CDW Corp (CDW) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, welcome to the CDW fourth-quarter and full-year 2015 earnings conference call.

(Operator Instructions).

As a reminder, today's call is being recorded.

I would now like to turn the conference over to Tom Richards, Chairman and CEO.

Sir, you may begin.

Thank you, Shannon.

Good morning, everyone, and thank you for joining us today to discuss CDW's fourth-quarter and full-year 2015 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 will begin our call with an overview of our full-year and fourth-quarter performance and share some thoughts on our strategic progress and expectations for 2016.

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 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 full-year 2015 earnings release was distributed this morning and is available on our website, investor.

CDW.com, along with supplemental slides that you can use to follow along with us during the call.

I would 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 our Form 8-K, which 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 in the Form 8-K we furnished to the SEC today.

Please note that that all references to growth rates or dollar amount increases in our remarks today are versus the comparable period in 2014 unless otherwise indicated.

In addition, all references to growth rates for hardware product, software and services today represent organic net sales only and do not include the results from Kelway.

The number of selling days for the fourth quarter and full year are the same in both 2015 and 2014, so there is no difference in growth rates for average daily sales and reported sales for either period.

A replay of this webcast will be posted to our website by this time tomorrow.

I would also like to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast without specific written permission from the Company.

And with that, let me turn the call back to Tom.

Thanks, Sari.

2015 was a year of both strong financial performance and strategic progress.

For the year we delivered a net sales increase of 7.6% with excellent profitability.

Adjusted EBITDA increased 12.3% and non-GAAP earnings per share increased 23.6%.

On a constant currency organic basis, which excludes results from our August 2015 acquisition of Kelway, net sales increased 5.3%.

Our performance in 2015 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 briefly walk through each of these and how they contributed to performance.

First, the power of our balanced portfolio of five US channels, each with over $1 billion in annual net sales.

In 2015 we had balanced performance across our two segments with both Corporate and Public increasing 5%.

MedLar and Small Business each delivered mid-single-digit growth.

On our Public side strong results from our Government Business, both from Federal and State and Local, offset flat sales in Education and lumpiness in Healthcare.

On a constant currency basis Canada grew mid-single-digits.

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.

As you will recall, in 2014 we had strong client device demand from both XP expiration driven PC refresh and Common Core curriculum digital testing requirements.

That led to client device sales of nearly 6 million notebooks and desktops which drove strong transaction growth.

This year solutions grew more rapidly than transactions, continuing the acceleration we saw in the second half of 2014.

With nearly double-digit increase for the year solutions represented a more typical 50-50 split, up from the 47% they represented in 2014.

This improved mix drove a higher gross margin.

And that leads to the third element of our business model that drove performance this past year, our variable cost structure and focus on cost control.

Between gross profits growing faster than net sales, our ongoing focus on cost control and our conservative approach to hiring we delivered an adjusted EBITDA margin for the year above our medium-term annual target.

Interest expense reductions combined with share repurchases helped leverage our 12% increase in adjusted EBITDA to a 24% increase in non-GAAP EPS.

These excellent results would not have been possible without the efforts of our dedicated and talented team of approximately 8,500 coworkers, including the nearly 1,000 new Kelway coworkers who joined us in August.

CDW coworkers are a true source of advantage in a highly competitive market and are a key reason why our business model was successful in delivering industry-leading performance year after year.

Let me take briefly a second to turn to fourth-quarter performance.

Net sales were up 12.1% and we delivered excellent profitability.

Adjusted EBITDA increased 15.1% and non-GAAP earnings per share increased 23.3%.

On an organic constant currency basis net sales increased 5.8% as currency shaved about 70 basis points off reported results.

Corporate increased 3.9% with Small Business up 5% and MedLar up 3.7%.

Public increased 9.2% led by Government's 16.5% increase.

This reflected both continued strong Federal results and excellent State and Local growth.

As expected, Healthcare was lumpy posting a nice rebound in the quarter, up 10.2%.

Education was down just over 1%.

Higher Ed declined mid-single-digits reflecting ongoing state budget issues.

K-12 posted flat results as lower client device sales were offset by E-Rate driven NetComm spend.

Our Other category more than doubled in the quarter reflecting the combined results of Kelway, Canada and Advanced Technology Services.

Kelway delivered results in line with our expectations contributing roughly 700 basis points to our consolidated fourth-quarter growth.

Sales were flat in local currency despite a challenging macro environment and last year's 20% plus organic growth.

Canadian sales were also flat in local currency as slumping oil prices drove lower sales in western territories which represent roughly a quarter of our Canadian sales.

Strong solutions activity helped drive high-single-digit growth in our Advanced Technology Services business.

Continuing the trend we saw earlier in the year in the US, solutions picked up further momentum in the quarter, increasing low teens, and more than offset flat transaction sales.

