Good morning. My name is Bridget, and I will be your conference operator for today's call. At this time, I would like to welcome everyone to CDW's 2014 First Quarter 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, Bridget. Good morning, everyone. It's a pleasure to be with you today and to report another quarter of record results. Joining me on the call today are Ann Ziegler, our Chief Financial Officer; Chris Leahy, our General Counsel; and Sari Macrie, our Vice President, Investor Relations. I'll begin today's call with a brief overview of our results and key drivers, Ann will run through the financial highlights, and then we'll go right to your questions. But before we begin, Sari will provide a few important comments regarding what we will share with you today. Sari?

Thank you, Tom. Good morning, everyone. Our first quarter earnings release was distributed this morning and is available on our website, 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 with 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 today. Please note that all references to growth rates or dollar amount increases in our remarks today are versus the comparable period in 2013. The number of selling days in the first quarter are the same for both 2013 and 2014, so there is no difference in growth rate for average daily sales and reported sales. A replay of this webcast will be posted to our Investor Relations website, investor.cdw.com, by this time tomorrow. I also want to remind you this conference call is a property of CDW and may not be recorded or rebroadcast without specific written permission from the company. So with that, I'll turn it back to Tom.

Thanks, Sari. We started the year off strong with sales increases well above forecast for the U.S. IT market, and excellent profitability. Net sales were $2.65 billion, up 10%; adjusted EBITDA increased 8.5%; and non-GAAP earnings per share increased 43.7%. This quarter's results reflect 3 key drivers: our balanced portfolio of channels, our flexible business model, and focus on productivity and cost control. The first driver of our results, our balanced portfolio of sales channels, contributed to a 7.2% increase in Corporate and a 14.5% increase in Public. Corporate performance was led by continued momentum in our largest customer channel, medium and large business, which increased 8%. Our small business channel, which is largely focused on customers with 20 to 100 employees, delivered its third consecutive quarter of improvement, up 3.3%. We are cautiously optimistic that we will see continued improvement in small business results as confidence in the economy builds. Public results were powered by our Education channel, which delivered robust growth, up 38.5% for the quarter. K-12 performance accelerated off of last year's rapid growth, driven by continued success delivering digital curriculum and common core testing solutions. Higher Ed delivered strong results, up high-single digits. State and Local continued its success delivering Public safety solutions offsetting lower sales in our Federal channel, and overall Government performance was up 0.7%. While Federal budgets were approved last year, the allocations process continued into the quarter. We are encouraged by increased activity as funds are released, and procurement offices are processing orders especially in the civilian side of our business. The environment in Healthcare continued to improve in the quarter, and our sales were up 8.8% driven by both client refresh and infrastructure. While it's too early to call a full recovery, we remain confident that Healthcare will be an important…

Thanks, Tom. Good morning, everyone. As Tom indicated, our first quarter financial results reflect the benefit of our balance, our business model and our focus on productivity and expense management. They also reflect the progress we are making against our financial strategies to drive contact growth, delever our balance sheet and deliver double-digit earnings growth. Let me begin with our P&L. If you have access to the slide posted on line, it will be helpful to follow along. I am on Slide 7. Top line growth [indiscernible] net sales $2.65 billion, 10% higher than last year on both a reported and average daily sales basis as we had the same number of selling days in both the first quarter of 2013 and 2014. Average daily sales were $42.1 million. On an average daily sales basis, sequential sales were down 0.3% [ph] versus Q4 2013, which is well above normal seasonality. Gross profit for the quarter increased 5.8% to 125 $50 million [ph] . As expected, we experienced gross margin compression for gross margin at 16%, down 70 basis points from last year's Q1. The decline was due to the impact of both fixed pricing pressure from both in lower margin's more transactional products, as well as advertising rollouts [ph] and the impact of inventory adjustment. In many cases, most of this pressure's at the SG&A level. Reported SG&A, including advertising expense, was $289.4 million, up just 2.7% over last year. This increase reflects sales commissions and other variable compensation costs consistent with our increased profits and cost associated with increased coworker count, as well as reduction in advertising expense of $1.8 million in the quarter or 5.9% compared to last year. We ended the quarter with 7,040 coworkers, up 76 coworkers since the end of 2013 and up 260 coworkers…

[Operator Instructions] Our first question is from Bill Shope with Goldman Sachs.

