CDW Corp (CDW) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CDW First Quarter 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Mr. Tom Richards, Chairman and CEO.

Please go ahead, sir.

Good morning, everyone.

It's a pleasure to be with you today and to report our first quarter results.

Joining me on the call today are Ann Ziegler, our Chief Financial Officer; Chris Leahy, our General Counsel; and Sari Macrie, our Vice President, Investor Relations.

I'll begin today's call with a brief overview of our results and key drivers, and we'll run through the financials and then we'll go right to your questions.

But before we begin, Sari will provide a few comments regarding what we will share with you today.

Thank you, Tom.

Good morning, everyone.

Our first quarter 2017 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'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 regarding these risks and uncertainties is contained in the Form 8-K we furnished to the SEC today and in the company's other filings with the SEC.

CDW assumes no obligation to update the information presented during this webcast.

Our presentation also includes certain non-GAAP financial measures, including non-GAAP earnings per share.

All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules.

You will find reconciliation charts in the slides for today's webcast as well as in our press release and the Form 8-K we furnished to the SEC.

Please note that all references to growth rates or dollar amount increases in our remarks today are versus the comparable period in 2016 unless otherwise indicated.

In addition, all references to growth rates for hardware product, software and services today represent U.S. net sales only and do not include the results of our U.K. or Canadian operations.

There were the same number of selling days in the first quarter of 2017 compared to the first quarter of 2016.

All sales growth rates referenced during the call will use the average daily sales rate unless otherwise indicated.

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.

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

Thanks, Sari.

We had a strong start to the year as we successfully addressed customer priorities across our diverse portfolio of end markets and leveraged the strength of our business model to deliver excellent top line growth and strong profitability.

Net sales were $3.3 billion, up 6.7% above last year, 7.6% when adjusted for the impact of currency translation.

We delivered adjusted EBITDA growth of 7.1% and non-GAAP net income per share growth of 12%, up 13% after currency adjustment.

These results reflect the impact of 3 key drivers: our balanced portfolio of customer end markets, a broad product and solutions suite and the impact of mix on our profitability.

The first driver of our results, our balanced portfolio of customer end markets, enabled us to address differing customer priorities.

Corporate, which represents sales to business customers with roughly 250 coworkers and above, increased 4%.

There was clearly more activity from customers, and we saw projects move from the back burner to the front.

But overall, Corporate customers remained cautious and continued to focus on more shorter-tail projects.

As you've heard me say before, medium to large business customers do not tend to spend on optimism.

That said, we did see some ongoing customer conversations on larger projects start to move from discussion to sale.

Small Business increased 8% as customer confidence remained strong.

Public had an excellent quarter, up 10%.

Public customers with fixed budgets were focused on spending approved funds.

Education results were outstanding, up 16%, reflecting excellent growth in both Higher Ed and K-12.

Networking was strong in both markets as we benefited from E-rate funds in K-12 and our Connected Campus strategy in Higher Ed.

Government results were also outstanding, up 14%.

Federal increased high teens.

These excellent results did not include sales of the client devices we discussed last quarter that were delayed at the end of 2016 as shipping did not begin until April.

Federal results were driven by ongoing success working with agencies as they moved ahead with projects funded under the current Omnibus budget as well as ongoing successful alignment with strategic programs.

State & Local also delivered excellent results, up high single digits, once again, driven by new contracts and ongoing success in public safety.

Our Other segment, which consists of our Canadian and U.K. operations, increased 5% in U.S. dollars.

Both operations continued to execute extremely well in market, each delivering double-digit growth in local currency.

To date, U.K. is not seeing significant changes in customer buying behavior even with the uncertainty related to timing and terms of Brexit.

We also continue to see excellent referral progress.

Canada is executing well in the face of uncertainty as both businesses and governments assess the potential economic impact from any changes in U.S. trade policy as well as potential changes in oil pricing.

The second driver of our results was our broad product and solutions suite.

Our ability to meet the total technology needs, both transactional and integrated solutions, of our customers is one of the fundamental reasons for our consistent performance.

This is a key point of differentiation for us in the marketplace.

It helps ensure we meet our customer priorities as well as helps offset market-specific dynamics like product life cycles or even partner challenges.

Market trends remained similar to what we saw throughout 2016 with ongoing focus on optimization, efficiency, securitization and the integration of software into solutions.

In addition, we also saw more client device upgrades.

This quarter, our broad portfolio of solutions helped us meet these priorities.

Let's take a closer look at overall product performance.

As expected, hardware sales growth accelerated from 2016 levels, increasing 6% for the quarter.

Client device demand was strong, up mid-teens with double-digit increases across all customer markets.

Video equipment, which include projectors and display panels, also increased across all end markets, up nearly double digits in the quarter.

NetComm increased high single digits with gains in all but one customer market.

Continuing last year's trend, customer focus remained on optimizing data center infrastructure with economical yet high-performing solutions.

We saw rapid growth in emerging technology solutions, including hyper-converged and flash, but it was not enough to offset declines in more traditional storage, and overall, the category declined high single digits.