Hardware increased 4% driven by solution categories including another quarter of nearly 20% growth in NetComm and high-single-digit growth in servers.

As expected, desktops declined.

Notebooks and mobile devices were down slightly in the quarter as double-digit growth in Corporate was more than offset by declines in our Public segment.

Our balanced portfolio helped deliver solid storage results.

Storage increased mid-single-digits.

Excluding emerging technology storage would have declined high-single-digits.

Flash increased triple-digits.

Software delivered an excellent quarter, up 11% driven by security and network management.

This strong performance more than offset the ongoing impact of a higher portion of revenues from SaaS sales and net service contract revenue, which are recorded at 100% gross margin and are netted down.

Cloud adoption remained strong in the quarter for both Software-as-a-Service and Infrastructure-as-a-Service with customer spend increasing significant double-digits.

So as you can see, 2015 was a year of excellent financial performance.

It was also a year of excellent strategic progress.

For CDW everything we too 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 the limited IT resources and the ever increasing pace of IT change they need help deciding what path to take and, most importantly, they need help implementing the best solution.

Our three-part strategy is designed to make sure that they turn to us as their trusted advisor and extension of their IT resources.

In 2015 we made progress against all three of our strategies.

Our first strategy is to gain share of wallet and acquire new customers.

In 2015 we added international capabilities through our acquisition of Kelway.

Kelway enables us to better serve existing customers with multinational needs and add new customers we may not have been able to serve in the past.

Integration is moving along as planned and we are seeing cross national business build.

To further this, next quarter we will have an exchange of sales leaders with a senior leader from CDW US moving to London and one from Kelway coming to the United States.

In October, to provide greater choice to our customers, we added Dell to our North American portfolio of products and services.

As we shared last quarter, bringing on a partner of Dell's size requires significant work to ensure we deliver the same sales and customer experience we provide for all of our partners.

This work is underway and our ramp program to bring them fully on board is on plan.

And throughout the year to help customers and prospects understand the full breadth of our offerings, we hosted over 1,700 in-depth customer briefings, including site visits and tech seminars, and maintained our ongoing drumbeat to optimize our sellers' books and enable them to sell more effectively.

We made excellent progress against our first strategy in 2015.

Though final market numbers are not yet available, given our performance we estimate we grew faster than the US IT market by 200 to 300 basis points on an organic constant currency basis.

Our second strategy is to continue to enhance our ability to deliver high-growth integrated solutions.

This is vital to our ability to stay relevant to our customers and requires that we invest the right resources and capabilities at the right time.

In fact, it is not prudent for us to invest too far in front of adoption.

Over the years we have learned how to cost effectively enter new solution areas, build a beachhead and then leverage our success across key verticals.

A great example of this is how we are moving forward with the Internet of Things.

In 2015 we launched a pilot IoT practice with a partner funded investment in Solution Architects.

This pilot resulted in an innovative solution for a food manufacturer in the Midwest that wanted to optimize its production processes and add new factory capabilities and strengthen quality control.

Our IoT solution connected an array of devices sensors and systems throughout the production process.

With real-time analytics the customer can streamline production, improve inventory management and quality control and increase security and operations.

We are now leveraging our success from this engagement with other manufacturing customers and we intend to move into additional verticals.

Like so many of the innovations in technology, the technology that drives the Internet of Things isn't new; the way it is integrated and the software layered on top is.

We estimate that today we offer more than 85% of the components required to implement a full Internet of Things solution.

What is exciting for us is that in the 85% we provide are solutions where we have a long history of helping customers harness the power of IT like networking and security.

In 2015 we continued to enhance our capabilities in security, which not surprisingly is one of our fastest-growing solution areas.

In addition to launching our new CDW Threat Check Version 2.0 we added several fast-growing security partners during the year, partners that are growing at triple-digit rates.

To support our cloud business we deployed a proprietary cloud provisioning platform that automates the fulfillment of select cloud services, as well as provides customers with additional online purchase and service management capabilities.

Staying ahead of the curve with new and innovative solutions for our customers remains a key priority for us.

Another key priority for us is our third strategy, to expand our service capabilities.

In 2015 we opened another market and now have technical specialists, service delivery and sales coworkers in more than 20 major US metro markets.

These markets are supported by a national traveling team and a nationwide partnership of OEMs and product partners and local service providers across the country.

We also opened our new 24x7 Level I and Level II Enterprise Command Center that operates and manages customer IT infrastructure remotely.

To help ensure we have a strong pool of technical resources in 2015, we expanded our associate engineering, or our ACE program, to 85 coworkers including hot areas like information security.

ACE is a true differentiator in our space as we bring on lower-cost engineers and train them in the CDW way.

Expanded service delivery capabilities underpin our first two strategies, to capture market share and expand our solutions capabilities by enabling us to deliver end-to-end solutions.

