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CDW Q4 2006 Earnings Call Transcript

January 26, 2007 | about: CDWC

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TRANSCRIPT SPONSOR

CDW Corp. (CDWC)
Q4 2006 Earnings Call
January 26, 2007 8:30 am ET

Executives

John Edwardson - Chairman and CEO
Barb Klein - SVP and CFO
Jim Shanks - EVP
Harry Harczak - EVP
Paul Shain - SVP, Berbee

Analysts

Ben Reitzes - UBS
Richard Gardner - Citigroup
Brian Alexander - Raymond James
Matt Sheerin - Thomas Weisel Partners
Jason Gursky - J.P. Morgan
Bernie Mahon - Morgan Stanley
Bill Fearnley - FTN Midwest
Dan Renouard - Robert Baird
Bruce Simpson - William Blair
Andy Hargreaves - Pacific Crest

Presentation

Operator

Good morning ladies and gentlemen and welcome to the Fourth Quarter 2006 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. John Edwardson, Mr. Edwardson, you may begin.

John Edwardson

Okay, thank you. Good morning and thank you -- thanks to all of you for joining us to discuss CDW's fourth quarter and full 2006 year results. With me in the room today are Jim Shanks, Executive Vice President; Harry Harczak, Executive Vice President; Barb Klein, Senior Vice President and Chief Financial Officer and Paul Shain, Senior Vice President responsible for Berbee's operations. Before we begin the call, Barb will present the Company's Safe Harbor disclosure statement, Barb.

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Barb Klein

Thank you, John and good morning. Any statements made by management in this conference call which are forward-looking, that is not historical in nature, are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Please be cautioned that such forward-looking statements involve risks and uncertainties, and are based on the Company's current expectations. Actual results could differ materially from such expectations. Certain risks, uncertainties and other factors affecting the Company's business are contained in its filings with the SEC, and are discussed in this conference call.

Also, if you are listening to a playback of this conference call, please be advised that our statements on this conference call are made as of the date of the call, are subject to future events, and should not be considered to represent the expectations of management other than as of the date of this call. Our press release and slides for today's call are posted on the Investor Relations' pages of our website at cdw.com. Supporting materials on the Investor Relations page are under the heading entitled "webcast."

John Edwardson

Okay, thank you Barb. 2006 was a productive but yet a challenging year for CDW. The year was characterized by the launch of several ground-breaking initiatives to expand our platform for growth, and throughout the year our co-workers worked very hard to implement much needed change to our business model and still improve performance while we were doing so. Beginning with our accomplishments, first we had several in 2006, that included the geographic alignment of tens of thousands of medium and large account customers in the corporate sector; second, the acquisition of Berbee Information Networks which will allow us to offer a wider range of services and products to our customers; third, we have strong double-digit revenue growth in the public sector; fourth, a greatly improved delivery organization for our service offerings; and last, a much more streamlined approach within our marketing and purchasing departments and working with our vendor partners.

We also heavily invested in infrastructure of the company. The completion of our first year of operations at the Western distribution center in North Las Vegas, this new state-of-the-art facility gives us plenty of capacity for future growth and as we went through the third and the fourth quarters of last year we leased a new office space that is now ready to go for the arrival of many new account managers which we will discuss with you shortly.

Moving on to performance, certain areas of our performance improved as we set new records for annual revenue, gross profit and diluted earnings per share. While our overall 2006 results were very good, we could have done better especially in the fourth quarter of 2006. We expected our revenue growth to be stronger throughout the fourth quarter as a result our cost structure outpaced our revenue growth, which contributed to lower operating income as a percent of revenue.

At CDW, we do set the bar high. I was not satisfied with our performance in 2006 and particularly in the quarter that just ended. Achieving profitable growth by providing an unmatched customer experience remains our central focus. Now that we have laid a new foundation for growth, it's time for us to leverage this enhanced infrastructure and profitably grow our company. There is plenty of work to do in all areas of the company in order to fully achieve our ambitious goals.

For example, we will continue to concentrate on the performance of our sales organization, the medium and large corporate sales teams which were realigned by geographic regions in mid-2006, have been working hard to reap the benefits of that new structure. They are making gradual headway and we are confident that they will successfully continue to reaccelerate revenue and grow profitably. It will also be important to improve the profitability of our public sector. While we were pleased with the public sector's revenue performance last year, it's time to leverage that growth in the higher operating income in each public sector channel.

We also want to drive more volume through our Western distribution center by further leveraging the supply chain through the fourth quarter of 2006. Approximately 30% of our shipments were handled by this new facility. Another key, of course, is Berbee. Berbee greatly enhances our ability to serve our customers as we can now offer more advanced customized IT solutions. We have significant expansion plans for Berbee as we expect to rollout the Berbee model beyond the six Midwestern states where Berbee currently operates.

