CDW Corp (CDW) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CDW First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Chairman and Chief Executive Officer, Tom Richards. Sir, you may begin.

Thank you. Good morning, everyone. It's a pleasure to be with you today and to report on our first quarter results. Joining me on the call are Collin Kebo, our Chief Financial Officer; Chris Leahy, our Chief Revenue Officer; and Sari Macrie, our Vice President, Investor Relations. I'll begin with a brief overview of our results and key drivers. Chris will run through our performance by customer-end market. And I'll share my thoughts on our expectations for the rest of 2018. Collin will run through the quarter's financials, and then we'll go to your questions. But before we begin, Sari will provide a few important comments regarding what we will share with you today.

Thank you, Tom, and good morning, everyone. Our first quarter 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 concerning these risks and uncertainties is contained in the Form 8-K we furnished to the SEC today and in the company's other filings with the SEC. CDW assumes no obligation to update the information presented during this webcast.

Our presentation also includes certain non-GAAP financial measures, including non-GAAP earnings per share. Our non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You'll find reconciliation charts in the slides for today's webcast as well as in our press release and the Form 8-K we furnished to the SEC today.

Please note that all references to growth rates or dollar amount increases in our remarks today are versus the comparable period in 2017, unless otherwise indicated. In addition, our references to growth rates for hardware, software and services today represent U.S. net sales and do not include the results from CDW UK or Canada. Also note that 2018 and 2017 net sales amounts are reported under the accounting standard, ASC 606. The number of selling days in the first quarter was the same in both 2018 and 2017. All sales growth references during the call will use average daily sales, 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 an excellent start to the year, delivering strong top line growth and profitability. Net sales were $3.6 billion, up 10.8% above last year, up 9.6% on a constant-currency basis. We delivered adjusted EBITDA growth of 11.9%, 10.9% on a currency-adjusted basis, and non-GAAP net income per share growth of 41%, up 39% after currency. These results include all the delayed shipments related to product shortages and partner process changes that we shared with you on our last call. Excluding these shipments, currency-adjusted revenue growth was strong -- increasing high single digits.

This quarter's excellent performance reflects 3 key drivers: Our balanced portfolio of customer end markets, the breadth of our product and solutions portfolio; and our variable cost structure. Let's look at how these performance drivers helped to deliver profitable growth once again this quarter.

First, our balanced portfolio of customer-end markets. As you know, we have 5 US sales channels: Corporate, which serves customers with coworkers from generally 250 and up; Small Business, which serves customers with roughly 20 to 250 coworkers; Healthcare, Government and Education, each generating annual sales of more than $1 billion. We also have our Canadian and UK operations, which together generated more than USD 1.5 billion in 2017. Our scale enables us to further segment these channels into customer-end markets and dedicate sellers and technical resources to deeply understand the needs of each market and address their unique customer priorities. Because markets often act in a countercyclical way, this segmentation also enables us to mitigate the impact of different macroeconomic and external factors that can impact each of these unique end markets. Chris will take you through a high-level overview of performance this quarter by each of our channels. Chris?

Thanks, Tom. The sales teams delivered a very strong quarter with increases across all of our U.S. channels and our international operations. In Corporate, sales increased 9%. We continue to see outstanding results from both our category penetration initiatives, which are focused on deepening our relationships by expanding the number of products and solutions each customer purchases from us, and also from our ongoing prescriptive book management. A more solid footing in the economy, coupled with rigorous execution of our programs, drove a continuation of the momentum we had in the fourth quarter with customers moving forward with more integrated, longer-tail projects. We are also seeing nice traction from new customer acquisition programs. All together, these efforts resulted in strong performance in both solutions and transactions.

Small Business increased 12%. Customer confidence remained strong and changes we have made to our go-to-market strategy continued to gain momentum, driving both transactional and solution sales. We continue to make progress fine-tuning our approach to cost effectively deliver value to Small Business customers, including resource allocation and investments in our e-commerce platform.

While early, our sellers indicated that customers were not yet making decisions based on tax reform in either of our Corporate or Small Business segments.

On the Public side of the US business, sales increased 7%. Government was up 12%. Federal's high single-digit increase reflected ongoing success working with targeted agencies as they move ahead with funded projects as well as the impact of January client device sales to the Department of Defense to meet the security mandated deadline. State and Local delivered another quarter of excellent results, up mid-teens, once again driven by new contracts and ongoing success in Public Safety. Education results were mixed, up 1% overall. K-12 sales were flat on top of last year's mid-teens growth. Client device sales remained under pressure as schools digested what they've purchased over the past 3 years and focused on maintaining existing equipment and extending early Chromebook life. The K-12 team continues to make progress helping schools create new learning environments and saw excellent growth in related technologies like collaboration. Higher Ed's mid-single-digit growth reflected ongoing success meeting networking needs as well as the impact of new contracts. These are especially good results given higher Ed's Q1 2017 performance where they delivered more than 20% growth. Healthcare growth was primarily driven by pent-up demand as customers decided to move ahead on purchases that had been put on hold, largely in the transactional space.

