CDW Corporation (CDW) reported second-quarter 2014 adjusted earnings (excluding amortization of intangibles and other one-time items but including stock-based compensation expenses) of 65 cents per share, which came ahead of the Zacks Consensus Estimate of 59 cents. Moreover, on a year-over-year basis, earnings were up 23.4%.
Revenues
CDW’s second-quarter revenues not only increased 11.8% year over year to $3.11 billion, but also came ahead of the Zacks Consensus Estimate of $2.96 billion. The year-over-year improvement was attributed to better-than-expected growth in the U.S. IT market and customer channels coupled with constant strategic achievements.
Moreover, revenues were up year over year based on higher demand from the education and government sectors. Growth in K-12 education and the Small and Healthcare businesses also impacted revenue growth. Notably, product refreshes and digital education implementation drove PC sales in the quarter.
Based on segments, total corporate revenues were $1.66 billion, up 7.7 % year over year. In corporate, small business grew 14% year over year whereas medium and large business increased 7%. Revenues from the Public segment came in at $1.27 million, up 17.5% year over year, primarily due to growth in the government sector (up 5.9% year over year) and Healthcare business (up 18% year over year). Also, increase in education business (up 25%) positively impacted the Public segment.
Other revenues (namely advanced technology services and Canadian operations) were up 11.9% on a year-over-year basis.
Hardware revenues increased 13.7% year over year driven by better-than-expected demand for client devices (comprising notebooks), mobile devices (comprising Chromebook) and PC desktops. Software revenues grew 4.2%, primarily due to solid performance across categories, which more than offset the decline in storage revenues. Higher warranties, product refreshes as well as cloud services drove Service sales, which increased12.7% year over year.
Operating Results
CDW’s gross margins were down 25 basis points from the year-ago quarter to 16%, primarily due to unfordable product mix and pricing pressure.
The company’s operating expenses increased 3.6% from the year-ago quarter The increase was primarily due to higher coworker compensation expense and increased coworker count coupled with higher marketing and advertising expenses. Operating margins came in at 6.1% compared with 5.5% in the year-ago period, primarily due to lower operating expenses as a percentage of revenues (down 78 bps year over year).
CDW’s adjusted net income (excluding amortization of intangibles and other one-time items but including stock based compensation expenses) increased from $77.9 million or 53 cents per share reported in the year-ago quarter to $113.2 million or 65 cents per share.
Balance Sheet & Cash Flow
CDW exited the second quarter with cash and cash equivalents of $227.6 million compared with $306.7 million in the previous quarter. Receivables were $1.53 billion versus $1.34 billion in the prior quarter. Long-term debt stood at $3.11 billion compared with $3.16 billion in the previous quarter.
The company reported cash flow from operations of $175.9 million for the six months ended Jun 30, 2014. The company also declared a cash dividend of apprximately 4 cents for the second quarter of 2014, payable on Sep 10.
Conclusion
CDW reported better-than-expected second-quarter 2014 results. Year-over-year comparasions were favourable primarily driven by growth in the U.S. IT market, increase in customer channels and continuous strategic achievements. Moreover, higher demand from the education and government sectors also impacted quarterly results.
Additionally, CDW’s enriched product portfolio and product refreshes continue to drive growth. The company’s significant exposure to high-end corporate desktop and digital education implementation also remains a positive.
We believe that the improving IT spending trend will help CDW post better results going forward. Also, the company’s strong position at medium to large businesses, focus on small & medium businesses and customer additions to grow market share are encouraging. The company’s effort to pay off debt is a positive.
However, a highly leveraged balance sheet, competition from Insight Enterprises Inc. (NSIT) and PC Connection, Inc. (PCCC), and pricing pressures remain headwinds.
Currently, CDW has a Zacks Rank #3 (Hold). Investors can also consider NVIDIA Corporation (NVDA) which has a Zacks Rank #1 (Strong Buy) and is worth buying.
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