Our sellers develop and manage the customer relationships, identify the opportunities and bring the right combination of products and services to solve a customer problem.

Our specialists work with the customers and partners to whiteboard the design, create a bill of materials for products and services required and draft the statement of work for the services.

And our professional services and service delivery engineers install and maintain the solution.

All of these workers that I've expressed are customer facing.

So you can see that investing in customer facing coworkers is vital to our ongoing success.

But just as we have built our knowledge about when to enter new solution areas, we have built our knowledge about when to calibrate our hiring.

As you recall, we were conservative in our hiring for the first three quarters of the year and instead focused on absorbing the more than 150 new customer facing coworkers we added in 2014.

You will also recall that to prepare for expected market share gains and incremental Dell revenues in 2016, we reignited hiring in November.

Given excellent recruiting success we ended up the year with more than 165 new customer facing coworkers, in line with our initial plan to add between 150 and 200.

We like where this puts us given the uncertainty in the economy.

Having these new hires on board gives us the flexibility to either absorb the capacity we have or add as the year moves along.

We currently look to add between 50 and 75 new customer facing coworkers in 2016.

But as always we will closely monitor market conditions and adjust as appropriate.

Let me close with a few thoughts about what we see for the demand picture in 2016.

With 2014 client device headwind behind us we expect continued balanced growth across solutions and transactions.

In addition, we expect to benefit from ongoing success in Government from both public safety at the State and Local level and Federal program alignment.

On the Education side we expect more normal spending now that we have overcome 2014's headwinds and remaining 2015 E-Rate funds are spent and new 2016 funds come online in the back half of the year.

We are optimistic that state budget issues will get resolved.

Healthcare is expected to remain lumpy with ongoing pressure on sales and profitability from industry consolidation.

With the addition of Kelway and Dell to our portfolio we look for Corporate to continue to build on its strong 2015 performance.

Our current view of US economic growth has us looking for 2% to 3% growth for the US IT market with a slow ramp through the year.

As you know, we hold ourselves accountable to outperform the market and continue to target organic constant currency growth of between 200 and 300 basis points above the US IT market.

In addition, we look for our partnership with Dell to add an incremental 150 basis points.

Just like the rest of our business, Dell results will depend on market conditions.

For Kelway in Canada we are targeting performance at least 200 to 300 basis points better than their respective market in local currency.

We currently expect IT growth in local currency for both markets to come in below the US in the 1% to 2% range.

As we always do, you should expect us to refine our views both for the market and our growth premium as we move throughout the year.

In 2016 you should also expect us to continue to execute our three-part strategy to ensure we will 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 ones.

This in turn will strengthen our relationships and importance to 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 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.

They also reflect the progress we are making against our long-term financial strategy to drive strong cash flow, deliver double-digit earnings growth and return cash to our shareholders.

Turning to the P&L, if you have access to the slides posted on when it will be helpful to follow along.

I am on slide 8. Consolidated top-line growth was excellent this quarter with net sales of $3.2 billion (see slide 8), 12.1% higher than last year.

While sales in Canadian dollars remain a relatively small portion of our total sales, less than 4%, the strengthening US dollar continued to depress organic net sales.

Currency shaved approximately 70 basis points off organic growth in the quarter, 30 basis points more than last year and 10 basis points more than last quarter.

On a constant currency basis organic net sales were 5.8% higher than last year.

On an organic average daily sales basis sequential sales were down 3.1% versus Q3 2015 which is in line with our usual Q4 seasonality.

Gross profit for the quarter increased 13.4% to $557.6 million.

Gross margin in the fourth quarter was 16.3%, up 20 basis points above last year.

Kelway continues to favorably impact margin given its higher mix of solution and services and we continue to mix into revenue recorded at 100% gross margin such as our net service contract revenue.

As you know, net service contract revenue favorably impacts gross margin but does temper revenue growth.

Consolidated reported SG&A, including advertising expense, was $377.7 million, 15.3% higher than last year.

Advertising expense increased 4.7% or $1.7 million in the quarter versus last year.

As expected, we accelerated hiring in the quarter and you can see the impact of this on our consolidated adjusted SG&A excluding advertising, which grew faster than sales, increasing 13.4%.

In addition to incremental coworkers, the SG&A increase was attributable to higher compensation due to ongoing mix into solutions and mix into Kelway which has a higher SG&A as a percent of sales.

Including advertising adjusted SG&A increased 12.2%, as you can see on the next slide, slide 9. Adjusted SG&A for the quarter excludes $11.2 million of non-cash equity compensation, $1.5 million of acquisition and integration expense and $2.1 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, incremental Kelway awards and performance against long-term incentive program targets.

To make it easier to calculate our adjusted EBITDA, which is essentially our gross profits less adjusted SG&A expenses, we also adjust for depreciation and amortization.