Our international operations had another outstanding quarter, up 31% in US dollars. Both Canada and the UK. continued to execute extremely well in markets with each delivering high-teens growth in local currencies. Both teams did a great job capturing share of March fiscal year-end buying. Share capture of commercial fiscal year-end buying was particularly strong in the UK, while capture of public entity spending was strong in both geographies. The Canadian team continues to leverage investments made in solutions. For the fifth consecutive year, CDW Canada was named the #1 IT solutions provider in Canada.

Today, UK is not seeing significant changes in customer-buying behavior, even with the uncertainty related to timing and terms of Brexit. We saw robust referrals business again in the quarter with referrals in constant currencies in the US to the UK increasing more than 50% in the quarter. International capabilities continued to grow in relevance and sales outside of the U.K. represented 1/4 of our CDW UK net sales. Clearly, our efforts to build one company are driving results. Being "One CDW" is about making it as seamless as possible to work with us wherever you are, for our customers, partners and our sellers.

A great example of how being One CDW translated into value for us and our customer is a global client refresh we are providing to a large healthcare company that we won in 2017.

Following the merger, the customer wanted to upgrade client devices and peripherals, monitors and accessories in 11 countries, including the US Sure, we can do that, but the sale wasn't only about the hardware. The customer wasn't just buying client devices from us. They were also buying our logistics and service capabilities. Their focus was on using IT to drive their business. They didn't want to be in the logistics business, but they needed to procure all the same model, custom build-to-order notebooks to image them and then stage and deliver them to more than 25 locations. "One CDW" could do that for them. The total deal represented nearly 5,000 laptops and peripherals combined and will generate more than $7 million between 2017 and 2018 with roughly 50-50 across the U.S. and the rest of the world. Importantly, this deal with the services rep generated nice overall margin. That's a great demonstration of the power of One CDW. With that, let me turn it back to Tom.

Thanks, Chris. Clearly, our sales teams' success depends on their ability to meet customer needs and that is where you see the impact of the next driver of our results, our broad product and solutions suite. Our ability to meet the total technology needs, both integrated solutions and transactional, 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. Our products and solutions breadth ensures that we always have something we can do to help a customer.

First quarter customer priorities remained similar to what we saw throughout 2017. We saw ongoing focus on data center optimization and efficiency, security and the integration of software into solutions as well as the continuation of client device hardware refresh. We saw strong growth across solutions and transactions with both increasing high single digits. U.S. hardware increased 8%, led by client devices, which increased low double digits and was above our expectations.

Growth was strong across all customer-end markets, except K-12. Even excluding the DoD shipments in January, client devices grew high single digits. In addition to market factors, client device growth benefited from new customer acquisition programs. These programs leverage our unique service offerings, which combine capabilities like buy and hold, staging and imaging with our broad product portfolio. Video equipment, which includes digital signage and display panels, also increased double digits in the quarter.

Data center hardware, which include servers, storage and power and cooling, increased high single digits. Customer focus remained on optimizing data center infrastructure with economical, yet high-performing solutions. This drove growth in emerging technologies like hyperconverged, which grew more than 70% in the quarter. Netcomm hardware also increased mid-single digits. Software increased 10%. Growth was driven by 3 ongoing trends: Software as a Service, which increased more than 50%; integration of software into solutions, which drove strong network management growth; and focus on protecting customer and company data, which led to more than 25% security software growth.

Software gross profits grew nearly twice as fast, 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 8%, driven by warranties and field services, which primarily reflect networking and storage engagements.

The final driver of our performance this quarter was our variable cost structure. With sales compensation that varies in line with gross profits, we were once again able to offset the impact hardware sales can have on product margin and delivered an adjusted EBITDA margin above last year's level. Clearly, the ability of SG&A to vary with gross profit is a key contributor to our sustainable profitable growth.

Another key contributor to our ability to deliver profitable growth is the ongoing investment we make into our 3-part strategy, which is designed to deliver the solutions and services our customers want and need.

Today, we are better positioned more than ever to serve our customers' total IT needs, whether in a physical, virtual or cloud-based environment in the US or internationally.

Let me briefly walk through each of these strategies and share a couple of examples of recent investments and how they are contributing to our performance. Our first strategy is to capture market share and acquire new customers. Continuous productivity improvement is key to profitably gaining share. The investment we made in the new residency program we introduced at last year's Analyst Day is a great example of how we do this. In the past, the new seller would spend 5 months in our sales academy, then move directly to their territory sales team. Now, after a seller graduates from sales academy, they join our sales residency program where they will work until they graduate on their 24th month with the company. Key to the success of this program is the investment we have made in dedicated sales residency program leaders, leaders who are accountable for driving incremental prescriptive rigor and leading structured sales and learning activities, including one-on-one coaching and developmental reviews. Their measures of success include acceleration in the rate of growth per seller band, reduced turnover and increased job satisfaction. In this program's first year, we saw double-digit increases in sales per seller with 2 years of tenure with the company. Sales continued increases in this quarter, coming in at 16%. We have also seen meaningful decreases in attrition in the sub-24-month length of service band. Of course, increased sales productivity and lower attrition drive profitable growth.