Server performance varied across customer end markets.

Increases in 3 of our customer end markets were not enough to offset declines in other customer end markets, and we saw the quarter end down mid-single digits.

We used our over 1 million square feet of distribution capacity and deep partner relationships to make strategic buy-ins for both data center solutions and client devices.

This helped us mitigate the memory price increase and supply issues felt across the industry.

Software sales increased 5%.

Customer spend for software increased in the high teens as, once again, much of the software was delivered as a service.

Remember, as a service revenues are netted down for accounting purposes.

Services increased 14%, once again driven by excellent performance in warranties and field services, which was led by cabling, networking and video implementations.

Customer spend for cloud-delivered solutions continued strong, once again up over 50% with spend in Infrastructure as a Service more than doubling, albeit off of a low base.

Fast-growing workloads addressed by the cloud included collaboration, backup and recovery and security.

Cloud security was a major contributor to overall security spend, which increased just over 20%.

Once again, much of this spend was netted down as it is delivered as a service.

And that leads me to the third driver of our performance, the impact of mix on profitability.

As you've heard me say before, an essential element of our long-term success has been our ability to consistently deliver profitable growth.

First quarter results provide an excellent example of how our variable cost structure helps us deliver this goal.

In 2016, you will recall that accelerated growth in netted-down revenues, including warranties, cloud and software assurance, led to mix shift, which improved our reported gross margin but dampened top line growth.

This quarter, with the expected acceleration in hardware spending, we did not mix as much into netted-down revenues.

Here's where you'll see the benefit of our variable cost structure.

Sales compensation is one of our largest expense components and it is based on gross profit.

This quarter, we saw expense leverage since gross profits grew slower than sales.

Because our sellers are compensated on gross profit, we maintained strong profitability in line with last year's first quarter, achieving first quarter records for adjusted EBITDA and non-GAAP net income per share.

Clearly, our variable cost structure has been a key contributor to our long history of profitable growth.

Another key contributor has been our ability to deliver solutions that meet each customer's unique challenges.

Because we have the scale to invest in vertically focused sales channels, we develop deep industry knowledge and customer intimacy that enables us to build meaningful solutions that solve key issues for our customers.

This quarter's Higher Ed performance, where solutions sales increased over 30%, is a great example of this in action.

Our Higher Ed channel has been helping universities and colleges address their challenges for over 10 years, challenges which have evolved over time.

Today, with the average college student bringing multiple technology devices to campus, comes the expectation that they will be connected everywhere any time, from dorm room to classroom, from dining hall to the quad.

This is where CDW's Connected Campus solution comes in.

Connected Campus connects students, instructors, devices and curriculum using cloud, networking and collaboration solutions across residence halls, classrooms, buildings, libraries, stadiums and even green space.

A recent example of the power of this solution is one where we helped a major Midwestern university with 5 campuses enhance connectivity across its entire operation.

Our Connected Campus solution helped the university avoid one of the most common pitfalls of network design: optimizing for coverage instead of capacity.

We assessed the network use in all of their campuses and determined which lecture halls, residence halls and facilities were most in need of capacity.

By doing so, we were able to increase access point density at those locations rather than distributing access points evenly across their entire footprint.

This was a big investment for our customer.

It took a full year from the RFP issuance to inking the deal.

And as you would expect, competition was heavy.

We won because of our experience and Connected Campus solution.

That solution includes design and installation of a mesh fabric network.

When completed, the customer will spend more than $25 million on this solution.

This is a great example of how solving key business problems for our sweet spot of customers in today's environment requires deep customer knowledge.

We combined our competitive advantage of scale, scope and disciplined execution.

Our customer knowledge helps drive sustainable profitable growth for us today and in the future.

To build this level of customer knowledge requires talented coworkers.

This quarter, we added 62 customer-facing coworkers, on target with the plan we shared with you last quarter that calls for adding between 100 and 125 customer-facing coworkers during 2017.

It is important to understand that all customer-facing coworkers are not the same.

Our largest population of customer-facing coworkers are our account managers, but they are supported by other key customer-facing coworkers, coworkers who enable the design and delivery of large, complex and higher gross profit solutions.

These coworkers include service delivery engineers, technical specialists, field sellers, and they represent roughly 30% of our North American workforce.

Layer on our account managers, and more than 2/3 of our coworkers are customer-facing.

We will continue to invest prudently to ensure we deliver the solutions that our customers need and take advantage of the opportunity we see in the marketplace for an international provider with scale and highly technical resources.

But just as we always do, we will monitor the marketplace and adjust our hiring plan up or down as needed.

Let me leave you with a few comments on the remainder of the year.

You'll recall that on last quarter's conference call, we shared our expectations for the 2017 U.S. IT market growth in the just a little above 2% to a little above 3% range and our target to grow 200 to 300 basis points above the market.

At this time, we expect the year to -- at that time, we expected the year to start off slow and then ramp as economic activity ramps.

While we certainly had a good first quarter, but as I tell my staff, one quarter does not a trend make, and there remains a fair amount of uncertainty both in the U.S. and abroad.

