CDW Corp (CDW) 2015 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the CDW third-quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to Tom Richards, Chairman and Chief Executive Officer. Please begin.

Thank you. Good morning everyone, it's a pleasure to be with you to report CDW's third-quarter 2015 results.

Joining me in the room are Ann Ziegler, our Chief Financial Officer; Chris Leahy, our General Counsel; and Sari Macrie, our VP, Investor Relations. I will begin with a high level review of our performance and strategic progress, Ann will take you through a more detailed review of the financials and then we'll go right to your questions.

But before we begin Sari will present the Company's Safe Harbor disclosure statement.

Thank you, Tom. Good morning everyone.

Our third-quarter 2015 earnings release was distributed this morning and is available on our website, www.investor.CDW.com along with supplemental slides that you can use to follow along with us during this 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 today.

Please note that all references to growth rates or dollar amount increases in our remarks today are versus the comparable period in 2014 unless otherwise indicated. The number of selling days for the third quarter are the same in both 2015 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 website by this time tomorrow. I also want to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast without specific written permission from the Company.

So with that let me turn the call back to Tom.

Thanks, Sari. I'm pleased to report that once again CDW delivered profitable growth.

Net sales were up 7.2% with excellent profitability. Our adjusted EBITDA grew at more than twice our top line, up 16.3% and non-GAAP earnings per share increased 30.8%. On a constant currency organic basis which excludes Kelway results, net sales increased 3.6%.

Our ability to deliver this profitable growth was the result of three key drivers: our balanced portfolio of sales channels, the breadth of our product and solutions portfolio including emerging technologies and our focus on cost control while we continue to execute against our three-part strategy. Let me walk you through each one of these and share some detail about how they contributed to our performance.

First, our balanced portfolio of sales channels. As you know we have five US channels: medium and large business we call MedLar, small business, healthcare, government and education, each generating annual sales of more than $1 billion. This portfolio of unique end markets serves us well when a channel is disrupted by macro or external challenges.

The power of this diversity was clearly evident this quarter with our corporate segment growing 6.3% while public was flat. On the corporate side we had excellent performance across both MedLar which increased 6.1% and small business which increased 7.1%. Both channels grew solutions revenue more than 60% faster than transaction revenues.

Our other segment which now includes Kelway along with CDW Advanced Technology Services, ATS, and Canada increased $134 million in the quarter. ATS posted a mid-teens increase driven by field services.

Canada continued to gain share in local currency growing nearly double digits in Canadian dollars. But after currency translation it declined nearly double digits in US dollars.

Kelway contributed sales in US dollars of $138 million. Performance was excellent in government which increased 10.7% driven by balanced performance in both state and local and federal. State and local continues to benefit from addressing public safety needs while efforts by our federal team to align against new strategic programs implemented over the past couple of years helped us benefit from more normal fiscal year-end buying.

Healthcare continued to experience expected lumpiness due to ongoing industry consolidation and increased 1.5% in the quarter. The combined performance of all of these channels more than offset the impact of an 8.5% decline in our education channel.

Education results reflected two channel-specific issues. First, the pace of e-rate funding. You will recall that CDW was named on both the largest number of application requests and received the largest dollar amount of requests for category two e-rate funds which are SEC funds designated for internal connections for public schools and libraries.

On our second-quarter call in August we shared that while that was certainly good news it was not clear how the timing of approvals would impact our customers' ability to implement solutions. We also shared that as of the end of July just over 20% of the requests by our customers had been approved.

A few days prior to the call the e-rate administrator said that the intent was to issue letters for all approved funding by the third week of September. While more than 90% of all applications were approved by the end of the third quarter those applications represented less than half of the total funds requested.

We ended the third quarter with just below 50% of customer dollar request approved. This lower than anticipated funding clearly impacted education results in the third quarter.

The second factor that muted education growth was the market dynamic for k-12 Chromebooks with average selling prices down significantly in the quarter. Given our focus on profitable growth our Chromebook sales were down in a market where units were growing.

The second driver of our performance was the balance of our product portfolio. Looking at broad product categories on an organic basis excluding Kelway hardware grew 4.2%, services grew 10.3% while software declined 3% in the quarter.

As expected we continue to see faster growth from more complex, integrated solution sales. Revenues were balanced between solutions and transaction as transactional sales were flat and solution sales were up high single digits. Cloud adoption remained strong for both software as a service and infrastructure as a service with total customer spend growing significant double digits.

Because these revenues are netted down their impact is quite small in our top line but is becoming meaningful to our gross profit. In fact, year to date cloud represents nearly 5% of total gross profit.

Hardware results were fueled by strong growth in categories that support solution sales, including NetComm which was up nearly 20%. Servers were up high single digits and enterprise storage was in the low single digits.

