Image source: Motley FoolCDW(NASDAQ: CDW)
CallMay q1209 earnings.
01, 2019, 8: 30. m.
Content: ready to speak: Hello, ladies and gentlemen, welcome to CDW
Earnings Call for the 2019 quarter. [
As a reminder, the meeting is being recorded.
Let me now introduce the host of Today's meeting, President and CEO Chris Leahy. You may begin. Chris Leahy --
Ji, thank you, president and chief executive.
Good Morning, everyone.
Thank you for discussing the first CDW with us today-
2019 quarter results.
I was talking to Colin Kebo, our chief financial officer;
And Beth Coronelli, our vice president of investor relations.
I will give a brief overview of our results, key drivers and our expectations for the remaining 2019 at the beginning of today's conference call.
Collin will take you to more detailed financial information.
We will then discuss your issue, but Beth will file a declaration of Safe Harbor Disclosure before we begin.
More from Motley Fool Beth ronelli--
Vice President of Investment Relations thank Chris.
Good Morning, everyone. Our first-
Quarterly earnings release was released this morning and posted on our website investor website. cdw.
Com, and supplementary slides that you can use with us during your call.
I would like to remind you that certain comments made in this presentation are considered forward --
Statement under the Reform Act on Private Securities Litigation of 1995.
There are risks and uncertainties in these statements, which may lead to significant differences in actual results.
More information about these risks and uncertainties is included in the earnings release and Table 8 --
K we provided information to SEC today in other documents submitted by the company to SEC.
CDW is not obliged to update the information provided during the webcast.
Our speech also includes some
GAAP financial indicators, including non-
Operating income and operating income
Earnings per share. All non-
According to the SEC rules, the GAAP measures have been aligned with the most directly comparable GAAP measures.
You will find the reconciliation chart in today's webcast slide, as well as in our earnings release and table 8
K we provided information to the SEC today.
Please note that, unless otherwise stated, all those referring to growth rates are increases in dollar amounts, and our comment today is compared to the comparable period in 2018.
In addition, all today's references on hardware, software, and service growth rates represent the United StatesS.
Sales only, excluding the results of CDW UK. or Canada.
The sales day in 2019 was reduced by one day compared to 2018.
Unless otherwise stated, the average daily sales will be used for all sales growth rate references during the call.
Later today, the replay of this webcast will be posted to our website in about 90 minutes.
I would also like to remind you that this conference call is the property of CDW and may not be recorded or replayed without the specific written permission of the company.
With this, let me transfer the phone to Chris. Chris Leahy --
Thank You, Beth, president and chief executive.
It is a pleasure to discuss with you today the results and strategic progress of CDW.
I am happy to report that we have had a good start this year
Line growth and profitability.
In the first quarter, the average daily sales increased by 11. 5%, up 12.
Fixed currency of 4%.
Net sales were $4 billion.
Sales were reported to have decreased by 7% per cent this quarter. Non-
GAAP operating income increased by 10.
$ 7% to $0. 287 billion
GAAP earnings per share increased by 18. 2% to $1. 24 per share.
This quarter's performance reflects three key drivers, namely, our balanced customer end-market portfolio, the breadth of product and solution portfolios, and ongoing execution for our three goalspart strategy.
Let's take a look at how these drivers have helped us achieve profitable growth this quarter.
First, our client market performance.
We have five Americans, as you know. S.
Channel: more than 250 companies provide services to customers;
Small businesses, serving clients of about 20 to 250 colleagues; and healthcare; government; and education.
In each channel, we have a team that focuses further on the customer terminal market and the vertical industry.
In government, for example, we have the federal government, and the team is focused on serving the Department of Defense and civil agencies as well as the state and local teams. Each of our U. S.
Channels generate more than $1.
3 billion of net sales in 2018.
We also have our America. K.
Delivered nearly $1 with Canadian business.
9 billion of net sales in 2018.
As most of you are familiar with, our balanced customer end market allows us to perform well even when external factors affect certain industries and industries.
All of our customer end markets grew this quarter, reflecting a generally healthy economy.
I am particularly satisfied with the implementation of our government channel, which has performed well despite the closure of the government.
Our businesses, small businesses and the public sector, as well as our international operations, have both contributed.
Digital growth was achieved this quarter.
Take a closer look at the show.
Net sales of our company team increased by 13%, achieving a balanced double growth
Digital growth in transactions and solutions.
The growth of the transaction is high by US-
Value services, including pre-orders, configuration, and staging, as well as securing client device inventory in a market with limited supply.
This enables the team to meet strong customer equipment needs driven by economic strength and healthy employment.
Customer equipment grew 20% in the quarter.
This is double for 11 consecutive quarters. digit growth.
At the same time, the Enterprise team continues to leverage our deep technical capabilities and a strong portfolio of solutions to help customers modernize their IT infrastructure and achieve the benefits of a more flexible architecture.
This has achieved outstanding results in servers, storage, software and netcomm.
Net sales of small businesses increased 10% year on year
Digital growth in transactions and single transactions
Digital growth of solutions.
