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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by and welcome to the CDW Fourth Quarter 2019 Earnings Call. At this time all participant lines are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Chris Leahy, Chief Executive Officer at CDW. Thank you. Please go ahead, ma’am.
Thank you, Shannon and good morning everyone. It’s a pleasure to be with you. Joining me in the room today are Collin Kebo, our Chief Financial Officer and Brittany Smith, our VP, Investor Relations and Financial Planning and Analysis. I will begin with an overview of the full year and fourth quarter financial and strategic performance and share some thoughts on 2020, then Collin will take you through a more detailed look at the results, capital strategy, and priorities and targets. We will move quickly through our prepared remarks to ensure we have plenty of time for Q&A. But before we begin, Brittany will present the company’s Safe Harbor disclosure statement.
Thank you, Chris. Good morning, everyone. Our fourth quarter 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 during the call. I would 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 non-GAAP financial measures, including non-GAAP operating income and non-GAAP earnings per share. 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 and in our earnings release and Form 8-K we furnished to the SEC today. Please note that all references to growth rates are dollar amounts, increases in our remarks today are versus the comparable period in 2018, 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 UK or Canada. There was the same number of selling day in the fourth quarter and in the full year as compared to 2018. Replay of this webcast will be posted to our website later today. 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.
Thanks, Brittany. 2019 was a year of both excellent financial performance and progress against our three part strategy for growth. Once again, we delivered record quarterly results and both strong sales growth and profitability. In the fourth quarter, net sales were up 11.3% on both the reported and constant currency basis to $4.5 billion. Gross profit increased 12.1% to $778 million. Non-GAAP operating income increased 14.3% to $342 million and non-GAAP net income per share was $1.57, increasing 18.4% on both the reported and constant currency basis.
For the year, net sales were $18 billion, up almost $1.8 billion year-over-year or 11% on a reported basis and 11.5% in constant currency. Gross profit increased 12.3% to $3 billion, non-GAAP operating income increased 12.5% to $1.4 billion, and non-GAAP net income per share increased 18% to $6.10. On a constant currency basis, non-GAAP net income per share increased 18.5%. Our excellent performance reflects the combined power of our balanced portfolio of customer end markets, a full suite of solutions and services that address customer priorities across the IT landscape, and our ongoing success executing our three part strategy for growth. I'll walk you through each of these and how they contributed.
First, the balance across our customer end markets. As you know, we have five U.S. sales channels; corporate, small business, government, education, and healthcare. Each of these channels are meaningful businesses generating annual sales of more than $1.5 billion. This scale enables us to further align sales teams into vertical customer end markets, including federal government, state and local government, K-12, and higher education. In addition, we have our UK and Canadian operations, which together delivered over $2 billion U.S. of net sales in 2019. These unique sales organizations serve us well when end markets behave differently from each other. Sometimes that occurs because markets are disrupted by macro or external challenges, sometimes it occurs when customer behaviors differ due to different priorities. In 2019, the teams did an outstanding job helping customers address their IT priorities and achieve their strategic objectives, delivering exceptional results. I am really proud of our team's accomplishments.
Our 2019 double-digit sales increase was driven by excellent results with strong underlying performance as well as some incremental drivers. The U.S. and UK both increased almost 11% in local currency. Our competitive advantages drove outsized growth in a market that played to our strengths. Our scale, scope, and robust distribution capabilities helped minimize the impact on tariffs and supply constraints and helped us gain market share. Our devices and service solution to the U.S. Census Bureau also contributed to our excellent net sales growth. The success of the Census depends on everyone's participation and that is what our mobile solution is enabling. Confirming addresses of 2019 and this year collecting census data from households that do not respond otherwise. The census project will be complete at the end of 2020, Collin will talk more about the expected impact of census on our financials.
And lastly, the acquisition of Scalar. Recall Scalar brought capabilities and security, cloud, infrastructure, and digital transformation to our Canadian business bolstering past solutions investments. Those investments also paid off last year, delivering double-digit organic gross profit growth. I am excited to share that both Scalar and Aptris are now operating in market as CDW. We are one company, one CDW, leveraging our integrated capabilities to deliver a seamless experience to customers. In short, 2019 was a terrific year.
Turning to the fourth quarter, you also see the benefit of our diverse customer end markets. So let's take a deeper dive. In corporate the team delivered 7% growth with balanced transactional and solutions growth as they successfully addressed ongoing customer demand for client devices while driving solid solutions results in particular, double-digit growth in servers and enterprise storage hardware. The small business team delivered nearly 8% growth driven by client device strength. Both channels lapped double-digit growth rates. Customer activity and purchasing remains strong as corporate and small business customers continued to move ahead with technology investments highlighting the importance of technology to achieve business goals. The government team increased sales over 20%, federal had another excellent quarter with sales up over 20% driven by very healthy client device performance as the team helped civilian departments move to [indiscernible].