Once again the balance of our storage portfolio with a wide offering of emerging technologies helped to more than offset declines in established products. And once again security was our fastest-growing practice area. Sales of new security products added in the past couple of years grew nearly 35% in the quarter while new flash products grew triple digits.

Together these two categories contributed nearly one-fifth of the total organic revenue growth in the quarter. Once again gross profits grew faster than software sales, up mid single digits as we booked more revenues net for both cloud-based solutions and software assurance.

Double-digit increases in software that supports solutions including security, storage and networking weren't enough to offset declines in license software and the netting down impact of software as a service. Software growth also was impacted by the absence of a large deal we spoke about last year.

Overall we delivered excellent results for the quarter driven by both our balanced channels and portfolio.

We also made excellent progress against our three strategic priorities in the quarter. First, our strategy to gain share of wallet and acquire new customers. As you recall, our acquisition of Kelway is about following our customers' needs for international IT solutions.

Kelway enables us to gain a wallet share of US-based customers with international locations as well as acquire new US-based customers who have international needs. A great example of the impact of how Kelway helps us gain share of wallet is a solution we are providing to the US-based cosmetics, fragrance and the personal care company that needed assistance with their global telephony environment. Initially, a CDW US unified communications customer they recently contracted with us to upgrade their unified communications environment in the UK and Spain.

In early 2016 we will begin implementation in Australia. The non-US hardware was procured through Kelway. CDW's best engineers and project management are overseeing design configuration and cut over for the entire project. Kelway is tackling the on-site tasks of rack and stack, training and cut over support.

Opportunities like this contributed to Kelway performance which was in line with expectations. Kelway delivered mid-single-digit top-line growth in constant currency during the quarter. We also moved full steam ahead building our integration plans to develop a seamless experience for customers on both sides of the pond.

During the quarter we continued to make strategic investments in building our brand and driving sales. In September we launched our newest integrated digital social media, print and TV campaign once again built around NBA Hall of Famer and All-Star IT guy Charles Barkley. This time Charles gets trapped in the Internet and CDW comes to his rescue.

This year's campaign features more partners than we have ever had. Nonpaid media placements highlighting the Save Barkley ad campaign so far have reached more than 3.6 million unique viewers. You can catch the television ads on NFL Monday Night Football, ESPN SportsCenter and college football as well as hear them on the radio.

You can also check out the campaign by visiting our website. And if you are so inclined you can use social media to help us rescue Charles with the hashtag #SaveBarkley.

We also made progress during the quarter on our second and third priorities to enhance our solutions and services capabilities. Services capabilities underpin our ability to deliver advanced solutions. And for us the main way we have been building these capabilities is via adding technical coworkers.

Since our IPO in 2013 we've added more than 100 North American service delivery coworkers who are primarily focused on helping deliver customer solutions. Service delivery engineers design, implement and manage solutions for our customers and they deliver managed services from our operation centers including our new Enterprise Command Center which we opened this August.

The ECC is a 24 by 7 by 365 day operation center that expands our managed services, cloud and mobility capabilities. A great example of how this will help us deliver on our value proposition is a managed cloud solution that includes mobility for a US-based sports clothing retailer with locations around the world. The customer needed a simple, easy way to implement its enhanced online presence and virtual buying experience.

Our answer: a cloud-based mobility solution that runs out of our new Enterprise Command Center. Since the customer has never offered a mobile purchasing option before, compute and storage requirements are unknown. Our solution provides burstable resources when needed for the new application to provide a consistent, positive customer experience.

And via managed services we will monitor usage and expand or shrink resources based on utilization. All aspects of the environment will be monitored and managed by CDW.

Over this three-year agreement this solution will deliver a total value of more than $400,000, a great example of the return we are generating on our ongoing investment in enhancing solutions and services capability.

While we continue to build our capabilities to deliver solutions and services we were cautious hiring this quarter. Despite a good start to the quarter the macro environment in late summer caused us to remain cautious and we held North American customer facing coworkers essentially flat with the second quarter. Given the strength we saw in September and the need to support 2016 group we turned hiring back on and currently expect to come in for the full-year close to 100 new customer facing coworkers.

Of course as we always do we will continue to monitor the marketplace and adjust our plans if we feel necessary.

I hope you can tell from my comments that this quarter's performance reinforced our confidence that we have an effective strategy in place, a strategy that serves us well when confronted with macro or channel-specific challenges and positions us for sustainable growth in the future, a strategy designed to continue our evolution into the leading IT solutions provider in North America and the UK, and most importantly a strategy that delivers both excellent profitability and strong cash flows. This confidence has led our Board to approve a 59% increase in our annual cash dividend, consistent with our capital allocation priority of achieving a dividend payout of 30% of free cash flow by year-end 2019.