We converted top-line growth of just over 12% to adjusted EBITDA growth of 15.1% and delivered $257.5 million of adjusted EBITDA at a margin of 7.5%, up 20 basis points over last year.

As expected, this margin was lower than our Q3 year-to-date adjusted EBITDA margin.

Looking at the rest of the P&L on slide 10, interest expense was 21% lower than last year at $38.4 million reflecting reductions driven by repayments and refinancing activities completed in 2014 and Q1 2015.

Turning to taxes, our effective tax rate was 37% compared to 35.4% for Q4 2014 which resulted in a tax expense of $52.4 million versus $28.3 million last year.

This increase was primarily driven by an increase in state taxes.

On a GAAP basis we earned $89.3 million of net income.

Our non-GAAP net income, which better reflects our operating performance, was $123.7 million in the quarter, up 21.1% over last year.

As you can see on slide 11, non-GAAP net income reflects after-tax add backs that fall in four general buckets: the ongoing amortization of purchased intangibles, non-cash equity compensation, acquisition integration expenses and other nonrecurring income or expenses.

Our Q4 weighted average diluted shares outstanding was 170.1 million, so we delivered $0.73 of non-GAAP net income per share, up 23.3% over Q4 2014.

During the fourth quarter we repurchased 1.1 million shares at an average price of $43.77 for a total of $48 million under our previously announced share repurchase program.

1 million shares were repurchased in the most recent block transaction and the remaining shares were repurchased on the open market.

Quickly turning to full-year results on slide 12, revenue was $13 billion, an increase of 7.6%, and average daily sales grew to $51.1 million.

Gross profit in 2015 was $2.1 billion.

Gross profit margin was 16.3%, up 40 basis points from 2014.

Adjusted SG&A including advertising increased 8.4% and we delivered full-year adjusted EBITDA of $1 billion, 12.3% higher than last year.

Our adjusted EBITDA margin for full-year 2015 was 7.8%, above our annual target of the mid-7% range.

Non-GAAP net income for 2015 was $503.5 million versus $409.9 million, up 22.8%, as operating results were amplified by lower interest expense which decreased $37.8 million.

Non-GAAP net income per share was up 23.6% at $2.93.

Turning to our balance sheet on slide 13, on December 31 we had $37.6 million of cash and cash equivalents and net debt of $3.2 billion or $400.6 million more than at the beginning of the year, reflecting cash paid and debt consolidation related to the acquisition of Kelway.

Net debt to trailing 12 month EBITDA at the end of Q4 was 3 times, 0.1 turns less than the end of 2014.

Our current weighted average interest rate on outstanding debt is 4.4%.

Given today's uncertain interest-rate environment I would like to remind you that our $1.5 billion floating-rate note term loan facility has a 1% LIBOR floor and we have $1.4 billion notional amount of 2% interest rate caps in place which don't expire until Q1 2017.

With the exception of an $88 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.

As you can see on slide 14, we maintained strong rolling three-month working capital metrics during Q4.

For the quarter our cash conversion cycle was 21 days, the same as last year's fourth quarter.

Cash taxes paid in the quarter were $82.2 million and cash interest was $29.2 million.

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 $9.6 million compared to $96.3 million in Q4 of 2014.

As you recall, free cash flow in Q4 2014 was benefited by one-time items and timing which pulled forward into that quarter roughly $100 million of free cash flow from Q1 2015.

Reflecting the impact of some larger public customer deals where payment extended beyond yearend, our free cash flow was lighter than anticipated in the fourth quarter of 2015 and our full-year free cash flow was $283.3 million or 2.2% of net sales.

Adjusting for the pull forward into 2014 of the $100 million of cash flow I just mentioned, we ended the year with adjusted free cash flow as a percent of sales for full-year 2015 at the high end of our target range of 2.5% to 3% of sales.

We made excellent progress during the quarter on our capital allocation strategy.

Our capital allocation strategy is comprised of the four following components which you can see on slide 15.

First, increase dividends annually.

To guide these increases we have set a target to achieve a dividend payout of 30% free cash flow over the next five years.

For this quarter we paid a dividend of $0.1075 per share on March 10 to shareholders of record as of February 25, up 59% from a year ago.

Since the IPO our dividends have more than doubled and in 2015 we paid $53 million of dividends to our shareholders.

Second, ensure we have the right capital structure in place.

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 2015 at 3 times.

Third, supplement organic growth with tuck-in acquisitions.

Our Kelway investment is an excellent example of this.

And fourth, return excess cash after dividends and M&A to shareholders via share repurchases.

Our initial authorization in November 2014 was for $500 million.

To date we have repurchased 6.3 million shares for $241.3 million at an average price of $38.57 per share.

These capital allocation priorities support our 2016 to 2018 medium-term targets which you see on slide 16.

Similar to 2013 to 2015 targets, we continue to target growth of 200 to 300 basis points faster than the US IT market.

