Good day, ladies and gentlemen, and welcome to the CDW Fourth Quarter Earnings Call. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, today's conference may be recorded. I would now like to turn the call over to Ms. Chris Leahy, Chief Executive Officer of CDW. Ma'am, you may begin.

Thank you, Chelsea. Good morning everyone. Thank you for joining us today to discuss CDW's fourth quarter and full-year 2018 results. With me on the call today are Collin Kebo, our Chief Financial Officer; and Beth Coronelli, our new VP of Investor Relations. I'll begin today's call with a brief overview of our results, key drivers, and our expectations for 2019. Collin will take you through a more detailed review of the financials. We'll then go to your questions. But before we begin, Beth will present the Safe Harbor disclosure statement.

Thank you, Chris. Good morning everyone. Our fourth quarter earnings release was distributed this morning and is available on our Web site, 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 earnings release, and Form 8-K we furnished to the SEC today and in the company's other filings with the SEC. CDW assumes no obligation to update the information presented during this webcast. Our presentation also includes certain non-GAAP financial measures, including non-GAAP earnings per share and adjusted EBITDA. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rules. You'll find reconciliation charts in the slides for today's webcast as well in our earnings release and the Form 8-K we furnished to the SEC today. Please note that all references to growth rates or dollar amount increases in our remarks today are versus the comparable period in 2017, unless otherwise indicated. In addition, all references to growth rates for hardware, software, and services today represent U.S. net sales only and do not include the results from CDW U.K. or Canada. Also note, that all 2018 and 2017 net sales amounts are reported under accounting standard ASC 606. The number of selling days were the same for both the fourth quarter and year-to-date in 2018 and 2017. All sales growth rate references during the call will use average daily sales unless otherwise indicated. A replay of this webcast will be posted to our Web site later today, approximately 90 minutes. I also want to remind you that this conference call is the property of CDW and may not be recorded or rebroadcast without specific written permission from the company. With that, let me turn the call back over to Chris.

Thank you, Beth. It's a pleasure to discuss CDW's results and strategic progress with you today. I'm please to report that CDW posted another excellent quarter, with strong sales and profitability. Fourth quarter results include an 8.6% increase in average daily sales, with net sales of $4.1 billion, up 9% in constant currency, an 8.8% increase in adjusted EBITDA to $323 million, and a 34.4% increase in non-GAAP earnings per share to $1.32. The strong performance contributed to an excellent 2018. For the year, we delivered 9.5% net sales growth with $16.2 billion of net sales, 9.8% adjusted EBITDA growth, and 35.1% to non-GAAP earnings per share growth. Our ability to deliver the strong fourth quarter and full-year performance was the result of three key drivers, our balanced portfolio of customer end-markets, the breadth of our product and solutions portfolio, and our ongoing execution against our three-part strategy. Let's take a look at how each of these drivers helped deliver profitable growth. First, our balanced portfolio of customer end-markets, as you know, we have five U.S. channels, Corporate, which serves customers with coworkers from roughly 250 and up; Small Business, which serves customers with roughly 20 to 250 coworkers; and Healthcare, Government, and Education. Within each channel we have teams further focused on customer end-markets and verticals. For example, in Government we have Federal with teams focused on serving the Department of Defense, and across civilian agencies, as well as state and local teams. Each of our U.S. channels generated more than $1.3 billion of net sales in 2018. We also have our U.K. and Canadian operations which together delivered nearly $1.9 billion of net sales in 2018. Our customer end-markets often act counter-cyclically given the different macroeconomic and external factors that impact each one. You see the benefit of…