Investments we have made to enhance our solution capabilities, our second strategy, are also driving profitable growth. Over the last 2 years, net new security and cloud customer-facing coworkers represented more than 10% of the total customer-facing coworkers added. You can see these results of these investments in our security and cloud performance. Once again, security and cloud were our fastest-growing solution areas, each growing customer spend more than 25%.

Our third strategy is to increase our service capabilities. Today, IT leaders are accountable for both running the business and using technology to drive results. To do both, customers are looking for ways to reallocate resources to areas with a greater strategic value. Having a partner like CDW is a great way for them to achieve this. One of the reasons is the meaningful portfolio of services we built to complement our menu of products and solutions. Our service offerings include logistics and configuration services for client devices and peripherals as well as solution configurations, including racking and storage customization. Services also include advisory, architecture and managed services, which are underpinned by our 24/7 network operating centers. These capabilities are increasingly giving customers ability to turn over the "Run IT" aspect of their IT spend to CDW. One element of our service value proposition to our customers is our ability to be the trusted adviser to help them navigate and then maximize all of the different consumption options that are available to them today in our hybrid IT world. To further drive that value, last year, we added a new service that we call, micro cloud consulting, to our portfolio of cloud advisory services.

Micro consulting engagements enable customers to get the professional consulting help they can afford in byte-size 8-hour increments. While still small, our micro consulting practice is growing rapidly. This is a great example of how we are delivering on a key objective of our Small Business go-to-market strategy -- finding cost effective ways that we can be our customers' outsourced IT expert.

Investments, large and small, continue to drive sustainable profitable growth. Targeted investments and customer facing coworkers is key to our ability to continue to evolve and maintain this position as the trusted adviser for our customers.

During the first quarter, we added 35 customer-facing coworkers, on target with the plan we shared with you last quarter that calls for us adding 100 to 125 customer-facing coworkers during 2018. Also during the quarter, we executed on the strategy we shared with you to invest a portion of the onetime step-up in net income from the 2017 Tax Cuts and Jobs Act in our coworkers around the world. This included the payment of $1,000 bonuses to hourly and front-line coworkers and the $12 million onetime restricted stock grants to nonexecutive coworkers. The remaining tax reform funded investments we discussed regarding our bold forward strategy are planned over the balance of 2018.

Let me leave you with a few comments on the remainder of the year. Clearly, we're off to a great start. Given what we are seeing in the market, we are cautiously optimistic that demand will remain firm for the balance of the year and we have increased our view of the US IT market growth. We now expect full year US. IT market growth of a little above 3%. We're also increasing our target for outperforming the market to a little above 300 basis points. So you can see we're in the "little above" mode these days, more than 50 basis points higher than our expectation we shared last call. These expectations recognize our strong 2017 performance and the year-over-year comparisons we are facing for both client devices and international. We expect ongoing, but moderating, strength in client devices, driven by both the market and our customer acquisition and service rep strategies that Chris mentioned as well as solid growth in solutions. That said, while we're pleased that the year-end supply chain delays were resolved in the quarter, the potential for additional vendor-specific shortages remains a wildcard. Of course, we will continue to refine our expectations as we move throughout the year. Now let me turn it over to Colin, who will share more detail on our financial performance. Collin?

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 offerings and variable cost structure. They also reflect successful investments in our 3-part strategy for growth and demonstrate the progress we are making against our long-term financial strategy to drive strong cash flow, deliver sustained profitable growth and return cash to shareholders.

Before I get started, I'd like to remind you that all of the financial information I will review reflects the adoption of ASC 606. So it's apples-to-apples comparisons for 2017 and 2018.

Turning to our P&L. If you have access to the slides posted online, it will be helpful to follow along. I'm on Slide 8. Consolidated net sales were $3.6 billion, 10.8% higher than last year on a reported and average daily sales basis. Average daily sales were $56.4 million. On a constant-currency basis, consolidated net sales were 9.6% higher than last year. Currency impact was driven by favorable translation of the British pound and Canadian dollar, adding roughly 120 basis points of growth. Currency tailwinds were 50 basis points higher than the fourth quarter. On an average daily sales basis, sequential sales were down 5.4% versus Q4 2017, a lesser decline than anticipated. This reflected 4 factors: First, a more positive than anticipated currency tailwind; second, stronger-than-expected client device sales; third, international success capturing fiscal year-end buying; and fourth, the shipment of sales impacted by Q4 supply chain delays, which delivered more than 100 basis points of sequential growth and added nearly 150 basis points of year-over-year growth. Excluding these shipments and the impact of currency, net sales increased just over 8% year-over-year.

Gross profit for the quarter increased 9.1% to $604 million. Gross margin in the first quarter was 16.7%, up 40 basis points sequentially from the fourth quarter and down 30 basis points over the last year. The year-over-year delta reflected the impact of 3 main drivers. The positive impact of increases in net service contract revenue and other 100% gross margin revenues, which include Software as a Service and warranties, was more than offset by ongoing hardware strength, which compressed product margin and mid-single-digit increases in partner funding compared to double-digit increases in sales.