Given the mixed signals we are currently seeing, we're maintaining our market growth views for now.

Of course, we will continue to refine our expectations as we move throughout the year.

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

Ann?

Thanks, Tom.

Good morning, everyone.

As Tom indicated, our first quarter financial results reflect the combined power of our balanced portfolio of channels, breadth of product offering and variable cost structure.

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

Turning to our P&L.

If you have access to the slides posted online, it will be helpful to follow along.

I am on Slide 7. Consolidated net sales were $3.3 billion, 6.7% higher than last year on a reported and on an average daily sales basis.

Average daily sales were $51.9 million.

On a constant currency basis, consolidated net sales were 7.6% higher than last year.

Currency impact was driven by the British pound to U.S. dollar translation, slightly offset by positive year-over-year impact from Canadian to U.S. dollar translation, shaving roughly 100 basis points off of growth.

Currency impact was 20 basis points lower than the fourth quarter.

On an average daily sales basis, sequential sales were down 7.8% versus Q4 2016, which was less than last year and in line with our historical Q4 to Q1 decline.

Gross profit for the quarter increased 5.4% to $553 million.

Gross margin in the first quarter was 16.6%, 20 basis points lower than last year.

The decrease primarily reflects the impact of a lower mix into netted revenue as declining product margin was only partially offset by the impact of increases in netted-down revenues, including SaaS, warranties and commission revenue.

Turning to SG&A on Slide 8. Consolidated reported SG&A, including advertising expense, was roughly 5% higher than last year.

Reported SG&A also includes $12.1 million of equity-based compensation; $0.5 million of acquisition and integration expenses; and $1.9 million of other expenses, including payroll taxes on equity-based compensation and historical retention cost.

Our adjusted SG&A increased 4%, primarily driven by sales payroll growth, roughly in line with gross profit growth.

Coworker count was up roughly 100 since year-end 2016 to just over 8,600.

Our adjusted EBITDA for the quarter was $249.2 million, up 7.1%.

This delivered an adjusted EBITDA margin of 7.5%, similar to last year.

Looking at the rest of the P&L on Slide 9. Interest expense was $40 million, $1.6 million higher than last year's Q1 level.

An additional month of interest on the 6% notes that were redeemed was partially offset by interest savings from the recent refinancing.

Turning to taxes.

GAAP taxes were $16 million, which resulted in an effective tax rate of 21.7%.

The reduction in effective tax rate primarily reflects excess tax benefits from the vesting of equity-based compensation.

On a GAAP basis, we earned $57.6 million of net income.

Our non-GAAP net income, which better reflects our operating performance, was $121.3 million in the quarter, up 7.7% over last year.

As you can see on Slide 10, non-GAAP net income reflects after-tax add-backs that fall in 4 general buckets: the ongoing amortization of purchased intangibles; equity-based compensation; acquisition and integration expenses and other nonrecurring or infrequent income or expenses, such as net loss on the extinguishment of debt; tax adjustments to arrive at non-GAAP net income, including tax-affecting add-backs at 36% and reversing the $11.6 million excess tax benefits related to equity-based compensation.

With Q1 weighted average diluted shares outstanding of 163 million, we delivered $0.75 of non-GAAP net income per share, up 11.7% over the prior year.

As we indicated last quarter, currency impact on EPS was similar to the impact on sales.

On a constant-currency basis, non-GAAP income per share increased 12.7%.

Turning to our balance sheet on Slide 11.

On March 31, we had $251.7 million of cash and cash equivalents and net debt of $3 billion as compared to $3 billion at March 2016.

Our cash plus revolver availability was $1.3 billion.

Net debt to trailing 12-month adjusted EBITDA at the end of Q1 was 2.7x, within our target range of 2.5 to 3x.

Our current weighted average interest rate on outstanding debt is 4.2%, 20 basis points below last year due to the term loan repricing and note refinancing we completed in Q1.

Roughly 95% of our outstanding debt remains either fixed rate or hedged.

As you can see on Slide 12, we maintained strong rolling 3-month working capital metrics during Q1.

For the quarter, our cash conversion cycle was 18 days, down 2 days from last year's first quarter and below our annual target range of low to mid-20s.

Year-over-year DSO increased 1 day and DPO increased 2 days.

The 1-day DPO increase in excess of the DSO increase was primarily due to mixing into partners with longer payment terms.

Cash taxes paid for the quarter were $6.3 million and cash interest was $48.4 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 a positive $215 million compared to $315 million in Q1 of 2016.

Free cash flow reflected the impact of our lower sequential sales decline and period end timing.

During the quarter, we continued to execute against our capital allocation strategy and repurchased 3 million shares for $175 million at an average cost of $59.26 per share.

Our capital allocation strategy is comprised of the following 4 components, which you can see on Slide 13.

First, to increase dividends annually.

To guide these increases, in November 2014, we set a target to achieve a dividend payout of 30% of free cash flow over 5 years.

For this quarter, we will pay a dividend of $0.16 per share on June 12 to shareholders of record as of May 25, up 49% from a year ago.

