But then you also have lots of opportunities to upgrade even once that's in place. And we really haven't seen that play out yet.

I can tell you that the complexity and just the thought of going through which workloads do I want to put in the cloud, how do I want to think about my on-prem solutions versus what I have off-prem has caused many of our customers to actually come to us and say help us think through this. And that's why we've added those cloud client executives this year, we're now up to 15.

Those people can sit down with customers and actually have that detailed planning discussion. So up to this point, it's been, as I said at the IPO, it's been a positive thing for CDW. And our cloud growth has been exceptional.

Great. Thanks a lot.

Yes, thanks, Brian.

Bill Shope with Goldman Sachs.

Okay, thanks. I wanted to dig in a bit more on the solutions and enterprise momentum you guys are looking for this year outside of servers. How are you thinking about other categories like storage? Are you saying any signs of a refresh here as we head into 2015?

And then, I guess, related to that, you had commented on storage growth, if you could break that down, as you've done in the past, in terms of incremental color on legacy versus emerging growth within storage?

Well, let me answer the second one first, Bill. The second one, it was more balanced this quarter. We saw strong growth from what you might think of as the more traditional solutions from a storage perspective. But we continue to see strong growth from the emerging brands and a lot of the flash technology.

So I just think it was a quarter where you had balanced growth, probably why we had a pretty good quarter overall relative to the growth rate. When we think of solutions, it's a much broader context than, for us, just servers and storage. It's our NetComm business, which has been a really stable and strong growing business. If you look at our performance over the last multiple quarters, NetComm is usually in the top two or three growth categories every quarter, which I think is a manifestation of what's going on in the data center, as well as the growth in cloud computing.

The second thing is our services practice which is another meaningful part of our solutions business, and, again, that's been a really strong growth for us, tied to our deployment of those customer facing co-workers that I talked about that are close to customers that can help to manage solutions and services. And then the other one, converged infrastructure, which is something we don't talk about a lot. It includes network but it also includes our security practice which is growing very aggressively, and our collaboration practice which is growing aggressively.

So that is kind of more of a holistic picture. I didn't even get into the mobility part that I mentioned in the script, so that's really how we think about solutions, not just the server and storage.

Okay, that's helpful. And then quickly, if I could, on the buyback. I wanted to understand why you wouldn't get more aggressive than just countering dilution this year? And, I guess, related to that, could you remind us of any legacy restrictions you still have on the buyback with some of your prior debt deals?

So let me address the first, the last question first. Under the remaining 8.5% notes we have outstanding, there's a restricted payment basket which would be, obviously, hit if we did a share buyback. That dollar amount is roughly $225 million as of the end of Q4. Obviously, that restriction would go away once we refinance the 8.5%.

Then the relevant RP basket becomes the one under the term loan, which at this point is in excess of $700 million, so much less of a restriction. In terms of how aggressive we're going to be on the buybacks this year, it's not, I guess, I don't mean me to say we're not going to a more aggressive, what I'm saying is the minimum commitment that we've made is to offset dilution. Whether we become more aggressive depends on market conditions, opportunities, obviously, if we exercise our call option on Kelway that will be a use of cash, as well. So at this point in the year, it's just hard to be more specific than that. We will, obviously, do the minimum commitment.

Okay. Thank you.

Thanks, Bill.

Sherri Scribner with Deutsche Bank.

Hi, thanks. Just thinking about your long-term goals of outgrowing the US IT market by 200 to 300 basis points. I just wanted to understand, in terms of your perspective, is that additional opportunity for share gains? How much more share opportunity is there for you, or is there largely driven by your mix of business and being better positioned in growing segments?

I would say, yes, Sherri. First of all, if you think about CDW being a $12 billion business, our addressable market is over $200 billion, so that's just in the US. Lots of upside for us relative to market share and market share opportunity, both with existing customers and with those customers that unfortunately aren't customers of CDW at this point, yet.

The second thing would be your point about the solutions business, obviously, it gives us opportunities to further penetrate into the data center and become more trusted advisors with our customers, so it really is a combination of both.

Okay, great. Thank you. And then, Ann, just quickly on the interest expense. I know you said that now your interest rate is about 5% on a blended basis, and I think you said, just wanted more clarification, but I think you said the interest rate drops in Q2. Just trying to figure out how to model it for the full year based on the $160 million to $170 million for the full year? Thanks.

Yes, I was alluding to the interest rate dropping because we've indicated that we will refinance the 8.5% no later than when they first become callable, which is in April of 2015. So it's too soon to say the amount of that drop because I don't know what the markets are going to be and what we will be able to refinance at. The two most recent refinancings we did at 5.5% and 6%, but it depends on market conditions when we do that refinancing.

Okay. Thank you.

Katy Huberty with Morgan Stanley.

Hi, it's Jerry for Katy. Just a question on the solutions versus transactional. I understand that solutions momentum is increasing going into this year and client is slowing down, but with the Common Core deadline in spring, in the spring of this year, could we see transactional stronger in the first half or would CIOs not be rushing to do upgrades?