Turning to SG&A, on Slide 9. Reported SG&A, including advertising expense, was roughly 4% higher than last year. Reported SG&A includes $8 million of noncash equity compensation and $2 million of other costs, including costs related to payroll taxes on equity-based compensation. Our adjusted SG&A increased 6%. Lower growth in adjusted SG&A compared to sales primarily reflects the variable nature of our sales compensation, which moves in line with gross profits. Coworker count was up roughly 20 since year-end 2017 to 8,750. Adjusted EBITDA increased 11.9% to $280 million. Adjusted SG&A growth, slower than sales, resulted in an adjusted EBITDA margin of 7.8%, 10 basis points higher than the first quarter of 2017. Once again, our results demonstrate the power of our variable cost structure.

Looking at the rest of the P&L, on Slide 10. Interest expense was $38 million, $2 million lower than last year's Q1 level. The reduction primarily reflected the benefit of last year's Q1 refinancing in the absence of the double payment of 1 month of interest on the notes that were redeemed. GAAP taxes were $39 million, which resulted in an effective tax rate of 23.4% compared to an effective tax rate of 21.9% in the first quarter of 2017.

As you can see on Slide 11, the increase in effective tax rate primarily reflects the year-over-year impact of lower excess tax benefits from equity-based compensation in Q1 2018 versus Q1 2017, which was partially offset by a lower federal tax rate.

Moving to Slide 12. On a GAAP basis, we earned $127 million of net income, more than twice last year's first quarter net income of $58 million, which included $57 million of debt extinguishment costs. Our non-GAAP net income, which better reflects our operating performance, was $163 million in the quarter, up 33.6% over last year. Non-GAAP net income reflects after-tax add-backs that fall in 4 general buckets: The ongoing amortization of purchased intangibles, equity compensation and related payroll taxes, integration expenses and other nonrecurring or infrequent income or expenses.

To get to our non-GAAP effective tax rate, we adjust taxes consistent with non-GAAP add-backs, including excess tax benefits associated with equity-based compensation. For Q1, our non-GAAP effective tax rate was 26.3%, down slightly more than 10 percentage points compared to last year's 36.5% rate, primarily due to the lower federal tax rate. Our non-GAAP effective tax rate of 26.3% applied to our non-GAAP pretax income of $221 million resulted in non-GAAP net income of $163 million. We've provided a more detailed reconciliation in our earnings release.

As you can see on Slide 13 to calculate our non-GAAP pretax income, you can get to this measure starting with either adjusted EBITDA or GAAP pretax income.

With Q1 weighted average diluted shares outstanding of $155 million, we delivered $1.05 of non-GAAP net income per share, up 40.5% over the prior year, as you can see on Slide 14. Currency impact on EPS was higher than the impact on net sales, adding about 160 basis points to first quarter growth.

Turning to our balance sheet, on Slide 15. On March 31, we had $221 million of cash and cash equivalents and net debt of $3 billion, which was flat to Q1 2017. Our cash plus revolver availability was $1.3 billion. Net debt to trailing 12-month adjusted EBITDA at the end of Q1 was 2.5x, at the low end of our target range of 2.5 to 3x. Our current weighted average effective interest rate on outstanding debt is 4.3%, 10 basis points above last year. While LIBOR increased in the first quarter, the impact on interest expense was minimal, given the 1.5% caps we have in place on our term loan in the amount of $1.4 billion. These caps expire in December 2018. During the quarter, we purchased an additional $1.4 billion of caps at 2.375 percentage to hedge 2019 and 2020. With caps in place, roughly 96% of our outstanding debt is either fixed rate or hedged.

As you can see on Slide 16, we maintained strong rolling 3-month working capital metrics during Q1. For the quarter, our 3-month average cash conversion cycle was 17 days, down roughly 2 days from last year's first quarter and below our annual target range of high-teens to low 20s. Year-over-year, DSO and DPO increases offset each other, largely reflecting the impact mixing into netted-down revenues has on both metrics. The remainder of the change reflects lower inventory days as lower average inventory balances were applied against the quarter's higher cost of goods sold.

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 $231 million compared to $215 million in Q1 of 2017. Remember, Q1 is a seasonally strong cash flow quarter because sales declined sequentially and cash tax payments are minimal. The year-over-year increase in free cash flow primarily reflects mixing into vendors with extended payment terms.

During the quarter, we continued to execute against our capital allocation strategy and repurchased 1.5 million shares for $109 million at an average cost of $72.63 per share. Our capital allocation strategy is comprised of the following 4 components, which you can see on Slide 17. First, 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 $0.21 per share on June 11 to shareholders of record as of May 25, up 31% from a year ago. Since the IPO, our dividend has increased nearly fivefold from the initial annual level of $0.17 per share. Second, ensure we have the right capital structure in place. We've set a target to generally maintain net debt-to-adjusted-EBITDA leverage in the range of 2.5 to 3x. We ended Q1 at 2.5x. Third, supplement organic growth with strategic acquisitions. Our CDW UK investment is an excellent example of this. And fourth, return excess cash after dividends and M&A to shareholders via share repurchases. At the end of March, we had $749 million remaining on our current share repurchase authorization.