Since the IPO, our dividend has increased nearly fourfold from the initial annual level of $0.17 per share.

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 3x.

We ended Q1 at 2.7x.

Third, supplement organic growth with tuck-in acquisitions.

Our CDW U.K. investment is an excellent example of this.

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

At the end of March, we had $467 million remaining in our current share repurchase authorization.

Our capital allocation priorities support our 2016 to 2018 medium-term targets, which you can see on Slide 14.

They are: to grow in constant currency 200 to 300 basis points faster than the U.S. IT market with a targeted adjusted EBITDA margin in the mid-7% range; maintain our net leverage ratio between 2.5 and 3x; and deliver low double-digit EPS growth in constant currency.

As we indicated on our Q4 call, we expect our full year adjusted EBITDA margin to be above our target range at roughly the same level as 2016.

You should expect us to continue 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 targets on an annual, not a quarterly, basis.

Let me provide you with a few additional comments for those modeling the rest of our 2017 financials.

I am on Slide 15.

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

Based on Q1 results and expectations for the rest of the year, we look for the balance of sales between first and second half to be generally consistent with our normal seasonality, roughly 48% to 52%, weighted towards the back half of the year.

We have the same number of selling days in Q2 '17 as Q2 '16.

In the second half of the year, we will have 1 less day in Q3 2017 as compared to 2016.

But that reverses in Q4 2017, so we end the year with the same number of selling days.

We currently look for currency headwinds at an annual average rate of roughly 70 basis points in 2017.

We expect greater impact earlier in the year with total first half impact at roughly 105 basis points.

This assumes average annual translation rates of $0.75 to the Canadian dollar and $1.20 to the British pound.

Given current expectations that the incremental impact of netting down will continue to stabilize through the remainder of the year, we look for our annual adjusted EBITDA margin to come in at roughly the same level as 2016.

We expect depreciation and amortization to continue at a similar rate as Q1 at roughly $64 million per quarter, $46 million of which is for purchased intangibles.

With the impact of our refinancings in March of 2017, we expect total annual book interest expense at roughly $150 million.

We now expect our full year effective GAAP tax rate to be between 33% and 34%, ramping up as we move through the year.

Excess tax benefits will continue to materially impact our GAAP tax rate in Q2.

Note that we have not assumed any reduction in the U.S. corporate tax rate.

The reduction is primarily due to tax benefits related to equity-based compensation.

Q2 equity-based compensation is expected slightly above Q1, primarily due to a new grant in 2017 and performance attainment.

The balance of the year is expected to be at or slightly below 2016 levels.

Remember, since we add back equity compensation expenses for non-GAAP net income, the tax benefits related to equity compensation will also be excluded from our non-GAAP net income.

Our all-in non-GAAP net income tax rate is expected to run between 37% and 38% for the full year.

You should expect us to use our capital allocation priorities, share repurchases and acquisitions to achieve our low double-digit non-GAAP EPS growth target in constant currency with similar currency headwinds throughout the year as on our top line.

Given U.K. and Canadian operations now represent roughly 10% of our business, it is important to consider currency translation when modeling both top and bottom line in this volatile currency environment.

Finally, a few notes for those of you modeling cash flows.

First, we continue to expect our annual cash flow to come in between 3% to 3.5% of net sales above our 2.5% to 3% of net sales rule of thumb as we continue to benefit from strong working capital performance and netted-down revenues.

As you'll recall in 2016, we delivered free cash flow as a percentage of net sales significantly above this target.

This reflected the onetime benefit of extending a few partners to longer payment terms as well as timing that will reverse in 2017.

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

We also expect to deliver a cash conversion cycle at the low end of our target range coming in at the low 20s.

As you know, with our typical cash flow pattern, our second quarter tends to be the lightest cash flow quarter of the year.

This reflects both our payment of estimated cash taxes for the first and second quarter and increased working capital needs to support what is typically our highest quarterly sequential sales increase.

For the full year, we expect a cash tax rate in the 32% range to be applied to pretax book income before acquisition-related intangibles amortization, which is approximately $46 million per quarter.

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

Cash taxes will be lower in 2017 versus '16, primarily due to tax deductions from discrete items related to equity and deferred compensation payouts.

That concludes the financial summary.

Before we open it up for Q&A, let me briefly address the SEC investigation we disclosed in 2015 relating to vendor partner program incentives.

We have no further updates since the last conference call.

We continue to cooperate fully 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.

With that, let's go ahead and open it up for questions.

(Operator Instructions) Operator, can you please provide the instructions for asking a question?

(Operator Instructions) Our first question is from the line of Amit Daryanani of RBC Capital Markets.

This is Irvin Liu calling in for Amit.

First off, congrats on the great quarter.

I guess my first question is I wanted to address the Corporate channel.

It looks like that channel reverted to growth on a year-over-year basis.

Is there anything specific to call out here?

Or better yet, can you talk about some of the factors that drove the improvement in the year-over-year trajectory?

First of all, thank you, and good morning.

Yes, we were obviously pleased regarding Corporate's return to growth.