We also continue to target an adjusted EBITDA margin in the mid-7% range.

Reflecting the conclusion of our initial refinancings and absence of earnings amplification from lower interest expense, starting in 2016 through 2018 our medium-term targets call for low-double-digit EPS growth.

We intend to use share repurchases and accretive acquisitions to amplify operating results and help achieve this target.

Keep in mind that we hold ourselves accountable for achieving our medium-term target on an annual not quarterly basis.

Let me provide you with a few additional comments for those of you modeling our 2016 financials; I am on slide 17.

We expect full-year organic constant currency growth within our annual medium-term target of 200 to 300 basis points above US IT market growth.

Given current market volatility and overall macro uncertainty, we currently look for growth to be closer to 2% earlier in the year.

As we continue to ramp our Dell business we expect it to add up to 150 basis points of incremental growth with revenue split roughly 40/60 between the first half and the second half of the year.

Currency headwinds are expected to continue to have a roughly 70 basis point impact throughout 2016.

Canadian currency will drive first-half translation and British pound/US dollar will drive second half.

This assumes average annual translation rate of CAD1 to $0.69 and $1.42 to the pound.

For seasonality we expect to deliver sales roughly in line with our historical average first-half/second-half split of 48% to 49% in the first half and 51% to 52% in the second half.

Remember, in 2016 we will have an extra sales day in Q1 and one less day in Q4.

We expect Kelway's first-half contribution to be 650 to 700 basis points to top-line growth.

This is based on a conversion rate which is about 6% lower than what we experienced in Q4 2015.

Remember, second-half 2016 revenues will include Kelway in the base.

Turning to expenses, for the year we expect adjusted SG&A to grow faster than consolidated sales.

There are two main drivers of this.

First, increased coworker count.

Consolidated coworkers including Kelway were approximately 8,500, up over 1,200 since the fourth quarter of 2014.

We ended the year with approximately 7,500 North American coworkers, up roughly 270 coworkers since the end of 2014 with most of these coworkers added in the fourth quarter.

Second, given Kelway's higher mix of services and solutions, sales compensation of a percentage of revenues will be higher.

Keep in mind that based on the normal rhythm of our business first-quarter sales are typically sequentially below our fourth quarter.

In addition, new coworkers added in the third and fourth quarter of 2015 will drive incremental expense.

These factors coupled with our normal revenue seasonality will drive adjusted SG&A as a percentage of sales to run higher in the first half of the year than the second half.

For the first quarter adjusted EBITDA margin will likely be slightly below the low end of our full-year target range of mid-7%.

For the full year we expect to be at the high end of that target range.

Moving down the P&L, including Kelway, we expect our full-year book interest to be about $155 million and our effective tax rate to be between 37% and 38%.

Q1 interest expense is expected be slightly lower than 2015 due to the refinancing activity we completed at the end of Q1 2015.

Otherwise interest expense will trend similarly in 2016 at the back half of 2015.

There was no change to our intent to continue to make share repurchases under our existing authorization.

And we continue to target low-double-digit EPS growth with this including our expectation that Kelway will deliver roughly $0.04 to $0.05 per quarter in the first half of 2016.

Another item to note for your modeling, going forward in 2016 our Other category will be comprised of our international businesses, Kelway and Canada.

Prior to 2016 Other included our CDW Advanced Technology Services business which will now be included in our two segments, Corporate and Public.

Advanced Technology Services runs under 2% of our North American sales, the majority of which are generated by our corporate segment.

Finally a few notes for those of you modeling our cash flow.

First we expect our annual cash flow to come in at the high end of our 2.5% to 3% of net sales target.

Second, our capital expenditures will be about 0.5% of net sales on an annual basis.

We also expect to continue to maintain our cash conversion cycle within our target range of the low- to mid-20s for 2016.

For the full year we expect a cash tax rate in the 37% range to be applied to pretax book income before acquisition-related intangible amortization, which is approximately $45 million per quarter.

In addition, we continue to pay approximately $20 million in tax annually related to cancellation of debt income we incurred in 2009.

That concludes the financial summary.

Before we open for Q&A let me briefly address the SEC investigation we disclosed last quarter relating to vendor partner program incentives.

We continue to fully cooperate with the SEC and, although we cannot predict the outcome, based on what we know to date we do not expect this matter to have a material impact on the Company.

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, please provide the instructions for asking a question.

(Operator Instructions).

Matt Sheerin, Stifel.

Tom, in regard to your commentary regarding cloud adoption and the acceleration of SaaS application sales, we have seen similar commentary from several of your vendors and distributors and concern about legacy hardware demand.

Do you have similar concerns or are you capturing that revenue in different ways, such as from emerging products or selling a SaaS application and cloud services, etc.?

And do you see that accelerating further this year?

Okay, good morning, Matt, thanks for your question.

Yes, I think first of all let's start with the kind of the premise that despite our success we still only have 6% of the addressable market.

