Q4 2019 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcome to the CDW fourth quarter 2019 earnings call. At this time all participant lines are in listen only mode. After the speakers presentation, there will be a questioning.
Answer session. So that's the question. During this session you need to press star one of your telephone.
Please be advised that today's conference is being recorded.
If you acquire any further assistance. Please press star Zero I would now like to have the conference over to your speaker today, Chris Leahy Chief Executive Officer has CDW. Thank you. Please go ahead ma'am.
You Shannon and.
Good morning, everyone at the pleasure to be with you joining me in the room today are Colin Kibo, our Chief Financial Officer, and Britney Smith, our VP Investor Relations and financial planning and analysis.
I'll begin with an overview of the full year and fourth quarter financial and strategic Portwood performance and share. Some thoughts on 2020, then call it will take.
Thank you through a more detailed look at the results capital strategy and priorities and targets, we'll move quickly through our prepared remarks to ensure we have plenty of time for today, but before we begin Britney will present, the company's safe Harbor disclosure statement. Thank you Chris Good morning, everyone. Our fourth quarter earnings release was distributed this morning and is available on our website.
Site Investor that CDW dot com, along with supplemental slides that you can use to follow along during the call I'd like to remind you that certain comments made in his 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.
Now to differ materially.
Additional information concerning these risks and uncertainties is contained in the earnings release in form 8-K, we furnished to the FCC today and the company's other filings with the SEC CW assumes no obligation to update the information presented during this webcast. Our presentation also includes certain non-GAAP financial measures.
Including non-GAAP operating income and non-GAAP earnings per share all non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with FCC rules, you'll find reconciliation charts in the slides for today's webcast in our earnings release and form 8-K, we furnished to the FCC today.
Please note that all references to growth rates are dollar.
And increases in our remarks today are versus the comparable period in 2018, unless otherwise indicated in addition, all references to growth rates for hardware software and services today represent us net sales only and do not include the results from CDW UK or Canada. They are the same number of selling days in the fourth quarter and.
The full year as compared to 2018.
A replay of this webcast will be posted to our website. Later today I also want to remind you that this conference call as a property of CDW. It may not be recorded or rebroadcast without specific written permission from the company with that let me turn the call back over to Chris. Thanks, Brittany 2019.
And with a year of both excellent financial performance and progress against our three part strategy for growth.
Once again, we delivered record quarterly results in both strong sales growth and profitability in the fourth quarter net sales were up 11.3% on both reported and constant currency basis.
$4.5 billion.
Gross profit increased 12.1% to $778 million non-GAAP operating income increased 14.3% to $342 million and non-GAAP net income per share was $1.57 cents, increasing 18.4% on both reported and constant currency basis.
For the year net sales were $18 billion up almost $1.8 billion year over year or 11% on.
Reported basis and 11.5% in constant currency.
Gross profit increased 12.3% to $3 billion non.
GAAP operating income increased 12.5% to $1.4 billion and non-GAAP net income per share increased 18% to $6 in 10 cents on a constant currency basis non-GAAP net income per share increased 18.5%.
Our excellent performance reflects this combined power of our balanced portfolio.
Holyoke customer end markets, our full suite of solutions and services that address customer priorities across VIP landscape and our ongoing success executing our three part strategy for growth.
I'll walk you through each of these and how they contributed.
First the balance across our customer end markets as you know we have five us.
Sales channels corporate small business government education, and healthcare each of these channels a meaningful businesses generating annual sales of more than $1.5 billion.
This scale enables us to further aligned sales team did a vertical customer end markets, including federal government state and local government K through.
12, and higher education.
In addition, we have our UK and Canadian operations, which together delivered over 2 billion us dollars of net sales in 2019.
These unique sales organizations serve us well when end markets behave differently from each other sometimes that occurs because markets are disrupted by macro or external challenges.
Sometimes it occurs and customer behaviors differ due to different priorities.
In 2019, the teams did an outstanding job, helping customers address their IP priorities and achieve the strategic objectives delivering exceptional results I'm really proud of our teams accomplishments.
Our 2019 double.
At sales increase was driven by excellent results with strong underlying performance as well as some incremental drivers.
The us in UK, both increased almost 11% in local currency, our competitive advantage to advantages drove outsized growth in a market the played to our strengths our scale scope and.
Distribution capabilities helped minimize the impact from tariffs and supply constraints and helped us gain market share.
Our devices of service solution to the U.S. Census Bureau also contributed to our excellent net sales growth.
The success of the census depends on everyone's participation and that is what our mobile solution.
Is enabling confirming addresses in 2019 and this year collecting census data from households that do not respond otherwise.
The census project will be complete at the end of 2020 common we'll talk more about the expected impact consensus on our financials.
And lastly, the acquisition of scalar.
Netscaler brought capabilities and security cloud infrastructure and digital transformation to our Canadian business.
Also during past solutions investments those investments also paid off last year delivering double digit organic gross profit growth.
Im excited to share that both scalar and abstracts are now operating in market as see.
W. We are one company, one CDW leveraging our integrated capabilities to deliver a seamless experience to customers.
In short 2019 was a terrific year.
Turning to the fourth quarter, you also see the benefit of our diverse customer end markets. So let's take a deeper dive.