Although we did, I think on previous calls, indicate that we were starting to see that kind of momentum in the Corporate segment.

There were a number of, I think, key drivers for this.

Some of it was you saw pretty strong performance in the transaction side of our business.

I think many customers considered some of the, what I'll call industry shortages when it comes to components and looked at this might be a good time to execute, refresh.

And we certainly saw that in both our notebook and our desktop.

I think that was one area of key drivers.

I think the second was just a really excellent quarter of execution by the leadership team, and focus.

And there was a general sense -- there has been a general sense of, as I said, optimism.

Although I'm not sure people run out and spend optimism on big projects, you can't deny the fact that on shorter-tail projects it did instill some confidence in the market.

Got it, Tom.

Thanks.

That was helpful.

All right.

And I guess you guys talked about adding 100 to 125 net new coworkers, and you guys are roughly halfway there relative to this target.

My question relates to coworker productivity.

Based on your -- the outlook of outpacing those IT spend by 200 to 300 basis points and your coworker increased target of about 1%, this assumes sort of a mid-single-digit year-over-year improvement in coworker productivity.

Just curious on what sort of factors will drive this productivity improvement.

Yes, that is a great question.

It's interesting, I tried to allude to some of this in the description of the type of coworkers we add.

One of the things to think about, and this is a little bit of a model evolution, quite honestly, at CDW, as we built out that technical organization, and the technical and services team is over 2,000 strong, in many ways, you consider this -- you should consider this as almost adding arrows to the quiver for the seller, because it is technical assets and resources that our customers can use, and that drives larger, more complex deals, which tends to drive increased productivity.

So that's just one way that the model has evolved and is helping us drive productivity in the organization.

The other is we have had, for the last 4 or 5 years, a pretty strong approach on sales force management and prescriptive selling, so to speak, and productivity.

And it's something we track and measure and make investments in helping the sellers.

And another good example is the investment we're making in e-commerce.

If you think about our enhancing our e-commerce platform, what you're doing is helping drive interested customers to the sales force.

So those are just 2 examples of the ways in which we've been able to sustain that improved productivity over a number of years.

Our next question is from Matt Cabral of Goldman Sachs.

Also had a question on the Corporate business.

I guess it sounds as though the environment was a little bit better but there's still some hesitancy from your customers in just bigger ticket solutions purchases.

So I'm just curious, what do you think it'll take to actually get those new expansion projects going again?

I'm just curious about the visibility you have around that ramp going throughout the year.

Well, Matt, we did see an increase in what I would call more of the strategic projects.

I just don't know that it's at full force yet.

I think -- look, I think anybody who watches what's going on in Washington, whether it's tax reform or regulatory rollback, is optimistic that they will happen but also a realist in that it's going to take time and there's a lot of work to get there.

And I think -- I know it sounds trite to say guys like me don't spend on optimism.

I think you actually have to see some things happening which will give you maybe that increased confidence.

Even the consistency in the economy, if you think about GDP in the first quarter was, what, 0.7% or something?

And even underneath that there were some inconsistency where you had consumer kind of pull-back and you had an increase in business investment.

And Matt, my sense is, when you start to see a number of the factors kind of play out in actuality is when you're going to see people get even more aggressive on what I'll call bigger, more complex projects.

Great.

And then just as a follow-up, it's coming up on 2 years since your last acquisition.

Just curious about how you're thinking about the opportunity for M&A at this point and how you compare and contrast the opportunity for inorganic growth versus repurchases within your capital allocation strategy.

Well, you're right, it is coming up on 2 years.

And we are, if I can take this as an opportunity to say how just incredibly pleased we are with the U.K. and their performance and what they've meant to our customers.

Matt, we tend to look at it, I think, from a pretty straightforward perspective.

We focus on organic growth as the key driver here, and I think we've demonstrated a long history of, despite our size and success, the ability to continue to outperform the market from an organic perspective.

And we'll continue to invest in that.

Having said that, the strategy has also been consistent.

There are parts of the marketplace where we may be motivated to acquire something because of speed to market or because of a capability.

And I would tell you, we are aggressively looking and considering and entertaining things that may enhance that.

And when we find something that feels like it fits the right strategy and matches our capital allocation priorities, then we'll be ready to go.

Matt, to your question on relative priority, I mean, the capital allocations are listed in the priority that we think of them.

And obviously, acquisitions come ahead of share repurchases and share repurchases are what we do with cash that's left.

So think about it that way as well.

Our next question is from Mark Moskowitz of Barclays.

I just wanted to see if we could just learn a little more about what's happening with your Services business and also just - they're attached to the cloud.

I know you don't always like to talk about all your partners, but I think a big question we get from a lot of investors is what's next in terms of the incremental driver of your business.

You guys have done a great job the last few years since the IPO, but services in the cloud just keeps coming up.

So if you can talk a little more about that, I'd greatly appreciate it.

Yes, let me clarify, Mark.

Was it services in general or services tied to the cloud?

Exactly; tied to the cloud.

Okay.

Yes.

