Good morning. My name is Stephanie, and I'll be your conference operator for today's call. At this time, I would like to welcome everyone to the CDW Second Quarter 2013 Earnings Conference Call. [Operator Instructions] I'd like to remind you that today's conference is being recorded. If you have any objections, please disconnect now. It is my pleasure to turn the call over to CDW's Chairman and Chief Executive Officer, Tom Richards. Mr. Richards, you may begin your conference.

Thanks, Stephanie, and good morning, everyone. It's good to be with you today and report strong results after the close of our successful IPO in July. Joining me today is the CFO, Ann Ziegler; and Chief Legal Officer, Chris Leahy. Also joining us for the first time is our new VP of Investor Relations, Sari Macrie. For those of you who are new to our calls, we will follow our usual format where I provide a high-level overview of results and strategic progress, and Ann provides a more detailed review of our financial results. After that, we'll open it up for some questions. But before we begin, Sari will read the company's Safe Harbor disclosure statement.

Thank you, Tom. Good morning, everyone. Our second quarter 2013 earnings release was distributed this morning and is available on our website at investor.cdw.com, along with supplemental slides that you can use to follow along with us during the call. I'd like to remind you that certain comments made in this presentation are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. Those statements are subject to risks and uncertainties that could cause actual results to differ materially. Additional information concerning these risks and uncertainties is contained in the Form 8-K we furnished to the SEC today and in the company's other filings with the SEC. CDW assumes no obligation to update the information presented during this webcast. Our presentation also includes certain non-GAAP financial measures. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You will find reconciliation charts in the slides for today's webcast, as well as in our press release and the Form 8-K we furnished to the SEC. All references to growth rates or dollar amount increases and our remarks today are, unless otherwise indicated, versus the comparable period in 2012. I'd also like to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast without specific written permission from the company. And with that, let me turn the call back to Tom.

Thanks, Sari. The profitable top line growth that CDW has delivered for the past 14 quarters continued into the second quarter of 2013. We also continued what has been a hallmark of our quarterly earnings announcements lately, delivering record-breaking results. In fact, we broke all of our previous second quarter records in 3 key metrics: net sales, which rose 7.5% to $2.8 billion; adjusted EBITDA, up 6% to $213 million; and non-GAAP net income, which was $79 million, up 17.8%. The CDW team was able to generate this strong financial performance because of the strategies we have in place to take advantage of the core strengths of our business. These strengths include, first, our unique value proposition. Our position between over 1,000 vendor partners and over 250,000 customers provides us with the unique vantage point to provide value to both customers and vendor partners. The choice we provide from more than 100,000 products and service alone creates tremendous value, yet given the increasing complexity of the IT marketplace, the real value we provide customers is how we guide them through the options to help them realize the fuller value of integrated solutions. For our customers, we are an extension of their IT Department. For our vendor partners, we're an extension of their sales and marketing resources. A second fundamental strength is our business model. Our business model leverages our scale and scope, our variable cost structure and performance-driven culture. Our scale and scope delivers national presence and enables our ability to allocate resources to market and technologies. Our variable cost structure enables us to modulate our hiring to meet market conditions, both up and down. Our third fundamental strength is our balance. Balance across products, technologies, partners and customers. There are always puts and takes in terms of which markets…