Let me leave you with a few comments on our expectations for the balance of the year. You will recall on last quarter's conference call we shared our expectation for US IT market growth in 2015 to come in around 3%. There is no change to our view for the market.

And given results year to date and expectations for the fourth quarter we continue to look for 2015 organic growth to meet our annual medium-term target to outgrow the US IT market by 200 to 300 basis points on a constant currency basis. This expectation reflects three key factors. First, we expect to see continued momentum in our corporate segment; second, while the e-rate administrator indicated that they expect to fund all workable requests by the end of the year, given school is in session we do not anticipate an e-rate spending uptick over the near-term; and finally, although there is no change to our view that healthcare will return to being a growth driver given the benefit technology provides to improving outcomes, industry consolidation continues and we expect healthcare results will remain lumpy over the near-term.

Keep in mind this look forward does not include the impact of Kelway. Kelway is on track to deliver the 500 to 600 basis points of incremental top line for the second half of the year we shared with you last quarter. So no change there either.

What has changed is that as you know in October we added Dell to our portfolio of products and services, providing another great choice for our customers. While we are very enthusiastic about the addition of Dell we are also realistic in terms of its impact. When we made the announcement in mid-October we were careful to note that we do not expect a material impact on 2015 results.

The reason is twofold. First, we have done business with Dell prior to this announcement with limited SKUs in the federal channel as well as both SonicWALL and Wyse. So revenues from this broader relationship will not be entirely incremental.

And second ramping up the build cycle to support a partner of Dell's magnitude is not a simple undertaking. Our number one priority is to ensure that we provide the same excellent sales and service experience to our customers that we do with all of our partners. To accomplish this requires that we have the right internal systems, tools and processes and that will take a little time, time to train the sellers and solution architects on Dell products solutions and systems, time to ramp up the marketing activity including digital outreach sales enablement tools and marketing collateral, time to hire both incremental sellers and backbone to support Dell transactions, and finally importantly time to align our systems and processes including data flows via EDI, lead sharing and executing our customer specific requests.

As we do with all of our strategic initiatives we will execute this deliberately and thoughtfully. So for now we don't expect any material impact on 2015 results from Dell.

Let's turn briefly to what we expect for 2016. We're in the middle of our planning process and as we always do we will provide our 2016 outlook on our year-end conference call.

In the meantime we can share that Kelway will impact top-line growth incrementally. Until we anniversary the 100% acquisition in August 2016 we currently expect it to grow in line with overall CDW. And given the pace of our ramp we currently expect incremental annual growth from the Dell partnership to add roughly 150 basis points of annual growth in 2016.

This is on top of our medium-term target of 200 to 300 basis points over the US IT market which we expect to continue to grow around 3%. More to come on the fourth-quarter conference call in early 2016.

With that, let me turn it over to Ann who will share more detail on our financial performance and capital action we took today. Ann?

Thanks, Tom. Good morning everyone. As Tom indicated our third-quarter financial results reflect the combined power of our balanced portfolio of channels, our breadth of product offerings particularly our ability to bring innovative emerging technologies to our customers and our focus on profitable growth. Our results also reflect the progress we are making against our financial strategy to drive strong cash flow, deliver double-digit earnings growth and return cash to our shareholders.

Let me begin with our P&L. In case you have access to the slides posted online it will be helpful to follow along. I am on slide 8.

Consolidated top-line growth was strong this quarter with net sales of $3.5 billion, 7.2% higher than last year on both the reported and average daily sales basis including two months of Kelway. Average daily sales were $54.7 million.

While sales in Canadian dollars remain a relatively small portion of our total revenue, less than 5%, the strengthening US dollar continued to depress organic net sales. Currency shaved approximately 60 basis points off of organic growth in the quarter, 40 basis points more than last year and 10 basis points higher than last quarter.

On a constant currency basis organic sales were 3.6% higher than last year. On an organic average daily sales basis sequential sales were up 1.5% versus Q2 2015 which is below recent Q3 seasonality.

As you remember Q2 was well above recent normal seasonality, up 18.4% sequentially. Gross profit for the quarter increased 11.8% to $567.2 million. Gross margin was 16.2%, up 10 basis points versus Q2.

On a year-over-year basis gross margin was up 70 basis points. Given its higher mix of solution and services Kelway added approximately 10 basis points to gross margin. More than half of the total gross margin improvement reflect the combined impact of a higher mix of revenues recorded at 100% gross margin such as our net service contract revenue and higher partner funding.

Consolidated reported SG&A including advertising expense was $362.6 million, up 12.4%. Consolidated adjusted SG&A including advertising was $287.4 million, an increase of 8.1%. This reflected the impact of consolidating two months of incremental Kelway expenses, increased sales payroll consistent with the growth in solution-related sales and higher gross profit as well as increased advertising expense which was 10.6% above last year as we continued to invest in the business.