Well, I think, as you alluded to, we've had pretty consistent outstanding growth.

I think some of that is driven by just the market in general and customers looking at workload-specific situations.

And you heard me allude to which workloads, at least for us, seem to be very appealing from a cloud perspective: backup and recovery; security; collaboration, just to name a few; as well as our platform, which -- Infrastructure as a Service, which is just like raw compute.

I think the thing that's happening is customers are looking at -- on a pretty regular basis now, each time they make a decision, "Where do I want the workload?

Where does it make sense for me?" And we actually believe that the world will continue to be kind of a hybrid solution for people for various reasons, whether it's the economics, their capital allocation strategy inside of their business.

I would say that our growth has been a function of the breadth of the offering and the number of places where we can help people migrate to the cloud.

It's also the services that we've kind of wrapped around our cloud offering.

Probably the -- one of the most visible ones is kind of this cloud consulting role, where we can go in and help a customer assess those workloads.

If you think about our value proposition, Mark, and it is to kind of take the complexity out of it, and you think about the market we focus on, those technical resources that I referred to in I think the first question are part of the big differentiator and why we're able to help grow the cloud the way we have been.

And just following up on the allocation.

Ann, if M&A doesn't become a primary consideration down the road, can we see accelerated debt paydown, just given the cash profile?

I would say that isn't our current thinking.

I believe we would continue to buy back stock.

The reason I'm a little bit hesitant on that is because there is this idea of tax reform out there, which may or may not make our interest deductions less attractive.

So keep that in mind as an overlay.

But in today's interest and tax environment, I would say it would be unlikely that we would accelerate any paydown of debt.

If those 2 things change materially, we would obviously revisit the appropriate capital allocation.

Our next question is from Matt Sheerin of Stifel.

Just a question regarding your commentary, Tom, on the memory situation.

Obviously, extended lead times and some price increases, and you talked about customers may be getting ahead of that.

Were you able to -- number one, are you seeing prices on the hardware increase and are you able to pass that along?

Is there a concern at all that will change any of the demand trends as we go through the year?

Okay.

Matt, yes -- let me make sure I answer all these in line here.

Yes, we felt like we were able to get ahead of it, at least right now.

Part of it is the capacity and the ability that we have -- our own distribution capability enables us to, if you will, buy in advance where we can.

So I think that certainly helps with the allocation to customers.

Yes, I think the second one is yes, we did see and will see increased pricing.

I think, whether or not that gets passed on to customers, Matt, is a function of what goes on in the marketplace, truthfully.

You can't really dictate how people are going to behave and how they're -- what they're going to do and what kind of pressure they're feeling to grow top line.

So I don't know that I could predict anything with clarity on how that'll play out.

I think a function of it might be, Matt, how long people think those shortages may last.

If they believe those shortages, and you've probably read this like I have, might end by the end of the year, they might not have a dramatic impact.

But if they think they're going to last for a long time and you see a scarcity of a resource, I mean, you know how that one will play out.

And just on that, so you're not actually unable to ship product to customer, right?

There's no product shortages yet from your vendors?

Yes, I think the way you said it is "yet." And yes, because we were able to buy in advance, we were able to deliver.

Now I think, again, it kind of tails -- it kind of links right back to my point: if the shortage plays itself out by the end of the year, then I think we shouldn't have major shortages for customers, so to speak, on end products.

But if it extends, then I think you're eventually going to have that work through the supply chain.

Okay.

That's quite helpful.

And just on the Education market where you're seeing accelerated growth, I know that's been a little bit choppy.

You've had commentary in the past about E-rate funding, how that's playing out.

It sounds like the Higher Ed is really working in your favor now.

But do you think that sort of return to the double-digit growth rate is sustainable here through the year, given your visibility?

Well, I think you kind of have to break it down into 2 buckets.

Do I expect the education market in general to continue to be a strong growth driver for CDW?

Absolutely.

I think we did see the E-rate funds begin to flow this quarter, which helped drive the K-12 growth.

I would expect for the back half of the year, Matt, that to kind of return to normal growth.

And normal growth, we expect that to be a meaningful contributor to our performance.

And I think the success in the college, university or higher ed marketplace we would expect to continue.

Now do I realistically expect it to be as strong as it was the first quarter?

I'd love that.

I'm not sure the team would love me to say that.

But I think we can expect it to continue to perform throughout the year.

Our next question is from Shannon Cross of Cross Research.

So I wanted to talk a little bit about the small business unit, the changes you made starting at the beginning of the year in terms of the organization.

Sort of anything you can give us in terms of focus, because obviously it's a nice contributor to growth.

And then I had another question.

Yes, Shannon, let me kind of reiterate what the driver was behind the decision.

I have felt for some time that of all of our markets, the consumption model in that market is changing as quickly and as fast as any we have.

Faster, obviously.

And I felt like, if we could create a little more focus by having a group and a sector, if you were, a segment that reported to me that woke up every day and all they thought about from top to bottom was the small business market, including not only selling to it but how we might service it differently, how we might provide technical support differently, that we would be able to gain more than our fair share of the market opportunity that sits there.