In corporate the team delivered 7% growth with balanced transactional and solutions group as they successfully address ongoing customer demand for client devices, while driving solid solutions results in particular double digit growth in servers and enterprise storage hardware.
The small business team delivered nearly 8% growth driven by client device.
Strength.
Channels low double digit growth rates.
Customer activity and purchasing remains strong at corporate in small business customers continued to move ahead with technology investments highlighting the importance of technology to achieved in the schools.
The government team increased sales over 20% federal had another excellent.
Excellent quarter with sales up over 20% driven by very healthy client device performance as the team helped civilian departments move to win 10.
The state and local team delivered high teens growth driven by double digit solutions results.
The team continue to leverage expanded contracts, helping customers secure their environments and.
As their infrastructure with strong growth and enterprise storage and server hardware.
Education increased 1% with low single digit growth and higher Ed and flat K through 12 results.
Higher Ed continued to leverage our sector expertise and broad portfolio to help campuses enhanced student and teacher experiences.
Through client device upgrades and collaboration tools for K 12, strengthen netcomm hardware and desktops was offset by a decline in notebook.
Due to chromebook performance.
The healthcare team delivered excellent performance up almost 14% with double digit growth and client devices as well as enterprise storage hardware.
We are and software.
Healthcare demand continued to be driven by infrastructure refresh and a heightened focus on a patient experience and clinical mobility.
Other which represents our UK and Canadian operations increased 27% on a reported basis. The UK team delivered excellent double digit growth.
In local currency the team continued to help customers transform their infrastructures and gain efficiencies, which drove double digit solutions growth.
Canadian growth was driven by scalar integration.
And is nearing completion, and we're providing expanded portfolio options to both legacy CDW, Canada and scalar customers.
So as you can see our results demonstrate the power of our balanced portfolio of customer end markets. Our results also demonstrate the power of our second driver of performance the breadth of our portfolio with over 100000 products services and solutions for more than 1000 vendor partners, we are well positioned to meet our.
Total needs across the spectrum.
For the quarter U.S. transactions increased low double digits led by 16% growth in client devices.
US solutions increased mid single digits.
Sales performance was balanced with us hardware and software increasing high single digits and services.
During 15%, let's take a deeper look.
Hardware increased 9% fueled by double digit growth and client devices and datacenter hardware.
Client device growth was broad based and driven by continued customer refresh and market gains.
For datacenter hardware, we saw a customers move forward with larger.
Projects driving with strong growth.
As we've discussed before our solutions business can be lumpy with the variability driven by the timing of when projects come to fruition and also the mix of hardware and software in the solution.
Customers continued to be focused on optimizing their datacenter infrastructure with akamai economical yet high performing solutions.
They are leveraging on premise and off premise solutions as well as software based technologies that create efficiencies.
Total software grew 8% with strong double digit growth in storage management operating system software and network management.
We continue to work closely with our customers to maximize the return on their.
Whether it be hardware software or services.
Which leads me to our services category services strong growth was led by configurations and professional services. Our services business had a tremendous 2019 with high teens growth, reflecting our services led go to market approach.
Cloud also contributed to this quarter's results.
With double digit increases in customer spend and gross profit.
Growth was driven by productivity security and collaboration as well as public cloud infrastructure as a service.
As you can see we had excellent well balanced performance in the quarter and we were able to help our customers across a broad spectrum of ITC needs.
That leads me to the final driver of our performance the impact of investments, we're making in our three part strategy for growth.
Investments made to ensure we continue to serve our customers it needs in this evolving market, whether it a physical virtual or cloud based environment in the us for internationally.
Our three part strategy.
Energy for growth is to first acquire new customers and capture share.
Second enhance our solutions capabilities and third expand our services capabilities.
Importantly, these three pillars work in tandem each is crucial to our ability to profitably assessed designed deliver and manage the integrated technology solutions.
As our customers want and need today in the future.
These pillars help us today in front of our customers emerging and ongoing priorities.
Let me share a couple examples of our strategy and action.
Last October one of our customers.
Medical Technology company with over 1 million patients had a cyber.
Correct.
The attacker lock the company's on premise datacenters and public cloud access and proliferated through its entire IP environment.
A few months prior members of CDW sales and technical teams have presented to the company on CDW is approach to information in network security.
Historically this customer had.
Early purchase transactional products from us not fully leveraging our solutions and services capabilities.
The company's IP director called CDW to utilize our expertise in this critical situation due to our teams presentation.
CW Security incident response team was engaged and immediately help to assess and limit the tab.
It was crucial to maintain patient safety and protect sensitive information ultimately in the coming days and weeks CDW helped to assess contain and remediate. The attack then we advised and installed security technology toward all future attacks and rebuild the customers datacenter infrastructure to get the businesses operations running again.
And with enhanced security.
CDW had a well orchestrated response, providing deep technical knowledge and services. In addition to our full suite of product capabilities.
This is not a unique example in today's environment cyber attack is the question of when not if security is a top priority for.
Customers, we have made investments in this capability from a co worker and vendor partner perspective to provide the right services and solutions to increase our customers readiness and protection from future attacks.
Another important priority that CDW is helping customers address is the upgrade of infrastructure to utilize internet of things.
Things and data analytics.
Customers are pursuing these investments to increase automation improve safety and efficiency manage quality control and drive growth and higher profits.
One of our manufacturing customers has positioned itself at the forefront of advanced manufacturing in recent years by upgrading is it a.