Our capital allocation priorities support our updated 2018 targets, which you see on Slide 18. As Tom mentioned, we now expect the US IT market to grow a little more than 3% and CDW to outperform the market by a little more than 300 basis points on a constant-currency basis. We now look for currency to contribute roughly 50 basis points to annual sales growth, assuming year-to-go exchange rates of $1.36 to the British pound and $0.76 to the Canadian dollar.

Given Q1 performance and year-to-go expectations, we expect to exceed our initial 2018 non-GAAP EPS growth target in constant currency and now look for non-GAAP EPS growth to be in the mid- to high 20s, which we define as 25% to 27%. We expect currency to have a similar impact on EPS growth to sales growth. We continue to expect our adjusted EBITDA margin to come in roughly 5 to 10 basis points-or-so below the high end of our high 7s to 8% annual target range as tax reform investments and tax expenses. Keep in mind that these are annual targets, not quarterly.

Let me provide you with a few additional comments for those modeling the rest of our 2018 financials. I'm on Slide 19. Our historical sales seasonality has been roughly 48% first half, 52% second half. Based on Q1 results and expectations for the rest of the year, we look for roughly 50 basis points of sales to shift from the second half to the first half of the year. Given Q1's better-than-historical sequential growth, we look for Q2 seasonality to run below historical seasonality. We have the same number of selling days as the prior year in each of the remaining quarters, and we end the year with the same number of selling days. We now expect annual depreciation and amortization to run a little less than $10 million above 2017 at roughly $68 million per quarter, $47 million of which is for purchased intangibles. With the impact of our term loan repricing in April, annual book interest expense is expected to come in at roughly $155 million. We continue to look for annual equity compensation to be roughly $7 million lower than 2017. We expect equity compensation to be at its highest level in the second quarter, up a couple of million dollars compared to Q1. We continue to expect our full year non-GAAP effective tax rate to be between 26% and 27%. We expect excess tax benefits to impact our GAAP tax rate in Q3 and Q4. Annual non-GAAP EPS is expected to grow approximately 300 basis points faster than non-GAAP net income, as share repurchases contribute to our annual target of mid- to high 20% non-GAAP EPS growth.

Finally, a few notes for those of you modeling cash flows. I am on Slide 20. First, we expect our capital expenditures to be slightly above 0.5% of net sales on an annual basis. We also expect to deliver a cash conversion cycle within our target range of high-teens to 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 quarters 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 26% to 27% range to be applied to pretax book income before acquisition-related intangibles amortization, which is approximately $47 million per quarter. In addition, with the reduction in our tax rate, we expect to pay approximately $13 million in 2018 for tax related to the cancellation of debt income we occurred in 2009. 2018 is the final year of payments.

We continue to expect annual free cash flow to come in at the low end of our tax-reform-enhanced rule of thumb run rate between 3.75% to 4.25% of net sales. This reflects 2017's over-delivery of 50 basis points above our pre-tax reform rule of thumb due to timing. That concludes the financial summary.

With that, let's go ahead and open it up for questions. (Operator Instructions) Operator, please provide the instructions for asking a question. Thank you.

(Operator Instructions) And our first question comes from Adam Tindle from Raymond James.

The phrase tuck-in accretive deals was recently removed, I think, last quarter and replaced with expand CDW strategic capabilities on the slides. And I think you could have somewhere near $1 billion of liquidity based on your share repurchase guide and debt position. So would CDW consider something larger like this? And how would you evaluate those options? And I have just one follow-up.

Well, let me first say that we -- now that we sit in the current financial position that we didn't have early on in our public life, I think we've been pretty transparent, Adam, about our interest and consideration of inorganic growth and looking at deals, whether they be strategic purely in nature or to help drive growth. And so I don't know that there's anything different other than we continue to look at the parts of the marketplace where we might add a particular capability that it would take us too long to build internally or other parts of geographic expansion that would help us serve customers on an international basis.

Okay. That's helpful. And just as a follow up, CDW often talks about being selective and taking the right kind of revenue. But I think Collin mentioned in the prepared remarks that partner funding grew at half the rate of sales, gross margin is still declining and we're lapping those hardware mix comparisons last year. So could you just talk about the results and whether maybe the environment is forcing somewhat of a pivot here from being selective. And what's causing the change in partner funding because I would have thought partners would reward a retailer more handsomely for strong performance like this.