And so that was the driver behind the unit.

If you think about that group and the resources they have available to them to make technology decisions, they're not as significant as those in the Corporate segment, yet they still want to avail themselves of the same kind of capability.

And so it was more about making sure that we customize how we thought about small business, from selling to solutions to services, and that's the real mission that, that group has.

Got it.

Okay.

And then I'm curious, the Dell EMC Partner Program, which was put in place a little bit earlier in the year, how should we think about the opportunity that you have in terms of is there increased profitability opportunity?

Increased access to products?

Just with the merger, any incremental benefit that you see?

Yes, well, first of all, Shannon, we had a strong relationship with Dell prior to the introduction of that program, so I don't know that we're sitting here with all these dramatically new benefits, because they treated CDW pretty well from the onset of our relationship last year.

And they've continued to execute really well.

And so I would say they're -- don't look for any incremental upside for us just because of the existing relationship.

Okay.

And then finally, just in terms of the notebook improvement, you talked about in terms of Win 10 and how long -- I mean, we're hearing good things, obviously, from the PC vendors, the top 3, who continue to gain share, in terms of corporate adoption and that.

But I'm curious as to what your customers are saying, what inning you think we're in, how long we can kind of expect to see the benefit and the support within your business, and obviously theirs, from what's going on there?

All right.

Thank you.

I haven't had the inning question for a while.

So look, I think the word I've been using when it comes to Win 10 is a gentle breeze here when it comes to its impact on CDW.

I do think we've been moving around a little bit on the Win 7 versus Win 10 and when you -- how long you can ship from Win 7 and compatibility issues.

And I think -- look, I don't know that we're in any particular inning.

I will tell you, if you think about just the experience at CDW, the last major refresh cycle we had was in, I think, 2014.

So we're on year 3, year 4. It feels about right, relative -- from a timing perspective, relative to customers kind of upgrading their client devices.

And I think that's as much a driver as Win 10, relative to what's going on with the notebook world at CDW.

Our next question is from Sherri Scribner of Deutsche Bank.

It's actually Adrienne Colby for Sherri.

In the past, you've commented that the first calendar quarter is typically a strong one in the U.K. I guess they benefit from some of the March fiscal year-end spending.

But it doesn't look like you saw a significant comp in sales this quarter.

And so I was just wondering if you're seeing a little bit more tempered demand on the International side of the business.

Andrea (sic) [Adrienne], if you think about it, if you look in local currency, they had an incredibly strong quarter.

I mean, the number that I report in U.S. dollars is the effect of currency translation, but they had a meaningful outperformance in the pound currency in local markets.

So they did, true to form, execute really well.

Okay.

And then as a quick follow-up, could you just update us in terms of the mix?

How much is U.K. based at this point versus the other international?

I don't know that we provided specific numbers around there.

We've indicated that the 2 together are roughly 10% of the business today.

And obviously, the U.K. is a much larger piece of that.

And the second one being Canada.

Our next question is from the line of Adam Tindle of Raymond James.

First question, just wanted to ask on operating leverage.

Gross profit dollars in the quarter declined sequentially, which I know is typical, but operating expenses were up sequentially.

I know you mentioned adjusted EBITDA margins, expecting them flattish year-over-year in 2017.

But it seems like we'd see more significant acceleration this year, given OpEx appears more front-end loaded and the bullish comments you made on productivity improvements.

So I was just hoping you can address the adjusted EBITDA margins guide.

Yes, I think you have to keep in mind that our adjusted SG&A generally grows in line with our gross profit growth.

You saw that last year, when our gross profit grew in excess of our rate of sales, our adjusted SG&A grew in line with gross profit.

So I think you just have to keep that in mind as you move through the year.

Q1 may not ease up -- I mean, you saw that we were able to maintain our adjusted EBITDA margin in Q1.

Given the sequential decline in sales in Q1, you actually begin to hit some of the fixed cost aspects of our sales compensation.

As we move through the year, our compensation will move around very clearly with our gross profit because it is, on sales compensation, driven by gross profit.

Okay.

And I just wanted to clarify, on revenue growth for 2017, you're obviously starting well above the target.

I'm trying to dig into what is implied for the rest of the year.

I think the 48%/52% first half/second half guide would imply year-over-year growth above the 5% or so you've talked about, but I do see that inventory days were down year-over-year.

So I'm just trying to get a sense for how much conservatism is built in or whether you're truly anticipating a slower pace of year-over-year growth as we progress throughout the year.

Well, we don't provide guidance as specifically as you're asking for, Adam.

We feel confident about the range that I've given you.

And I think it's really early in the year to start trying to get too cute relative to what's going to happen over the latter part of the year.

There's too many variables out there.

And I'll say that I've learned the hard way, being in this job for a while now.

I would just say, look, great start to the year on the top line.

I think it remains to be seen what happens with kind of the economy, what happens with some of the policies that will determine whether the start contains in addition to the constraints that you talked about.