Customers of small businesses remain optimistic and continue to invest in their businesses and employees.
Similar to businesses, our competitive advantage has enabled small business teams to achieve about 20% customer equipment growth based on similar growth last year.
Small businesses continue to benefit from the focus we created when we set up our booth --alone segment.
For example, our small enterprise technology team provides tailor-made advice based on the unique needs of small businesses, including emerging technologies and consumer alternatives.
We were able to do this, which led to a nearly 50% increase in software as a service for small businesses this quarter.
Public's net sales increased by 10%, reflecting a strong contribution from the government and the health care sector.
The government provided high
Net sales of adolescents increased year on year
Digital growth has been achieved in the federation, states and localities.
Despite the partial closure of the government in January and the difficult year, the federal team has achieved these excellent results. over-
Client device comparison.
With regard to the closure, the team worked closely with affected civilian agencies when they reopened.
By the end of the first quarter, our sales with private institutions were generally in line with the plan.
Our ability to support the government's ongoing priorities in infrastructure modernization, strengthening cybersecurity and combat readiness drives robust solution performance.
The growth of federal solutions also benefits from scheduling, as we have several large projects delivered earlier than expected.
Transaction reductions partially offset the performance of the solution.
As you can recall, the federal government has achieved great success in helping agencies to complete the defense department's mandate, winning 10 devices in 2017 and 2018.
We have now completed 10 shipments related to the Ministry of Defense authorization.
The continued success of the contract and public safety program drives state and local performance, which contributes to the growth of enterprise storage, netcomm and software.
Education increased 2. 4%, K-
12 and higher ed offers lowdigit growth. K-
Strong growth in customer equipment and video drives net sales performance, offset by some confusion in the solution.
The team continues to work with schools to design and transform classrooms for collaborative learning in a more active and flexible learning space.
The higher education strength of client devices was partially offset by the decline in solutions, as we achieved strong performance from several large network projects in 2018.
Helping customers in higher education to address security issues has driven strong growth in security software.
Health care grew by more than 8%.
The team continues to help customers protect their IT environment and modernize their infrastructure.
This car is two-way.
The solution achieved digital growth this quarter.
The customer also continues to refresh the client device, which drives the mid-order
The number of transactions increased.
Our international team has achieved strong growth with total sales growth of nearly 13% in the USS. dollars.
Both teams did well this quarter and each team did well
Digital growth in local currencies.
In Canada, solutions continue to grow faster than transactions.
Scalar, which closed on February 1, met expectations.
Integration is in progress and we are starting to offer extended portfolio options for existing CDW Canada and Scalar customers.
Based on our enhanced value proposition and the combined breadth of our products, services and solutions, we are winning new businesses. In the U. K.
The team did a good job in terms of share in the public sector Fiscal Year --
Terminal purchases bring particularly strong growth as they benefit from go-to-
Our government team has made market improvements.
Multinational customers continue to take advantage of our international business in the United States. S. to U. K.
Recommendation for the quarter increased by 20%.
Today, we do not see any impact on demand from the Brexit.
As I mentioned last quarter, we have set up an agency on the African continent to support CDW U. K.
Broader growth opportunities in the EU.
This is also a contingency plan for Brexit.
With the new entity, we have expanded our ability to support our customers on the continent. First-
Quarterly results also demonstrate the second driver of performance, the broad mix of our trading and integrated solutions.
The overall portfolio was strong this quarter.
Hardware increased by 10%, software increased by 18%, and services increased by 16%.
Our solution grew for the second consecutive quarter.
Transactions grew by 10%, achieving digital growth.
The performance of the solution reflects the sustained advantages of the economy, the need for customers to replace old infrastructure, and their desire to take advantage of a more efficient and flexible architecture.
Our sales and technical team has done a great job in helping customers successfully meet these requirements.
Our solution results also reflect the benefits of a backlog refresh as lead time for solution categories such as NetComm returns to a more normal level.
As we grow by more than 20% in server and enterprise storage, these trends drive our strong hardware growth.
Hardware growth has also been driven by double-digit customer growth as we leverage the scale competitive advantage of distribution centers to help customers overcome supply constraints this quarter.
NET software sales increased by 18%.
As you know, software is becoming a bigger part of IT solutions.
The success of helping customers adopt new architectures and protect their IT environment helps them achieve superior performance in network management, storage management, and security software
Our cloud solutions capabilities have also contributed to the strong performance of the quarter.
We drove twice.
Productivity, platform, security, and collaborative workloads again lead to digital growth in customer spending and gross profit.
Professional service and warranty increased the service by 16%.
Strong growth in the solution category, including software as a service and warranty, both of which are Web-approved for our 30-basis-
Gross profit margin expansion in the first quarter.
As you can see, this quarter's performance demonstrates the power of our balanced customer end market and a broad portfolio of products and solutions, both of which clearly serve our strong top and
While we have benefited from some favorable timing, net sales have still increased by double digits in the same currency in order to accommodate this situation, which is how our team is overcoming uncertainty (including government shutdown) when the results of the Brexit and shipping restrictions are imminent.