The state and local team delivered high teens growth driven by double-digit solutions results. The team continued to leverage expanded contracts, helping customers secure their environments and modernize their infrastructure with strong growth in enterprise storage and server hardware. Education increased 1% with low single-digit growth in higher Ed and flat K-12 results. Higher Ed continued to leverage our sector expertise and broad portfolio to help campuses enhance student and teacher experiences through client device upgrades and collaboration tools. For K-12 strengthened Netcom hardware and desktops was offset by a decline in Notebook due to Chromebook performance.
The healthcare team delivered excellent performance, up almost 14% with double-digit growth in client devices as well as enterprise storage hardware and software. Healthcare demand continued to be driven by infrastructure refresh and a heightened focus on a patient experience and clinical mobility. Other, which represents our UK and Canadian operations, increased 27% on a reported basis. The UK team delivered excellent double-digit growth in local currency. The team continued to help customers transform their infrastructures and gain efficiencies, which drove double-digit solutions growth.
Canadian growth was driven by Scalar. Integration is nearing completion and we are providing expanded portfolio options to both legacy CDW Canada and Scalar customers. So as you can see, our results demonstrate the power of our balanced portfolio of customer end markets. Our results also demonstrate the power of our second driver of performance, the breadth of our portfolio with over 100,000 products, services and solutions from more than 1000 vendor partners we are well-positioned to meet our customers total needs across the IT spectrum. For the quarter, U.S. transactions increased low double-digits, led by 16% growth in client devices. U.S. solutions increased mid-single digits.
Sales performance was balanced with U.S. hardware and software increasing high single-digits and services increasing 15%. Let's take a deeper look. Hardware increased 9%, fueled by double-digit growth and client devices and data center hardware. Client device growth was broad based and driven by continued customer refresh and market gains. For data center hardware, we saw customers move forward with larger projects driving a strong growth. As we've discussed before, solutions business can be lumpy with the variability driven by the timing of when projects come to fruition and also the mix of hardware and software in the solution. Customers continued to be focused on optimizing their data center infrastructure with economical yet high performing solutions. They are leveraging on premise and off premise solutions, as well as software based technologies that create efficiencies.
Total software grew 8% with strong double-digit growth in storage management, operating system software, and network management. We continued to work closely with our customers to maximize the return on their IT investment, whether it be hardware, software, or services, which leads me to our services category. Services' strong growth was led by configurations and professional services. Our services business had a tremendous 2019 with high teens growth reflecting our services led go to market approach. Cloud also contributed to this quarter's results, with double-digit increases in customer spend and gross profit. Growth was driven by productivity, security, and collaboration as well as public cloud infrastructure as a service. As you can see, we had excellent, well-balanced performance in the quarter and we were able to help our customers across a broad spectrum of IT needs.
That leads me to the final driver of our performance, the impact of investments we are making in our three part strategy for growth. Investments made to ensure we continue to serve our customers IT needs in this evolving market, whether in a physical, virtual, or cloud based environment in the U.S. or internationally. Our three part strategy for growth is to first acquire new customers and capture share. Second, enhance our solutions capabilities; and third, expand our services capabilities. Importantly, these three pillars work in tandem. Each is crucial to our ability to profitably assess, design, deliver, and manage the integrated technology solutions our customers want and need today and in the future. These pillars help us stay in front of our customers emerging and ongoing priorities.
Let me share a couple of examples of our strategy in action. Last October one of our customers, a medical technology company with over 1 million patients had a cyber attack. The attacker locked the company's on premise data centers and public cloud access and proliferated through its entire IT environment. A few months prior members of CDW sales and technical teams had presented to the company on CDW's approach to information and network security. Historically this customer had primarily purchased transactional products from us not fully leveraging our solutions and services capabilities. The company's IT Director called CDW to utilize our expertise in this critical situation due to our team's presentation. CDW Security Incident Response Team was engaged and immediately helped to assess and limit the attack. It was crucial to maintain patient safety and protect sensitive information. Ultimately in the coming days and weeks CDW helped to assess, contain, and remediate the attack. Then we advised and installed security technology to ward off future attacks and rebuild the customer's data center infrastructure to get the businesses operations running again with enhanced security. CDW had a well orchestrated response providing deep technical knowledge and services in addition to our full suite of product capabilities.
This is not an unique example. In today's environment, a cyber attack is a question of when not if. Security is a top priority for our customers. We have made investments in this capability from a coworker and vendor partner perspective to provide the right services and solutions to increase our customer's readiness and protection from future attacks. Another important IT priority that CDW is helping customers address is the upgrade of IT infrastructure to utilize Internet of Things and data and analytics. Customers are pursuing these investments to increase automation, improve safety and efficiency, manage quality control, and drive growth and higher profits.
One of our manufacturing customers has positioned itself at the forefront of advanced manufacturing in recent years by upgrading its IT infrastructure to enable Internet of Things technology and enhancing automation throughout its plants. Several years ago the customer began modernizing all 47 of its manufacturing plants in North America. At the start of the customer's modernization journey the Executive Director of IT turned to CDW as his trusted strategic IT partner given our past track record successfully completing turnkey projects. To take advantage of the data they wanted to collect CDW developed and deployed solutions to upgrade the customer centralized IT capabilities and infrastructure as well as each plants network infrastructure.
