Thomas E. Richards - CDW Corp. Sari L. Macrie - CDW Corp. Christine A. Leahy - CDW Corp. Collin B. Kebo - CDW Corp..

Irvin Liu - RBC Capital Markets LLC Matthew Cabral - Goldman Sachs & Co. LLC Jayson A. Noland - Robert W. Baird & Co., Inc. Matthew John Sheerin - Stifel, Nicolaus & Co., Inc. Adam Tindle - Raymond James & Associates, Inc. Shannon S. Cross - Cross Research LLC Kathryn Lynn Huberty - Morgan Stanley & Co. LLC Sherri A. Scribner - Deutsche Bank Securities, Inc.

Mark Moskowitz - Barclays Capital, Inc..

Good day, ladies and gentlemen, and welcome to the CDW Fourth Quarter and Full Year 2017 Earnings Conference 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. As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Mr. Tom Richards, Chairman and CEO. Sir, you may begin..

Thank you. Good morning, everyone, and thank you for joining us today to discuss CDW's fourth quarter and full year 2017 results. With me on the call are Collin Kebo, our Chief Financial Officer; Chris Leahy, our Chief Revenue Officer; and Sari Macrie, our VP, Investor Relations.

I'll begin with an overview of full year and fourth quarter results and their drivers. Chris will share some thoughts on the performance of our sales organizations, and then I'll provide thoughts on our strategic progress and expectations for 2018 and 2019.

I'll hand it over to Collin who will take you through a more detailed review of the financials, including a walkthrough of the expected impact of new taxes and new accounting rules. After that, we'll open it up for some questions. We have a lot to get through today. But before we begin, Sari will present the company's Safe Harbor disclosure statement..

Thank you, Tom, and good morning, everyone. Our fourth quarter and full year 2017 earnings release was distributed this morning and is available on our website, 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, including non-GAAP earnings per share. All non-GAAP measures have been reconciled to the most directly comparable GAAP measures in accordance with SEC rulings.

You will find the reconciliation charts in the slides for today's webcast as well as 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 2016 unless otherwise indicated.

In addition, all references to growth rates for hardware, software, and services today represent U.S. net sales and do not include the results from CDW UK or Canada. Also note that all 2017 and 2016 net sales amounts are recorded under the current year standards and do not reflect the impact of our adoption of ASC 606.

There was one more selling day in the fourth quarter of 2017 compared to the fourth quarter of 2016. The number of selling days for the full year was the same in both 2017 and 2016. All sales growth rates referenced during the call will use average daily sales unless otherwise indicated.

A replay of this webcast will be posted to our website by this time tomorrow. 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. So with that, let me turn the call back to Tom..

NetComm, storage and servers, with all three posting declines. We expect these issues to be reversed in the first half of 2018. While difficult to control or predict, we believe there were additional actions we could have taken as a leadership team to minimize this impact.

Fourth quarter software performance continued to be fueled by security and network management. Meaningful gains and netted down categories compressed top line growth. You see the impact of that in our gross profit from software which grew high-single digits, roughly three times as fast as net sales.

Services' modest growth reflected the absence of strong warranty growth we saw in last year's fourth quarter. The final driver of our performance was the power of our balanced portfolio of end markets. With five U.S.

channels each over $1 billion in 2017 net sales and an additional $1 billion-plus from our UK and Canadian operations, our diverse end markets helped us absorbed macro and exogenous impacts on the business. Chris will review the full year and fourth quarter performance.

Chris?.

Thank you, Tom. Good morning, everyone. Performance was balanced across our segments in 2017, with Corporate up 8%, Public up 8% and Small Business up 9%. Our combined UK and Canadian operations had an exceptional year, posting 15% growth in U.S. dollars. Each grew mid to high-teens in local currency.

Corporate's growth reflected increased confidence in the economy, which drove mid-teens growth in Client Devices as well as mid-single digit growth in NetComm and software. Our focus on Small Business and the creation of a standalone segment paid off in 2017.

Small Business growth was driven by double-digit increases in client and high-single digit increases in video. Public had double-digit growth across both our government and education channels, while healthcare struggled throughout the year and ended slightly down. Government growth was balanced across both federal and state and local.

State and local continued to benefit from new contracts as well as success delivering public safety solutions. Federal growth was fueled by Client Devices, reflecting our success helping agencies meet the Department of Defense mandate to move to Win 10 by January 2018.