As we enter 2007, our plans are to profitably outpace market growth and leverage the investments we made during the past year. Now that our infrastructure is better prepared for growth, we plan to aggressively hire more sales force co-workers as Jim Shanks will discuss in his presentation. We will also focus on hiring more Berbee engineers. In addition, we plan to have more IT co-workers within CDW to better leverage technology and improve productivity across our entire company. To offset this planned increase in SG&A expense, we intent to keep other SG&A costs in check and keep our existing level of non-sales and non-IT co-workers flat for the foreseeable future.

Turning to slide 3, we have updated our U.S. market opportunity slide to include services as you can see IDC is expecting total hardware, software and services IT growth over the next four years to average approximately 5% to 6%. So we still believe there is plenty of opportunity for growth here in the U.S.

Before my comments on the fourth quarter of 2006, I would like to discuss the litigation settlement included in the quarter. In the fourth quarter of 2006, we recorded a one-time $25 million pre-tax litigation settlement. The lawsuit involved the 2003 purchase of selected assets in Micro Warehouse and the filing by Micro Warehouse for bankruptcy protection shortly thereafter.

We were a target in this case primarily because we've purchased the selected Micro Warehouse assets just before the bankruptcy filing. We believe that the trustee representing the creditors had no right to recover any money from us and we were very comfortable with our position in the case. But as you know in today's world, there are always risks and uncertainties involved in litigation not to mention the costs and resources required if this case went to trial. To prevent further distraction from the case we negotiated to settle for $25 million. We would far prefer to focus on growing our business and not have to focus on costly and time-consuming litigation. We still firmly believe our investment in Micro Warehouse and the subsequent integration was well worth everything we put into it.

Slide 4 of the webcast presentation is fourth quarter of 2006 results compared to the previous period a year ago. Total revenue was $1.82 billion in Q4 of 2006 compared to $1.61 billion in Q4 of 2005, which was 13.5% increase. Included in total revenue is approximately $109 million from Berbee, which was included from the time the acquisition closed on October 11, 2006 through the end of the calendar year.

Fourth quarter gross profit was 15.6% of revenue, operating margin was 4.5%, and non-GAAP operating margin which excludes the $25 million expense for the litigation settlement and is explained in our press release was 5.9%. Barb Klein will give you more detail in her section, but we experienced some erosion in product margin that we need to reverse.

Net income decreased 24% to $53.6 million. Net income on a non-GAAP basis, which excludes the $15.4 million after-tax expense for the litigation settlement and is explained in our press release decreased 2.2% to $70 million. Diluted earnings per share was $0.67 compared to $0.86 a year ago, the fourth quarter of 2006 included stock-based compensation expense of approximately, $0.03 per diluted share due to the implementation of FAS 123 and approximately $0.02 per diluted share from a higher effective tax rate in the fourth quarter. Diluted earnings per share on a non-GAAP basis which excludes the $25 million pre-tax expense for the litigation settlement and is explained in our press release was $0.86 which was flat compared to that with the year ago.

Two important measures of productivity decreased in Q4 on a year-over-year basis, we need to turn these around. There are annualized revenue per co-worker which declined to $1.471 million in the fourth quarter of 2006 down from $1.513 million in Q4 a year ago. Annualized gross profit margin per coworker also decreased to $229,000 in the fourth quarter of this year from $234,000 in the fourth quarter a year ago.

Slide 5 shows our return on equity as well as our return on invested capital. In the fourth quarter of 2006, we achieved ROE of 21.8% and return on invested capital of 35.8%, including the acquisition of Berbee and excluding -- but excluding the $25 million litigation settlement, Barb will provide more detail on the ROIC trend later in her presentation.

While, we did not repurchase any shares in CDW stock in the fourth quarter of 2006, we did spend a significant amount of cash, more than $180 million to purchase Berbee. As you can see on slide 6, during the rest of the year, we repurchased approximately $4.1 million of shares of common stock and returned $269 million to shareholders, comprised of $228 million of share repurchases as well as an annual cash dividend of $41 million.

Now I would like to give you an update on Berbee. The Berbee team has been with us for few months now and we could not be more pleased with their performance. In our press release financials, Berbee is reported as a separate operating segment. Before the fourth quarter of 2006, Berbee had $109 million in revenue from the date of the acquisition through the end of the quarter. Berbee's operating margin of 3.5% includes amortization of intangibles. Barb Klein will provide more financial details in her presentation.

There are many advantages to the CDW-Berbee combination. First and foremost is our expanded ability to serve our customers whose IT demands have grown larger and more complex. We can now offer customers more customized services and advanced technologies, which enables us to better compete against the bars with some more offerings. The combination of Berbee engineers and data center professionals and CDW specialists gives us more than 760 co-workers who customize solutions for customers' increasingly sophisticated technology needs.