Sure to enable internet of things technology, and enhancing automation throughout its plans.
Several years ago, the customer began modernizing all 47 of its manufacturing plants in North America.
At the start of the customers modernization journey, the executive director of it turn to CW as trusted strategic partner.
Given our past track record successfully completing turnkey projects.
To take advantage of the data I wanted to collect CDW double.
Developed and deployed solutions to upgrade the customer centralized capabilities and infrastructure as well as each plants network infrastructure.
In each plant.
CDW designed and deployed high speed state of the heart state of the art secure network with redundancy and plenty of bandwidth and scalability to serve as the foundation for the customers advanced manufacturing push.
On top of the secure and reliable high speed network that CDW created the customer deployed scales sensors and.
Robots, modernizing its manufacturing and operating processes.
The customer net is now reaping the benefits of its upgraded it capabilities, including automating tasks, which significantly reduce costs, making more informed business decisions at a quicker pace based on the new data.
And lastly, improving stuff.
Security due to the protocols and protections put in place supporting the customers focus on safety.
CDW is an integral partner for each step of this initiative and we continue to work on other projects to support our customers goals.
These examples highlight Cws report strategy for growth in crude including how well the.
His position for important it trends and how is crucial to achieving our customers objected CDW has a proven track record of evolving with IP trends.
These examples also underscore the importance of one of Cws competitive advantages our co workers, they get ITC and make meeting and exceeding the needs of our.
Their top priority.
We continue to invest thoughtfully and customer facing coworkers and ended the year up 223, excluding scalar interest.
As our services business has grown the composition of customer facing co workers has changed to a mix of demand generating who workers and service delivery co workers at.
Additionally, other factors such as leveraging third parties for service delivery have made this metric less meaningful therefore going forward, we plan to share stats on our customer facing coworkers periodically rather than quarterly.
No that we will continue to invest prudently and co workers and as always adjust our hiring plans based on market conditions.
And that leads me to our expectations for 2020 financial performance.
In Twentytwenty, we currently expect the us in market to grow between 2.5% to 3%, which is below 2019 use in market growth, reflecting a lower 2020 GDP growth forecast.
We expect to our topline.
Grow faster than the U.S. IC market slightly above our 200 to 300 bits range in constant currency. The census project is expected to partially offset moderating client device growth in 2020, which drives our expectations slightly above our target range.
For 2020, we expect non-GAAP earnings per share.
Share growth of approximately 10% on a constant currency basis.
We will of course continued to keep a watchful eye on the macro environment, including wild cards like supply constraints. The UK EU trade deal tariffs Corona virus and the U.S. presidential election in the meantime, the team will continue to do what they do.
Yes out execute the competition and leverage our competitive advantages to help our customers address their IP priorities and achieve their strategic objectives.
I Hope you can tell from my comments that 2019 outstanding performance reinforced our confidence that we have the right strategy in place we want to continue to evolve.
With the market continue to capitalize on technology trends and continue to invest in fast growth growing areas of the business.
We do this by performing a rigorous detailed strategic plan every three years and executing against it.
We recently kicked off the planning process for our next cycle.
Also we recently made two important leadership announcements, Chris quarterly named Chief commercial and operating Officer, and the addition of Sona troll and the newly formed will achieve growth and innovation officer.
Chris is known for her strong sales and operating leadership cultivating talent delivering for our customers and delivering results.
The only joined CW with a track record of success shaping omni channel sales operations building ecommerce businesses developing digital platforms and driving innovation.
They will work with CDW is outstanding Executive Committee and teams across the organization to enhance our competitive advantages and to continue to drive.
Renovated performance generating superior returns and serving our stakeholders.
Now, let me turn it over to college to share more details on the financial performance.
Thank you Chris Good morning, everyone as Chris indicated our fourth quarter and full year results reflect the combined power of our balanced portfolio of channels broad product offerings.
And ongoing execution of our three part strategy. They also reflects successful investments in our business that build on our long term financial strategy to drive strong cash flow deliver sustained profitable growth and return cash to shareholders turning to our fourth quarter piano on slide eight consolidated net sales were $4.5 billion.
Up 11.3% on a reported and an average daily sales basis currency was neutral in the quarter.
On an average daily sales basis sequential sales decreased 6.1% versus the third quarter of 2019.
As expected the sequential average daily sales decline was greater than historical seasonality.
Given the strength in the third quarter, but better than expected driven by one strong client device growth in four or five us channels as we continue to leverage our competitive advantages to gain market share and help customers refresh their devices and to over 20% local currency year over year growth in the UK, where we saw solutions.
Next come to fruition.
Gross profit for the quarter was $778 million, an increase of 12.1% gross margin was 17.1% up 10 basis points over last year, driven by product margin, partially offset by netted down revenue streams not growing as fast as net sales.
Turning to.
Yes, gionee on slide nine our non-GAAP EPS DNA, including advertising increased 10.4%. The increase was primarily driven by sales compensation, which moves in line with gross profit growth.
Coworker count of 9896 was up over 870 co workers from December 2018 with roughly.
50% of the increase from our 2019 acquisitions and the remaining from organic co worker investments.
GAAP operating income was $284 million up 16.8%, our non-GAAP operating income, which better reflects operating performance was $342 million an increase of 14.3.