So you were able to nicely counter some of the gross margin pressure with OpEx discipline. But how should we think about the mix and margin dynamic as we head into the second quarter and the remainder of the year? Can you give us a bit more color on that? Is it more of the same, or should we assume gross margins begin to normalize somewhat?

I think, Bill, as a starting point, a lot of it's going to depend on how long the client refresh continues. I mean, as you heard Ann talk about, that was one of the drivers when you have that kind of, just growth in the marketplace. We -- people ask me what inning are we in, how long is it going to last? And we do expect to continue not necessarily though as intense as it was in the first quarter to the remaining part of the year. And as it goes back to a more normal distribution, we would expect to see gross profit to follow then.

And then looking at the -- I guess the flip side of that would be thinking about the revenue growth side of the equation. Obviously, you've boosted the outlook for the year. But if we dig down into the strength and the growth this particular quarter, the Education segment was obviously the key source of upside. How are you thinking about the sustainability of the underlying drivers in that particular segment as we model out the rest of the year?

Well, as we've said, Education is the gift that continues to perform, so to speak. And while we would expect it to continue to grow -- obviously though, it's not going to grow at that rate because we start to lap some pretty amazing performance last year. But with the date still off into the 2015 timeframe, we still have school districts that are in the mode of getting ready. So we do expect it to continue, but I think it would be a little unrealistic to continue at 38%. I would love it, but I think the realist in me says that probably won't happen.

Our next question is from Ben Reitzes with Barclays.

Wanted to talk about PCs and the sustainability of that given the XP situation. Does that continue throughout the year? It seems like it would based on your guidance now raised for IT spend in your own revenue growth. And outside of Education, what gives you and PCs, what also gives you confidence in that forecast? Because you just answered the Education question. So maybe if we could talk about other areas, maybe servers, storage, anything that also helps drive that higher-than-expected outlook that you just gave for revenues?

All right, Ben, so a couple of things. One is let's take the PC part first. We do expect there continue to be uplift from the refresh and the expiration of XP. I think the reality that it was going to happen hit people. I think there are people in the marketplace who wondered whether it would happen. And so as we still have customers that are in the process of refreshing their client devices. As I alluded to with Bill's question, I don't know that it will keep the same intensity that it had that first quarter, but I do believe it will continue to be a growth driver for the remainder of the year. And if you look at it, it wasn't just in Education where we had strong PC growth. I mean it really was across the spectrum -- it was gonna [ph] get that, this notion of the balance and having multiple channels. We saw strong growth in our Corporate segment, we saw strong growth in our Public segment with the exception of Federal. So we think that it's going to continue from a growth perspective. As far as other -- then you kind of dipped into what other categories. As you saw in the quarter, we continue to see strong growth in network, which I think kind of fits as people are upgrading their client devices and expanding, you're going to drive traffic, and traffic is going to drive upgrades for networking. We would expect that to continue. And in some of the other -- I think you asked about the servers or storage. We see some interesting dynamics going on in storage. You heard me say that, on the whole, it was flat. But we see this really incredible transition happening where the growth rate of the newer resource [ph] technology is tracking at an exponential rate as people transition to some of the new storage capabilities. I don't know if I got it all because there was a lot in that question...

That was great, and my apologies. My follow-up is simply on pricing. Ann mentioned there was some pricing dynamics that impact gross margin. What's going on in pricing? And what's embedded in your guidance for how pricing plays out as we go throughout the year? That's it.

We've been clear for several quarters that there continues to be pricing pressure in more transactional products, and that continues. And you see the impact of both the mix shift to transactional products and the continued pricing pressure. We don't expect to see that newly rate [ph] in the short term. That end of the IT market has always been subject to pricing pressure. And part of our strategy with a balanced portfolio is to make sure that we continue to invest in the higher margin solutions business to attempt to offset that from a total portfolio basis.