As a reminder Kelway sales compensation as a percentage of sales runs higher than our North American operations given their higher mix of solutions and services revenues.

We ended the quarter with approximately 7,300 North American coworkers, up roughly 75 coworkers since the end of 2014. Consolidated coworkers including Kelway were approximately 8,300, up over 1,000 since the third quarter of 2014.

As you can see on the next slide, slide 9, adjusted SG&A for the quarter excludes $7.8 million of non-cash equity compensation, $7 million of acquisition and integration costs and $2 million of historical retention costs and other expenses. Our non-cash equity compensation increased year over year primarily due to ongoing annual long-term performance awards granted in Q1 and incremental Kelway awards.

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. We retained a significant portion of this quarter's gross profit improvement and converted top-line growth of just over 7% to adjusted EBITDA growth of 16.3% to $282.1 million. This translates to an adjusted EBITDA margin of 8.1%, up 70 basis points over last year.

Let's look at the rest of the P&L. On slide 10 interest expense was 23.2% lower than last year at $38.5 million, reflecting reductions driven by repayment and refinancing activities completed in 2014 and Q1 of this year. Our effective tax rate was 38.7% versus 37.9% in Q3 2014.

On a GAAP basis we earned $150.9 million of net income. Our non-GAAP net income which better reflects our operating performance was $143.2 million in the quarter, up 29.3% over last year.

As you can see on slide 11, non-GAAP net income reflects after-tax add-backs in four general buckets: the ongoing amortization of purchased intangibles, non-cash equity compensation, acquisition and integration costs and other nonrecurring income or expenses. This quarter our non-GAAP net income also adjusts for a pretax gain on our Kelway minority investment of $98.1 million. This gain represents the required accounting treatment of our previously held 35% minority investment to reflect the fair value assessment at the 100% ownership level.

With Q3 weighted average diluted shares outstanding of $171 million we delivered $0.84 of non-GAAP net income per share, up 30.8% over the prior year. As anticipated Kelway contributed roughly $0.03.

During the quarter we repurchased 2.7 million shares at an average price of $38.19 per share for a total of $101.6 million under our previously announced repurchase program. 2.25 million shares were repurchased in the most recent block transaction by our sponsors and 411,000 shares were repurchased on the open market. Approximately 1.6 million of these shares were repurchased to offset the dilution from the issuance of shares in connection with the Kelway transaction.

Turning to the first nine months of the year on slide 12, consolidated net sales were $9.6 billion, an increase of 6% on both a recorded and average daily sales basis as average daily sales grew to $50.1 million. On a constant currency basis organic net sales were up 5.1%. Consolidated gross profit during the first nine months of 2015 was $1.6 billion, up 9% and gross profit margin was 16.3%, up 50 basis points from last year.

SG&A including advertising expense increased $75.4 million or 8.2%. Consolidated adjusted EBITDA was $761 million, 11.3% higher than last year. Non-GAAP net income for the first nine months of 2015 was $379.8 million versus $307.7 million in 2014, up 23.4% driven by our higher operating results and lower interest expenses which were down $27.6 million.

Turning to our consolidated balance sheet on slide 13, we finished the quarter with $3.17 billion of net debt, $348.8 million higher than the beginning of the year. This increase reflects the use of cash and consolidation of net debt for the Kelway acquisition. Our cash plus revolver availability was $1 billion.

As expected net debt to trailing 12-month EBITDA at the end of Q3 was just above our target range of 3.1 times, 0.1 turn less than Q3 2014. The weighted average interest rate on outstanding debt is 4.4%.

In this potentially increasing interest rate environment I'd like to remind you that our $1.5 billion floating-rate term loan facility has 1% LIBOR floor. And we have in place $1.4 billion notional amount of 2% interest rate cap which don't expire until Q1 of 2017.

With the exception of a $94 million facility at Kelway the remainder of our outstanding debt is fixed rate. So approximately 94% 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 cost.

Cash taxes paid in the quarter were $94.6 million. Cash interest paid was $44 million, $17 million higher than Q3 2014. This primarily reflects a change in interest payment timing as we replaced our 8% notes that we previously paid semiannually in April and October with 5% notes on which we pay interest in March and September.

Free cash flow which we calculate as operating cash flow plus the net change in our flooring agreement less capital expenditures was $156.2 million for the quarter, $7 million more than last year's $149.3 million. Our year-to-date free cash flow was $273.6 million, down $86 million from last year, reflecting the ongoing impact of the roughly $100 million of anticipated Q1 2015 cash flows that were recorded in Q4 of 2014 which we have discussed in the past.