Non-GAAP operating income margin was 7.5%.
Moving to slide ton interest expense was $38 million up 3.2%. The increase was primarily due to paying a rate on the term loan and 29 team that exceeded the capped rate in 2018.
Our GAAP effective tax rate shown on slide 11 was 21 point.
4% Mcwhorter down 150 basis points compared to last year. This resulted in fourth quarter tax expense of $50 million.
To get to our non-GAAP effective tax rate, we adjust taxes consistent with non-GAAP net income add backs, including excess tax benefits associated with equity based compensation, which is.
As shown on slide 12 for the quarter, our non-GAAP effective tax rate was 23.7% flat with last year's rate. Our full year 2019 tax rate was favorably impacted by a benefit from research and development tax credits.
As you can see on slide 13, with fourth quarter weighted average diluted shares outstanding of 146 million.
GAAP net income per share was $1.27 up 21% our non-GAAP net income was $229 million in the quarter up 14.2% over last year non-GAAP net income per share was $1.57 up 18.4% from last year.
Turning to full year results on slides 14.
Team through 19 revenue was $18 billion, an increase of 11% on a reported and an average daily sales basis on a constant currency basis consolidated net sales were 11.5% higher than the prior year as Chris mentioned 2019 was a terrific year, reflecting great execution against the right strategy.
And our balanced portfolio. Additionally, 2019 net sales growth benefited from several extra drivers one the scalar acquisition, which contributed just over 100 basis points to our device as a service solution for the us sensors, which contributed approximately 60 basis points.
And three a backlog.
Flush in certain categories, such as Netcomm, you will recall that lead times extended in 2018, and then returned to more normal levels in 2019, creating a onetime positive flush collectively these three items contributed approximately 250 basis points of net sales growth in 2019.
While difficult to quantify.
We believe our competitive advantages of scale and distribution centers helpless navigate chip shortages and gain additional share in client devices.
Gross profit was $3 billion up 12.3% and gross profit margin was 16.9% up approximately 20 basis points due to product margin and an increase in the mix of net.
Down revenue streams, partially offset by year over year net sales growth outpacing the year over year growth and partner funding.
GAAP operating income was $1.1 billion up 14.8%, our non-GAAP operating income was $1.4 billion for the year up 12.5%.
Non-GAAP operating income margin was seven.
0.6%.
Net income was $737 million and non-GAAP net income was $902 million up 13.6% non-GAAP net income per share was $6.10 up 18%.
Turning to the balance sheet on slide 20 at December 30, Onest cash and cash equivalents were 154.
$1 million and net debt was $3.2 billion.
Our cash plus revolver availability was $1.3 billion as shown on slide 21, we maintained strong rolling three month working capital metrics during the quarter. Our three month average cash conversion cycle was 18 days down one day from last year's fourth quarter.
Full year free cash flow was $789 million, which is 4.4% of net sales and slightly above the high end of our free cash flow rule of thumb of three in three quarters to foreigner quarter percent of net sales.
The $37 million year over year increase in free cash flow, primarily reflects higher cash profit partially offset by.
Higher inventory.
2019 capital expenditures totaled $236 million or 1.3% of net sales. This higher level reflects capex for the 2020 phase of the sensus devices, a service offering which I'll discuss in more detail at the moment.
As expected, we returned more than 100% or free cash flow to.
To shareholders in 2019, we deployed $840 million of cash to shareholders, which included $183 million of dividends and $657 million of share repurchases at an average price of approximately $108 per share.
Turning to capital allocation priorities on slide 22, our.
Priorities remain the same from the previous quarter and continue to reflect our intent to drive shareholder value through returns of capital and strategic investments in.
In order of priority first increase dividends annually to guide. These increases we will target the annualized fourth quarter dividend at approximately 25% of non-GAAP net income and to grow.
In line with earnings going forward.
Second ensure we have the right capital structure in place with a targeted net leverage ratio in the range of 2.5 to three times. We ended the quarter, a 2.2 times slightly below the low end of this range. Our third capital allocation priority is to supplement organic growth with strategic acquisitions, our acquisitions of scalar.
Mattress are great examples of this.
And fourth return excess cash after dividends and M&A to shareholders through share repurchases at the end of December we had $679 million remaining on our current share repurchase authorization.
Given our current leverage we expect to once again returned more than 100% of free cash flow to shareholders and 20.
20.
Our capital allocation priorities support our 2020 targets, which you see on slide 23.
Before I review, our annual targets, let me first provide some comments on the device as a service solution for the United States Census Bureau, as you've heard US discussed the rollout consists of two phases the address canvassing.
These which was completed in 2019 and contributed approximately 60 basis points to 2019 growth the majority of which was recognized in the third quarter.
In the 2020 phase or the census collection phase hundreds of thousands of smartphones and tablets are being deployed into the field to take the census, we currently expect to 22.
20 phase to contribute approximately 110 basis points of incremental net sales growth in 2020.
As a reminder, CDW is the lesser for the sensus device as a service offerings. Therefore, we will recognize lease revenue over the period. The devices are used in the field depreciation from a capex most of which was.
In the fourth quarter of 2019 will be matched to the lease revenue as Chris mentioned the census project will be complete at the end of this year.
To summarize the census, really showcases how CDW helps customers achieve their objectives by leveraging CDW is differentiated capabilities integrated solutions from multiple vendor partners.