So I think that is a great starting point.

Yes, we do expect our cloud success to continue, it is of interest to customers.

But I think I have said this at least for the last three or four years, I do believe that customers will settle in on a hybrid model for their IT infrastructure.

And as such that will include parts of the platform being on prem.

If you think about our results this quarter, Matt, I think it is an interesting example.

Servers grew very nicely in the quarter, which indicates that you can have both and you will have both as customers kind of look at workloads and make the decision where the workload is best positioned.

I think if you look at our storage results this quarter, mid-single-digits, a lot of that driven by emerging technology.

If you think about converged infrastructure, which I would argue is kind of in on prem response in some ways to a pure cloud model, I think you have got lots of opportunities.

And then the last one is think about the NetComm, we have had this drumbeat going, if you will, on successful NetComm growth, meaningful successful NetComm growth.

So I think all of those can coexist and it is especially exciting for us because we still have a relatively small percent of the overall addressable market.

Okay, great, that is helpful.

And on the education market, you talked about the puts and takes there with hardware slowing but E-Rate picking up.

Do you see more of the same this year or will there be an equal offset and you won't get much growth from that market?

Well, I think it is best, Matt, to actually break it into the two subcomponents because each of them have a little different dynamics going on.

If you think about K-12, a lot of what was a real challenge from a growth perspective to that group this year was the bizarre success they had in 2014 and most of it driven by common core curriculum.

So as many of you pointed out to us when we were on the road last year, how are you going to grow on top of that?

That now is kind of behind that group.

I think another interesting thing, and you saw it in the results in the quarter, is as the E-rate funds begin to flow that you see an increase in solutions business.

And so K-12 had a nice quarter in some of the what we would call data center products, be they NetComm, be they servers and storage.

And so, we would expect that balance to be more representative going forward.

And as you also know, and I don't want to become an expert on E-rate here, but the E-Rate of 2015 is still being deployed and we are yet beginning the E-Rate process for 2016.

So you will look at that as a great opportunity for the people in K-12.

If you go to higher Ed, it is a function of a lot of those institutions depend on state funds.

And I think some of what you saw in the last half of last year was just directly tied to state funding.

I know I serve on the Board of a higher education institution, that certainly was a challenge for that institution.

And we are anticipating that that is going to get resolved sometime during the year and things will return to normal in higher Ed.

Okay, thanks very much.

Rich Kuegele, Needham.

Good to see the leverage in the quarter.

I wanted to just ask specifically then about the broader IT spending market in the US.

You said that you thought it would be closer to 2% and then I suppose ramping as the year goes on to the 3% range.

Can you just talk about where you might be seeing the weakness to back that up?

Or do you think it is more of a high-end enterprise problem?

Any comments on that?

No, I think, look, if you just think about the mixed economic signals here in the last probably 30 or 60 days, right, on the strong side you have got the labor market, right, you have got unemployment, you have got gas prices, you have got all those things that would typically drive consumer spending.

But at the same time, as you guys know, you have got weakness in manufacturing and the oil industry, and you have got kind of general macro worldwide economic concern.

And I think you just sense -- now I don't have a statistic, Rich, but you just sense a little bit of angst.

And we think all that is angst driven by the financial markets, we do think it causes people to be a little more thoughtful in costs.

But you also I think have confidence that as we move through the year we kind of get some stability that we'll get back to that 3% range.

So it is more of what do we sense.

Is there a -- if you are asking like are customers coming to us saying we are delaying our decisions, I would say it is not that stark.

I think there are people just being more cautious right now as we kind of see how this plays out.

Okay, then just as a follow up to that.

Is any of that causing you to change your inventory buying?

Are you trying to play things a little closer, give yourself a little bit more flexibility or do you think your own plan is sufficient?

No, look, we are pretty thoughtful about that on an ongoing basis, Rich.

And so we are going to be opportunistic where it makes sense to do that from an inventory standpoint.

And so much of the business today doesn't necessarily just come into the warehouse, whether it is because it is customized or it is driven by software, that it isn't quite the -- kind of the big challenge it probably was five years ago.

Excellent.

Well done, thank you.

Amit Daryanani, RBC Capital Markets.

A couple questions from me.

First, just to start off with the Dell relationship.

I am wondering as you go beyond 2016 and the $200 million contribution, do you think it kind of stabilizes at these revenue run rates or is there a bigger ramp up beyond the $200 million you are going to see this year with them?

Good morning, Amit.

Look, I think it obviously continues to grow.

I think Michael put the number out there, $1 billion, which I told him thanks a lot.

But what we do see is the relationship expanding and, again, not necessarily at the cost of our other partners, because at 5% or 6% market share there is lots of opportunity for us.

I think we are trying to be thoughtful about it because of the customer's expectation of what we deliver and wanting to do it right.