Thank you, Chris. Good morning, everyone. We delivered another quarter and full-year of results consistent with our long-term financial strategy to drive strong cash flow, deliver sustain profitable growth and return capital to shareholders. Before I begin, I'd like to remind you our results reflect the adoption of ASC 606 providing an apples-to-apples comparison for 2017 and 2018. Turning to our fourth quarter P&L on Slide 10, consolidated net sales were $4.1 billion an increase of 8.6% on a reported and average daily sales basis compared to last year. In constant currency, consolidated net sales grew 9%. Currency had a 110 basis points swing moving to a headwind of 40 basis points in Q4 2018 from a tailwind of 70 basis points in Q4 2017. As expected our sequential average daily sales decline of 6.8% was greater than historical seasonality given the strength in the third quarter. Gross profit for the quarter increased 13.1% to $694 million. Gross margin expanded 60 basis points driven by mixing into net revenues including software-as-a-service, warranties, commission revenue and other services and product margin which benefited from the strength in solutions categories as well as the overlap of client devices shipped to the Department of Defense last year. Turning to SG&A on slide 11, our adjusted SG&A including advertising increased more than sales the 17.1% increase was driven by three factors. Increased sales compensation which is directly tied to gross profit growth, performance based compensation consistent with higher attainment against goals and the balance of the strategic investments we announced at the beginning of 2018 which were funded by Tax Reform. Our co-worker count of 9019 was up nearly 300 from the fourth quarter of 2017. Adjusted EBITDA for the quarter was $323 million an increase of 8.8% compared to last year with an…

Thank you. [Operator Instructions] And our first question will come from the line of Matt Sheerin from Stifel. Your line is open.

Yes, thank you, and good morning. Just a question regarding your outlook for this year, specifically relative to the transactional business and client device, looks like we're going into year-three of a fairly positive refresh cycle, both on the notebook-PC side and servers. I know we're up against some deadlines with some Microsoft operating system support changes early next year. So, what's your thought on the cycle? Are we in the last innings here? And as you see potentially lower transactional business, and it sounds like there's momentum on the solutions side, will we continue to see positive mix helping your gross margin?

Morning, Matt. Thank you for that question. I think there's a lot in there, so let me just take it piece by piece if I could. So, if we take a step back and think about client, you're right. We're seen really healthy demand there, and obviously watching that closely. A challenge to predict what inning we're in and I would say that the data points seem to be indicating that there are more factors impacting client refresh than have traditionally been the case. So, for example, we certainly do have the normal lifecycle refresh, older client devices out there, and some time-sensitive operating system upgrades coming up Win 10, Win 7, et cetera. But we're also seeing customers seeking competitive advantages through new technologies in this area to elevate productivity obviously, and to drive efficiency with their coworkers. So, in terms of taking advantage of that, the cycle seems like it's a little different frankly than it has been. So those time-compelling events are important and will continue to drive demand, but we're also seeing what I say is a little bit of a smoother level of demand across the years. Now that's obviously tied to budget and the ability to have that budget to spend, and we're seeing healthy budgets out there. So, on the client I would say we're going to continue to see strong demand, but we are overlapping some healthy growth last year and the year before, so we might see that moderating a little bit, but again, continuing on a more consistent basis than really time sensitive. On the solutions side, there's a lot going on there as well. We obviously have some Microsoft end of service coming around in the next year or so. And that will drive upgrades in the datacenter infrastructure, but equally, the advances in the technology and innovation is very interesting to customers, and we continue to have conversations with them about investing across the full spectrum, whether it's on-cloud, on-prem, et cetera. So, I think you're going to see a healthy environment. That said, when we look at 2019, there seem to be more external uncertainties than we had going into 2018. And so our perspective, sitting where we are today, is that the IT rate of market growth might be a little lower than what we saw in 2018.

Okay, thanks. That's very helpful. And just a quick follow-up regarding the federal business, you talked about tough comps in Q4, and you'll still have some tough comps this quarter. You didn't talk about any disruptions or delays relative to the federal shutdown, anything there to share with us?

Yes, on the federal shutdown, which started, as you know, at the end of last year, really no impact to Q4 results. We did have some projects slip because they were placed; orders weren't placed at the end of December. And we've obviously missed about a month worth of writing. Now, the good news is we had a holiday in there, we're in the period when our customers are really evaluating, as opposed to buying quite as much. And our teams were, frankly, on the phone with those customers during the shutdown to help them be ready when they got back. So we could see some shift in timing if orders aren't getting out. Now that they're back at working we could see some shift. But we don't expect that to be business that's lost, we just think projects might shift into Q2. Obviously, with the possibility of another shutdown looming there would be more concern because that could have longer-term effects and it could start to impact the rest of the economy. The other point I do want to make is, when you look at our federal business, we have Department of Defense teams and civilian teams, I think I mentioned in my prepared remarks. And if you look at the mix of that business, a lower portion of that business is civilian. And civilian agencies are the ones that were primarily shutdown because it's a partial shutdown. And even for the agencies that were shutdown there were some essential workers working, and so we tried to take advantage as best we could of that.