Professional and configuration services logistics and distribution capabilities, all delivered as a service.
Turning to our 2020 targets, we expect us to market growth of 2.5% to 3%. This modest deceleration compared to 2019 reflects lower GDP forecasts strong client device.
Comparisons and moving past some end of support dates.
We expect CDW net sales growth slightly above the high end of our 200, a 300 basis point range over us IP market growth the incurred incremental contribution from the census helps us overlap 2019 strong outperformance, including some of the extra drivers I.
Previously mentioned currency is expected to be neutral, assuming foreign exchange rates of $1.28 to the British pound and 75 cents. So the Canadian dollar.
We expect non-GAAP operating income margin to be in the mid 7% range and non-GAAP earnings per share growth to be approximately 10% on both the reported and constant currency.
Basis.
Please remember that we hold ourselves accountable for delivering financial targets on an annual constant currency basis Slide 24 provides additional modeling thoughts for full year 2020.
We expect net sales in the first half the year to be in line with our historical norm of 48% to 49% of full year net sales keep in mind.
And that the normal rhythm of our business is for first quarter net sales to typically be the lowest dollar amount and sequentially below our fourth quarter over the past five years on an average daily sales basis. The Q forward to Q1 sequential decline has averaged down approximately 7%.
We expect this year's first quarter sequential decline to be.
In line with historical seasonality.
Moving down the piano non-GAAP operating income margin is expected to be in the mid 7% range total annual depreciation and amortization is expected to be in the range of $390 million to $400 million. This includes approximately $160 million of amortization expense for.
Mission related intangible assets and approximately $145 million of cost of goods sold depreciation depreciation and amortization expense and asked today, excluding the amortization of acquisition related intangibles is expected to be around $90 million equity based compensation is expected to be several million dollars.
Higher than 2019.
Interest expense is expected to be in the range of $156 million to $158 million with the year over year decrease driven by expected lower short term interest rates are 2020, non-GAAP effective tax rate is anticipated to be in the range of 25.5% to 26.5%.
We expect share repurchases to drive non-GAAP earnings per share growth 200, a 300 basis points faster than non-GAAP net income growth currency is expected to be neutral for the full year to non-GAAP earnings per share growth.
We expect content constant currency non-GAAP earnings per share growth in the first half the year to be higher than our full year.
Constant currency target as we have one additional selling day and one more and more incremental contribution from the census project in the fourth quarter, we will have one fewer selling days and the contribution from the census winds down one selling day difference impacts quarterly profit growth by approximately 200 basis points.
Additional modeling thoughts on the components of cash flow can be found on slide 25, our free cash flow rule of thumb remains unchanged at three and three quarters to foreign a quarter percent affect sales.
We expect capital expenditures to be roughly 0.7% of not sales slightly above the normal half a point of sales primarily.
Acting gross capital investments related to our downtown Chicago office move to be clear. This slight increase does not change our free cash flow rule of thumb.
We expect the cash tax rate to be in the range of 25 in a quarter to 26 in a quarter percent of pre tax income adjusted for amortization of acquisition related intangibles, we expect to delivery.
Cash conversion cycle within the annual target range of high teens to low twentys.
That concludes the financial summary, with that I'll ask Shannon to open it up for questions can we please ask each of you to limit your questions to one with a brief follow thank you.
As a reminder to ask a question you will need to press star one of your telephone to withdraw your question.
Our sapanski, please symbolically compiled accounting roster.
Our first question comes from that cover all of credit Suisse. Your line is open.
Thank you.
Just starting off on the downtick in the wider actually spending environment you talked about wonder if you touch on just what you're hearing in terms of customer budget plans heading into 2020 in.
What's driving your expectation for return to a more normalized two to three points of share gains this year.
Good morning that it's Chris where customers as we turn the corner and.
To 19.
Customers were clear that Ikea continues to be a priority. So we saw some good momentum and.
They are buying in our business there continue to higher they're continuing to focus on investing in it. So thats helped good coming out of the year via the downtick is based on what we see in front of US. We've got GDP forecast that have come down we've got uncertainties out there I take through those wildcard in our prepared.
Remarks.
And so when we take a look at what's out there. That's how we think about it. We also frankly from an I.T. growth perspective take a look at a wide variety of data both internal data that is proprietary as well as act term external factors and attractive land on a solid expectation for the upcoming year.
In terms of our premium.
You know loss were always going to be focused on outgrowing the market by two to 300 basis points, but we're confident this year in guiding slightly above that 300, because we feel good that the census work that we're doing will contribute and will offset some of the.
The client moderating growth that we expect to see.
Got it and on that point about client growth moderating as Pcs definitely top of mind given across turns around when seven and the CPU shortages can you talk a little bit more about what you've baked into your current plans for Pcs in 2020, and just how we should think about the cadence.
And so that through the year.
Well.
As we anticipated last year, we expected.
Client device to grow but at a moderated rate because we've got a couple of years of strong strong growth from refresh we have.
End of service that's already.
Happened now in January and our expectation was that we see some growth in the first half as the year because based on past experience. When there is end of service you still get some flow through into the quarter or little bit beyond.
Theres more wild cards out there right now you look at Corona virus for example, and it's too early to tell how thats going to impact.