Higher Ed grew mid-teens, reflecting their excellent success delivering networking solutions to meet the ever-growing demands of multiple end user devices across campuses, delivering more than 20% growth in networking.

K-12 increased mid-single digits driven by success in implementing collaborative learning environments and delivering networking solutions. Our segment performance was balanced in the fourth quarter as well. Corporate and Small Business both increased 6%, while Public increased 7%.

Strong growth in government, which increased 7%, and education, which increased 8%, was partially offset by health care, which declined 5%. Our international business had another excellent quarter with both the UK and Canada growing high-teens or better in U.S. dollars.

And both operations grew double-digits as well in their local market as they gained share and out-executed their competitors. In addition to out-executing in their local market, CDW UK is growing its international business. You'll recall that we acquired CDW UK in August 2015.

The objective was to acquire the ability to serve our U.S.-based customers' international needs. In 2017, we doubled the size of our dedicated international selling team and generated more than $100 million of customer spend in cross-referrals from the U.S. to the UK and the UK to the U.S., up from $75 million in 2016.

In 2015, roughly 10% of CDW UK's customer spend came from outside the UK. Today, it is more than 20%. In addition, 14 out of the UKs top 20 customers were both U.S. and UK customers. The programs we have put in place to drive international success are clearly paying off. That wraps up the quick summary of customer end market performance.

Tom?.

the U.S., the UK and Canada. The remainder of our investments will be directed at strategic initiatives. As you may know, we perform a rigorous detailed strategic plan on a three-year cycle. We are nearing completion of our most recent review, which we call Bold Forward.

Of course, for competitive reasons, I won't share the specifics, but expect us to invest in fast-growing areas of business identified in Bold Forward. Investments will occur both in 2018 and in 2019. These 2018 investments will be more than offset by reduced taxes and we expect our non-GAAP earnings per share to increase in the low to mid-20% range.

For 2019, as we overlap the onetime tax reform step-up, we currently look for earnings per share growth of 10% or slightly above with capital allocation fueling the amplification of operating earnings. Of course, tax reform also means drives a meaningful increase in our annual free cash flows.

We intend to return incremental cash flows consistent with our capital allocation priorities. Before I turn the call over to Collin, I'd like to thank our coworkers publicly. Our financial and strategic success in 2017 would not have been possible without the efforts of our dedicated and talented team of more than 8,700 coworkers.

Our coworkers are a true source of advantage in a highly competitive market and are a key reason why we are successful delivering industry-leading, profitable growth year after year.

And with that, let me turn it over to Collin who will share more detail on our financial performance and implications of both tax reform and some exciting new accounting rules..

state taxes, expanded base, international, and excess tax benefits from equity-based compensation. To get to our expected non-GAAP effective tax rate of 26% to 27%, we adjust for taxes consistent with non-GAAP add-backs including excess tax benefits associated with equity-based compensation. We then apply this rate to our non-GAAP pre-tax income.

Given tax reform, I thought it would be helpful to walk through how to calculate our non-GAAP pre-tax income. As you can see on slide 16, you can get to this measure starting with either adjusted EBITDA or GAAP pre-tax income. For 2017, our non-GAAP pre-tax income was $958 million, and our non-GAAP effective tax rate was 36.8%.

We provided a more detailed reconciliation in our earnings release. The other key change to our financials is the adoption of ASC 606. As Sari indicated, 2017 results discussed on this call reflect 2017 accounting standards. As of January 1, 2018, we have adopted the new standard ASC 606 under the full retrospective method.

Adoption of the new standard results in lower net sales than reported under the prior standard primarily due to the netting down of certain Software categories, mainly Security. Accordingly, 2017 net sales under the new standard were $14.8 billion, $359 million less than previously reported.

We provide a comparison of these two standards for 2016 and 2017 on slide 17. Note there is a de minimis change to gross profit in adjusted EBITDA dollars, but the main change is in the margin calculation as the net sales basis lower. It's important to understand that the incremental netting down impact dissipates on margin as you move down the P&L.

Please use the new standard as the baseline when you model the business going forward. We posted a deck on our website that provides a more detailed review of the impact of the new standard on our results along with recast numbers by segment.

Both the new standard and the change in our effective tax rate influence our 2018 financial targets, which you see on slide 18. Our previous targets were set in place for 2016 through 2018. We are extending our view into 2019 to give you a sense of what to expect when we anniversary the implementation of tax reform and the new standard.