Okay, great. Thank you.

Thank you. And our next question comes from the line of Katy Huberty with Morgan Stanley. Your line is open.

Good morning, Katy.

Hi, good morning. Can you talk to whether you think there was any push out of demand -- or sorry, pull-in of demand around price increases due to tariff-related impacts in segments like networking during the quarter?

Yes, thanks for the question, Katy. We did have conversations with customers around that. And we reached out to customers, frankly, proactively to see how we could help. But at the end of the day, we did not feel any significant pull into the fourth quarter as a result of tariffs. We just didn't feel it.

Okay, thank you.

Thank you. Our next question comes from the line of Adam Tindle with Raymond James. Your line is open.

Okay, thanks and good morning. I just wanted to start on the solutions as a service, looks like that's a little bit of a change here. And hoping that you can talk about how this change could potentially change the competitive environment. Is there advantages that CDW has versus others in terms of scale, balance sheet, et cetera, versus small competitors? And if you could touch on how we can think about the key metrics as this picks up, is it deflationary to revenue growth but similar profit dollars? Thanks.

Yes, thank you, Adam. Yes, when we think about as a service generally, it's -- I'll start with, it's compelling to our customers. It's complicated in how you'll see it in our financial results because of the various ways that it can appear. So, if you have software as a service, for example, that's pretty clear, and that's down. We have a broad portfolio of software as a service that we offer our customers, and we are heavily involved in helping them to implement where they see fit, something like device-as-a-service. And I went through the Census example, the multiple advantages that we have that all work together, frankly, in a solution like device-as-a-service, is what won us the trust of the Census to actually get it done. Now, how that looks on the balance sheet and how it looks in the financial statements, I'll have Collin take you through, because it is constructed in such a way that it will be reflected in the financials in a certain way. But we've got other device-as-a-service deals that are constructed slightly differently and they will show up separately in the financial statement. So, let me have Collin just jump in on that one.

Yes, sure. Thanks, Chris. Adam, as we're taking these offerings to market the one consistent thing is that there is no standard approach to the accounting. All of these deals are being structured differently. In some instances it may come on to our balance sheet, in other instances we may lease from someone else, and in other instances it may just simply be a financing transaction where we're bringing in a third party to arrange financing and then through our financial statements it just looks like a normal product sale. But we did make the decision to move forward to non-GAAP operating income on a go-forward basis so that in those instances where we are putting capital to work, that we're including that depreciation expense, which is effectively the cost of goods sold on the offering. We felt that that was the right way to look at it. In terms of how it changes the model, I think because it's unclear exactly how all of these are going to be structured. It depends on each individual transaction. The Census is effectively a full revenue transaction, we are not netting down much on that. So I wouldn't expect that as an example to have a muted impact on the top line. I did make some comments on capital expenditures where we expect to be at our regular CapEx excluding the Census. We're not exactly sure when that CapEx will go out depending on the timing for the Census, whether it be later this year or early 2020, but I think the important point is that we don't expect it to change our free cash flow percentage [technical difficulty] So, whatever that CapEx number is we're still committed to the post tax reform free cash flow grew -- three-and-three-quarters to four-and-a-quarter percent.

Okay, that's helpful. Just as one quick follow-up, since adjusted EBITDA margin is going away I want to ask one last question on it. Gross margin has been increasing. I would imagine that this could continue to be a trend as the mix towards net seems more secular in nature. Just want you to maybe touch on how we can think about the impact to adjusted EBITDA margin if this continues to occur. I know there's some offsets, but how can we think about drop-through, and could we see another level of adjusted EBITDA margin beyond the high sevens as you continue to ratchet up?