The addition of Berbee's best-in-class engineering capabilities and advanced technologies will also help us grow more quickly our customer base, capture greater share of our customers' IT spending and increase our addressable market. A key way for us to take market share is to leverage cross-selling opportunities between our two sales organizations. While Berbee specializes in Microsoft and higher-end Cisco and IBM products, CDW offers products from more than 1000 vendors. Our integration team will be rolling up the sales integration model that outlines how the CDW-Berbee sales organizations will work together to cross-sell products. With this model in place, the Berbee team would be able to tap into wide range of products CDW sells to facilitate more transactional sales to Berbee's customers.

In addition, CDW account managers will be trained on Berbee offerings so they can educate their customers on Berbee's customized solutions. Both teams are very excited about the expanded opportunities to generate more profitable revenue. In operations, a welcome new advantage for Berbee is the ability to use CDW's configuration center. In the fourth quarter of 2006 we began to configure hardware for Berbee customers. Vendors shipped products go directly to our distribution center and the hardware was configured on our premises. This is an efficient process that shortens implementation schedules that reduces total project cost.

In 2007, we expect to incur some additional costs to further integrate Berbee back office processes such as systems related to financial systems and co-worker services. We expect to complete these tasks by the end of the year. In the fourth quarter of 2006, the demand for unified communications among the Berbee customers continue to be strong. In addition now that Microsoft has launched the Vista and Office 2007, Berbee is helping their customers migrate to these products. As we've mentioned before since Berbee is not an authorized reseller of Microsoft and CDW is a large account reseller, we expect to gain Microsoft license revenue. As for seasonality, the fourth quarter is usually Berbee's strongest quarter, Berbee largest customers tend to make significant year-end technology investments, this trend continued in 2006.

As we announced previously, our objective is to double Berbee's revenue in five years on an organic basis based on Berbee's revenue of $309 million for the trailing 12 months ended July 31, 2006. We discussed this with you on our last phone call. By joining CDW, the Berbee team now has more access to capital to replicate this model. The company has proven that it can grow both organically and through acquisitions over the last several years, while Berbee was one of the best if not the best IT solution provider in the US, there are other companies similar to Berbee that we will be looking at during 2007.

Berbee creates a platform to help us reach our stretch objective of $10 billion in revenue on a run rate basis by the end of 2008. We expect to generate this growth from the combination of acquisition as well as organic growth. In closing, a big thank you goes to all of our CDW co-workers for their efforts in 2006. You have continued to demonstrate a great spirit and willingness to tackle change and still deliver unmatched service to our customers as demonstrated by two important surveys done by eWeek and CIO Insight magazines late last year.

We also welcome our new Berbee co-workers. They were wonderful additions to the CDW family and we look forward to working together with you for many years in the future. Jim Shanks will now discuss revenue growth results and the sales force items, Harry Harczak will then review products trends and Barb Klein will close with financial results. Jim.

Jim Shanks

Thank you, John. The public sector segment CDWG generated total sales of $551.3 million in the fourth quarter of 2006, which was a 15.4% increase from the fourth quarter of 2005. Average daily sales were $8.75 million in the fourth quarter of 2006, compared to $7.583 million in the fourth quarter of 2005, representing a 15.4% increase from the prior year. On an average daily sales basis, the public sector grew 18.1% in October, 14.9% in November and 12.4% in December.

All customer channels within the public sector had double-digit revenue growth in the fourth quarter of 2006 with healthcare and state and local government channels delivering the strongest results.

Total corporate segment sales were $1.64 billion in the fourth quarter of 2006, representing a 3% increase over last year. Average daily sales in the fourth quarter of 2006 were $18.471 million, compared to $17.925 million in the fourth quarter of 2005, which was an increase of 3%.

On an average daily sales basis, the corporate sector increased 3.5% in October, 1.5% in November and 4.6% in December. As we discussed previously in March 2006, we segmented the majority of our medium and large corporate customer accounts into geographic territory. As expected the geographic re-alignment of the corporate sector proved to be a challenging process throughout the year that impacted corporate sector growth.

We are confident that the advantages of this significant undertaking are worth the effort. Benefits of the geographic re-alignment are designed to maximize our sales coverage model, better understand customer needs and enhance our product and service offerings, deepen existing customer relationships, and increased share expense, increase the stability of market opportunities and strengthen relationships with vendor partners to create more sales opportunities.

Corporate sector growth in December 2006 based on an average daily sales -- based on average daily sales of 4.6% was our highest month of growth since March 2006. We believe this is one indication that we are making progress. Our CDW philosophy of never being satisfied is firmly intact, and we continue to focus on improving corporate sector growth and profitability.