In each plant CDW designed and deployed high speed state of the art secure network with redundancy and plenty of bandwidth and scalability to serve as the foundation for the customers advanced manufacturing push. On top of the secure and reliable high speed network that CDW created, the customer deployed scale sensors and robots modernizing its manufacturing and operating processes. The customer is now reaping the benefits of its upgraded IT capabilities including automating tasks which significantly reduce costs making more informed business decisions at a quicker pace based on the new data. And lastly improving security due to the protocols and protections put in place supporting the customer's focus on safety.
CDW is an integral partner for each step of this initiative and we continue to work on other projects to support our customers goals. These examples highlight CDW's three part strategy for growth including how well CDW is positioned for important IT trends and how IT is crucial to achieving our customer's objective. CDW has a proven track record of evolving with IT trends. These examples also underscore the importance of one of CDWs competitive advantages, our coworkers. They get IT and make meeting and exceeding the needs of our customers their top priority. We continued to invest thoughtfully in customer facing coworkers and ended the year up 223 excluding Scalar and Aptris.
As our services business has grown the composition of customer facing coworkers has changed to a mix of demand generating coworkers and service delivery coworkers. Additionally other factors such as leveraging third parties for service delivery have made this metric less meaningful. Therefore going forward we plan to share stats on our customer facing coworkers periodically rather than quarterly. Know that we will continue to invest prudently in coworkers and as always adjust our hiring plans based on market conditions.
And that leads me to our expectations for 2020 financial performance. In 2020 we currently expect the U.S. IT market to grow between 2.5% to 3% which is below 2019 U.S. IT market growth reflecting a lower 2020 GDP growth forecast. We expect our top line to grow faster than the U.S. IT market slightly above our 200 to 300 bps range in constant currency. The census project is expected to partially offset moderating client device growth in 2020 which drives our expectations slightly above our target range. For 2020 we expect non-GAAP earnings per share growth of approximately 10% on a constant currency basis. We will of course continue to keep a watchful eye on the macro environment including wildcards like supply constraints, the UK EU trade deal, tariffs, Coronavirus, and the U.S. Presidential election. In the meantime the team will continue to do what they do best, out execute the competition and leverage our competitive advantages to help our customers address their IT priorities and achieve their strategic objectives.
I hope you can tell from my comments that 2019's outstanding performance reinforced our confidence that we have the right strategy in place. We want to continue to evolve with the market, continue to capitalize on technology trends, and continue to invest in fast growing areas of the business. We do this by performing a rigorous, detailed, strategic plan every three years and executing against it. We recently kicked off the planning process for our next cycle.
Also we recently made two important leadership announcements. Chris Corley named Chief Commercial and Operating Officer and the addition of Sona Chawla and the newly formed role of Chief Growth and Innovation Officer. Chris is known for her strong sales and operating leadership, cultivating talent, delivering for our customers, and delivering results. Sona joined CDW with a track record of success shaping omnichannel sales operations, building e-commerce businesses developing digital platforms, and driving innovation. They will work with CDW's outstanding executive committee and teams across the organization to enhance our competitive advantages and to continue to drive differentiated performance generating superior returns and serving our stakeholders. Now let me turn it over to Collin to share more details on the financial performance.
Thank you Chris, good morning everyone. As Chris indicated our fourth quarter and full year results reflect the combined power of our balanced portfolio of channels, broad product offerings, and ongoing execution of our three part strategy. They also reflect successful investments in our business that build on our long-term financial strategy to drive strong cash flow, deliver sustained profitable growth, and return cash to shareholders.
Turning to our fourth quarter P&L on Slide 8, consolidated net sales were $4.5 billion up 11.3% on a reported and an average daily sales basis. Currency was neutral in the quarter. On an average daily sales basis sequential sales decreased 6.1% versus the third quarter of 2019. As expected the sequential average daily sales decline was greater than historical seasonality given the strength in the third quarter but better than expected driven by one strong client device growth in four or five U.S. channels as we continued to leverage our competitive advantages to gain market share and help customers refresh their devices. And two, over 20% local currency year-over-year growth in the UK where we saw solutions projects come to fruition. Gross profit for the quarter was $778 million, an increase of 12.1%. Gross margin was 17.1% up 10 basis points over last year driven by product margin partially offset by netted down revenue streams not growing as fast as net sales.
Turning to SG&A on Slide 9, our non-GAAP at SG&A including advertising increased 10.4%. The increase was primarily driven by sales compensation which moves in line with gross profit growth. Coworker count of 9,896 was up over 870 coworkers from December 2018 with roughly 50% of the increase from our 2019 acquisitions and the remaining from organic coworker investments. GAAP operating income was $284 million up 16.8%. Our non-GAAP operating income which better reflects operating performance was $342 million, an increase of 14.3%. Non-GAAP operating income margin was 7.5%.