Our results also prove the third driver of our performance, our three-
Part of the growth strategy.
For CDW, our strategy starts with our customers.
Maximizing their technology investment to drive productivity and growth is their priority, but given the speed of limited IT resources and technological change, our customers need to help make technical decisions to implement solutions and then manage their technology investments. Our three-
The part strategy is designed to ensure that customers ask us for help and make the right decisions for their business. Our three-
Part of the strategy for growth is, first of all, acquiring new customers and gaining share;
The second is to improve the ability of solutions;
Third, expand service capacity.
It is important that these three pillars cross each other and jointly promote our ability to deliver integrated technology solutions that customers want and need in a profitable way.
The first pillar is to increase productivity.
We do this through enhanced systems and data, productivity plans for the sales team, and investments in branding and marketing.
This enhances our ability to achieve our overall strategy.
Productivity gains have enhanced our ability to invest while achieving profitable growth.
The second pillar ensures that we remain relevant to our customers by investing in solutions capabilities, enabling us to be their trusted partners today and in the future.
Our third pillar ensures our value.
Added Service features to provide many integrated terminals todayto-end solutions.
These three interrelated pillars, combined with our scope and scale, create a strong difference in the market.
Let me share some examples of our strategy in action.
Our first pillar includes increased productivity through investment, process improvement, and automation.
The new proprietary partner portal we implemented last year is a good example.
The Partner Portal further enhances our ability to work with our supplier partners.
For example, we have enhanced real communication and presentation.
Providing time data with partners, providing timely analysis and insights to partners, enables us to collectively provide more targeted and effective sales planning, training and support to our sales and technical organizations.
The portal will also help us to more effectively join our 50 to 75 new partners each year to keep our portfolio optimally relevant to our customers.
An example of the second and third pillars of our strategy is the solution we offer for 500 non-profit integrated health networks.
After migrating the electronic medical record system to the public cloud, the customer's cost and performance problems are increasing.
An integrated team of our healthcare sales staff and technical solution architects work closely with customers to evaluate their IT environment and evaluate options.
The solution is to move their entire electronic medical record platform, Web storage, software and communications back
There are four key reasons why CDW can help customers through this journey.
First, because we are technology.
Agnostic, we are able to invite just devices to discuss the pros and cons of the public cloud
Premise and hybrid solution.
Second, our broad portfolio of products and solutions enables us to deliver on multiple technologies and brands to create an integrated solution.
Third, our experienced healthcare team is able to leverage their deep industry experience to develop compelling bestin-breed solution.
Finally, we are able to deliver solutions with professional service capabilities.
This project has helped our customers reduce costs, improve performance, and net sales of more than $20 million.
We are confident that our strategy positions us as strong growth, providing us with good service in the face of macro channel or partner challenges, and leveraging our competitive advantage to deliver strong profitability
We will continue to make strategic investments to ensure that we remain the preferred partner for our customers.
An important investment we make is our customers.
We added 55 in the first quarter, excluding about 300 customers
Face the scalars of colleagues.
We continue to plan to increase between 125 and 175 customers-
2019 for colleagues
Now, let me leave you some thoughts on the rest of the year.
Obviously, we have a good start.
Our view on the market outlook of 2019 is generally consistent with that of the beginning of the year.
We will continue to expectyear U. S.
IT market growth in the 3% range.
Given our strong performance in the first quarter, we are constantly increasing the organic base of currencies to increase the target of superior to the market to 300 to 375 basis points.
We continue to expect Scalar to contribute an additional 100 basis points of growth this year.
These expectations recognize our strong performance of 2018. over-
We are faced with annual comparisons in both client devices and international performance.
We expect the continued but moderate strength of the customer's equipment and the solid growth of the solution.
Nevertheless, while we are pleased that the lead time in the solution category is back to a more normal level, the possibility of a chip shortage remains a wildcard.
Of course, as we move forward throughout the year, we will continue to refine our expectations.
Now let me hand it over to Collin, who will share more details of our financial performance. Collin? Collin Kebo --
Thank you, chief financial officer, Chris.
Good Morning, everyone.
As Chris said, our first one
Quarterly results reflect our balanced portfolio of channels, a wide range of product offerings and the continued execution of our three-part strategy.
They also reflect our successful investment in our business on the basis of long-term development.
Long-term financial strategy to drive strong cash flow, achieve sustained profit growth and return cash to shareholders.
To our first one.
Quarterly profit and loss on slide 8.
Consolidated net sales were $4 billion, an increase of 9.
7% and 11 of the report.
On average, we sell 5% pounds a day because our sales day is reduced by one day. On a constant-
On the basis of average daily sales of currencies, consolidated net sales increased by 12. 4%. First-
The results of the quarterly merger included a two-month scalar, which performed in line with expectations.
On the basis of average daily sales, continuous sales fell by 2.
9% compared with 2018, it was about 500 basis points higher than the average in the previous three years, better than expected.
This reflects several factors.
The growth of customer equipment is stronger than expected, especially in companies and small businesses, as we take advantage of our scale competitive advantage in distribution centers to help customers overcome supply constraints during the quarter. In the U. K.