But that could impact supply chain and adds is some delays we are still looking at Intel shortages of course, we leverage our competitive advantages take inventory, but there are couple more factors now that we weren't looking at six months ago that make it more difficult to understand where those client purchases will be taking place throughout the course of the year.
Thank you.
Thank you. Our next question comes from amid.
For your line is open.
Thanks, a lot to two questions for me as well I guess, maybe start with the 2020 guide Chris could you help clarify you basically saying its IP spend a two and a half at 3% plus share gains of two to 300 basis points and then.
Plus 200 million of revenues from census Bureau is not the right way to think about your 2020 guide and then just on the census Bureau contribution.
Is it going to be fairly linear through calendar 2000 to you is going to be more each one heavy off given the way that's going to ramp up.
Yes, hi on it and eliminate let me back up and get that that right.
We're looking at their two components, 2.5% to 3% is what we expect the U.S. IP market rate of growth to be and we're saying that our typical target a premium above that two to 300 basis points, you should expect us to come in slightly higher than that 300 basis points.
As a premium over it it's not a premium.
In plus additional debt does that make sense that makes perfect sense stays with low paying off okay and in terms of the the sequencing I'll, let Colin give you the details here on that we would expect.
More contribution from the census, and.
Let's say the first half or first three quarters.
As of the year as I said in my prepared comments, we expect it to wind down by the time, we get to the fourth quarter.
Got it and then I guess just call it as a follow up all your net leverage targets at least decent amount. We're doing all will be well under two times by the ended the year as Union has no deal done you maintained the buyback dividends we've talked about.
If that's really.
The case are you comfortable with leverage going under two times or should we start thinking about 2020 being a year, where perhaps buybacks will be more modules to get you back in the two announced three times target range.
Yes.
So we ended the year at 2.2 times in my prepared comments I did say that we again intend to.
Two.
Returned more than 100% of free cash flow and to shareholders. Obviously, we're mindful that were sub the two and a half of three times target.
Thank you. Our next question comes from Adam Tindle.
James Your line is open.
Okay. Thanks.
Good morning, Chris I, just want to revisit the goal to expand.
Capabilities that you've talked about on the slides I.
I think the leverage math would suggest that you have about 2 billion and liquidity to still stay within your leverage target and probably even more if you want to temporarily sit above it sounds like you have in the past I know you've done some smaller tuck.
And that just first question would be wondering if you would consider something more elephant size to borrow buffett term and what would be the key items you'd look for in that potential assets.
Yes, and thanks for the question.
Elephant size I don't I don't know, how big that means but I would say this look you know that we are actively.
Looking.
For potential.
Companies that can supplement our solutions and services capabilities and we're looking at different kinds of organization small tuck ins frankly can be more simple to do.
And very easy to get gained traction quickly larger organization, we need to think about a lot of.
Factors, including the ease of integration and the way that we can we can operationally bring onboard a large organization you know the filters that we look at we look at it strategic fit for our customers. That's first and foremost is it going and create more relevance to our customers. We don't get that through that filter, we don't get even further than that.
Operational.
Alignment is the second one and then obviously cultural fit and financial return I will tell you on cultural fit when I think about kelway several years ago in scalar and address the cultural fit in those firms has been really terrific and I think thats been a very large portion of why we've been successful the teams have done a great.
At integrating and becoming CDW, one company and go into market as a seamless team to our customers, who have really appreciated that and that actually speeds the ability to leverage our solutions capabilities across the whole of the organization.
In terms of a larger company if we find one that make sense and takes through all those levers we absolutely.
I would take a look.
Okay. That's helpful. Thank you and just as a quick follow up Colin Thanks for all the model commentary I just wanted to ask on.
You talked about Q1 revenue expecting to be down about 7% sequentially per day, I think thats, maybe a little over 5% sequentially as reported the question is.
Historically, EPS, it's a little bit.
And perfect, but I think generally down somewhere around two times that revenue decline on a sequential basis.
Correct me, if I'm off here, but given your investment plans and timing with the normal seasonality that you're talking about on revenue also apply to EPS in Q1, where as reported would be down maybe just over 10% sequentially.
Adam I don't normally think of sequential EPS from quarter to quarter.
What I did say, though in my prepared comments is that we do expect the first half of the year EPS to be stronger than the full year. Some of that is due to.
It's a timing and some of that is due to the.
Extra day, we have in the first quarter.
Okay. That's helpful. Thank you.
Thank you our next question comes from.
China with Bank of America. Your line is open hi, Thanks for taking my questions and congrats on the quarter end on the guide calling the guide for full year operating margin at the mid Sevens.
I mean, thats actually that's pretty strong I mean, your margins have been better than many of your competitors.
Just wondering I mean, you will.
We assume you're going to see a mix shift between client devices.
Versus more of cloud solutions and netted down items. So can you talk about what are some of the things can drive that can drive that.
A little bit higher than than mid Sevens, what do you need to see to get the operating margin a little bit higher.
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Thanks for the question Roop will.
Yes.
There are lot of things that impact our operating margins starting at the gross margin. There's the mix of items that we saw what's your reference.
From seeing there are commoditization headwinds end market mix. So there are a whole series of mixes that move in and out.
As we Nixon to solutions that does put.
Upward pressure on our gross margin, but we do have a higher cost to serve associated with solutions. So the flow through to the operating margin.