There is no change to our target to grow net sales 200 300 basis points above U.S. IT market growth in constant-currency.

Given the incremental netting down impact of the new standard on one of our fastest-growing offerings, security software, and moderation in client device growth to the year-over-year comparisons, we expect to be near the middle of the 200 basis point to 300 basis point range.

While the new standard increases reported margin from more netted down revenue, it has little impact on the year-over-year margin change. We expect any modest positive mix impact to be mostly offset by continued, albeit slower, growth in client devices in the ongoing competitive marketplace.

Prior to the impact of the tax reform investments Tom spoke about, our adjusted EBITDA is expected to come in at the high end of our annual target range of high 7s to 8%. With tax reform investments which are expected to shave off roughly 5 to 10 basis points, we expect to deliver adjusted EBITDA margin for the full year within our target range.

Non-GAAP EPS growth on a constant-currency basis is expected to be in the low to mid-20% range, which we define as 23% to 25%. This assumes a non-GAAP effective tax rate between 26% and 27%. Turning to 2019, we continue to expect to deliver net sales growth of 200 to 300 basis points above the U.S.

IT market in constant-currency, with an adjusted EBITDA margin in the high 7s to 8% range. For those of you who have followed us since the IPO, you've seen the evolution of our financial targets. From 2013 to 2015, deleveraging and refinancings amplified operating growth to deliver robust EPS growth.

In 2016 and 2017, share buybacks amplified operating growth. In 2018, operating growth will be amplified by tax reform and continuing contribution from share repurchases.

In 2019, with the onetime lift from tax reform behind us and approximately 30% of free cash flow going to dividends, we expect 10% or slightly better non-GAAP EPS growth, with capital allocation amplifying operating results. As you can see on slide 19, our expectations for free cash flow have evolved with our targets.

Given new lower tax rates, we expect to generate higher free cash flow as a percentage of net sales going forward. In 2018 and 2019, we expect this increase to be approximately 75 basis points, resulting in a new free cash flow rule of thumb of 3.75% to 4.25% of annual net sales.

We expect to be at the low-end of this range in 2018, given the 50 basis points of over-delivery in 2017. Timing can impact annual flows, but it tends to even out over multiyear periods. Capital allocation continues to reflect our intent to drive shareholder value through returns of capital and strategic investments.

As you can see on slide 20, our capital priorities are essentially the same since we instituted them in November of 2014. First, increase dividends annually. We increased our dividend 31% this past November. Recall that in November of 2014, we set a target to achieve a dividend payout of 30% of free cash flow within five years.

Post tax reform, that represents 30% of a larger number. Second, ensure we have the right capital structure in place. Our target is to generally maintain net debt-to-adjusted EBITDA leverage in the range of 2.5 to 3 times. We ended the fourth quarter at 2.6 times. Third, supplement organic growth with acquisitions that add to strategic capabilities.

Our CDW UK investment was an excellent example of this. And fourth, return excess cash after dividends and M&A to shareholders via share repurchases. At the end of December, we had $858 million remaining on our current share repurchase authorization.

In 2017, we repurchased a total of 8.9 million shares for $534 million at an average cost of approximately $60 per share. Between share repurchases and dividend payments, we returned nearly $650 million to our shareholders in 2017, slightly above our free cash flow for the year because of the excess cash on the balance sheet at the end of 2016.

Given 2017's over-delivery of free cash flow as a percentage of sales, we expect to once again deploy more cash than generated. You should expect us to return this cash in order of our capital allocation priorities. Finally, let me provide you with a few additional comments for those modeling the rest of our 2018 financials. I am on slide 21.

I will start with the full year and then share some thoughts on inter-year phasing. You have our perspective on adjusted EBITDA and non-GAAP EPS from the 2018 annual medium-term targets.

Using the bridge on slide 16, to get from adjusted EBITDA to non-GAAP net income, first deduct depreciation and amortization, which excludes the amortization of purchased intangibles.

In 2018, we expect total depreciation and amortization to be approximately $8 million higher than 2017 and the amortization of purchased intangibles to be flat year-over-year at roughly $185 million. So depreciation and amortization less the amortization of purchased intangibles is expected to grow approximately $8 million versus 2017.

Second, deduct interest expense, which we expect in the range of $156 million to $158 million. For those of you starting with GAAP pre-tax income, noncash equity-based compensation is expected in the mid- to high-$30 millions, down approximately $7 million, year-over-year.

