CDW Acquires Stake In $850M IT Firm, Posts Q3 Gains

CDW agreed to buy a stake in an $850 million London-based solution provider and announced a surge in profit and sales driven by improved federal buying activity.

The Vernon Hills, Ill.-based solution provider, No. 8 on the CRN SP 500, acquired a 35 percent stake in Kelway, a 900-employee IT integrator founded in 1990.

CDW can purchase the remaining 65 percent of Kelway's business between June 2015 and mid-2017, which the company intends to do if Kelway's performance lives up to expectations, said CDW Chairman and CEO Thomas Richards.

[Related: CDW Nearly Doubles Q2 Profit, Sees Strong PC Sales On IPO Anniversary]

For the company's most recent quarter, which ended Sept. 30, CDW saw non-GAAP net income rise 29.9 percent from $85.2 million to $110.7 million, or 64 cents per share. That beat estimates of 62 cents per share from analysts at Zacks Investment Research.

Sales also jumped 14 percent during the quarter from $2.86 billion to $3.27 billion, beating expectations of $3.1 billion.

"We're proud and pleased with the quarter CDW has produced," Richards said during the company's earnings call.

The quarterly results were released before the market opened Thursday. Investors sent the company's stock up about 4 percent Thursday to a recent market value of $5.59 billion.

CDW sees the Kelway acquisition as a low-risk way to add geographic diversity to its sales strategy, Richards said. Kelway derives 90 percent of its customer sales from the United Kingdom, he said, but has sales operations in 100 countries across Europe, Africa and the Middle East.

Richards said CDW has had a positive experience working with Kelway on several projects over the past 18 months. Kelway's success with their ServiceWorks cloud computing suite of hosted and managed services could be particularly instructive to CDW down the road, he said.

The company also operates three data centers in the United Kingdom, he said, and has profitability in the range of CDW's.

A reversal of fortunes in the federal sector fueled a 17.6 percent growth in CDW's government vertical to $441.3 million. Richards said the sector started to rebound late in the second quarter and increased leading up to the Sept. 30 end of the U.S. government's fiscal year.

"Federal buying behavior was more normal in 2014," he said.

Barring another fiscal crisis, Richards expects growth in the federal sector to continue for quarters to come. However, the increase in federal business, which tends to be more transactional, contributed to a year-over-year 0.5 percent decline in gross margin to 15.5 percent, said Ann Ziegler, CDW's chief financial officer.

Richards said the company's salesforce is already incentivized to pursue long-term relationships rather than one-time, commodity sales, but noted CDW is constantly looking for ways to improve gross margin.

"Our sellers have a long history of going after margin opportunities," he said.

CDW's education sector also posted 23.2 percent year-over-year growth to $632.8 million, thanks largely to Chromebook and related security and software sales to the K-12 vertical, Richards said.

And with less than 50 percent of schools prepared for the Common Core requirements, Richards believes opportunities will continue to abound.

"I keep saying 'this thing [education sales boom] can't continue,' and every time I say that, these people keep proving me wrong," Richards said.

In the coming quarter, Richards expects to see IT market growth of 4 percent, with CDW delivering revenue growth 600 basis points above the market.

PUBLISHED NOV. 6, 2014