So we think that kind of 2016, if you will, will be kind of the first full year of the ramp.

Got it.

And I guess, Ann, you're talking about fiscal 2016 EBITDA margins to be at the higher end of the target range, so it was even kind of high 7s%, close to 8%.

This would be the second year in a row you are well above the target ranges that you guys have talked about.

I am curious, do you think -- do we start to think about your EBITDA margins as high 7s% to 8% longer-term, or you don't want to go that far quite yet?

We actually think we will be within our target range in 2016 of the mid-7% range, which we define as 7.4% to 7.6%.

So we do actually expect, because of investments in SG&A, we do expect the adjusted EBITDA margin to be lower in 2016 than it was in 2015, and at the high end of our medium-term target range.

Fair enough, thank you.

Mark Moskowitz, Barclays.

A couple questions if I could.

Just kind of curious if you can talk about how we should think about the contribution to revenue growth in 2016 versus 2015, from your emerging vendors' bucket versus your more traditional vendors' bucket?

And then I have a follow-up.

Gee, it is tough to quantify that for you, Mark, truthfully.

I mean, I think if you think about it by product family, obviously in the storage business you continue to see this incredible growth that is offsetting some of the legacy products.

And it produced in the quarter, what, mid-single digits.

So, I think that is probably representative of the emerging -- where most of the emerging players are coming from with the exception of security where we, as I think mentioned in the script, continue to add new security partners and their growth rates are triple digit.

It is not necessarily that way in every one of the product suites where you have an influx.

It really is in specific product areas, and right now we are seeing most of the emerging vendors in converged infrastructure, storage -- if you keep that as a separate category -- and software I think are where the biggest new players are.

Okay, thank you.

And then as a follow-up on the commentary today around services and just increased SG&A, you alluded to the services thrust going forward.

How should investors think about kind of the multiyear tail there in terms of is there really a nice deeper penetration in terms of recurring revenue opportunities as you think about the services engagements kind of seeing full strides one to two years out?

Yes, look --.

Deeper penetration on the wallet.

Yes, well, from a penetration of wallet, Mark, you are kind of dead on.

The strategy so to speak is that if you think about our historic legacy, which was predominantly kind of hardware driven, and you think about the evolution of technology, the more dominating positioned software is playing, even in hardware like network is a great example or NetComm.

And then you expand it to kind of the issue for our customers, this is -- IT resource issue, and the need to have a partner that can take on some of those implementation and service activities.

We would expect that to become an increasingly large part of our business.

Then you add on top of that cloud computing, which you could argue is more of a services play.

I think you should look to -- and we expect the services business and therefore the good margins, which is implied, that go with that business to be an increasing part of our profile going forward.

Thank you.

[Matt Cabral], Goldman Sachs.

So I wanted to dig a little bit deeper into where you stand with the integration of Kelway relative to your plan, both in terms of increasing share with your existing customers as well as the opportunity to add in new customers.

And then related to that, I just want to know what the experience so far has really taught you about the potential to potentially further expand internationally in the future?

Okay.

Well, Matt, first, as I think I alluded to in the script, the integration itself is on plan and going well.

And more specifically, you heard me mention that the cross business is building so to speak, cross-border business.

Just to give you a perspective we have -- since we started this process I can tell you we have got 10 or 11 pretty significant deals that have come as a result of this integration and it has generated north of $50 million in business.

So as we would have expected you are beginning to see the momentum build.

Having said that, I think we are still at the tip of the iceberg only because we are being pretty careful about the customers and what they are looking for and how we respond to those customers, just because the subject of international can be -- if you just say are you in the international business, that can be a pretty large part of the world so to speak.

And so we are being thoughtful.

If you remember, Kelway is a UK dominant company at this point with, I think I shared less time, about 90% of their revenues coming from the UK.

But they have built a hub and spoke strategy where they have locations in other parts of the world.

And that will be the way we will continue to expand our capabilities is by following that kind of hub and spoke expansion.

And typically it is done by following a customer to a particular area and then using that to expand in the area.

Great.

And then as a follow up, can you talk about what you are seeing in the PC market right now and what you are expecting out of that going into 2016?

And also just what level of client interest you are seeing right now around Windows 10?

All right, let me take the second one first.

And keep me honest here if I don't answer the first one second.

So on the Windows 10, I think we are -- there is a decent amount of interest.

I think though, Matt, what they are doing is following their normal refresh cycle.

And when the opportunity presents itself then they would implement Windows 10.

I don't believe it is a kind of full-court spread let's go get it done now, it is more of we are on this normal cycle, it appears to be from many different vantage points -- it provides power and different efficiencies.

But it is not -- if you are thinking about is it a massive tailwind the way Windows XP expiration was I would say no.

The word I have used is it is going to be a gentle breeze at our back.

The second thing is this year was an interesting year for us in the client devices, especially notebooks, and to an equal degree tablets because we had that incredible 2014.