Moving to Slide 10, interest expense was $38 million up 3.2%. The increase was primarily due to paying a rate on the term loan in 2019 that exceeded the capped rate in 2018. Our GAAP effective tax rates shown on Slide 11 was 21.4% in the quarter down 150 basis points compared to last year. This resulted in fourth quarter tax expense of $50 million. To get to our non-GAAP effective tax rate we adjust taxes consistent with non-GAAP net income add backs including excess tax benefits associated with equity based compensation which is shown on Slide 12. For the quarter our non-GAAP effective tax rate was 23.7% flat with last year's rate. Our full year 2019 tax rate was favorably impacted by a benefit from research and development tax credits. As you can see on Slide 13 with fourth quarter weighted average diluted shares outstanding of 146 million GAAP net income per share was $1.27 up 21%. Our non-GAAP net income was $229 million in the quarter up 14.2% over last year. Non-GAAP net income per share was $1.57 up 18.4% from last year.
Turning to full year results on Slide 14 through 19, revenue was $18 billion, an increase of 11% on a reported and an average daily sales basis. On a constant currency basis consolidated net sales were 11.5% higher than the prior year. As Chris mentioned 2019 was a terrific year reflecting great execution against the right strategy and our balanced portfolio. Additionally, 2019 net sales growth benefited from several extra drivers. One, the Scalar acquisition which contributed just over 100 basis points; two, our device as a service solution for the U.S. Census which contributed approximately 60 basis points; and three, a backlog flush in certain categories such as Netcom. You will recall that lead times extended in 2018 and then returned to more normal levels in 2019 creating a onetime positive flush. Collectively these three items contributed approximately 250 basis points of net sales growth in 2019. While difficult to quantify we believe our competitive advantages of scale and distribution centers helps us navigate chip shortages and gain additional share and client devices.
Gross profit was $3 billion up 12.3% and gross profit margin was 16.9% up approximately 20 basis points due to product margin and an increase in the mix of netted down revenue streams partially offset by year-over-year net sales growth outpacing the year-over-year growth in partner funding. GAAP operating income was $1.1 billion up 14.8%. Our non-GAAP operating income was $1.4 billion for the year up 12.5%. Non-GAAP operating income margin was 7.6%. Net income was $737 million and non-GAAP net income was $902 million up 13.6%. Non-GAAP net income per share was $6.10 up 18%.
Turning to the balance sheet on Slide 20, at December 31st cash and cash equivalents were $154 million and net debt was $3.2 billion. Our cash plus revolver availability was $1.3 billion. As shown on Slide 21, we maintain strong rolling three month working capital metrics during the quarter. Our three month average cash conversion cycle was 18 days down one day from last year's fourth quarter. Full year free cash flow was $789 million which is 4.4% of net sales and slightly above the high end of our free cash flow rule of thumb of 3.75% to 4.25% of net sales. The $37 million year-over-year increase in free cash flow primarily reflects higher cash profit partially offset by higher inventory.
2019 capital expenditures totaled $236 million or 1.3% of net sales. This higher level reflects CAPEX for the 2020 phase of the census device as a service offering which I'll discuss in more detail in a moment. As expected we returned more than 100% of free cash flow to shareholders in 2019. We deployed $840 million of cash to shareholders which included $183 million of dividends and $657 million of share repurchases at an average price of approximately $108 per share.
Turning to capital allocation priorities on Slide 22, our priorities remain the same from the previous quarter and continued to reflect our intent to drive shareholder value through returns of capital and strategic investments in order of priority first, increased dividends annually. To guide these increases we will target the annualized fourth quarter dividend at approximately 25% of non-GAAP net income and to grow in line with earnings going forward. Second, ensure we have the right capital structure in place with a targeted net leverage ratio in the range of 2.5 to 3 times. We ended the quarter at 2.2 times slightly below the low end of this range. Our third capital allocation priority is to supplement organic growth with strategic acquisitions. Our acquisitions of Scalar and Aptris are great examples of this. And fourth return excess cash after dividends and M&A to shareholders through share repurchases. At the end of December we had $679 million remaining on our current share repurchase authorization.
Given our current leverage we expect to once again return more than 100% of free cash flow to shareholders in 2020. Our capital allocation priorities support our 2020 targets which you see on Slide 23. Before I review our annual targets let me first provide some comments on the device as a service solution for the United States Census Bureau. As you've heard us discuss the rollout consists of two phases, the address canvassing phase which was completed in 2019 and contributed approximately 60 basis points to 2019 growth, the majority of which was recognized in the third quarter. In the 2020 phase or the census collection phase Hundreds of thousands of smart phones and tablets are being deployed into the field to take the census. We currently expect the 2020 phase to contribute approximately 110 basis points of incremental net sales growth in 2020. As a reminder CDW is the lessor for the census device as a service offering. Therefore we will recognize lease revenue over the period that devices are used in the field. Depreciation from the CAPEX most of which was spent in the fourth quarter of 2019 will be matched to the lease revenue. As Chris mentioned the census project will be complete at the end of this year.
To summarize the census really showcases how CDW helps customers achieve their objectives by leveraging CDW's differentiated capabilities. Integrated solutions from multiple vendor partners, professional and configuration services, logistics and distribution capabilities all delivered as a service. Turning to our 2020 targets we expect U.S. IT market growth of 2.5% to 3%. This modest deceleration compared to 2019 reflects lower GDP forecasts, strong client device comparisons, and moving past some end of support dates. We expect CDW net sales growth slightly above the high end of our 200 to 300 basis point range over U.S. IT market growth.