As you can see on slide 14, we maintain strong rolling three-month working capital metrics. For the quarter our cash conversion cycle was 18 days which was down compared to last year's third quarter. While very pleased with this result we don't expect to sustain this level and look for our cash conversion cycle to be within our target range of the low to mid 20s for the remainder of the year.

Let me provide now a few additional comments for those of you modeling our 2015 results. I am on slide 15.

Starting with revenue, as Tom mentioned we expect organic constant currency growth to come in for the full-year within our annual medium-term target range of 200 to 300 basis points over the US IT market growth which we continue to expect to be about 3%. Given our current expectations for Q4 we continue to expect to deliver organic seasonality at our past three-year average first-half, second-half split of 48% to 52%. In addition we expect Kelway's second-half growth contribution to be in line with our initial 500 to 600 basis point view, with Kelway delivering roughly 700 basis points of growth year over year in Q4.

Remember Q3 reflected two months of Kelway revenues. The fourth quarter will have Kelway in all three months. Also note that while Kelway like Canada is impacted by currency because we won't have them in our prior-year period until we anniversary the full acquisition our P&L won't reflect any year-over-year translation impact.

On the expense side we expect our adjusted SG&A to increase at a rate higher than net sales in the fourth quarter driven by ongoing mix into solutions, incremental Kelway SG&A and our continued investment in the business. This brings our adjusted EBITDA margin for the fourth quarter of the year at or slightly below the low end of our mid-7% annual target range. That said given year-to-date performance we now expect our full-year margin to be slightly above the high end of our mid-7% target range.

Moving down the P&L including Kelway we expect full-year book interest to be in the range of $160 million and our effective tax rate to be between 37% and 38%. For earnings we continue to expect Kelway to contribute between $0.06 and $0.08 per share on a non-GAAP basis for the second half of 2015. With just under $0.03 contributed this quarter, that leaves roughly a nickel for Q4.

This assumes a currency rate of roughly $1.55 to the British Pound Remember this is non-GAAP earnings per share, so it doesn't include amortization of purchased intangibles or acquisition and integration costs or one-time gains and expenses. Given first nine months results for full-year 2015, we continue to expect to see our mid-teens non-GAAP earnings per share growth target, delivering growth in the low 20s.

Moving to cash flow on slide 16 for full-year 2015 we continue to expect a cash tax rate of 39% to be applied to pretax book income before items related to the Kelway transaction and acquisition-related intangibles amortization. In addition we will pay $20 million to $21 million related to the cancellation of debt income we incurred in 2009.

We expect to deliver full-year cash flow within our target of 2.5% to 3% of net sales. Adjusting for the pull forward of Q1 cash flow into Q4 2014, normalized free cash flow as a percentage of net sales would exceed this target.

Note that while Kelway's cash flow is higher in the back half of the calendar year our organic CDW cash flow tends to decrease sequentially in the fourth quarter due to working capital requirements. And finally we expect our cash interest to be in the range of approximately $153 million to $155 million for the full year.

This takes us to our capital allocation priorities on slide 17. There is no change to our commitment to revisit our dividends annually. Today's 59% dividend increase is consistent with our target of achieving a 30% payout of free cash flow in dividends over the next four years.

There is no change to our net leverage ratio target. We expect to end the year at the high-end of our target of 2.5 to 3 times.

And while we will continue to evaluate strategic opportunities our focus will be on creating a seamless customer experience for our US and UK customers for some time to come. So while strategic acquisitions remain a priority we do not anticipate any near-term acquisitions.

Finally there is also no change to our intent to continue to make share repurchases under our existing authorization either alongside our sponsors or in the open market.

Before we turn it over to questions let me share a few thoughts on our medium-term targets on slide 18. There is no change to our 2016 to 2018 annual medium-term target. We currently expect the UK market to grow roughly in line with to slightly below the North American market.

As acquisitions are one of the ways we intend to grow earnings per share faster than revenue there is no change to our low double-digit earnings per share growth target. That said, for 2016 we will have the benefit of incremental Kelway sales and earnings for seven months of the year and an incremental contribution from Dell, so we do expect to exceed these targets.

We currently expect non-GAAP EPS to grow in the low teens for 2016. When we release year-end results we will provide more on our expectations for 2016.

That concludes the financial summary. Let's go ahead and open it up for questions.

Can we please ask each of you to please limit your questions to one question and one follow-up. Operator, can you please provide the instructions for asking a question?

(Operator Instructions) Sherri Scribner, Deutsche Bank.

Hi, thank you. Tom, you a mentioned some additional costs related to ramping the Dell business. Can you give us some sense of how much additional cost that will add to the operating expenses and how do expect that to ramp through 2016?

Good morning, Sherri. First of all thank you. Yes, we're not going to be that specific truthfully because it would be hard to be precise and I don't want to lead you down a bad path.