We look for a non-GAAP effective tax rate between 26% and 27% in 2018, which you then apply to our non-GAAP pre-tax income to arrive at our non-GAAP net income. Finally, we expect share repurchases to drive non-GAAP EPS growth 250 to 300 basis points faster than non-GAAP net income.

Moving to inter-year phasing, we expect to deliver sales roughly in line with our first half/second half historical average split of 48% to 49% and 51% to 52%. Keep in mind that based on the normal rhythm of our business, first quarter sales are typically our lowest dollar amount and sequentially below our fourth quarter.

Over the past three years, on an average daily sales basis, the sequential decline has averaged down 9% to 10%. We expect a sequential decline consistent with this range, but it could vary as we work through the supply chain dislocation Tom spoke about.

Remember to use average daily sales and the new revenue standard for both periods when calculating sequential growth. Currency tailwinds are expected at an annual average rate of roughly 20 basis points with greater impact earlier in the year. This assumes a translation rate of $0.80 for the Canadian dollar and $1.30 for the British pound.

Given the strong Q1 gross margin overlap, 16.6% under the prior standard and 17.0% under the new standard and tax reform investments, we expect this year's Q1 adjusted EBITDA growth to be less than the full year growth.

We expect Q1 non-GAAP EPS growth to be within our full year growth range given the benefit of lower Q1 interest expense as lower rates from last year's refinancing did not kick in until Q2 of 2017. Additional modeling thoughts on the components of cash flow and phasing can be found on slide 22. That concludes the financial summary.

With that, let's go ahead and open it up for questions. We covered a lot today. So in order to make sure we can take questions from as many of you as possible, please limit your questions to one with a brief follow-up. Operator, please provide the instructions. Thank you.

Operator?.

. And our first question comes from the line of Amit Daryanani with RBC Capital Markets. Your line is now open..

Hi. This is Irvin Liu dialing in for Amit. It's nice to see the continued momentum in the other segment, which has been a pretty good contributor to your overall year-over-year growth profile for the past two quarters.

Just longer term, should we view international as a strategic growth driver for your business going forward?.

Yes. Good morning, and thanks for the question. I think that is a fair expectation. That's how we look at it. Ironically, the decision to expand internationally more aggressively was the result of our last three-year cycle of strategy.

And after a meaningful forethought about what customers are asking us to do, it continues to be an excellent decision and there's excellent execution. So I think it's fair that that will continue to be a meaningful part of our growth going forward..

Got it. Thanks. And just as a follow-up, you guys talked about reinvestments in strategic initiatives. I wanted to get a sense of where you expect some of the returns on these investments will be reflected.

I guess, my question is, longer term, could these reinvestments accelerate your revenue growth beyond your typical 200 to 300 basis point market outperformance expectations?.

Well, I was going to say yes until you said, will it go beyond the 200 to 300 basis points? Because I don't know that we have that kind of long-term predictability.

But I think it's fair that we would only invest the money in those areas where we see the highest amount of customer demand and, therefore, opportunity for the ultimate purpose of driving both top line and bottom line growth.

And as you've seen in the past, there are periods of time when we exceed our own 200 to 300 basis points of share growth and would like to have more of that going forward, for sure..

Got it. Thanks, Tom. That's all I had..

All right. Thanks again..

Thank you. Our next question comes from the line of Matt Cabral with Goldman Sachs. Your line is now open..

Good morning, Matt..

Hey, good morning, Tom. So the revenue outlook seems like a bit of a down-tick relative to just how 2017 shook out, both in terms of how you're looking at the market and your expected share gains.

Could you just help us understand a little bit more what's driving that and just the biggest moving pieces we should think about year to year?.

Yes, Matt. I don't know that I would call it a down take from this perspective. I think we've talked a lot about 2017 was very much like 2014 where you had this kind of exponential tailwind of client growth and it drove hardware. And when you have that kind of client growth, it's highly unlikely you're going to repeat it.

I think you heard me even talk about this quarter we had, in some categories of client growth, high teens and over 20% in notebooks, just as one example.

So I think in my prepared comments, Matt, I said that I think next year we'll return to a more normal balance in the business, which tends to be more of a balance between solutions and transaction, more of a balance between those products that you heard Collin talk about will be impacted by 606.

So you're going to have that amplification of a netting down impact, which is true for a company like CDW, but it doesn't necessarily get reflected that way in the general U.S. IT market growth.