The incremental contribution from the Census helps us overlap 2019 strong outperformance including some of the extra drivers I previously mentioned. Currency is expected to be neutral assuming foreign exchange rates of $1.28 to the British pound and $0.75 to the Canadian dollar. We expect non-GAAP operating income margin to be in the mid 7% range and non-GAAP earnings per share growth to be approximately 10% on both the reported and constant currency basis. Please remember that we hold ourselves accountable for delivering financial targets on an annual constant currency basis.
Slide 24 provides additional modeling thoughts for full year 2020. We expect net sales in the first half of the year to be in line with our historical norm of 48% to 49% of full year net sales. Keep in mind that the normal rhythm of our business is for first quarter net sales to typically be the lowest dollar amount and sequentially below our fourth quarter. Over the past five years on an average daily sales basis the Q4 to Q1 sequential decline has averaged down approximately 7%. We expect this year's first quarter sequential decline to be generally in line with historical seasonality.
Moving down the P&L non-GAAP operating income margin is expected to be in the mid 7% range. Total annual depreciation and amortization is expected to be in the range of $390 million to $400 million. This includes approximately $160 million of amortization expense for acquisition related intangible assets and approximately $145 million of cost of goods sold depreciation. Depreciation and amortization expense and SG&A excluding the amortization of acquisition related intangibles is expected to be around $90 million. Equity based compensation is expected to be several million dollars higher than 2019.
Interest expense is expected to be in the range of $156 million to $158 million with the year-over-year decrease driven by expected lower short-term interest rates. Our 2020 non-GAAP effective tax rate is anticipated to be in the range of 25.5% to 26.5%. We expect share repurchases to drive non-GAAP earnings per share growth 200 to 300 basis points faster than non-GAAP net income growth. Currency is expected to be neutral for the full year to non-GAAP earnings per share growth. We expect constant currency non-GAAP earnings per share growth in the first half of the year to be higher than our full year constant currency target as we have one additional selling day and one more -- and more incremental contribution from the census project. In the fourth quarter we will have one fewer selling day and the contribution from the census winds down. One selling day difference impacts quarterly profit growth by approximately 200 basis points.
Additional modeling thoughts on the components of cash flow can be found on Slide 25. Our free cash flow rule of thumb remains unchanged at 3.75% to 4.25% of net sales. We expect capital expenditures to be roughly 0.7% of net sales slightly above the normal half a point of sales primarily reflecting gross capital investments related to our downtown Chicago office move. To be clear this slight increase does not change our free cash flow rule of thumb. We expect the cash tax rate to be in the range of 25.25% to 26.25% of pre-tax income adjusted for amortization of acquisition related intangibles. We expect to deliver a cash conversion cycle within the annual target range of high teens to low 20s. That concludes the financial summary. With that I'll ask Shannon to open it up for questions. Can we please ask each of you to limit your questions to one with a brief follow-up. Thank you.
[Operator Instructions]. Our first question comes from Matt Cabral with Credit Suisse. Your line is open.
Thank you. Just starting off on the downtick in the wider active spending environment that you talked about, wonder if you can touch on what you're hearing in terms of customer budget plans heading into 2020 and what's driving your expectation for return to a more normalized two to three points of share gains this year?
Good morning Matt it is Chris. Customers have returned the corner in 2019. Customers were clear that IT continues to be a priority. So we saw some good momentum and they're buying in our business. They continue to hire, they're continuing to focus on investing in IT. So that felt good coming out of the year. The downtick is you know based on what we see in front of us. We've got GDP forecasts that have come down, we've got uncertainties out there I tick through those wild cards in our prepared remarks. And so when we take a look at what's out there that's how we think about it. We also frankly from an IT growth perspective take a look at a wide variety of data both internal data that's proprietary as well as external factors and try to land on a solid expectation for the upcoming year. In terms of our premium you know us, we're always going to be focused on outgrowing the market by that 200 to 300 basis points but we're confident this year in guiding slightly above that 300 because we feel good that the census work that we're doing will contribute and will offset some of the client moderating growth that we expect to see.
Got it. And on that point about declining growth moderating PCs is definitely top of mind given cross currents around Win 7 and the CPU shortages, can you just talk a little bit more about what you've baked into your current plans for PCs in 2020 and just how we should think about the cadence of that through the year?
Well, as we anticipated last year we expected client device to grow but at a moderated rate because we've got a couple of years of strong, strong growth from refresh. We have at the end of service that's already happened now in January and our expectation was that we'd see some growth in the first half of the year because based on past experience when there was end of service you'd still get some flow through into the quarter or a little bit beyond. There are some more wildcards out there. Right now you look at Coronavirus for example and it's too early to tell how that's going to impact but that could impact supply chain and add to some delays. We are still looking at Intel shortages. Of course we leverage our competitive advantages to take inventory but there are a couple more factors now that we weren't looking at six months ago that make it more difficult to understand where those client purchases will be taking place throughout the course of the year.
Thank you.
Thank you, our next question comes from Amit Daryanani, Evercore. Your line is open.