Thanks, Tom. Good morning, everyone. It's great to be here with you discussing our earnings as a public company. It's been a busy time since our last call. As you know, on July 2, we completed our IPO. We issued 23.25 million shares and raised $373.5 million after commissions and underwriting discounts and before cost. Our underwriters exercised their over-allotment option last week, raising an additional $56 million. We also executed a number of debt transactions, all while we continue to execute against our plan. So let's start with our results. As Tom indicated, top line growth was excellent this quarter, with net sales of $2.779 billion, 7.5% higher than last year on both the reported and average daily sales basis as average daily revenues grew to $43.4 million. We had fairly typical seasonality, so on a sequential basis, average daily sales in Q2 2013 increased 13.4% versus Q1. Gross profit for the quarter increased 5.8% to $451.6 million. Gross margin was down 30 basis points to 16.2%, primarily due to the overlap of last year's reversal of a reserve accrual and lower product margins. These impacts were partially offset by increased sales of higher-margin demand services and increased contribution from 100% gross margin revenues. Tight focus on cost helped deliver SG&A, including advertising expense of $298 million, up only $7.5 million or 2.6% over last year. This increase was driven by increased sales commissions and other variable compensation costs, consistent with increased sales and gross profit, partially offset by the timing of coworker hiring. Adjusted EBITDA for the quarter was an all-time record $212.6 million, up 6%. Our Q2 adjusted EBITDA margin was 7.6%, down 20 basis points from last year as cost control helped mitigate some of the impact of product margin compression. As Tom mentioned, we entered…

[Operator Instructions] Our first question comes from Mark Moskowitz with JPMorgan.

Your 2Q revenue definitely delivered nice revenue acceleration on a year-over-year basis. I was just kind of curious, can you give us a sense in terms of how much of that acceleration was driven by penetration of the existing customers versus market share gains? And how sustainable do you think those factors are?

Mark, look as we talked about during the road show, we think more than a significant portion came from penetrating existing customers, but there was some portion -- we don't really share the percentages. But it was more heavily weighted to penetrating existing customers than it was acquiring new customers, just in total.

Okay. And the follow up relates to the new hiring plans for the second half. Can you give us any sense in terms of the focal points where those new hires will be most focused? Is there a certain sector, certain product type, service type? If you can just elaborate there, that'd be great.

Okay. So it'll be, as I said, the 125 are what we call customer-facing coworkers, it will be spread across some of our specialist organization and particular areas where we're seeing strong growth. And we'll also be adding a fair amount of new sellers, both inside sellers and field sellers. So it will really be across those 3 disciplines and then the fourth one is service delivery, expanding out our national services footprint. So it will be in those kind of 3 groups.

Our next question comes from Ben Reitzes with Barclays.

I wanted to ask about gross margin trends. You talked about how the notebooks, it seemed like the notebooks may be even surprised to the upside. I would assume they might be on the lower margin side, but I wasn't sure. And I wanted to kind of get your view of how gross margins may play out for the year, given the trends you saw in PCs in the quarter.

Ben, I would say that what we saw in general was kind of gross margin pressure. And what we would call more of the transactional products, it was pretty consistent across the whole product suite. We anticipate that, that's going to continue. We think it's a function of just kind of the economic climate and some of the pressure and headwind it's putting on the business. So it was kind of a constant pressure across that group of products, specifically.

Got it. And you think that's going to last throughout the year, given the industry dynamics that are, perhaps, going on with some large competitors and are planning that way?

Yes. That's exactly -- we are anticipating that it is going to continue. Look, I'll be thrilled if it doesn't, but we're kind of counting on it continuing to happen.

Got it. But it's in the plan, it sounds like, that the margin can stay in this range?

Well, we are going to hold ourselves accountable to delivering the profitability we -- Ann articulated. So the answer is, yes, we're going to deliver.

Our next question comes from Bill Shope with Goldman Sachs.

Okay, great. My question is on the subsegments. Could you dig in a bit more to the growth acceleration, the Medium and Large business segments, and how you're thinking about the pace of business during the second half?

Yes. We're -- as I said, we're thrilled with what we've seen. That momentum started to pick up at the end of last year, and we've just seen it continue. I think part of it has to do with, as you know, the market segment that is our sweet spot and we focus on within MedLar, more seeing what I would call businesses continuing to invest in infrastructure. And we saw that in the solutions part of our business that's tied to MedLar. I would tell you also that as we identified, we also had strong transaction growth. So it wasn't just a one-trick pony as far as what's driving that. And we are anticipating that will continue throughout the rest of the year. It's been 2 or 3 quarters of good momentum now.