Yes, as you know, there are a variety of factors that impact our gross margin. Chris mentioned mix and there are all these other different mix of products, mix of netted down revenues, mix of channels, mix of are you selling newer or more mature technologies, all of those things impact our gross margin. And then I think the other thing to keep in mind is we have a compensation structure that's tied to gross profit dollars, and we pay on that. And our solutions business does have a higher cost to serve. So, not all of that gross margin is going to drop down to EBITDA margin because of our variable cost structure. And so what I would say is it depends on how all of those things come together over time. Obviously, in the fourth quarter of this year we have a confluence of positive factors that caused a very strong increase in that gross margin. We'll see how that plays out over time depending on how all of those factors interact with each other. Continuing with EBITDA margin, you know we had mid sevens for a long time. And at our analyst day, a year-and-a-half ago, we did increase our outlook for that from mid-sevens, to high-sevens, to eight because of those factors that you mentioned. So, we'll see how that plays out over time.

Thank you, and congrats on the solid results.

Thank you.

Thank you.

And our next question comes from the line of Shannon Cross with Cross Research. Your line is open.

Thank you very much. I wanted to talk a bit more about the Canadian acquisition. I'm curious, is there anything that you expect to leverage from what they're doing that perhaps you can take into CDW? And then vice-versa, sort of how are you looking at the integration of that asset over the coming year? And then I have a follow-up. Thank you.

Yes, no, thanks for asking. We're really excited about Scalar. I would say that this is really an organization with an exceptional fit. And when you tick through what we look for in an acquisition that works, Scalar really hit all the boxes. You think about their deep technical expertise in areas that our customers are looking to us for advice in, including services capability; they add in-market sellers and technical folks with business up and running. And they have a great cultural fit, as I mentioned before. One of the things that was really interesting to us is the non-overlapping customer base. So, when you think about the value that we can bring to each others' customers immediately it's pretty attractive. Scalar has been really primarily a solutions-focused and based organization. And CDW, as you might remember, in Canada, our transactional business has been very robust, and we've been investing in the solutions area for some time. So, by bringing those two together we've got a nice base of customer that we can now offer a more fulsome group of IT solutions. In terms of Canada-to-U.S., if that was part of the question, like we've done across the board, even with the U.K., where we find opportunity to take best practices in the U.S. or in the local market and bring it back, we certainly will do that. And I think one area you can think about is operating efficiency. So, while this acquisition is really all about growth and bringing value to our customers, as we combine the two we would look to get some good operating efficiency down the road.

Thank you. And then I'm curious, I think you added about 300 coworkers last year, and I believe you mentioned you plan to add about 50% of that this year. Is that because you made this acquisition, that maybe you're not as aggressive in terms of hiring, or is that just the potential for upside if you find the right people?

Yes, I think there -- there was a number that I mentioned in my prepared script, was the 350, and that's a Scalar coworkers that are joining our family. We brought in about 165 customer-facing coworkers last year, and so we're looking to about 125 to 175 this year. So, reflecting the same level of confidence in our ability to execute.

Okay, thank you.

Yes, I think some of the confusion may have been, I gave a number on total coworker account up about 300, and Chris was referencing just the customer-facing coworker count.

Okay, great. Thank you.

Thank you. And our next question comes from the line of Keith Housum with Northcoast Research. Your line is open.

Good morning. Thanks for the question. And just a follow-up on Scalar, can you provide a little bit color in terms of their margin profile and the impact to the bottom line?

Keith, we're not going to provide that information. As we said, we don't expect them to be accretive this year, but we would look for them to be accretive next year, but we are not going to get into the details of the margin and frankly, it can fluctuate very much like CDW. It's based on the type and mix of solutions that they're selling at any given point in time during a quarter. But we're excited about the opportunity together and what we'll be able to drive overall in CDW U.K. as we bring the operations together.

Okay. And just as a follow-up question, in terms of the census project with regards to devices and service, what happens after the end of the product and the service becomes -- it comes back to you? Is there an opportunity to sell the product and perhaps have a gain or loss on the product, or is there an opportunity to recycle that into another project?

Well, that's actually part of the full spectrum of everything that's happening in this product. We are not the third party that will be taking the devices back, but another organization will be taking the devices back and then you know through resale benefiting from that. But that's part of the -- from soup to nuts, the entire project includes a repatriation if you will, of the devices, but by a third party, not CDW.