I would tell you that there's going to be a meaningful addition of coworkers. And let me just give you the category so you've got coworkers, you have marketing investment, you've got systems, all of those kinds of things.

But I will say that despite all of that we obviously think the upside is pretty meaningful as I said. And we plan to deliver consistent with the targets we've said to people about adjusted EBITDA. So you should not expect it to be but I will call an aggregate negative relative to the targets we've talked about for profitability.

Okay. That makes sense.

Then thinking about the education segment you mentioned sort of a stall in e-rates and not everyone has been approved yet. Would you expect that to resolve itself in 2016? I know it's a bit early but trying to get a sense of that market.

I hope so, Sherri. I hope so. When I think about the length of this process and all the work that's gone into winning many of those awards if you will from a CDW perspective and the time invested I think it's going to be a function of not only when they finally get what I'll call completed but then we have the window of opportunity to implement the solutions in the school districts I think that will be probably the biggest gauge.

Thank you.

Brian Alexander, Raymond James.

Thanks and good morning. On the Dell contribution, Tom, it sounds like this might only impact 2016 revenue by about $200 million for some of the reasons you talked about.

How big has Dell been for CDW in the past in terms of total revenue with federal and Wyse, etc.? And is there any reason why CDW wouldn't represent a similar market share of Dell as it does for other large vendors like HP or Cisco?

Because I think if that happens this could be more than a $1 billion opportunity over time for CDW. And I think Michael Dell actually stated publicly that CDW could be billions of dollars to Dell, so maybe just talk about the longer-term opportunity. Thanks.

Okay, Brian. First of all good morning and second of all I hope I answer all those sub questions that are in there. So I know you'll call me on it if I don't.

So let me start down the path and say if we do think obviously let me start with the big picture. I think it's reasonable to assume over some period of time and I don't know that I can tell you Brian exactly when that is when we'll be at full production, and it's reasonable to assume that for a large partner that we could take a meaningful part of their channel revenue.

So I think all of those are fair assumptions. Your math is the same as ours relative to what 150 basis points will probably mean to us next year.

But I can tell you that the business we did have with Dell which really was a couple federal contracts and SKUs and SonicWALL and Wyse was in the $120 million, $130 million, $140 million, $150 million range. So that will give you one of the reasons why it's not a total incremental lift when you think about next year which is some of the early press I think people didn't appreciate that and they were running to these numbers that didn't really understand that obviously you knew a little bit about that.

I don't know, did I answer most of those questions? If I missed one, go ahead and ask it again.

Just longer term can this be a business that you think is in excess of $1 billion? I know it's going to take time but trying to think longer term.

Well it depends how long long term is for me on this question. But as you know we have some other large partners that are $1 billion. I love the fact that Michael is so excited about CDW and the prospects.

But I'd be really hesitant to say, yes, I see it being $1 billion by some timeframe because there's just so many things. Let me just suffice to say we did it with the expectation that is going to help us meet a set of customers' needs that we've not been able to address in the past. And we think it's going to have a meaningful impact on CDW.

And then just the follow-up on Kelway. If I look at their productivity, revenue per employee is about $900,000 per year and I think CDW has been basically 2X that.

So how is it that Kelway's operating margin profile is comparable to CDW given that gap in revenue per employee? Is that just the richer mix of offerings that they have or what else would explain that?

Bingo. It is -- they have a much higher, not much higher, they have a higher mix of solutions which trickles itself all the way down through the business from a profitability perspective and that drives the bottom-line number you alluded to. So you're right on target.

Okay, thanks.

Matt Sheerin, Stifel.

Yes, thanks and good morning. Question just regarding your comment on the education market.

I appreciate why obviously the revenue was down year over year for the reasons you stated. But on the issue of lower sales due to Chromebook and ASP declines there, is there can you quantify what the gap was there in terms of lost revenue or revenue opportunities that you walked away from? And as you go forward is that sort of the new normal where you're being more selective on lower margin, lower returns type of products?

Well, Matt, I would say it's not the new normal, it is the normal for CDW to if you think about we've talked about how people are focused here and profitable growth has always been the guide so to speak. So I think it's normal if you think about what happens when you see a market and the ASPs drop in the meaningful way they did and the margin kind of comes out of it, that doesn't mean you're never going to go after that kind of business.

There may be strategic reasons. But as a general course it's just not worth it to chase those kind of deals for sheer purpose of revenue. And that's not the way we kind of focus on CDW.

Now going forward, I think you're always going to be looking at ways to cut the cost so that you can find ways to make those kind of sales and do it in a profitable way and I think as we've always done in the past we will continue to look for those. But we're just not going to be in it for the revenue chase would be the way I'd ask you to think about it.

Got it. Okay. Then just another question on Dell if I can.

It looks like Kelway has had a pretty good relationship with Dell there. If you could comment on that?