And just those number of variables, I don't know that it's prudent for me at this point to go much beyond to say we know and we're confident we're going to deliver 200 to 300 basis points above the U.S. IT market.

Our next question is from Keith Housum of Northcoast Research.

If I could just drill down a little bit more on your Government and Education segment, which has been on a tear the past 2 or 3 years.

Are you guys taking share there or is it really a growth in the underlying market?

And what's the opportunity here for this to continue?

Because obviously it's a huge driver in the overall growth rate.

I'll give you my -- an opinion.

I think -- qualitatively, I think we feel like we really have taken share.

I think the ability -- and it is an advantage of CDW's.

Our scale enables us to have meaningful vertical go-to-market sales organizations.

That enables us to have people who do nothing but think about those segments and therefore develop solutions for those segments.

If you remember back on the early days of the Common Core curriculum and CDW being kind of first to market with a prepackaged solution to help the K-12 market, was I think one example of taking share and the benefit of our scale.

That has also played out in the Connected Campus.

So -- and it's not just in education, Keith.

We've kind of seen this play out.

And so I would venture to say we have taken meaningful share in those markets.

Great.

And as you think about the solutions, like the Connected Campus you mentioned, are we still in the early stages of those solutions?

Or do you think that's been rolled out across a lot of the market already?

Well, if you're just talking about Connected Campus, I'd say there's still lots of opportunities out there to expand the Connected Campus opportunity.

But those solutions aren't static, too, Keith.

I mean, if you think about, as an example, I'll go back to K-12.

The original solution was very student-education focused, right, the package we put together for the Common Core.

And then that drove a next level of solution, which became this version of, okay, we've got all of these students digital testing, using client devices.

That drives, then, another need for K-12, which was network and network administration and network management.

So they tend to evolve.

And CDW has done a nice job of evolving with its customers.

Our next question is from Katy Huberty of Morgan Stanley.

I actually want to follow up on the government conversation because your results are particularly impressive, given that we're hearing from other resellers, other technology companies that the government spending, federal in particular, is incredibly weak right now given change in leadership.

So just curious whether you think this strength can continue or if there's any spillover of the market trends in your business as you move through the year.

Yes, I think, first of all, let's separate it into 2 buckets, Katy, because I think there's different drivers, if you will, in each.

In State & Local, you heard me say that we've continued to be successful in capturing new contracts, new business, so to speak.

And so that is all additive to CDW when we get those contracts.

In particular, we developed a core competency, if you will, in public safety.

And so I don't see those waning, if you will, going forward.

And in the federal space, it was an exceptionally strong quarter.

I think it would be unfair, although I'm not -- it's not beyond me to ask the team to continue to repeat an unfair performance, but I think it would be probably unlikely that they would continue to have that kind of growth rate through the year.

But I think our alignment with the strategic programs hasn't really yielded anything yet that says that it wouldn't continue to be a growth.

Now having said that, I was just in Washington last week meeting with both customers and some of our sellers, and I think there is this little bit of, "Okay, is defense spending going to get more money?

Is it going to come at the expense of the civilian?"

The nice thing about CDW, I'll go back to one of my favorite words about this place, is balance, is that we have relationships with customers on both sides of the federal government marketplace.

And I think that will, based on what I know today, will enable us to continue growth.

Got it.

And then just a quick follow-up.

On the data center business, you talked about some areas of growth, some areas of decline in terms of your end markets.

Can you just clarify where you continue to see strength versus where the slowdown has occurred in the server storage businesses?

It's fascinating, Katy, and one of the things I do every quarter is look at not just the aggregate number, but then I spend a fair amount of time peeling the layers of the onion back looking at segments.

And I think it's, and this is probably no surprise to you, it's bounced all around.

For example, this quarter, one of our strong selling server markets was small business.

And small business has also been one of our fastest growing cloud computing markets.

And you start to wonder, "Well, what is it that drives that?" I think some of it is driven by incentives that OEMs may put in the marketplace.

Some of it could be driven by, "Hey, I don't really want to change architecture."

In other situations, you have people who are clearly saying, "Hey, I'm going to either go with hyper-converged or cloud computing or virtualization." And all of those, I think, have tended to make the server market kind of bounce around.

So I'd like to give you some crisp, perfect answer, but the truth be known, each quarter feels different, each segment feels different.

And fortunately for us, we've been able to optimize those that are growing.

And that concludes our Q&A session for today.

I'd like to turn the call back over to Tom Richards for any further remarks.

Okay.

First of all, thank you again for taking the time this morning.

I do appreciate your questions and interest in CDW.

And as I always say, if your company needs help, I can't think of anybody better that could help them with their IT needs than CDW.

I'd also like to remind you that on May 11 we have our Analyst Day, so I'm hoping we'll see everybody at the Analyst Day session.

We're excited to host you here at CDW.

And the last, as you know, Mother's Day is around the corner, and I don't think you want to forget Mother's Day, because if it weren't for her, you would not have the sheer joy of attending these earnings calls.

All right.

Thanks, everybody.

See you.

Bye-bye.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude today's program, and you may all disconnect.

Everyone, have a great day.