Might not be is great or I think the operating margin might be closer in line to the transactional side of the business.
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I think the big wildcard here is how.
How strong hardware is as we go forward.
This narrative that our margins are going to float up over time has been out there.
Our for several years and I think a lot of that was had an assumption that hardware growth was going to slow down a not beer is robust and clearly we've done through a pretty heavy cycle here of three years, where that hasn't been the case and you haven't seen as much upward movement on the on the operating margin as you might expect notwithstanding all the success we.
We've had in cloud and solutions and not a down item. So I think if we were to go through an extended period of time multiple quarters or years, where we saw that play out I think we would revisit at that point in time at our analyst day, a few years ago, we took our margin target up a little bit as a result of that trend, but again I think we'd.
On a see more.
Sustainability of.
The strength of netted down items relative to where hardware us.
Yes that makes sense thanks for that.
John.
For my follow up just wanted to touch on the education end market you've seen some strong growth.
In the higher Ed.
Segment, but maybe a little bit slower on the K through 12, so any thoughts on how that segment trends in 2020.
Yes, it's Chris on education were just under a little pressure right now we've seen.
ASP is declining a bit and also the chromebooks spaces then.
The one that has been most to constrain when it came to.
Supply opportunities this supply availability this past year and availability simply if we if it was out there we could get it. So we do expect to continue to see in Q2 thousand 20, those same pressures on the business at the other thing that's happened is Google Google.
Will the extension of is auto update exploration, which is simply the equivalent of end of service they've extended a year, so that alleviated, while I'll call the urgency of customers to refresh and upgrade.
But that will be an opportunity when when the year expires next year well located through 12, we still consider to be growth.
Area for Us and the teams are really focused on specific solutions that they can bundle and bring to those customers that have to do with things like modern we're at modern class rooms at that are more collaborative and learning environments that are on modular et cetera. So we feel good about K 12 in the long term.
Okay. Thanks for all the details.
Thank you. Our next question comes from Matt sharing with Stifel. Your line is open.
Yes, Thank you and good morning.
A question regarding the strength that you saw in the UK I think you said that was up 20% year on year.
Is that related at all to.
The Brexit transition and post that closed.
Are you seeing any impact either positively or negatively.
Matt Yes. Thanks for the question. The answer is no we havent seen a lot of change over the last couple of years.
In client behavior, as a result of Brexit and.
Certainty surrounding that we've tried to we tried to comment on that regularly with you I think thats just.
Great execution in performance by the team and a number of solutions.
Your next coming to fruition. We also had if you recall.
Netherlands entity and so customers are comp.
Suitable using that in the regular course is business when I look at the UK business. The nice thing is the balance that we've seen in growth in both their UK local business as well as referral business, meaning you asked to UK business and also collectively you can you as customers doing business outside of those.
So call it widely international all of that is on a good growth trajectory and we're really excited to see that because that that reflects the power of the thesis going into the combination and it's working.
Okay. Thanks for that.
And then relative to the expectations on hardware and.
We certainly gets the headwinds or you're going to see in terms of the PC refresh cycle, but it looking at the solution side of the enterprise class saw hardware networking storage servers, you had some strength you talked about networking.
For some of those reasons.
But what should we be you're expecting there in terms of your outlook for the enterprise class products, Yes, I think it this way as I said customers are still prioritizing.
Investment and they have different priorities, sometimes its client sometimes its.
The datacenter depending on where.
Are there focused in their business and what they're trying to accomplish.
Looking forward, we expect to see benefit of that investment and the key thing is that when it comes to the solution.
Projects, they are lumpy and I keep saying, we're going to find another word but that really is the best word I mean, if you think about 2019.
We had some lumpiness throughout the quarters and we just saw a number of deals come to fruition and you saw nice healthy Q4, you got to expect that going forward just because of the timing and also the mix, which is a big part of that whether its hardware software services into the more software component the more muted the topline so again customers are focused.
On using technology to drive strategic outcomes in their business and they're focused on securely running their quote unquote utility IP and we've got the full portfolio to help them do that.
Okay. Thank you.
Thank you. Our next question comes from Shannon Cross with Cross Research. Your line is open.
Thank you very much for taking my question I just have one.
Chris can you talk a bit about what drove you to put a chief growth and innovation officer in place, how you're sort of thinking about that position and and how.
So work with others within.
Your executive team at this point I'm just.
I'm curious instead.
Created that that Raul. Thank you, yes sure. Thanks very much for the question.
Well I'll start with a simple reason you when we think about.
Forward looking we're really focused on scaling sustainable growth. It this is about focus for growth and.
In particular.
Earlier, when we think about our customers are partners in products and the channels and platforms that we used to sell and the technology and digital capabilities that underpin, though is the connective tissue between them is becoming more and more important. So this rule is really intended to help online.
And focus our efforts in investments around driving the connectivity there when you take a step back CDW has historically delivered meaningful profitable growth.
And we've done that through continual innovation and continual investment disciplined investment and focus on investing where the growth.
Growth is so when I think about growth and innovation and bringing that team together. It's just another natural step in in the way that we think about.
Growth in the future.
Okay. Thank you.
Thank you. Our next question comes from Katy Huberty with Morgan Stanley.
Line is open.
Thank you good morning, just thinking through seasonality for the air in the first half you have the bulk of the benefit of sense as the spillover of some of the win 10 refreshes and the extra selling days have just what are the offsets to those tailwinds that that land you add.