The team performed very well and caught three financial years
Although there is uncertainty about Britain's exit from the EU, the final purchase and foreign exchange are not as large as expected.
We also benefit from favorable opportunities.
Last year, we shared that the lead time has been extended in certain categories, such as NetComm, which has resulted in our backlog increasing to a higher levelthan-normal levels.
In the first quarter, the lead time returned to a more normal level, creating a positive rush we had previously expected to receive throughout the annual meeting.
In addition, as several large projects are delivered earlier than expected, the Federation benefits from scheduling.
Overall, the favorable timing contributed some $60 million to $70 million in net sales for the first quarter.
Gross profit increased by 11 this quarter.
Between $ 3% and $0. 672 billion.
Gross margin expanded by 30 basis points, driven by the gross margin of the product, which continues to benefit from the advantages of the solution category, and the overlap of client devices shipped to the Ministry of Defense last year.
The advantages of software as a service and warranty also help to expand profits, which are recognized on the network.
Turn to SG & A on slide 9. Our non-
SG & A, including advertising, increased by 11. 7%.
The growth is mainly driven by sales compensation, which changes with gross profit growth, incremental scalar expenses and investment in the business, which is related to our go-
Since 2018, the number of 9,434 colleagues has increased by nearly 700, about half a yearover-
An increase of one year compared to Scalar, the other half comes from investment by organic colleagues. Roughly two-
Of the nearly 700 more colleagues, 30 were customers --facing roles. Non-
GAAP operating income, replacing the Adjusted EBITDA with our internal and external pre-
Operating profit from taxes was $0. 287 billion, up 10. 7%. Non-
The profit margin of GAAP's operating income is 7. 3%.
Historically, since the first quarter was a seasonally low sales quarter, adjusted EBITDA margins were the lowest in the first quarter.
We expect non-quarter
The GAAP operating income margin follows a seasonal pattern similar to the quarterly Adjusted EBITDA margin.
Move to slide 10.
Interest expenditure was $38 million, an increase of 1. 8%.
This is mainly driven by an increase in the interest rate ceiling from the strike price of 1.
5% to two or three-
Financing of 8% and Scalar, partially offset by savings from the refinancing of regular loans, we will overlap at the beginning of the second quarter.
The effective rate of our GAAP shown in slide 11 is 20.
Compared with the effective tax rate of 23, the tax rate for the quarter was 2%. 4% last year.
That led to tax spending of $39 million in the first quarter, flat year-on-year.
Lower GAAP effective tax rates are driven by higher Excess tax benefits brought about by stocks
Basic compensation for the first quarter of 2019 and first quarter of 2018
Time benefits related to scalar acquisition.
These two items, as well as other tax adjustments that do not correspondGAAP add-
Back, adjust to export our non-
The Slide effective tax rate, as shown in Slide 12.
This quarter, our non-
The effective tax rate is 25.
8%, down 50 basis points from 26 last year.
The tax rate of 3% is mainly due to the fact that the IRS issued an invisible low on the global level on foreign taxation in 2018. taxed income.
As you can see on slide 13, first of all
The quarterly weighted average spread of unissued shares per share was $0. 149 billion and GAAP net income was $1. 02, up 25%. Our non-
GAAP net income, which better reflects operating results, increased by $0. 185 billion in the quarter.
Up 9% from last year. Non-
Net income per share is $1. 24, up 18.
2% more than last year.
Currency against the windGAAP earnings-per-
Share growth in the first quarter was around 90 basis points.
Go to the balance sheet on slide 14.
As at March 31, our cash and cash equivalents amounted to $0. 285 billion and our net debt was $3 billion.
The price of our cash revolver is $1. 3 billion.
As shown in slide 15, we have maintained a strong scroll of three-
Quarterly Indicators of working capital. Our three-
The average monthly cash conversion cycle is 17 days, which is the same as last year. in our annual target range, high teenagers are 20 years younger.
Free cash flow for the quarter was $0. 303 billion, compared to $0. 231 billion in 2018.
Keep in mind that Q1 is a seasonally strong cash flow quarter, as sales decline continuously from the fourth quarter to the first quarter and cash taxes are minimal. The year-over-
The annual increase in free cash flow primarily reflects higher cash margins and is mixed with suppliers with extended payment periods.
During the quarter, we returned $0. 22 billion in cash to shareholders, including a $43 million dividend and a $0. 177 billion share repurchase, with an average price close to $91 per share.
Steering slide 16.
Our capital allocation focus remains the same and continues to reflect our intention to drive shareholder value through capital returns and strategic investments.
First, increase the dividend every year in priority order.
To guide these growth, we set a goal in November 2014 to achieve 30% free cash flow dividends over five years.
We will pay a dividend of $0 this quarter.
As of June 11, recorded shareholders were 295 per share in May 24, up 40% from a year earlier.
Second, make sure we have the right capital structure with the target net leverage ratio within 2.
5 to 3 times.
We ended the quarter at 2.
Three times, slightly lower than the low end of this interval.
Third, add organic growth to strategic acquisitions.