So we remain pretty optimistic about this year, based on the momentum we're taking into the first quarter and based on some of the investments we made last year, I think it's just sheerly overlapping that big client impact on top line growth..

And then just as a follow-up, you called out in your prepared remarks some shortages in a few key solutions areas.

Could you talk a little more about what happened and just help us quantify the impact if at all possible?.

Well, look, I'll give you – let me answer the last part of the question first and then I'll tell you a little bit about what happened. Our estimate, and again, it's an estimate, you always have at the end of the quarter a flush that goes through. And in most quarters, the majority of that gets shipped and delivered to customers.

So in this quarter, we've kind of estimated the impact to be somewhere around $40 million to $50 million of solutions business that we would have expected would have been shipped and delivered to customers and it didn't. And it was a number of factors, Matt. It was some product issues with a couple of our major partners.

It was some supply chain issues with a couple of our partners. And while all of those things we don't control, as you heard me say, we're being very transparent. We think we could have done an even better job of managing around those, but the fact of the matter is it had that kind of impact.

And I also said, to keep it in perspective, we do think we're pretty confident that stuff's going to flush through during the first half of the year..

Got it. Thank you..

Okay, Matt..

Thank you. Our next question comes from the line of Jayson Noland with Baird. Your line is now open..

Good morning, Jayson..

Okay, great. Good morning. Just to follow up on that last thought. Tom, you mentioned NetComm storage and server. That is a broad range.

So we're to assume there were lots of partners here and kind of multiple supply chain issues?.

Well, I would say there was more than one and less than five.

How's that?.

Okay. Fair enough. You called out client, security, and hyperconverged as three areas of strength. I wanted to jump into one of those, security, an important investment area for CDW and somewhat complicated. I think you mentioned 60 partners.

What more can you do there? And how are you investing going forward?.

Yes. Thanks for the question, Jayson. Look, there is, as you can imagine, kind of an evolving and expanding opportunity with the customers.

As they look at everything from building out, what I would describe as holistic security strategy for their business, all the way through the multiple points that you're attempting to protect inside the business, whether it's what I'll call network protection or data management. And the business is expanding to consulting. It's expanding into managed.

It's expanding into multiple endpoint kind of capabilities. And so we have continued – if you followed our growth in that category, it's been meaningful and consistent for a long period of time. And we're going to continue to invest in that area and kind of follow our customers..

Thanks for the color, Tom..

Okay. Thanks, Jayson..

Thank you. Our next question comes from the line of Matt Sheerin with Stifel. Your line is now open..

Good morning, Matt..

Yes, hi. Good morning. Good morning, Tom.

Looking at some of your end markets and, as you talked about, the comps are certainly going to be tough this year, particularly in the government area on federal where you talked about that refresh and the DoD with the Win 10 upgrade, is that already flushed out or do you still have some of that in the January quarter? And what are you thinking in terms of government spend this year?.

Well, the majority of it, I think, would, to use your term, would be flushed out. I think the Win 10 date was extended to the end of January. But from our perspective, the majority is flushed out. And look – what do we have? Do we have a budget tomorrow? Right? So maybe I'll have a different answer after tomorrow, Matt.

But the other thing that we have seen, at least in my time at CDW, is after you have a refresh year, then customers begin to shift their focus to other parts of their IT infrastructure, whether it's data center, solutions, cloud, security. And what we'll tend to do, then, is follow our customers.

And we would expect to see growth in those areas now that they've kind of taken the Win 10 refresh off the table..

Okay. That's helpful. And just on the lower tax rate, which obviously you're benefiting from, but so are most of your U.S. customers.

And have you had or your account managers conversations with customers where they're looking at maybe stepping up IT or CapEx spend because of that?.

I'll tell you what we've seen, Matt. And it may be a little early in the cycle.

I think, when I talk to my peers, when I've talked to some of our customers, everybody's in the mode of digesting what I'll call the impact of tax reform and then thinking about where they're going to take the money, either returning it to shareholders, investing in coworkers, or investing in their business.

And so I still think we're in the process of the money flowing down to budgets. That's why we're kind of cautiously optimistic that that's going to end up – and I've seen a couple of surveys where people say they're going to have budgets at least equal to last year. I think we're all hopeful that it will be more than that.

But I haven't quite seen that translate from benefit of tax reform to a literal actual budget expansion and people start to spend it yet..

Okay. All right. Thanks a lot, Tom..