Okay, great. And then as a follow up, I guess on the other side of that, some of the weakness you saw in Health Care. How are you thinking about that in the back half? Should that weakness continue? Is there a possibility that you get some growth there in the back half?

Well, I think they're going to continue to see some of those headwinds that I alluded to. Those will continue. But as I also said, we do still view Health Care as a strong component of our growth profile. And so we're going to expect that they'll get back into the positive side of the ledger. We're just not quite exactly sure when that is and when some of the -- what I would describe ambiguity tied to House sequestration trickles down into Medicare, Medicaid. And so that's going to continue to be a headwind for them.

Our next question comes from Brian Alexander with Raymond James.

With, Tom, with the sales momentum building in the second quarter, especially for Medium and Large and with the comparisons overall for revenue easing in the second half, should we expect the second half growth to be greater than what we saw in the first half? I think you were about 5.8% in the first half. Should we see that accelerate? And where would you expect to see that acceleration if you believe that?

Brian, I think we're going to continue to kind of meet our commitment to be 200 to 300 basis points at least greater than the IT market. There are some wildcards in the second half. What happens in the federal market with sequestration and how that plays out with the budgeting process, which, I wish I had enough clairvoyance to predict, but I don't. But we are anticipating a strong mid-single digits growth over the second half of the year, assuming the IT market continues to grow in low-single digits.

Great. And then just a follow-up on the gross margin and the pricing pressure that you talked about. Is that a function of where you saw the sales strength? In other words, Medium and Large business may be a little bit more competitive than some of your other customer segments? Or are you suggesting it was really transactional products across customer segments?

Brian, it was the latter. It was really -- we saw it across the segments, and it was transactional products in general.

Our next question comes from Chris Whitmore with Deutsche Bank.

Just to follow up on that last question. I wanted to ask you if it was specifically related to one competitor that's instigating the pricing, and to what extent are you getting support from your vendors to take that competitor on?

No. I don't think I could point to a single competitor that was driving the pricing pressure in the marketplace. Look, we constantly get support from our partners to kind of build solutions and to grow the business. But the direct answer is no, it wasn't a single competitor.

Okay. That's helpful. And then secondly I wanted to ask about sales productivity. The sales force looked incredibly productive or revenue per coworker is the highest it's been in several years. Do you see more room to drive productivity higher over the next 12, 18 months? Any color on that would be helpful.

I think my team would tell you, they could answer that question with a yes. We do see opportunities to grow productivity on a per-sales basis and also revenue per coworker. We think, despite our excellent execution and our focus on process improvement, we have a number of initiatives underway right now, which we think are just going to continue to enhance the productivity of that sales organization.

Our next question comes from Katy Huberty with Morgan Stanley.

You talked a lot about the acceleration in hardware, PCs, Netcoms, storage. But can you talk about the deceleration in software? Were there particular offerings or categories that drove that deceleration?

I don't really think it was unique to a particular category as much as it was just tied to -- there were some deals that didn't repeat that were pretty significant. And that ends up being a one-quarter kind of phenomenon. But I wouldn't say there was anything, Katy, that would say there was weakness in a particular software category. We've had some surprising growth from new players in software -- and for the software market, that's been encouraging. And so nothing that I would kind of say, "Gee, here's a systemic weakness in a particular part of the marketplace."

Okay. And then as we think about OpEx into the third quarter, given that it sounds like hiring was maybe back-end loaded in 2Q, you still plan to add heads in the back half, and there's $2 million to $3 million of incremental investment. Should we think about OpEx growing faster than revenue sequentially in the third quarter?

Not so much faster but more in line with. It's how I would think about it.

Our next question comes from Jayson Noland with Robert Baird.

Tom, any sense for the divergence between MedLar and Small business there?

Yes. Good question, Jayson. We think kind of as I alluded to in the script that there is still more of a cautious nature. And I suspect it's just the nature of the beast and the financial flexibility that a small business has versus a larger corporation that might have more resources, with which to allocate to making IT investment. I don't know that it's anything more than just different views of the economic climate they're operating in and who has more flexibility and therefore, who can make greater investment. That would be just my thesis at this point.