The acquisition of Scalar is a good example.
Fourth, dividends and excess cash after mergers and acquisitions are returned to shareholders through stock repurchase.
Our capital allocation priorities support the latest 2019 outlook you see in slide 17.
As Chris mentioned, we continue to look forward to the United StatesS.
The IT market grew by about 3%.
We now expect net sales to grow by 300 to 375 basis points over the US. S.
The IT market is growing on an organic basis.
We continue to anticipate that, in addition to 100 to 300 basis points, Scalar will contribute about 375 basis points of growth.
Currency is now expected to represent 50-basis-
Assuming the exchange rate is $1, there is a headwind throughout the year.
£ 25 and $ zero.
We continue to expect
Profit margin of GAAP operating income will be in the medium term
The range of 7% is 2019.
What we expect nowGAAP earnings-per-
Sharing in constant growth
The monetary base is between 11% and 12%, which is slightly higher than our previous expectation of about 10%.
Currency headwinds are expected to decrease by 50 basis points from the constantcurrency rate.
Keep in mind that we are responsible for achieving our financial goals every year.
Slide 18 provides additional modeling ideas.
We currently expect sales in the first half of 2019 to be split into about 48 in the second half.
The first half of the paragraph 5%, 51.
In the second half of 5%, 50 basis points were different from the historical seasonality in the first half of 48% and the second half of 52%.
Taking into account the strength of the first quarter, this reflects the expected seasonal lower than historical levels in the second quarter, including the impact of federal time and backlog flushing.
This is also a factor in the overlap of upcoming customer equipment in the company, which is a challenging comparison in the USK.
There are also key unknowns, such as chip supply in the second half of the year and Brexit.
When modeling Q2, please remember that the foreign exchange headwinds in the first half of the year are greater.
We look forward to the second one.
Quarterly headwinds will be consistent with the 90 basis points we experienced in the first quarter.
With the decline of P & L, we continue to look forward to
Profit margin of GAAP operating income will be in the medium term7% range.
The total annual Depreciation and amortization is expected to be between $0. 27 billion and $0. 275 billion.
This includes approximately $0. 18 billion in acquisition amortization.
The relevant Intangible assets, including the initial estimate of the scalar may change slightly once the procurement accounting is completed.
Depreciation and amortization charges in SG & A, excluding amortization of acquisitions
Related intangible assets are expected to be approximately $85 million. Equity-
Basic compensation is expected to be about $5 million to $7 million higher than 2018, driven mainly by the following factors
Q1's basic plan.
Interest spending is expected to be between $0. 165 billion and $0. 167 billion this year. over-
Annual growth driven by the cap rose from strike prices at 1.
5% to two or three-
Eight percentage points of standard financing. Our 2019 non-
The GAAP effective tax rate is expected to be close to the lower limit at the end of 25. 5% to 26. 5% range.
We expect stock buybacks to driveGAAP earnings-per-
Share growth is about 350 to 400 basis points faster than non-growth. Net income from GAAP. Non-GAAP earnings-per-
Stock growth is expected to face a currency headwinds of 50 basis points, similar to the highest level.
Other modeling ideas about the free cash flow component can be found in slide 19.
Our free cash flow rule of thumb remains the same. 75% to 4. 25% of sales.
Excluding the census, expectations for capital expenditure remained unchanged, slightly higher than half of the point of sale.
We expect the cash rate to be slightly lower than 25. 5% of pre-
Tax revenue adjusted for acquisition amortization
Related intangible assets
We expect to provide a cash conversion cycle within the target range of high teens to low 20 years.
This concludes the financial summary.
With this I will have the operator open it and ask questions. [
Operation instructions]Thank you.
Questions and Answers: Operator [
Our first question came from Matt Cabral at Credit Suisse. Matt Cabral --Credit Suisse --
Analyst Chris, I'm just wondering if you can talk about the health situation in the context of a wider range of needs, specifically the solution, which sounds like it's been a good performance this quarter, if you can comment on the sustainability of the old age infrastructure update you mentioned in your prepared review. Chris Leahy --
President and Chief Executive Officer. Hi, Matt.
I'm glad you got the call again.
I would love to do so.
I think we break it down into many factors that affect the strength of the solution.
Looking back, you really have five to seven.
As you know, over the past year, traditional data center infrastructure has built up what people call technology debt.
Whether it's budget constraints and the customer extending the life of the asset, or the cloud or strategy that our customers are considering, as we talk to our customers now, what I call the new normal of hybrid, they're really looking --
Enable data center.
So, first of all, the old infrastructure, of course, the deadline for the end of Windows 2008 and SQL Server services in January is the catalyst for demand.
But at the same time, we are also thinking about how to combine the two technologies of hybrid cloud.
So you have a few factors.
The absolute need for outdated infrastructure and upgrades, and what drives this is that you still have some deadlines.
But at the same time, Matt, we have a lot of conversations over a longer period of time.
I want to say that the roadmap means growth in the future.
Prem, cloud growth and ongoing views, I will call on-
Estimated quantity model.