So I would say, those -- I don't know, I think there were 2 or 3 in there, Adam. So let me just try to knock them out one at a time. The first is, no, we haven't changed our selectivity. In fact, I would describe us as probably even being more selective when it comes to where we go, what products and services we decide to focus on, in part because of our strategy that we just finished for the next 3 years. So no change in selectivity. In fact, the number of opportunities this quarter much like other quarters where we just said, "You know what, no, thank you." Now sometimes when you make that decision, that can impact where you end up on a particular scale from a funding perspective. I think the one thing to keep in perspective is the funder -- funding growth from partners was very -- was positive this quarter and meaningfully positive. It just didn't keep pace with the unexpected growth in top line sales. And sometimes that unexpected growth comes in areas that are areas that are prime areas for the vendors and sometimes they come in areas that are prime for customers, but aren't necessarily prime for vendors. And so we think we do a really effective job of balancing those 2 things, meeting customers' growing needs and at the same time serving our partners well in the marketplace. So I don't really think about it as a marketplace dynamic. The other thing that I was pleased to see is, I tend to look at margin 2 different ways. Sequentially is kind of the current condition in the marketplace because what happened last quarter is the closest reportable period to what we're experiencing now, and you heard that there was nice positive growth. A lot of that was driven by our strong solutions performance in the quarter. And then I look at it year-over-year just to say, okay, what if we've done differently and while there was a slight decline in the margin year-over-year, I think Collin walked you through some of the things that are happening, and part of it was just the strong hardware growth, which I'm not going to turn away from. The last thing I would say though, and we have been, I think, rock solid consistent on this, is the area we put many calories on, even some degree more calories on, is our adjusted EBITDA performance because that is what we can control, that is making sure that our cost structure is aligned with what's going on in the marketplace. We don't control everything that happens with gross profit.

Adam, it's Collin. The only thing I'd add to what Tom said is that there are several components to partner funding. I think the most commonly thought of is vendor incentive rebates, but there are other things where partners will help fund some of our advertising programs and so a driver there wouldn't necessarily be sales, but the driver would be more the timing of our marketing campaigns. Purchase discounts are also a component of partner funding and that can vary based on which partners you're mixing into and out of. So just consider that there are many different drivers of what contributes to partner funding year-over-year, and that's why we've consistently said you can see that contribution bounce around from quarter to quarter depending on those drivers.

And our next question comes from Amit Daryanani from RBC Capital Markets.

I guess 2 questions for me as well. Maybe to start with, Tom, Q1 extremely strong organic growth performance. Even if I take out FX and some of the pushout contributions, I get growth at something north of 8% for the March quarter. Could you maybe just help me understand wouldn't 8% plus growth in Q1, we're talking about 3%-plus IT spend, 300 basis points of share gain for the full year. What ended up being better that you don't think will sustain for the rest of the year. Is that the IT spend was better? Or you think share gain is somewhat higher?

Yes, good question. I think there were a couple of different reasons that made the first quarter look a little stronger. The first one was, the better-than-expected client growth. And you heard me allude to some of that was driven by the DoD mandate which ended in January. So that's one. Two, was the pull forward or delay, whatever right term is, of the supply chain activity, which we alluded to, in the last quarter. The third thing was the opportunistic performance by our international team in, what I would describe as, both the Public and then year-end opportunity. And then the fourth was currency. So if you kind of look at all those and fast-forward them, you're going to see a few of them were, if you will, onetime events.

Understood. And I guess, if I can just follow up on Netcomm, which I think you mentioned was up mid-single digits. Could you just talk a little bit more about what's going on in that segment because if I recall that's where a lot of the pushouts have happened last quarter. So I would have thought that would do somewhat better. So some clarity there would be helpful.

Yes, it is. It was. Although it wasn't a lot of, it was part of, I would say. It was -- Netcomm and the data center, Amit, were the 2 areas where we had some pushouts. I think part of it is to some degree, as Cisco transitions, as a big network partner, to a software-driven architecture, you get more of the netted-down impact on top line. But I would tell you outside of Cisco, a lot of the other network vendors had a pretty strong quarter. So I think some of that shift, and you heard me talk about this, the shift to software-driven architectures is increasing. As that increases, I think you're going to continue to see some of those product lines bounce around top line wise, but also see margin enhancement.

Our next question comes from Matt Cabral from Goldman Sachs.

Just to build on Amit's question. I guess, given the strong start to the year, wonder if you could talk a little bit more about just what you're hearing from customers on the health of the broader demand environment at this point. And I know Chris said no impact from corporate tax reform so far. But just curious if you think that's an incremental sale when that builds as we get through the year.

Well, I would tell you I hope, Matt, that does, obviously. I think we haven't heard people directly connect, would be the way I would say it, the tax reform benefits and IT investments. We have heard people initially take care of coworkers or employees, although -- like we did, and then start to think about how do I take the remaining benefit and start to plough through the business. So I am hopeful, I think the word we used was cautiously optimistic, that one of the things that's going to drive demand for the rest of the year would be as that flows through the decision process inside a company. And I saw -- I think it's -- I mean, I think everybody feels fairly cautiously optimistic about the economy, and we hear that from customers. We just don't hear them say, "Hey, because of this, we're not going to push this project forward and give you that opportunity." But we anticipate that, that will happen as we move through the year.