And our next question is from Brian Alexander with Raymond James.

Tom, it sounds like you're a little bit more confident on the overall IT market this year as you referenced 4% growth in your prepared comments. And it was 3% to 4% previously. Is that primarily because the first quarter came in better than you expected, and you're basically flowing that through the year, or do you actually think the balance of the year will be better than you previously thought?

I think it's more of the former than the latter, Brian. When you come out of a quarter like this, it has an impact on what you think the annual's going to be. And I don't think this is -- I don't think it was just a first quarter phenomenon. As I alluded to earlier, I think you're going to have carryover in people doing the upgrade in the process. So I think that is really the main driver. We are seeing, as you heard my comments, increased confidence in Small Business, which we always kind of look at as kind of an insight as to how people are feeling about the economy. And I think the last comment I'd make was when I talk to myself executives about what was driving the client refresh? The easy answer is to go right to XP, but they will quickly tell you that some of this is customers having a little more confidence in the general economy, and therefore, taking advantage of a refresh opportunity.

Okay, and then just on the data center part of your business, servers down, storage flat. To what extent did you see things slow down at the end of the quarter, and perhaps, pick up in April? There's been some discussion from distributors and other solution providers that things really did slow down at the end of March, but they've recovered thus far in Q2. So I'm just curious if you've seen a similar pattern?

We've been pretty constant. I mean if you look at our performance, we didn't see kind of a peak and valley, if you want to put it that way, or valley and peak would be maybe a better way to say it. It's been pretty constant. And the interesting thing for us, Brian, I think is a big differentiator is -- and then it comes back to the balance issue. We saw pretty different performance across data center technologies in the different segments. We -- even though our server revenues were down, we saw 3 or 4 segments that had really strong server growth. And when you go to storage, I think it was actually 4 or 5 segments. So it really seems to be, for us, very segment-driven relative to where people are, what are they focused on. And the last thing I would tell you is I think in our Small Business, it's as much a mind share issue as anything else. It's how many different IT projects can a Small Business person manage at one time? And if the client issue is staring them in the face because of the expiration of XP, they're going to deal with that first. And so I think that will dominate some of the mind share for a while in this modern market.

And our next question is from Tien-tsin Huang with JPMorgan.

Just want to ask about seasonality and the advertising spend there? I heard some of the comments there, but how should that play out through the balance of the year?

We look at adjusted SG&A in total as we look at the balance of the year. And we would expect our adjusted SG&A to grow more in line with sales as we move through the remaining 3 quarters than you saw in the first quarter.

Let me just ask one more on the balance sheet. Obviously, you've been seeing a lot of value in the senior notes, that makes sense. Will you take a pause here in the short term with debt retirement given the note redemption and the cash interest and tax payments that you -- and the dividend that you talked about?

Actually, the next time we have any debt that's callable is our 8% note. And those do not become callable until December. And then the 8.5% notes become callable in April. And there was an opportunistic opportunity to purchase a little bit of the 8.5% notes, and we did that. But absent some other opportunistic buy, we would expect that again, calling notes when they become callable in December and then in April.

And our next question is from Matt Sheerin with Stifel.

A question on Small Business. You talked about relative growth there and above-market trends. But are you starting to see customers begin to migrate to the Public cloud strategy? And how are you working with customers through that transition, and how does that affect your model going forward in terms of services both -- versus hardware?

Well, we have seen the work we've done with Small Business on cloud. That's been happening for multiple quarters now. So it's not a new phenomenon for us. We've -- our cloud portfolio has had really exponential growth rate. Now, it's still relatively Small Business, but the growth rates are just amazing, which suggest that we're doing a pretty effective job of helping them sort through what different options they have. And then we've got such a broad portfolio of cloud-based solutions, both in the SaaS and IAS and its services and even in our aggregation services, that it gives the customer the ability to pick and choose how they want to construct a cloud-based solution. And I think part of the reason that as you've seen the growth rates improve in Small Business, one of the reasons that the margin has held up really well is because a lot of what Jill and her team have been selling to the Small Business customers, are cloud-based solutions, which as you know, are 100% margin business for us in a lot of cases. So we continue to feel really good about our ability to help customers navigate through that.