So, as I pointed out in my comments, the demand continues to stay healthy as the data center is now at the center when customers use it to drive their business. Matt Cabral --Credit Suisse --AnalystGreat.
Then in the international arena, I know it's early, but, just wondering if you can talk more about the integration of scalars and help us think about the opportunities for further international expansion in the future. Chris Leahy --
President and Chief Executive
OK let me start with Scalar and I will say the integration is on target.
As you know, from our history, we are very thoughtful and very planned about how to do this ---
First of all, we pay great attention to our customers and colleagues.
It feels good.
What I want to say is that the team has come together.
The sales organization understands that when you bring additional benefits to the help they can offer their customers, I would say that the sales organizations at Scalar and CDW have frankly felt that some quick wins. Our teams in U. K.
The CDW team is very excited about the technical resources that Scalar has, and Scalar is very excited about the additional portfolio they can bring to our customers.
Very positive there and on goals.
In terms of further geographical expansion, I will return to our overall view of growth.
If it is really valuable to our customers, it is our starting point.
It needs to be in line with our strategy, which may include expanding our capabilities in terms of technology or geography.
So at the end of the day, this is one of these two things.
The value proposition must be there and the price must be convincing.
Look, we're in the market.
I think one of the problems that often arise is that when you are doing integration, are you not on the market?
Aren't you looking at the bottom? Is it there?
We would definitely consider it if there was an opportunity to help us push the acceleration capability faster rather than build it, but we also want to make sure it's a compelling price.
The next question is Shannon Cross from Cross Research. Shannon Cross --
The analysts are curious, the healthcare company, or I'm not sure if what you're talking about is a hospital company, where they start over again
Prem from the cloud. I'm trying --
We heard about this.
We're just in the Dell World, which is clearly a trend.
But what I want to know is how many customers come to you at this point and say, "Look, we don't know what we're doing.
We are not sure the best route here.
"Then look at their entire data center and make changes.
Or is it too early for us, in terms of cloud proliferation, to really do that?
Again, this is a bit back to the previous question about how long this can last.
I mean, some of the companies we talked about saw it as more than one.
Annual Update cycle for the entire data center and hybrid system.
So I'm just curious about what you think. Chris Leahy --
President and Chief Executive Officer. Hi, Katy.
Your question--oh is it --
Oh, Shannon, I'm sorry.
I mixed up my name. Hi, Shannon.
I would say that the question you are asking is exactly what our customers are asking us, take a step back and understand that they have the infrastructure that needs to be updated, but also want to implement the right capabilities, the right capabilities for the future needs of their business or organization.
So this is a roadmap dialogue.
The opportunity for CDW is to help them guide their ability in strategy.
When you think of too many options, including what I call "on-
The premise measurement model, you know some of these providers, you now have the traditionalpremise.
You have a cloud-prem. You've got on-
Prem is a measurement and service payment model where you can use the public cloud.
The more choices customers need, the more help they need.
Yes, it will be a long process. term road map.
You can't--they can't --
Customers just can't make changes overnight. Shannon Cross --
From the profit perspective of CDW, how should we look at the benefits for you?
I think, what I want to say is, in-
Prem has a higher margin opportunity compared to turning to the cloud, and as far as I know, it's more of a rating loop?
As we have been thinking for years, I am trying to understand that there may be more potential profit growth. Chris Leahy --
President and Chief Executive Officer.
Let me start and let Colin jump in.
I think our view of profit is that, as you know, there are a lot of things that will not only affect our profits, but also our profits.
This is what we are selling, when we sell it, can it be rated, is it based on the transaction ---
I would say that there is quite a mix of factors in the solution business that will drive changes in profit margins. Collin Kebo --
Chief Financial Officer yes
Shannon, the only thing I want to add is to build on Chris's comments about the many different kinds of mixes that are happening.
I think your intuition is correct and you will expect a higher gross margin for the solution, but as we have already discussed, it also has a higher cost of service.
So, if you look at the past quarter, we do have good solution performance.
Our gross profit margin grew strongly year on year, but you see an increase in our SG & A, which also reflects an increase in service costs.
So I think you need to think about that, not the bottom line. Chris Leahy --
Even in some solution areas, Shannon, we have what I call merchandising pricing.
Therefore, the pricing pressure in the solution area has also declined.
The next question comes from Katy Huberty at Morgan Stanley. Katy Huberty --
Analysts congratulated the quarter.
I think it's the first question.
How do you know, or how do you come to the conclusion that the revenue growth you are seeing is stock gains, not just a stronger overall market, in view of the shortened lead time, winning 10 upgrades, and the flexibility of some old infrastructure, it may also be a market phenomenon?
And then I did. up. Chris Leahy --
President and Chief Executive of Katy
It's a pleasure to hear from you.
I think when we see the growth rate of market share, at least what we see, we look at the performance of the company and we are quite confident that we are actually sharing it across the board.
I mean, when you take over 20% of server storage as an example, it's a pretty strong share growth for US relative to the other areas we see in the market. Collin Kebo --
Chief Financial Officer yes
This is a collage, Katie.
What I want to say is that the market is no different from what we thought three months ago.