Thanks a lot. Two questions for me as well I guess. Maybe I will start with the 2020 guide Chris, could you just help clarify you're basically saying it is IT spend a 2.5% to 3% plus share gains of 200 to the 300 basis points and then plus 200 million of revenues from Census Bureau. Is that the right way to think about your 2020 guide? And then just on the Census Bureau contribution is it going to be fairly linear through calendar 2020 or is it going to be more H1 heavy given the way that's going to ramp up?
Yeah, hi Amit. Let me let me back up and get that right. So we're looking at -- there are two components, 2.5% to 3% is what we expect the U.S. IT market rate of growth to be and we're saying that our typical target, our premium above that 200 to 300 basis point you should expect us to come in slightly higher than that 300 basis points as a premium over it. It is not a premium plus additional debts, does that make sense.
That makes perfect sense. Thanks for clarifying that.
Okay. And in terms of the sequencing I'll let Colin give you the details.
Yeah Amit, we would expect more contribution from the census in let's say the first half or first three quarters of the year. As I said in my prepared comments we expect it to wind down by the time we get to the fourth quarter.
Got it and then I guess just call it a follow-up, your net leverage targets at least based on the math we were doing will be well under two times by the end of the year as you know there's no deal done you maintain the buyback dividends we've talked about. If that's really the case are you comfortable with leverage going under two times or should we start thinking about 2020 being a year where perhaps buybacks will be more larger to get you back in the 2.5 to 3 times target range?
Yeah Amit. So we ended the year at 2.2 times. In my prepared comments I did say that we again intend to return more than 100% of free cash flow to shareholders. Obviously we're mindful that we're sub 2.5 to 3 times target.
Thank you. Our next question comes from Adam Tindle with Raymond James. Your line is open.
Okay, thanks and good morning. Chris, I just want to revisit the goal to expand capabilities that you talked about on the slides. I think the leverage math would suggest that you have about 2 billion in liquidity to still stay within your leverage target probably even more if you want to temporarily sit above it like you have in the past. I know you've done some smaller tuck ins but just first question would be wondering if you would consider something more elephant sized to borrow buffet term and what would be the key items you'd look for in that potential asset?
Yeah. And thanks for the question. Elephant size I don't know how big that that means but I would say this, look you know that we are actively looking for potential companies that can supplement our solutions and services capabilities. And we're looking at different kinds of organizations, small tuckins frankly can be more simple to do and very easy to gain traction quickly. Larger organizations we need to think about a lot of factors including the ease of integration and the way that we can operationally bring onboard a large organization. You know the filters that we look at, we look at is it strategic fit for our customers that's first and foremost, is it going to create more relevance to our customers. We don't get that through that filter, we don't get even further than that. Operational alignment is the second one and then obviously cultural fit and financial return.
I will tell you on cultural fit when I think about Kelway several years ago and Scalar and Aptris the cultural fit in those firms has been really terrific. And I think that's been a very large portion of why we've been successful, the teams have done a great job integrating and becoming CDW one company and going to market as a seamless team to our customers who have really appreciated that. And that actually feeds the ability to leverage our solutions capabilities across the whole of the organization. In terms of a larger company. If we find one that makes sense and ticks through all those levers we absolutely would take a look.
Okay that's helpful. Thank you. And just as a quick follow-up, Collin thanks for all the model commentary. I just wanted to ask on you talked about Q1 revenue expecting to be down about 7% sequentially per day. I think that's maybe a little over 5% sequentially as reported. The question is historically EPS it's a little bit imperfect but I think generally down somewhere around two times that revenue decline on a sequential basis. Correct me if I'm off here but given your investment plans and timing with this normal seasonality that you're talking about on revenue also apply to EPS in Q1 or as reported would be down maybe just over 10% sequentially?
Adam I don't normally think of sequential EPS quarter-to-quarter. What I did say though in my prepared comments is that we do expect the first half of the year EPS to be stronger than the full year. Some of that is due to a sense of timing and some of that is due to the extra day we have in the first quarter.
Okay, that's helpful. Thank you.
Thank you. Our next question comes from Ruplu Bhattacharya with Bank of America. Your line is open.
Hi. Thanks for taking my questions and congrats on the quarter and on the guide. Collin the guide for full year of rating margin at mid 7s, I mean that's actually -- that's pretty strong. I mean your margins have been better than many of your competitors. Just wondering, I mean you -- we assume you are going to see a mix shift between client devices versus more of cloud solutions and netted down items. So can you talk about what are some of the things that can drive that a little bit higher than mid 7s, what do you need to see to get operating margin a little bit higher?