Okay, understood. And last question, any additional color or growth rate you can provide for Netcom and storage?

Well, we don't provide actual forecast by product category, but I can tell you it seems like every one of these earnings calls I do, Netcom and storage is highlighted as an area that's growing faster than overall CDW. So I think it's just a function of, as people have been moving data, enhancing data center that the movement has to be -- the data has to be stored. You just kind of see those 2 technologies kind of working in a step function together.

Our next question comes from Bhavan Suri with William Blair & Company.

Just a couple of quick questions, but first on the solutions business, which saw some strength, what sort of emerging pieces or what's driving the strength there in terms of specific solutions in the emerging space?

Well, I alluded to 1, which is security has been just kind of a really significant growth engine for us. We've been adding additional resources to support that growth. Also on the area of networking and Netcom in general, as people are kind of expanding their networks to deal with the proliferation and movement of data. And in storage, as I just alluded to, again, it's -- I don't know how many quarters in a row we've continued to have strong storage growth. So those, I think, are 3 categories that seem to be the biggest consistent drivers of our solutions business. I had one other. We put -- we have a category called Converged Infrastructure. It includes security, mobility, networking, collaboration. And those have been strong, strong growth areas for us.

Okay. And then what was utilization in that business?

Well, we measure utilization across the company, and let's just say it was in the mid-60s range, which is a good utilization rate for us.

Yes. And then one last one from me. As you look at the MedLar business and you look at sort of the solution sale into that, are you running into different competitors there, rather than the typical sort of distributors of ours that you might have run into just, say, selling a hardware or PCs or something?

No, not yet. I mean, if you're kind of asking are we beginning these systems integrators come downmarket, no. We -- look, I would say, I can't say never. But I would say for the most part, we're competing with the people that we traditionally have competed with which is the local bars.

Our next question comes from Matt Sheerin with Stifel.

I just wanted to talk again on the gross margin. And as you look to the September quarter in terms of seasonality, I know in the past, due to the strength in federal, that you've seen some modest margin erosion in the September quarter. Are you expecting that as well? And in line with that, you did talk, Tom, about a cautious outlook on government due to the sequester. Are you expecting normal seasonality and budget flush in the federal business this quarter?

So those are kind of related, actually. Let me see if I can come out, Matt, and see if I can answer the question. I think look, as I said earlier, it's a wildcard. I mean, I think we're in a little bit of a territory that we haven't been before. But based on the volume of work and planning and activity our government organization is seeing, we would expect to see -- I don't know that I'd call it a full flush, but kind of an improvement and increasing activity. We just don't know the degree at this point. And so I think that will influence both your question on top line growth and then just as importantly, your question on margin. So it is a bit of a wildcard as we go into some unchartered waters here.

Okay, fair enough. And as my follow-up, on the hardware side, you did talk about strength in notebooks. Is that coming from both the corporate and government and education markets? And then related to that, you didn't mention tablets. Has that continued to be strong? We've seen some distributors talk about some weakness there's, so what are you seeing in tablets and how does that affect your margins?

All right. So let me make sure I got both of those. The first one is we saw the notebook growth pretty much across the spectrum when it comes to the different segments. And we did see some tablet softening, if I can say it that way, which, I think, just kind of demonstrates the growth of the portfolio, the benefit of having such a broad portfolio.

Okay. And the margins on tablets for you in line with notebook margins?

Look, the tablet margin is, by nature, going to be not as strong as notebook. But it isn't anything that isn't kind of in a normal rhythm of the business, if I can say it like that.

[Operator Instructions] I'm currently showing no further questions. At this time, I would turn the call back over to management for closing remarks.

All right. Thanks, Stephanie. I'd like to thank everybody again for taking the time this morning in joining us. Thank you for your interest in CDW. And as I always end these calls, if you or your company need some help with technology, we'd be more than happy to help and you guys know how to find me. So thanks again for joining.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect and have a wonderful day.