And then also you looked talking about incremental revenue opportunities next year. But my question is are you looking at any potential share shifts against your existing vendor base? And how are those conversations playing out in terms of your relationship with your top vendors and top competitors to Dell?

Right. So it's another one of those multiple question questions. So let me see.

I can comment on your first question which I think was the relationship between Dell and Kelway. It's been a good relationship, very productive. And I think it's a great example of how when Dell's in the lineup with other ones they have great relationships with the other partners.

It's all about focusing on the customer. So I would tell you that one of the things that we did here when we thought about this was, and the sales guys weren't necessarily in love with this, but we added incremental targets to people's books so to speak so that you wouldn't have people just doing share shift to make numbers.

I think we've shared that with everybody. I think the second thing we did, Matt, was we were very transparent with people. We talked to people, we explained the fact that this was driven by the number of times where a customer may have standardized on two different technologies and we have to walk away from half the business.

And that's not consistent with CDW. So I think on the whole and on the average people were appreciated our transparency. They appreciated the fact that we added the incremental goaling to people to drive the behavior you'd want which is not share shift but grow the business.

Okay, fair enough. Thanks a lot, Tom.

Amit Daryanani, RBC Capital Markets.

Thanks a lot. Good morning guys. I will start not with the Dell question.

Could you just talk about what happened with your ARs in the quarter? It was up about $150 million. It seems like a big uptick versus what we've seen seasonally in the past, so was it just more back-end loaded quarter, could you maybe just walk through what happened there?

The thing you have to be careful about when you look at the components of our cash conversion cycle as opposed to the actual cash conversion cycle or working capital in total. One of the other things I mentioned was the impact of net service contract revenue on our gross margin.

When we do things that are netted down so to speak and we go through this in our 10-Q the revenues for AR are in many cases gross. Because we're collecting the gross amount for the customer even though we're only recognizing the netted down amount in our GAAP revenue.

So as you mix in two items that net down it has a negative impact on your accounts receivable. It has a positive impact on your DPO, so those two things tend to offset. So if you look at the entire working capital or cash conversion cycle it nets out but if you look at individual components it distorts the individual components.

Got it. That's helpful.

And then if I just get back to the Dell question as well, the way you guys are describing should we think that maybe the near-term for 2016 you could see some sort of margin headwind? Because you add a lot of expenses but the revenues don't show up and then over time it sort of normalizes? Is that the right way to think about it?

And then sort of Brian's take this could be a $1 billion business over time if it becomes that do you think it's going to be all organic? Or would there be some cannibalization away from your other larger vendors potentially?

Let me answer the first question. Look, I kind of reinforce the notion we don't anticipate not meeting the targets you guys have heard from us from an adjusted EBITDA perspective.

So that would suggest that we think the growth that we'll get both in revenue and profitability will offset the investment as we move forward. And the second thing, I mean I said we're doing this because we think it's a growth catalyst for CDW that's driven around customers. I think it can be a meaningful part of the business and we've tried to structure it so that there isn't cannibalization.

Now does this suggest that may never happen? Look, I'm not going to be that prescriptive and say never but I do believe that we've done this in a way that it should be focused on additional growth to CDW.

Perfect, thank you guys.

Osten Bernardez, Cross Research.

Yes, good morning. Thanks for take my question.

I just had a question with respect to the cadence of OpEx as we consider the addition of Dell. And I understand that the intention is to meet your stated goals for the year of looking into 2016.

But I guess should we, how long do you think it would take for you to meet that goal? Will there be -- I'm assuming there will be some startup costs associated with adding Dell on as a partner?

You know, I did say in my comments that we do expect SG&A to grow more rapidly than revenues in Q4, so you'll see that in Q4. Remember our medium-term targets as we start thinking about 2016 our medium-term targets are annual targets and we have from time to time a little bit of lumpiness in the quarter in terms of SG&A.

Remember in particular Q1. Q1 declines on revenue basis in general sequentially from Q4 and we carry the SG&A over. So you generally see SG&A being a higher percentage in Q1 and that tends to normalize as you move sequentially through the year.

And so again there is no change to our medium-term targets. And beyond Q4 this year I don't think we're pointing to any material change to the trends in the business in terms of how SG&A flows through.

Got it. And then secondly when I look at the business and how you were able to grow your solution sales much rapidly than your transactional business for the quarter, how do we think about or how are you thinking about the mix of that business as you look ahead?

Are you in a place where you believe you can better predict where solution sales will end up on a relative basis looking into 2016?

No, I think a lot of it starts with what's important to customers and what customers feel like they need to get addressed. Some of what you're seeing this year is the function of the focus they had on client devices and transactional products last year. I think we actually talked about the way to think about this they have budgets and when they have priorities that drive us spend, like last year was a lot of the client refresh, then solution projects get pushed out and then when you get a new year you have the ability to have what I'll call the balance.