If you think about it, even from a notebook and mobile device perspective on top of I think in 2014 that category grew something like 36% or some ridiculous number.

This year we were in the mid-single-digits.

So pretty -- I think pretty impressive considering that we would expect it to continue to be kind of a normal part of the growth trajectory.

In fact, I tell people all the time if you -- even before 2014 if you looked at our performance in client devices in 2011 and 2012, even when all the people were reporting death of the PC, etc., etc., that continued to be a growth business for us, a steady growth business.

We have no reason to believe that is not going to be the case continuing going forward.

Got it, thank you.

Brian Alexander, Raymond James.

Tom, just focusing on the first half of the year and looking at the guidance you gave.

It looks like you are expecting revenue to be up around 12% if I take all the components that you messaged, mark it up to share gain, Dell, Kelway and add it all up.

I just want to make sure we are on the same page -- that you are looking for low-double-digit growth because consensus is closer to about 14%.

Are you talking about at a consolidated level, that is what you are talking about?

Yes, consolidated sales in the first half.

Yes, and I think you have to start with, Brian, I think even as you noted in some of your published material, is that we originally built the original target on a 3% and we are saying we think it is going to start at 2%.

That has a corresponding impact all the way through the business.

Nothing has changed about how we feel about Kelway; nothing has changed about how we feel about Canada.

I think you also though have to then consider the currency impact, which is obviously a little different than it was.

And if you kind of take those two things out of the equation I think it looks pretty much exactly the way we stated.

So that hopefully gets you squared with the number.

Yep.

No, that is helpful.

And then, Ann, just to follow up on DSOs, up six days I think year over year.

How much of that was driven by the impact of net revenue accounting as you go more to services, etc., and the mix that affects DSOs?

How much of it was that versus an actual underlying increase in DSOs?

I know you talked about extending payment terms to large customers, should we expect that to continue?

Yes, a couple things.

It was really on the Public side of the business; Public had significant strength in Q4.

And in general our Public customers have longer DSOs than the corporate side of the business.

So that was the impact I was referring to, in particular we had some large deals where payment extended into 2016.

You get E-Rate business, for example, which just takes longer to collect because of all the administrative burden associated with it.

In your first question, if you are looking at the impact of netted down revenue, so to speak, a very high level way to look at that is to look at the corresponding increase in DPO.

Because remember, it causes DSO to go up, but it also causes DPO to go up in a way that generally offsets it.

So, at a very high level, if you look at the change there, that would be the part that would be attributed to netting down and then the rest would be the mix into Public.

Great, thank you very much.

Sherri Scribner, Deutsche Bank.

I wanted to get a little more detail on the strength you are seeing in the storage segment.

It sounded obviously like the emerging segments are seeing growth and I know you mentioned converged.

But are you seeing an increased adoption of flash-based storage at your customers, is that transition accelerating?

Yes, Sherri, I think in the script I actually remember the numbers triple-digit growth in our flash business.

Yes.

So your instincts are right on.

It is becoming -- like any other new technology, the more it gets deployed, the more costs come down, the greater customers deploy the technology.

And so, it is driving a big part of the emerging growth in our business, which at this point more than offset the -- what I will call the legacy business.

Okay, thanks.

And then I just wanted to circle back on the services business and the recurring aspect of that.

I guess when I think about your services I think of it more as helping customers adopt new technologies, but not necessarily as a recurring service like a traditional service.

Can you maybe help us think about that and maybe gauge how to think about how it recurs?

Thanks.

Nope, I think that is a great question because it does sometimes get lost in the shuffle, so to speak.

If you looked at it today the lion's share of our services business is kind of project management driven, that is implementing a NetComm solution for somebody.

But if you think about areas like infrastructure as a service, remote network management and monitoring, some of the SaaS products, those are all more in the what I will call recurring revenue stream.

Even though that today still isn't pure, Sherri, because I think people are still adapting to how do I deliver a recurring revenue capability.

But I would tell you my instincts are that over time that will increase.

Now I don't know what the pace is going to be, but I do see -- if you just think about us building our command center, it was to address an ongoing opportunity in remote network management and monitoring and that is more of a recurring revenue service capability.

Thank you.

Thank you.

Ladies and gentlemen, that was the last question.

I'm going to turn the call back over to Mr. Richards for closing remarks.

Okay, thanks again, everybody, for taking the time this morning.

I appreciate your questions and your interest in CDW.

And I'm going to close with -- it is Valentine's Day and Sari holds her breath when we get to this part of the call.

So, for all you guys out there, don't blow it, you will pay for it for a long time.

And if I can appeal to your emotional quotient -- I read yesterday that $13 billion was spent on Valentine's Day.

So from an economic perspective, please contribute to the economy.

Thanks, everybody.

See you.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation and have a wonderful day.