Yes, Keith, there is an assumption because of the accounting on this. There's a residual value that'll be assumed and ultimately what that is -- you know, there could be a minor variance, but I wouldn't expect it to be material.

Okay, thank you.

Thank you. Our next question comes from the line of Jason Rogers with Great Lakes Review. Your line is open.

Yes, just following up on the M&A questions. Are you finding more opportunity in Canada as far as the potential for new customers, view that as more of a focus for the M&A or do you see just opportunities widespread geography wise?

Thanks for that question. I wouldn't say that we find more or less opportunity up in Canada or in the U.K. or in the U.S. for that matter. I mean, we have a process where we're always engaged in knowing and looking at what is out in the marketplace. And frankly, given our institutional knowledge, we tend to scout outside what's on the market anyway and we see a lot in the U.S. and we assess a lot, but as I think many of you know, we're really quite disciplined about an acquisition and we look for something to complement our strategy. The cultural fit is really quite important to us. Is it going to enhance value for our existing and prospective customers, and then ultimately at a compelling price and you know, the compelling price is quite important to us. And when you look in the market, there can be a lot of interesting opportunities, but if the price isn't right it's not something that we're going to move forward on if we can build ourselves.

And I wonder if you can make some comments around your cloud growth in the quarter, if you're seeing any material acceleration as far as shifting offsite and any potential cannibalization of your historical offering?

Yes. We're not going to give that number this quarter. I think a couple -- maybe three quarters ago, we let you all know that our -- the customer spend which will be gross sales, gross revenue, customer spend was in the $3 billion area, so I would say it's a robust and mature practice with a broad selection. I think the question specifically around seeing growth in the cloud at the expense of on-prem, you know, we have always been, for several years now, a fan of the hybrid model, and you know, I think our view has always been that the world is going to land in a hybrid place, and I do think that's what we're seeing in the market. For us, it's opportunity across the board, we're not seeing -- certainly, some customers are repatriating back to on-prem for a variety of reasons as you know, but not at the expense of actually moving other workloads to the cloud. So I think we're seeing very balanced assessment by our customers. We're trying to help them understand what's best for them and their particular business, because obviously, the different businesses can take advantage of different types of technologies, but strengthen those and not one at the expense of the other is what we're feeling.

Okay, thank you.

Thank you. And our next question comes from the line of Paul Coster with JPMorgan. Your line is open.

Hi, thanks, this is Paul Chung on for Coster, thanks for taking my question. So just on operating margins, I know you are investing in the sales force and probably create some noise, but how should we think about areas where you can see some operating leverage beyond fiscal year '19? Sounds like, from the comments you made earlier, gross margin should stay in the 516% range? Thank you.

Yes, thank you. So our thoughts on 2019 are that our non-GAAP Operating income margin will be in the mid 7 -- again, I know it's a new metric, but if you think that our CapEx has historically run around half a point of sales, you can take 50 basis points and add it to that to give you kind of a comparable adjusted EBITDA margin. I made some comments earlier about some of the factors that impact our gross margin and how they interact with each other and also we do have a highly variable cost structure. So as the business does grow, and we generate more gross profit dollars, even if they come from solutions we have additional variable expense that goes along with that. And then secondly, we continue to make investments in the organization in terms of adding customer facing coworkers and other investments to ensure that we continue to drive that top line outperformance to market of 200 to 300 basis points. So yes, we feel good about our ability to deliver that mid-7 non-GAAP operating income margin and you know, depending on how the market evolves over the next several years, we could potentially update that, but for now it's 7.5%.

Thank you.

Thank you. And this concludes today's question-and-answer session. I would now like to turn the call back to Ms. Chris Leahy for closing remarks.

Thank you. As we wrap up the call today, I'd like to thank our 9,000 plus coworkers for taking care of our customers every single day, and for focusing on our customers' success thereby ensuring CDW's continuing success, and for those customers listening in, thank you for trust in CDW. We never forget that your success is our success. To our new Scalar coworkers, welcome to the CDW family, we are truly excited about the future and the opportunity to serve our customers together. Thank you for everyone who participated. We appreciate your questions and we'll look forward to next time. Thanks.

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