Thanks for the question Ruplu. Yeah. You know, there are a lot of things that impact our operating margins starting at the gross margin. There's the mix of items that we sell, which you're referencing. There are commoditization headwinds and market mix. So there are a whole series of mixes that move in and out. As we mix into solutions that does put upward pressure on our gross margin. But we do have a higher cost to serve associated with solutions. So the flow through to the operating margin might not be as great or I think the operating margin might be closer in line to the transactional side of the business. I think the big wildcard here is how strong hardware is as we go forward. This narrative that our margins are going to float up over time has been out there for several years. And I think a lot of that was -- had an assumption that hardware growth was going to slow down and not be as robust. And clearly, we've been through a pretty heavy cycle here of three years where that hasn't been the case and you haven't seen as much upward movement on the operating margin as you might expect, notwithstanding all the success we've had in cloud and solutions and netted down items. So I think if we were to go through an extended period of time, multiple quarters or years where we saw that play out, I think we would revisit it at that point in time at our Analyst Day a few years ago. We took our margin target up a little bit as a result of that trend. But again, I think we'd want to see more sustainability of the strength of netted down items relative to where hardware is.
Yeah, that makes sense. Thanks for that, Colin. For my follow-up, I just wanted to touch on the education end market. You know, you've seen some strong growth in the higher Ed segment, but maybe a little bit slower on the K-12. So any thoughts on how that segment trends in 2020?
Yeah, it's Chris. On education, we're just under a little pressure right now. We've seen ASPs declining a bit and also the Chromebook space has been the one that has been most constrained when it came to supply opportunities, the supply availability this past year. And availability simply if it was out there, we could get it. So we do expect to continue to see into 2020 those same pressures on the business. The other thing that's happened is Google's extension of its auto update expiration, which is simply the equivalent of end of service. They've extended it a year, so that alleviated what I'll call the urgency of customers to refresh and upgrade. But that will be an opportunity when the year expires next year. Well K-12 we still consider to be a growth area for us. And the teams are really focused on specific solutions that they can bundle and bring to those customers that have to do with things like modern classrooms that are more collaborative and learning environments that are modular, etc. So we feel good about K-12 in the long term.
Okay. Thanks for all the details.
Thank you. Our next question comes from Matt Sheerin with Stifel. Your line is open.
Yes. Thank you and good morning. A question regarding the strength that you saw in the UK, I think you said that was up 20% year-on-year. Is that related at all to the BREXIT transition and post that close, are you seeing any impact either positively or negatively?
Hi, Matt. Yeah, thanks for the question. The answer is no. We haven't seen a lot of change over the last couple of years in client behavior as a result of BREXIT and the uncertainty surrounding that. We've tried to comment on that regularly with you. I think that's just great execution and performance by the team and a number of solutions, projects coming to fruition. We also have, if you recall, a Netherlands entity. And so customers are comfortable using that in the regular course of business. When I look at the UK business, the nice thing is the balance that we've seen in growth in both their UK local business as well as referral business, meaning U.S. to UK business and also collectively UK and U.S. customers doing business outside of those regions. So call it widely international. All of that is on a good growth trajectory and we're really excited to see that because you know, that reflects the power of the thesis going into the combination and it's working.
Okay, thanks for that and then relative to the expectations on hardware and we certainly get the headwinds that you're going to see in terms of the PC refresh cycle. But looking at the solutions side of the enterprise class, hardware, networking, storage servers, you had some strength as you talked about networking for some of those reasons. But what should we be expecting there in terms of your outlook for the enterprise class products?
Yeah, I think of it this way. As I said, customers are still prioritizing IT investments. And, they had different priorities. Sometimes it's clients, sometimes it's the data center, depending on where they're focused in their business and what they're trying to accomplish. Looking forward, we expect to see a benefit of that investment. And the key thing is that when it comes to these solutions projects they are lumpy. And I keep saying we're going to find another word, but that really is the best word. I mean, if you think about 2019, we had some lumpiness throughout the quarters and we just saw a number of deals come to fruition and you saw a nice healthy Q4. You got to expect that going forward just because of the timing and also the mix, which is a big part of that whether it's hardware, software, or services. The more software component, the more muted the top line.
So, again, customers are focused on using technology to drive strategic outcomes in their business and they're focused on securely running their "utility IT" and we've got the full portfolio to help them do that.
Okay, thank you.
Thank you. Our next question comes from Shannon Cross with Cross Research. Your line is open.
Thank you very much for taking my question. I just have one, Chris can you talk a bit about what drove you to put a chief growth and innovation officer in place, how you're sort of thinking about that position, and how still work with others within your executive team at this point. I'm just I'm kind of curious as to what created that role?
Thank you. Yeah, sure. Thanks very much for the question. We'll all start with a simple reason. Know when we think about forward looking, we're really focused on scaling sustainable growth. So this is about focus for growth. And in particular, when we think about our customers or partners in products and the channels and platforms that we use to sell and the technology and digital capabilities that underpin those. The connective tissue between them is becoming more and more important. So this role is really intended to help align and focus our efforts and investments around driving that connectivity there. When you take a step back, PTW has historically delivered meaningful, profitable growth and we've done that through continual innovation and continual investment, disciplined investment and focus on investing where the growth is. So when I think about growth and innovation and bringing that team together, it's just another natural step in the way that we think about growth in the future.
Okay, thank you. Thank you. Our next question comes from Katy Huberty with Morgan Stanley. Your line is open.
Thank you. Good morning. Just thinking through seasonality for the year in the first half, you have the bulk of the benefit of senses that spillover of some of the wind, 10 refreshes and the extra selling day. So just what are the offsets to those tailwinds that land you at more normal seasonality in the first quarter, in the first half versus maybe a little bit better seasonality given those factors?