Jerry, that's a good question. Look, we still, there's a significant number of school districts that have not deployed yet, and there is some discussion about whether they would extend the date relative to reimbursement and funding.

So I wouldn't be surprised if you saw some of the school districts extend their acquisition, especially when you think about the kind of linkage to one-to-one initiative from a digital curriculum standpoint. So I don't think we should depend on the fury that we've kind of seen to get ready. But I wouldn't be surprised if we saw school districts in the first half of the year trying to get ready for spring 2015.

Got it. And the follow-up is on the strong NetComm growth that you commented on. I assume a lot of that is related to the client refresh. Is any of that related to customers going to a hybrid model or using the cloud? Just trying to figure out if that momentum is going to continue, as well?

I think the thing about the NetComm growth is it was, it's been really consistent both before the big client refresh and through the client refresh. I think it's a function of kind of the popularity and growth in mobility inside of businesses. It's a function of the increased use of cloud computing. So there's a number of things that are driving it that are in addition to the client refresh. So that is why we would expect it to continue to be a good growth category for us.

Got it. Thank you.

Amit Daryanani with RBC Capital Markets.

Thanks a lot, good morning, guys. Two questions for me. One, maybe you could just talk a little bit more on Kelway, you have had some more time to spend with them, I'm sure. Do you think there is something structurally at Kelway that prevents the operating margins over time getting closer to what CDW has versus currently, I believe, at 2.5% to 3%?

Well, look, we have spent, obviously, additional time with Kelway. We've had three or four months of working closer with the team. And as I said, I think on the last call, we think there are learning opportunities for both sides, both operationally, go to market.

So our focus has been on the pilot that we've been operating for 18 months, we are going to continue to operate in that role, even though we're a 35% investor in Kelway. But I don't think you should be sitting here going, okay, CDW is going to increase its ownership and automatically Kelway's margins are going to dramatically increase. I think that's an unfair assumption. We do think there are lots of opportunities, though, for us to improve the efficiencies on both sides of the pond.

Fair enough. And then, if I just look at the 2015 outlook that you guys have provided of mid-teens EPS growth. I'm curious, is there any way to think about, what you think operating income dollar growth would be because as you (inaudible) some sort of deleverage and potential in buybacks that is built into the mid-teens EPS growth. So just sort of get a sense of how much of that is operating income driven versus leverage below the operating income line?

Yes, Amit, I think the way you need to think about it is we focus on EBITDA margins, and we're looking at maintaining those margins. So we would expect the EBITDA margin to be relatively consistent with the rest of the growth coming from further interest reductions, as well as stock buybacks.

Perfect. Thanks a lot, guys.

Jayson Noland with Robert Baird.

Great. Thank you.

Hey, Jayson.

Hello. Ann, a question on seasonality, you mentioned on your slide on modeling on the revenue side. Would that look normal in comparison to past years for calendar 2015, about 48%/52% first half, second half?

At this point, we're expecting relatively normal seasonality as we move through the year. Now that can, obviously, change as exogenous factors happen during the year, but right now we're looking for roughly normal seasonality.

Okay. And then a follow-up question, I think in the script, your business in Canada, FX is mentioned as a headwind. I assume that's true with Kelway to a certain extent. How do you manage a strong dollar with your business off, outside the US?

At this point, it's all translation adjustment. Canada buys in dollars and pays in dollars, and so it's translation adjustment. We did take about a 40-basis-point hit to top line growth in 2014 because of that translation adjustment.

When you look at Kelway at this point, it's a relatively de minimis part of the business. You saw the small amount that we reported in other income net, and, again, it is translation adjustment, so at this point, we're not doing any hedges.

Okay. Congrats on the success. Thanks.

Thank you.

(Operator Instructions) Anil Doradla with William Blair.

Hey, guys. Congrats on the quarter. A couple of questions. Tom, you talked about K-12, some of the education trends, but when I look at 2015, do you think this is going to be a growth business?

Yes I do. Yes, absolutely. It's just, it would be pretty hard for them to repeat the incredible growth they had in 2013 and 2014, but we do believe K-12 remains a growth business for CDW.

Great. And one of the kind of secret sauces that you've always talked about is just the culture, work culture. Can you share some attrition numbers, whether it is 2014 or during the quarter, employee attrition numbers and compare that against your competitors?

We don't share those kinds of attrition, and, quite honestly, I don't know the competitors. I just know that -- I can tell you this that it continues to be a place where people start and in many cases finish their career. And I think that speaks volumes about the work environment, and I've often said this, I think the reason CDW takes such good care of its customers is because the co-workers take such good care of each other first.

Great. All right, thanks a lot, guys.

Thank you. I'm showing no further questions. I'd like to turn the call back to Tom Richards for closing remarks.

Okay, thank you, again, to everybody for taking time out of your morning to talk about CDW. We appreciate your interest. We're very proud of 2014, and equally as excited about 2015 and the things that we're going to be able to do to help customers.

So if your company isn't taking advantage of CDW, you know where to find us. And, as always, it's Valentine's Day, go hug somebody. Thanks, everybody. See you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.