Got it. And then, on the international, just given the success of your U.K. push so far, just curious if you think there are any lessons learned from the integration of Kelway so far that almost create a blueprint in some sense for you to just apply to future M&A outside of the U.S. going forward.

I'll give you my answer, and then I'll let Chris give you her spin on it. As I've told my team, if I could replicate the Kelway experience every time we do an acquisition, I'm all in. Because it met our expanding customer need, it was accretive to the business that benefited from being part of CDW. We have benefited from some of their experience and -- like managed services. So not that I'm greedy, Matt, but I'd love to have that every time we go forward. Having said that, I think it's given us increased confidence and awareness of expanding our international footprint because of what we learned and the success we've had. And Chris who had a lot to do with that successful integration, I will let her comment.

Yes. Matt, I think Tom said -- really said most of it. You can be assured that we've developed plans and blueprints off of that acquisition, all the way from frankly lead generation to evaluating opportunities, but planning well in advance for the integration because we've come to realize how important that is to the immediate and then longer-term success of the -- of an acquisition.

And our next question comes from Jayson Noland from Baird.

And just to clarify, Tom, the lead times are back to normal in Netcomm and data center?

Well, I -- the answer is, all of the supply chain issues that we had in the fourth quarter were cleaned up. Having said that, we continue to hear rumblings of potential delays, which is why I described that as a wildcard going forward.

Okay. Understood. The follow up is on cloud and security strength. Are you able to find the right talent to invest in those 2 markets or at least train new hires in these areas that you expect to see continued success through the year?

So Jayson, the answer is, yes. And part of it is because of our ability to find people inside of CDW who have both experience and/or interest in focusing on security or cloud performance that helps us if you will fund the resource additions we want to make. And I think the last part of it was absolutely yes, that these will continue to be meaningful growth areas for CDW from both a skill, capabilities and footprint standpoint.

Our next question comes from Matt Sheerin from Stiefel.

Just a couple of questions. One regarding the commentary on the strength in Corporate, and Chris talked about the fact that one of the reasons for that success is the increased penetration of product sales within existing customers, both solutions and the client devices. Could you maybe elaborate more on that, give us any metrics that have shown your average sales accounts today versus a year ago? Or any other metrics? And then, within that, are you finding within big enterprises that the decision makers on data center type of products versus client devices are different? And is that a challenge for your account managers?

Yes. I'll take the first part of that question. We don't give out specific metrics on those types of programs. What I can tell you is we're seeing increase across the board when it comes to the various initiatives we put in place, whether it's category, penetration, acquisition, et cetera. Those continue to be positive. But we don't provide those metrics generally. On the decision maker, I think the answer is, it depends. And we have great penetration in both the decision making area for the client as well as data center. Given the, I'll say, the complexion of the sellers that we have been growing and training, their ability to get to the appropriate place has increased dramatically over the past 5 to 6 years. And so the ability from an accelerated perspective to get to the decision maker in the data center, even we start in the client space, where that might have been, as an example, the purchasing folks a while back, allow us to move forward to the other area.

And Matt, I'll give you one other little connective tissue. One of the things that, I think, has been an important part of our success has been the rigor and attention to detail around book management. And part of that has been, we've transitioned pretty effectively over the last 4 or 5 years to make sure that the size of a book that a seller has, is -- gives them an opportunity to make a great living, but also motivates them to penetrate existing accounts instead of just planting new flags. Those incremental customer-facing coworkers that we've been adding for the last 4 or 5 years then get the benefit because we now are creating new books that are fairly good rate that have a scale and scope that allows them to go and attack. So if you're managing a book with, let's say, 200 customers, your ability to get to key decision makers is going to be limited based on time. But if you're managing a book that is meaningfully less than that, then you're going to be incented and have the time to penetrate other areas of the business, and one of the benefactors is our success in the data center.

That's very helpful. And then, my follow up on the Education market. You talked about K-12 being flattish after many years of double-digit growth, and you talked about the drivers there. And any catalyst that you see within the next year that would sort of bring some signs of life and reacceleration of growth there?

I would say yes to that. The new kind of learning environment, we've referred to the classroom of the future or the modern learning environment, is really where our customers are focusing. And that's really about optimizing the teaching and learning experience through technology and learning space investments. And while I would tell you we'd expect this year to be pretty modest growth across the board due to the clients' muted demand environment, we do feel that we are very well positioned to assist our customers in this new area and believe it's a central role, frankly, in the classroom of the future, K-12, and we'll see growth rebound in the coming years.

Yes, Matt, I think the word I've used is, it's kind of a transition year for K-12. And that as Chris used the term creative learning, it's just not a description, it's actually a concept that, we're finding, has a lot of IQ tentacles to it. And it's exciting for us. And so you can think about us transitioning to the thing that customers are now asking for, is to help us create an actual environment that is more conducive to creative learning.

Our next question comes from Shannon Cross from Cross Research.

I just had a couple of quick questions. One, just on client. I'm curious as to what you're hearing and thinking about sustainability of the growth that we've seen in client. How much of this has been Win 10 or new products? And at what point all of those computers out there that we all talked about that were 5 to 6 years old either replaced or no longer needed?