Okay..

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

Okay. Thanks, and good morning..

Good morning..

I just wanted to just start with Tom on the growth premiums specifically. In 2017, CDW obviously outperformed that 200 to 300 basis points growth premium target and I know it's clear you're guiding for this to attenuate into 2018.

I'm sure I'm reading too much into this, but just trying to understand why would changing mix away from transactional products and towards solutions in 2018 lower the growth premium or is there an aspect of maybe just being conservative with your outlook?.

No, I think the first is it's kind of simple economics, Adam. The client is a hardware play more so and when you sift into solutions, you're shifting into much more of the netted down businesses.

And we saw that happen, if you go all the way back to 2016 I think is a good indicator where you had kind of mid-single digits of client growth, kind of a normal business year for us. And then you had pretty good solutions growth, but a fair amount of that got netted down.

If you remember, we've had questions about that netting down that impact during that timeframe. It's quite simply that math..

And remember, there's some incremental netting down in 2018 that wasn't there in 2017, because of the adoption of 606 and that we're now taking security software in that..

Okay. Maybe just a follow up for Collin then. Well, sales growth was I think 10% or so in fourth quarter, gross profit dollar growth was 6%, and for the year gross profit dollar growth lagged sales growth. I know mix was a factor here. You mentioned Bold Forward being focused on investing in fast-growing areas.

Is that initiative more focused on revenue growth or gross profit dollar growth? And if it's the latter, when should gross profit dollar growth outpace sales growth? Thanks..

So the answer, Adam, is it's focused on customers' fast-growing areas which, if you follow the logic, if it's fast-growing and important to customers, it's going to have both revenue and profit growth, because if it's important to them, then it generally has greater value.

So that many of the investments you'll see if you looked at our history, if you think about visualizing victory, it was in areas like cloud computing, services expansion, security, collaboration, and Bold Forward will continue to try to identify over the next three to four years those areas like managed services that might continue to be important to our customers.

And if those products and services happen to be 606-ified and therefore netted down, we're still going to pursue them, because it's going to be important to customers and then, therefore, generates meaningful profitable growth for CDW..

Okay. Thank you..

Okay..

Thank you. Our next question comes from the line of Shannon Cross with Cross Research. Your line is now open..

Thank you very much. I wanted to go back to some of the reinvestment that you talked about. And I understand you have some onetimers, which are the grants, as well as the cash payment.

But when you're talking about investing in the strategic initiatives, just trying to understand how much this is sort of increasing the ongoing level of investment, because you now have savings from tax rate, or are some of those more sort of onetime in nature for 2018?.

Shannon, it's Collin. We quantified the investments in the neighborhood of 5 to 10 basis points of margin or another way to dimensionalize is it is approximately 100 basis points of EBITDA growth.

You've pointed out that some of those will be onetime occurring in 2018 and some of the others that I guess what I would call more run rate will get feathered in as we go throughout the year. Now, as we move into 2019, obviously, we'll get a full year's worth of those.

So I would think about that 5 basis points to 10 basis points carrying into next year as well..

Okay. Thank you. And then, I had a question. Tom, you talked a bit about the client business reverting back to sort of normal levels following a pretty strong refresh year. Some of the partners out there have talked about the fact that we're going to be sort of four years past ex the end of life and that there may be some opportunity for upgrade there.

I'm curious if you think that most of that has sort of been captured through the Win 10 upgrade or if there is potentially, at least, some tailwinds that could support client when you look at it..

Shannon, I would tell you, look, I just have, quite honestly, a hard time when you talk about high-teens growth in the client business for us for most of the year and it really has been all year.

I remember on this call last year collectively you guys saying to me what gave me the confidence we were going to have hardware growth, and it was the kind of knowledge that we were at about a four-year refresh cycle. Look, in some ways, I hope I'm wrong. I'd love to have more client tailwind.

I have a tough time seeing it being really a meaningful tailwind in 2018, quite honestly..

And then if I could just fit one more in. In terms of gross margin for 2018, obviously, you've got some benefit from netted down, but then you're talking that there'll be a little pressure, so I'm curious. Is this more pricing or mix related? Because if client is going to slow, then theoretically margins should see some uptick.

So, is there pricing in there? How should we think about it?.

Yes. There is some of that. I mean, I think one of the wild cards that I think has been fairly well-discussed is how will participants use the benefits of tax reform. And I think there's a school of thought that some people are going to just use it to have more competitive pricing in the marketplace.