More normal seasonality in the first quarter in the first half versus maybe a little bit better seasonality given those factors.
I can you repeat the question Katie.
Yes, just just thinking through some of that the.
Tailwinds in the first half in the first quarter you have the bulk of the census impact in the first half the year and.
Hopefully get some spillover effect as of PC refresh says.
At least in the first quarter and then you have the extra selling days. So just curious why you wouldnt see maybe a little bit.
Other than normal seasonality in one Q and the first half because of those factors are there some offsets that you're thinking through.
No I would say no no real offsets.
We do have some pretty meaningful overlaps in the back half of the prior year. So I think thats also.
So informing us.
Okay, and then just as a follow up have you gone back and looked at just spending trends and customer behavior around elections in terms have any any expectation around how that might impact spending this year.
Yes, it's Chris if you go back to the 2012 in 2016 election, what we did see as we did see a deceleration in IP bend it growth.
So thats why we call out as a wildcard the U.S. election, this year, because the uncertainty leading into it could cause them to.
Great and that that came in those two years in the back half of the year.
Okay. Thank you.
Yep.
Thank you. Our next question comes from Paul Coster with Jpmorgan. Your line is open.
Yes, thanks for taking my question.
Chris you've been pretty specific barrel of the three point.
Investment strategy and investing in new feature generically, but where do we see this in terms of Golar spend is intact, Susan Neil Prudency.
<unk> expenses, what coins people you recruit see how are you reallocate resources to catch.
As for mutual fund students using some Lynn could you even on Q. The your underwriting a little bit because with the investments that opex was higher than that might be all doors.
Yeah, Keith Thanks for the question I think you see it up and down.
It would ever in various line items in that TNL. So for example.
We are investing in people.
Investing in technologists solution architects delivery engineers were also investing in technology and.
Capabilities to enable our.
Sales organization in to enable our co workers to deliver to our customers to create a experience for our customer that becomes more seamless and.
Full to the sales process. So we're investing in a number of different areas as we always do.
CDW.
In terms of the impact on our profitability look we are I don't think we would see anything different but we're always in that outperforming the market allows us to deliver on our.
On our commitment to shareholders, but also reinvest in the business and that's pretty that very important for the future growth of the organization when I think about.
Scaling for sustainable growth is not just about performing for today, but it's also about laying the foundation for growth against our growth model in the future.
Sure and Thats where were investing.
Today and tomorrow.
I would just at the investment is both in the Opex Ham and the Capex line. The majority of our normal Capex goes against our infrastructure and then in your question are we under earning I guess the flip that is are we over.
And I would say no we feel like we have the right balance between investment back into the business that allows us to continue to create differentiation in the marketplace that enables the sustainable outperformance versus the market. So could we pull back on investment in the short term.
Yes, absolutely would the margin pulled up yes, but I think that two to 300 basis point premium that weve consistently been able to deliver over time, you would see that.
Chipped away. So we think we have the right balance between.
Investing in the business and growth and margin.
Thank you very much.
Thank you. Our next question comes from Keith Housum with Northcoast Research. Your line is open.
Good morning, everybody.
Help me understand on index last year in the past few years spending in the when 10 refresh cycle was generally done within companies are the customers general budgets or were they special I.
I guess.
I am expenditures as either won't repeat or you expect the reprioritized going forward.
Yeah, Hi, Keith I.
My sense, they haven't talked with customers and feedback from our sales organizations as we didnt hear a lot of chatter about onetime.
Increases in budgets to refresh.
Client, it's really a natural the natural process of their IP investment cycles.
Keith again, I, just as we think about how we manage our own business.
Our CIO shouldn't get incremental budget to get us upgraded the winter and this I think part of what are our customer goes through every year is determining what their priorities.
Our and addressing those priorities within the context of their budget.
Okay. That's helpful and changing gears on your slightly as my follow up I noticed that respect is completely early with the Corona virus, but can you help us understand like in terms of the supply chain and inventory in the channel how how long could across the virus go on or how bad enough get.
It actually impacts anybody who is there enough inventory to channel that can withstand enough quarantine for some factories for several weeks.
Yes, no I wish I had the answer to that Keith I, just don't it's too early in the process right now and we all what I can say is we are working very closely with our Oems right now to get a better understanding.
But I just don't we don't have visibility to that I think our vendors are still trying to figure that out and it all as they depend on how long it last what alternatives they have.
But we'll just do the best that we can to ensure that.
That we take care of our customers. The extend inventory is available will leverage our competitive.
Advantages and take that but I just it's hard to know at that point in time, I don't want to project out.
Into the future.
Okay I appreciate that thank you.
Thank you and I'm currently showing no further questions at this time I turn the call back over to quickly for closing remarks.
Thank you Shannon.
I'd like to recognize the hard work of our almost 10000 co workers around the globe and their ongoing dedication to serving our customers. They are the reason we had such exceptional performance in 2019, and why we will continue to outperform the IP market going forward. Thank you to our customers for the privilege and opportunity to help you achieve your goals and.
Thank you for your time today and continued interest in CDW, Collin and I look forward to talking to you next quarter take care.
Ladies and gentlemen. This includes this conference call. Thank you for participating you may now disconnect.
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Hello.
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