Okay. First of all, I think this has been -- obviously, we were surprised by the success even in the first quarter. So the refresh has extended a little bit longer. I don't want to get into crystal balling how long refresh is going to continue because I'm probably going to fall short on that one. Here's what we do know, that even before we go through periods like the last 12 to 18 months, because we exclusively focus on the B2B marketplace, client growth has been a constant for us, client device growth. And so we would expect that to continue. I don't think we have the benefit of the huge tailwind of the DoD. And I don't know that there's a single driver, an answer to your question, that's driving the client refresh. I think it's a combination of, for example, if you have a lot of customers in the technology sector, they're growing like crazy, they're adding employees. Well, that in and of itself can drive client growth, and it's not tied to Win 10, it's not tied to security, it's just tied to the growth of their business. So to some degree, I think the interesting wildcard on this would be a constant growth of the economy, what does that mean for employee expansion and what does that mean for client growth going forward.

Okay. That's helpful. And then I guess, with regards to -- we've been talking to a lot of your partners on that and there is all of this discussion about flexible consumption models and Device as a Service and just basically taking everything to ratable which, obviously, is a good thing from a recurring revenue perspective. I'm curious as to what you're hearing from customers, though. Is it still sort of a push versus a pull? Are they increasing their discussions on that? And then how does it all get billed for an accountant for over time?

Okay. There's a lot in there. I think -- I don't know that we're -- maybe I'd just -- this is an opinion. We're at equilibrium on push and pull. I think people are increasingly looking for ways to outsource IT, if you let me use that term liberally. And whether it's cloud computing or Device as a Service, in theory, they're saying we want to take -- we want you, CDW, to take Tover the run it aspect of this business. If you look at our cloud results and you think about some of the Device as a Service examples we've given, it's clearly got some momentum. It actually plays to one of our strengths. And this was something I was trying to allude to in my formal comments, is the logistics capability of CDW and the size and breadth of our warehouses and our logistics infrastructure is -- we're finding to be incredibly helpful as we look at Device as a Service opportunities, which we are seeing increase in a meaningful way.

Just to follow up on the accounting, the answer is, it depends. The transactions can all be structured differently. CDW could make a sale to a leasing company, then a leasing company could turn around and lease to the customer. In that case, we'd recognize it upfront. If CDW were the lessor, then that would be spread over the life of the lease.

And are you finding more -- I'm just curious, is there going to be a shift more to a ratable revenue from your standpoint? Or is it sort of too early to tell?

I think it's too early to tell.

Yes, I think in the beginning it was funny. We joked about this. There was nothing being done ratably. It was -- yes, it's as a service, but we want you to buy it the way that you always did. We have seen, I would say, over the last 18 months more and more comfort by both the partners and the customers in doing it ratably.

And our final question will come from Katy Huberty from Morgan Stanley.

I'll ask both upfront, I know we're towards the end of the call. So first, just broadly speaking, does it feel like the uptick in demand is cyclical in that your business customers are going back and addressing pent-up demand and doing typical refresh? Or you picking up a mindset shift among businesses where there's thinking about IT penetrating more parts and processes across the business within the use cases? And then secondly, what are the competitive dynamics or your exposure relative to the market that you think allow you to outpace that 200 to 300 basis point growth premium this year?

All right. So I think the answer to the first question, Katy, would be it's both, that -- and if you think about some of my formal comments, it was attempting to get at that, is that we are seeing increasingly customers talking to us about kind of becoming their "run IT' partner, if you will, run IT, which I think is a little bit of them thinking about how do I reallocate resources and what parts do I think somebody like CDW can actually do better and then I can take those resources maybe and work on strategic development. So I think that is -- and look, I also think, tied to that is a little bit of one of the questions earlier about the economy and confidence and spending just more on IT. If you said, why have we been able to continue to take share on a constant basis, I think it's a number of different factors. It is the breadth of the portfolio, quite honestly, which as I'd like to tell our sellers, we always have something we can do for a customer. The second thing is, as we've gotten more prescriptive on our book management, we've found ways to have greater motivation, to penetrate better inside of accounts. If you think about the additional coworkers, we've been on a pretty steady drumbeat now for, I think, at least the last 4 or 5 years of adding 100 to 125 customer-facing coworkers. So we're extending our reach. And then I think the last thing, just as an example, as part of our strategy, the addition of -- expansion of our international capabilities has enabled us to help more of our larger Corporate customers with IT solutions around the world. And that clearly has been a major factor in our success rate.

And that will conclude our question-and-answer session for today's conference. I would now like to turn the conference back over to Mr. Richards for any closing remarks.

Okay. Thank you, once again, everybody, for your time this morning and your questions. They help us a great deal and make sure we're focused on the things that are important to you guys and investors. And I'd be remiss, we moved this earnings call up earlier so you have plenty of time to get ready for Mother's Day. No excuses on anybody's part. Thanks, everybody.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may now disconnect. Everyone, have a wonderful day.