And so I think you have to be cognizant that that could happen out there. We're hopeful that as you get a more balanced approach that you'll have some shift into higher-margin products and services, but you have to offset it with some of the competitive actions in the marketplace..

Great. Thank you..

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

Good morning, Katy..

Good morning. Thanks for the questions.

Can you provide a bit of an outlook similar to what you did around the client business in 2018 relative to 2017 as it relates to the potential for some data center refresh, sort of that NetComm, storage, server categories? Are you thinking that you can see some acceleration given the push-out of demand from fourth quarter and as companies shift from client refresh to refreshing other areas of their infrastructure?.

I think that's a fair summation, Katy, that we would expect, much like I think I described in the federal government that you're always kind of dealing with, even with tax benefits, a limited budget and people prioritizing what they're going to do based on what's important.

And it was clearly a year of a lot of client refresh for a lot of our segments, and we would anticipate that that attention would shift. We're certainly seeing it.

If you heard me talk about the momentum we have in hyperconverged and flash and cloud computing and services – or excuse me, security and services, those areas we would expect to continue to be growth areas as we move into 2018..

Okay. And then just back to some of the exogenous factors that impacted fourth quarter, it doesn't feel like 1Q guidance assumes that all that revenue comes back.

Can you just give a little bit more detail around why it's first half and not necessarily first quarter that you capture the revenue from the orders that you didn't ship to in December?.

That's fair. That's fair. I think some of it's because the information we're getting is things might not clear out until the end of the first quarter, which could kind of slip into the beginning of the second quarter.

So we were just trying to be transparent with what we're being told relative to kind of clearing out the stuff that didn't get shipped as expected. And some of it was product based, Katy, which has a little different cycle to it when it comes to getting products tested and released the way they were expected..

Great. Thank you very much..

All right. Thanks, Katy..

Thank you. Our next question comes from the line of Sherri Scribner with Deutsche Bank. Your line is now open..

Morning, Sherri..

Hi. Thank you. Good morning, Tom. Thank you for the question. I just wanted to ask about the Intel processor issues, and some people have commented that potentially there will be a bit of a – not really a refresh, but in servers, there might be a bit more demand as some of the fixes slow down the processing.

Can you maybe comment on what your customers have said about their concerns about the Spectre and the Meltdown issues, and if there might be a little bit of a boost to server demand this year from that?.

Yes, I don't know that there's anything, Sherri, really more revealing than I think everybody's kind of talked about. We did see some pauses and discussions during the fourth quarter about that.

Whether or not that plays out into increased capacity beyond what I alluded to in answering Katy's question, I don't know that I could predict that at this point.

I think in general, we feel that the solutions part of our business, in particular, some of the data center stuff, is going to have some incremental growth over 2017, in part because people will be reallocating some of the money they spend on client..

Okay. Great. Thank you..

All right. Thank you..

Thank you. Our next question comes from the line of Mark Moskowitz with Barclays. Your line is now open..

Hey, Mark..

Thank you. Good morning. Wanted to follow up on what appears to be somewhat conservative guidance for revenue for 2018.

How much of that is due to CDW-specific activities in terms of some of the reinvestment to coworkers and new hires? Is there any concern there could be some disruption, or is it more just because of what you said earlier around client, and that's really what it is?.

Hey, Mark. You broke up a little bit. Let me restate what I think you asked just to make sure I answer the question. I would say our look at the year from a kind of trying to estimate growth driven by GDP, looking at IT growth on top of it, that really didn't have anything to do with where we're investing the money, so to speak, in coworkers.

It had more to do with taking a look at that data, coupling it with the baseline of a really exponentially strong year in client growth, added on top of that the 606 impact. When you kind of put all those together trying to give some clarity about what we think is going to happen for this year, that's how we got to the number..

Thank you. Ladies and gentlemen, this concludes today's question-and-answer session. I would like to turn the conference back over to Tom Richards, the Chairman and CEO, for closing remarks..

Okay. Thanks, everybody, as always, for your questions and the attention to CDW. We appreciate it. We feel good about where we finished 2017 from a full year perspective. I think we could have done some things a little better to make what was a pretty good fourth quarter better and look forward to 2018.

And as always, I'll leave you with one inspirational comment as you think about Valentine's Day, dilly dilly. All right. Thanks, everybody..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may now disconnect. Everyone, have a great day..