Can you repeat the question, Katy?
Yeah, just thinking through some of the tailwinds in the first half, in the first quarter. You have the bulk of the census impact in the first half of the year and hopefully get some spillover effect of PC refreshes, at least in the first quarter and then you have the extra selling day. So just curious why you wouldn't see maybe a little bit better than normal seasonality in 1Q and the first half because of those factors, are there some offsets that you're thinking through?
No, I would say no real offsets. We do have some pretty meaningful overlaps in the back half of the prior year. So I think that's also informing us.
Okay, and then just as a follow up, have you gone back and looked at just spending trends and customer behavior around elections in terms of any expectation around how that might impact spending this year? "
Yes, Katy, it's Chris. If you go back to the 2012 and 2016 elections, what we did see is we did see a deceleration in IT spend, IT growth. So that's why we call out as a wildcard U.S. election this year, because, the uncertainty leading into it could cause some deceleration. That came in those two years in the back half of the year.
Okay, thank you.
Thank you. Our next question comes from Paul Coster with J.P. Morgan. Your line is open.
Yes, thanks for taking my question. Chris, you've been pretty specific about the three part investment strategy and investing in the future generically. But where do we see this in terms of the dollar spend, is it in CAPEX, is it in the operating expenses, what kinds of people are you recruiting, how are you reallocating resources to capitalize on these opportunities? And suddenly could you even argue that you're under earning a little bit because of the investments that OPEX is a bit higher than it might be otherwise?
Yeah, thanks for the question. I think you see it up and down wherever in various line items in that P&L. So, for example, we're investing in people, investing in technologies, solution architects, delivery engineers. We're also investing in technology and digital capabilities to enable our sales organization and to enable our coworkers to deliver to our customers to create an experience for our customer that becomes more seamless and useful to the sales process. So we're investing in a number of different areas, as we always do at CDW in terms of the impact on our profitability. Look, we I don't think you'd see anything different, but we're always outperforming the market allows us to deliver on our commitments to shareholders, but also reinvest in the business. And that's pretty that's very important for the future growth of the organization. When I think about scaling for sustainable growth It's not just about performing for today, but it's also about laying the foundation for growth against our growth model in the future. And that's where we're investing today and tomorrow.
Paul, I would just add, the investment is both in the OPEX and the CAPEX line. The majority of our normal CAPEX goes against our IT infrastructure. And then in your question, are we under earning, I guess similar to that is, are we overinvesting and I would say no. We feel like we have the right balance between investment back into the business that allows us to continue to create differentiation in the marketplace that enables the sustainable outperformance versus the market. So could we pull back on investment in the short term? Yeah, absolutely, with the margin pulled up, yes. But I think that 200 to 300 basis point premium that we've consistently been able to deliver over time, you would see that get shipped away. So we think we have the right balance between investing in the business and growth in margin.
Thank you very much.
Thank you. Our next question comes from Keith Housum with Northcoast research. Your line is open.
Good morning everybody. Can you just help me understand last year and the past two year spending in the 110 refresh cycle was that generally done within companies or the customer's general budgets or were they special I guess one time expenditures as either won't repeat or you expect to be reprioritized going forward?
Yeah. Hi, Keith. My sense, having talked with customers and feedback from our sales organizations is we didn't hear a lot of chatter about onetime increases in budgets to refresh client. It's really a natural process of their IT investment cycles.
Yeah Keith, again just as we think about how we manage our own business, our CIO sure didn't get incremental budget to get us upgraded to Win 7. And, I think it's part of what a customer goes through every year is determining what their priorities are and addressing those priorities within the context of their budget.
Yeah, that's helpful. And then changing gears here is slightly is my follow-up. I know -- I respect this completely with the Coronavirus, but can you help us understand, like in terms of the supply chain and inventory in the channel, how long could the Coronavirus go on or how bad it could get before it actually impacts anybody, is there enough inventory in the channel that can withstand, quarantine for some factories for several weeks?
Yeah. No, I wish I had an answer to that, Keith. I just don't, it's too early in the process right now. And what I can say is that we're working very closely with our OEMs right now to get a better understanding. But we don't have visibility to that. I think our vendors are still trying to figure that out. And it all depends on how long it lasts, what alternatives they have. But we'll just do the best that we can to ensure that we take care of our customers and till the extended inventory is available we'll leverage our competitive advantages and take that. But I just it's hard to know at this point in time. I don't want to project out into the future.
Okay, appreciate that. Thank you.
Thank you. And I am currently showing no further questions at this time. I would like to turn the call back over to Chris Leahy for closing remarks.
Thank you, Shannon. I'd like to recognize the hard work of our almost 10,000 coworkers around the globe and their ongoing dedication to serving our customers. They are the reason we had such exceptional performance in 2019 and we will continue to outperform the IT market going forward. Thank you to our customers for the privilege and opportunity to help you achieve your goals. And thank you for your time today and continued interest in CDW. Colin and I look forward to talking to you next quarter. Take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.