Based on what Chris said, when you see areas where we really have a lot of strength, I'm talking about the growth of government, customer equipment, and the company's high youth growth rate of 20%, server storage and data centers, I just don't think the markets in these areas are growing at this rate, and we allocate more excess performance to the market. Katy Huberty --
This makes sense.
So, what should we look at the early trading of $60 million to $70 million in the third quarter?
Is this the quarter of June?
So should we model a slowdown in revenue growth in June?
Or there were other factors that started working in June and backfilledforward? Chris Leahy --
President and Chief Executive Officer.
I'll have Collin do the modeling, but it's really some accelerated transactions.
So these started this year. to-
In our opinion, we will not see them replaced by performing.
Something rushed out of the lead was a bit like-time impact.
So we don't want to see this alternative sale on the back end. Collin Kebo --
Katie, chief financial officer.
My view of $60 million to $70 million is that this is a combination of federal timing and NetComm backlog flushing.
I had expected NetComm backlog to work during the year.
Some were in the second quarter.
Some of them were in the second half.
Some of the timing of the federal agreement, these are things that we think are more likely to happen in the second quarter, and actually change in the first quarter.
So I think it's a combination of the second quarter and the second year.
But if you look at the first half, the second half
We give half of the differences and it's clear where Q1 is and you can get an idea of what we think about q2.
The next question comes from Adam Tinder of Raymond James. Adam Tindle --Raymond James --
AnalystI just wanted to start with a 2019 EPS growth guide.
You from about 10% rise to slightly higher than 10% in the first quarter more than 10%.
So I was wondering why there was no more traffic going through.
We just got a call from our competitors and they have a similar trend.
With this year's development, growth is becoming more and more scarce, and the pricing environment is becoming more and more difficult. what is one aspect of the headwind of gross profit margin?
After the strong first quarter, did more investment increase opex conservatism?
Just any help to the bucket, why not increase the flow
Over time. Collin Kebo --
Adam, chief financial officer. It's Collin.
I think there are a few things going on.
One is the influence of timing.
So it's clear that the timing of $60 million, $70 million, also has some EPS.
According to the consensus of the quarter and the year, it is about between 12% and 13%.
I think if you look at what we think about the whole year, it will show that we are moving between $0. 08 to $0. 11 of that.
So you can think about it, the main reason for the rest is the timing.
In general, we feel and we--
We felt about a year before three months ago. Adam Tindle --Raymond James --
Oh, that's right, Colin.
Maybe it's just a matter of cash flow.
The cash cycle is accelerating now within the scope of the rule of thumb, not above the rule of thumb, but maybe we're spoiled, but it's a change.
So I was wondering why it changed more colors.
You just cleaned up the backlog.
Are you investing in inventory to offset this flush over the course of the year?
Any color is helpful. Collin Kebo --
Chief financial officer, of course.
I think last quarter, we might be a little clearer about what we expected for the whole year.
From the perspective of free cash flow, we expect to be in 3. 75% to 4. 25%. The above 4.
25% more is a statement about capital deployment and how we use cash.
We are looking forward to more returns than the 4 th.
25%, this is because we overdelivered our cash flow last year relative to our expectations.
A little catch up
I call it the return on capital of shareholders.
So what I want to say is that we still want to be within 3. 75% to 4. 25% this year.
I do think that if you look at our balance sheet, it will be a bit volatile as we grow throughout the year.
We carry some higherthan-
Normal stock levels, but we do this to help customers in an environment where supply is limited.
So again, I think it can be a bit bumpy every quarter, but when I look back at the full year, I expect that we will be in 3 years. 75% to 4. 25%.
The next question comes from Matt Sheerin from Stiffel. Matt Sheerin --
The financial company of stefield. --
Analyze a few of my simple questions.
First, as far as your federal business is concerned, do you see the contribution of the sensory contract?
How should we consider the profit and loss situation this year? Chris Leahy --
Yes, Matt, president and chief executive, very little at this point.
As we mentioned earlier, we expect a 40 basis point increase this year.
We are still studying the feeling, time, and so on of various devices.
So we haven't had any updates yet, nothing different, just a little scrolling now. Matt Sheerin --
The financial company of stefield. --AnalystOK.
Then with regard to the healthcare business, you give some very good examples of customer engagement there. You've had --
Looks like there's been a very volatile business for a few years, and now you 've got four or five quarters in the same middle-up singledigit growth.
Is this just a sign that the industry is finally making these investments and moving towards the digital world?
Or, given your skills, are you just getting a share in this market as well? Chris Leahy --
President and Chief Executive Officer.
I think you're insightful.
There's one thing about both.
I think, first, as you know, when we 've been in an affordable health care bill uncertainty world for a few years, our health care system, this is the biggest part of our customers in this area who are worried about their source of revenue.
Despite the aging of infrastructure, this has led to a slowdown in their spending, and so on.
So first, Matt, you 've taken it off the table, not the political frontier and center.
It pops up sometimes.
But with the uncertainty of the source of income, the hospital has decided to start spending, so this is the first part.