Okay, thanks. That's helpful. And then on Federal, you mentioned a more stable demand and pipeline. But do you have confidence that you will see a recovery in that market at all this year, and do you see any growth coming there?

Well I think what I said was we're seeing the funds flow now and the allocation process and procurement offices starting to put out contracts. And we did see some pickup in activity in civilian. I do think it's still going to be a multiple quarter process until we see Federal Government begin to be kind of back on an upward trend. We are encouraged by activities because in the Federal market, until you see contracts being let, until you see dollars being specifically allocated to a project, the sales process can't kind of -- the flywheel doesn't fly, so to speak. And we are seeing that now. If you said to me, I would expect -- if you look at the Federal sales process, normally, it's very back-end loaded. It's heavy in the third and fourth quarters. And I would say if we're going to see a recovery, that's when we'll see it.

[Operator Instructions] Our next question is from Jayson Noland with Robert Baird.

Tom, just a clarification question on storage. Your ability to offset weakness in the traditional storage market with emerging technologies, is that basically a function of your early engagement with companies like Nimble and youpanics [ph] , or is there something else there?

The answer is yes. And also some of the Converged Infrastructure project that we've been working with the more traditional vendors, but you're on the right track.

Do you see that more as a secular shift than something that's product-cycle driven?

It feels product-cycle driven. I mean I think everybody is -- everybody -- a lot of the OEMs are moving to develop those kinds of solutions. And so I think if you look at our customers, this is kind of the second iteration, as I would describe it of efficiency. The first was we did virtualization. We virtualized storage, we virtualized servers. And customers then created incremental capacity by doing that. And now, as they get to the next phase, they're looking at these more efficient storage capabilities to, again, create greater capacity at less cost. So I think it's just the nature of the technology beast, so to speak.

Okay, and then a follow-up question on that Healthcare vertical. Good quarter, you've got easy year-on-year compares the next couple of quarters. Do you see better visibility in that vertical specifically?

Well it's getting better. They're a little bit covered with some of the Federal budget issues when it comes to Medicare and Medicaid reimbursement. But I was encouraged, quite honestly, in addition to the client refresh to see the networking business grow, because I think that's an indication of people making, what I'll call, investments they're driving themselves versus responding to maybe on expiration of XP. And I think that's a good sign. But again, it's just a couple of quarters here so we're going to remain cautiously optimistic on Healthcare, but do view it as a growth driver this year.

And our next question is from Jerry Lou with Morgan Stanley.

Calling in for Katy here. Just wanted to ask about Chromebooks. It's obviously been really strong in recent quarters. But even including accessories and other services you provide, does that -- do those products put extra pressure on margins versus traditional notebooks and desktops?

Well, I think they do if you just sell them in isolation. And one of the things that I think has been great about our Education result is it was part of a broader solution. And I think as I've alluded to, as you deploy the Chromebooks, it drives and pressures things like your network. It drives the need for increased security. It drives the need for network management and all of those kinds of things, Jerry, bring higher margins with them.

Got it. And the same question on just the CapEx this quarter. I think it was -- the $30 million was maybe doubled recent quarters. What drove that? Does it have to do with any data center or cloud buildout, and do you expect the expense to continue at this level?

Yes, our CapEx was in line with our normal spending in the quarter. I think you may be picking up a investing cash flow relating to a charitable contribution that was triggered that tied back to the original LBO. And the cash flow for that contribution went out this quarter, and that was picked up in financing cash flow, but CapEx was normal in the quarter.

Thank you. And I'm not showing any further questions at this time. Mr. Richards, please proceed with any further comments.

Okay. Once again, really, really proud of the team's performance this quarter. Again, on our ability to kind of help our customers with what's important to them at any given time in their IT life cycle. And as I always say, if any of you need help with your IT inside of your companies, CDW is absolutely the person you ought to be calling. And let me leave with this, for all of you mothers out there, Happy Mom's Day. All right. Thanks, everybody.

Thank you, ladies and gentlemen, for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a wonderful day.