We love the balance we have on our business between transaction and solution products. It gives us the ability to constantly be in the mode of helping customers. And as you heard me say in my formal comments, we're in the 52%, 48% perfect balance.

And as we think about going forward next year, we've continued to invest in our solutions business as you've heard me talk about whether it's in the term of coworkers, in the term of the ECC that I mentioned. And so we would continue to expect to see our solutions business growing at a good clip going forward.

Thank you.

Katy Huberty, Morgan Stanley.

Yes, thanks. Good morning. If you achieved your target of growing 200 to 300 basis points above market it suggests the market was flattish in the third quarter, so I just wonder how that impacts your view of market growth going into the fourth quarter and next year?

Well first, Katy, good morning. Second that's an annual number that we try to benchmark on the 200 to 300 basis points. It does jump around obviously.

And as you know there are all kind of mixed signals going on right now about the economy. And on one hand you read the facts about GDP was readjusted to what like 1% or something in the quarter. And then I saw a survey by CIOs that said they had back-end funding available.

So we're just kind of going on the operating assumption that it's going to be the same kind of growth into the last part of the year that we've seen to this part. Would I love it to be more?

No one would be more happy than me. But I think from an assumption standpoint the 2% to 3%, or excuse me, the 3% growth is about what we expect.

Okay. Got it.

And then over the last month the number of companies, Rackspace, Teradata, HP, Oracle have sort of capitulated and partnered with AWS. Any updated thoughts as to whether that could be a sales channel Amazon, Microsoft, Azure over time or is the opportunity still around consulting and helping companies transition to cloud with more of a direct relationship with the customer?

No, we've got a really meaningful Azure practice today and growing at a really exciting clip. So I think that is part of our strategy long term and while we don't have a formal relationship with AWS today we have ways with other partners. If that's something that's important to a customer we can help them there.

But I think your instincts are correct. As I alluded to the kind of growth numbers we're seeing in our cloud business, Katy, is very much driven by infrastructure as a service. And that is right along the lines of the Azure question you asked.

Great, thank you.

Jayson Noland, Robert Baird.

Okay great. Thank you good morning.

I wanted to ask on the hiring pause in North America, your corporate numbers look good but you must have seen something in the quarter. Was it slippage or smaller deal sizes? What made you rein in hiring?

No, it was a lumpy, my favorite economic term, it was a lumpy quarter from a growth perspective. And we saw in August it felt like a pause. And I don't know if it was just CDW or a bigger economic issue and that's really what caused us to say you know what, we've got existing capacity.

This is not talking about Dell and Kelway and that. This is kind of on a pure organic basis. So we're going to just hold where we are.

But then we did see kind of a nice come back in September and dripping into October, so felt pretty good about turning on the faucet again so to speak. And that's why I'm pretty optimistic we're going to be able to get close to that 100-plus customer facing coworkers that I've challenged the sales executives to deliver.

Okay, that sounds good and makes sense. I wanted to follow up on the solutions business, so strong and more than offsetting some softness in transactions.

But specifically the drivers there, it sounds like security and emerging storage were strong. Could you detail a little more what's going well in solutions and why it's expected to continue?

Yes. So if you think about I'll talk about the high-level category. So NetComm, which was had a really strong quarter and I think that is in part driven by security as people upgrade what I'll call the physical part of their security infrastructure. I think that had a lot to do with the NetComm growth.

We continue to have good growth in servers and storage in the mid to high single digits. I think some of the server growth is by people as we had some we had a program focused on the expiration of 2003 last year.

I think when you're engaged in those kind of discussions, whether the customer makes a decision right then or you plant the seed for some future kind of upgrade we are seeing interesting enough in the server space a lot of people taking advantage of upgrading with options whether it's adding hardware or memory that helps drive some of that growth which means that some of the software investment people made in virtualizing and creating of incremental capacity is now being consumed. So that's all kind of goodness.

And in the storage space what I'll call emerging technology people whether it's flash or if you consider CI part of that, those have been great growth engines for us and I think suggests that customers are always on this track to look for more efficient ways to manage the exponential growth in data that just is the nature of the world we live in would be the areas I would tell you. I also don't want to miss the constant double-digit growth in our services business which is an important part of the solutions story. And that's been a pretty Steady Eddie double-digit growth business for us and that's an important part of why solutions has continued to grow.

Thanks a lot, Tom.

There are no further questions in the queue at this time. I will turn the call back over for closing remarks.

Okay. Thank you again to everybody for taking the time to be with us today and for your interest in CDW. And I will leave you with this thought.

It's Thanksgiving time, so go hug a turkey. They need it.

All right, thanks everybody. See you.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.