The second part, as far as you are concerned, at the time they consume, they are going through the same modern assessment as many of our customers, that is, how can we improve productivity?
How can we improve our customer experience?
All of this requires modernization of the data center and more flexible architecture.
So we have this conversation.
When we look at the growth rate of health care, we do have the confidence to share our share on the basis of these two trends.
The next question is Jason Rogers from the Great Lakes review. Jason Rodgers --
Great Lakes review--AnalystYes.
What is the organic growth this quarter?
Currency base other than scalar? Collin Kebo --
Chief Financial Officer yes
We did not provide it, but we did share the scalars that met expectations.
Prior to that, we said we expect Scalar to contribute about 100 basis points throughout the year.
So I think this will give you a rough chance. Jason Rodgers --
Great Lakes review--
The analysis is correct.
With the increase in hardware, this quarter increased by 10%, what is the growth of client devices?
Remember, obviously, do you see any signs of slowing down there?
But I just wanted to know that there was little progress beyond that. Collin Kebo --
Chief Financial Officer yes
Our client devices grew by double digits this quarter and we continue to see healthy demand for client devices.
Obviously there are some issues with availability of supply and we will have some big overlap.
So while we are happy with the client device business, I expect the growth rate to slow as we grow throughout the year. Jason Rodgers --
Great Lakes review--
Finally, I would like to know if there is any change in the competitive environment, especially if you are getting attractive solution sales.
Do you see any new competitors there? Chris Leahy --
President and Chief Executive Officer.
I would say--
A stable part of our business is that the competitive environment is always changing.
So you have different types of organizations in this area.
We are used to the organization that competes with it.
This is just a competitive environment.
This is just what we are used.
We control what we can and face it every day.
So I don't want to say much, it's just the continued high competitive nature of our work.
The next question comes from Keith Housum of North Coast research. Keith Housum --
North Coast research center-
Analyst Chris, I hope you can compare and contrast Scalar with the Kelway acquisition.
As I think Kelway has been providing revenue growth for several years.
Help me get these long.
Expectations of what you see in the Canadian market.
Then now through the scalar acquisition, compared to the United States, what is your market share in CanadaS. ? Chris Leahy --
President and Chief Executive
Let me take it apart a bit.
I started from behind and went forward.
Canada's market share is quite the same as that of the United States. S.
Market share and the United StatesK.
Within 5% of the entire market.
With Scalar, this may add a little bit.
In terms of scalars and Kelway, they are highly consistent in the purpose of the acquisition, bringing value to our customers in the areas required by customers.
So you will remember that international customers want to reduce touch points globally, and that's why we bring them there;
In Canada, customers look for a full portfolio of portfolio options from single providers in various areas such as customers, transactions, solutions, and additional expertise in high-end areas
Growth solutions such as security, hosting services, infrastructure, etc.
So the two are consistent in this respect.
The difference is that AmericaK. --CDW U. K.
It also brings us the ability to support our customers around the world.
This is different from our ability in Canada.
Canada is not the center of global support for the United States.
As a result, both companies intend to make growth acquisitions.
Neither of them is focused on synergy if you like.
As we scale up our business, we will get operational synergies in Canada, but none of these are cost issues, they are growth games designed to be highly aligned with our strategy, our customers tell us that they want and need more ability. Does that help? Keith Housum --
North Coast research center-AnalystIt does.
I appreciate it. Just a follow-
On the government side, and changing gears.
Talk about some of the business being brought up, or are you more of a timing project?
Is this really like reducing the government's overall budget for spending on technology over the course of the year?
Will this give your sales staff and architect engineers an opportunity to add additional revenue on that basis?
So it might just be a total growth, not just a pull-in revenue? Chris Leahy --
Yes, this is a good question.
I wouldn't think so because many of these projects are multi-purposeyear projects.
As you know, we have described, and I know others have described that these solutions projects can be very confusing.
It is not easy to grasp the timing accurately.
So, to be frank, some projects are up to January, February, and others may be postponed from last year to this year.
So I don't think it's going to bring in the dollar, I think it's just changing the schedule, not freeing up sales time to work elsewhere, because they are already working on projects related to delivery later this year.
I have no further questions at this time.
I want to transfer the call to Chris Leahy as a closing note. Chris Leahy --
Thank you for your presence and questions today.
As always, I would like to thank all of our 9,400 CDW colleagues in particular for their excellent efforts and dedication to our customers every day.
They are our true competitive advantage and the core, soul and reason we are constantly delivering meaningful value to exceed our customers' needs and expectations.
This is the reason we have and we will continue to lead the industry.
I would also like to thank our customers for providing us with the privilege and opportunity to serve and repeatedly win your trust.
Thank you, we look forward to talking to you next quarter. Operator[
Participant: Chris Leahy--
President and Chief Executive-
Scolalin Cobo, Vice President of Investor Relations-
Matt Cabral, Chief Financial Officer-Credit Suisse --
Analysis by Adam Tinder-Raymond James --
Analyst Matt Sherin-
The financial company of stefield. --
Great Lakes review--
Analyst keith Housum--
North Coast research center-
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