On December 31, 2006, our sales force numbered 2,589 coworkers including 206 Berbee sales force coworkers. That compared to 2,153 coworkers on December 31, 2005. Excluding Berbee, we grew our sales force headcount by more than 200 net new sales force coworkers in 2006 and exceeded our goal to add approximately 150 net new sales force coworkers during the year. Included in the sales force count are approximately 300 advanced technology specialists. We also note that Berbee engineers are not included in our sales force count.

Earlier in 2006, we focused our hiring efforts more on the public sector. Toward the end of the year, we began to focus more on the corporate sector. For 2007, we plan to add approximately 350 to 400 net new sales force coworkers, which will include field sales, advanced technology specialists and account managers for the corporate sector, the public sector, Canada and Berbee.

Slide 7 shows average daily sales per average sales force coworker excluding the impact of Berbee and is therefore on a non-GAAP basis. For the fourth quarter of 2006, average daily sales per average sales force coworker were approximately $11,900 compared to approximately $12,100 in the fourth quarter of 2005.

Slide 8 shows a similar sales force productivity analysis, using gross profit dollars on an average daily basis, which also excludes Berbee and is therefore on a non-GAAP basis. Average daily gross profit dollars per average sales force coworker were approximately $1,810 for the fourth quarter of 2006 compared to approximately $1,870 for the fourth quarter of 2005. In the fourth quarter of 2006, the percentage of sales force turnover based on trailing 12-months was in the low 20s and improved compared to one year ago.

Slide 9, shows that the web generated approximately $491 million in direct online sales for the fourth quarter of 2006, representing an 8% increase compared to the same period a year ago. Online sales in the fourth quarter of 2006 comprised 28.6% of total sales excluding Berbee. Berbee sales are not generated on the web due to the high service component of their sales. Harry Harczak, will now comment on product trends.

Harry Harczak

Thank you, Jim, and good morning. Our product revenue results for the fourth quarter of 2006 include the impact of Berbee product sale. As the result of Berbee's focus on advanced technologies, the product categories primarily affected on Netcomm, Servers and Data Storage.

Turning to slide 10, we compare our product mix for the fourth quarter 2006 for a product mix for the fourth quarter 2005. Software was our largest product category comprising 17% of sales. The Netcomm category was second at 14.1%, desktop computers and servers third at 13.6%, data storage was fourth at 13.5% and notebooks and accessories were fifth at 11.8%. Netcomm is now our second largest product category primarily due to the addition of Berbee sales.

Slide 11 shows product category growth rates. Revenue growth for Netcomm products was 53.4%. As you recall, Cisco Advanced Technologies are one of the three products focal areas within Berbee which contributed significantly to the growth rate. CDW results without Berbee also had strong double-digit growth. Managed networking switches continue to drive the category as well as security hardware. The category was positively impacted by our Cisco Gold certification for CDWG that we earned in 2006, which allows us to sell a broader array of Cisco products to our public sector customers.

Revenue in the memory category rose 14.3%. Contributing to the growth was customer adoption of newer higher performance memory products. We believe desktop and notebook system memory growth was driven primarily by customers adding memory to the new core dual systems to maximize performance, which in turn will prepare them to fully support the Microsoft Vista platform. The combined Notebooks and accessories product category increased 13% driven by strong notebook sales which represents most of this category.

The software category increased 11.4% including Berbee sales, database software helped drive growth reflecting continued strength from the launch of Microsoft SQL 2005 a year ago. The launch of Vista by Microsoft did not have a significant impact on CDW's business in the fourth quarter of 2006. However, we do believe some customers who did not have licensing agreements in place maybe waiting to purchase Microsoft Vista and Office 2007 at some point in the future.

It's part of our effort to position CDW as a thought leader in information technology. In November 2006, we released the results from our first Microsoft Windows Vista tracking poll. The survey of 761 IT decision makers indicated that 86% expect their organizations to adopt Windows Vista with 20% of organizations deploying a new operating system within the next 12 months.

CDW plans to release an update to the tracking poll during the first quarter of 2007 to track trends and customers' perceptions and plans for adoption of Vista. While sales of Microsoft Enterprise agreement only contribute to revenue on a net basis, sales continue to be strong as customers migrated to licensing agreements that provide upgrade benefits.

Data storage devices increased 10.3% versus the prior year period. This category includes Berbee sales. Berbee and CDW both experienced solid demand for the category in the fourth quarter. Customers continue to need to store larger amounts of data, protect against theft and data loss, comply with increasing government legislation and be able to access and secure stored data. As we provide more higher-end network storage solutions for our customers, we see customers moving towards more disk-based storage versus tape.

Revenue from input devices grew 9.7%. We continue to merchandize attached products such as wireless, mouse and keyboards, with anchor products such as desktops and notebooks. Desktops and servers increased 6.7% and include Berbee server sales. The inclusion of Berbee had a significant impact on the growth rate in server revenue as Berbee focuses on server virtualization and consolidation solutions from IBM.

Revenue in the printer category decreased 1.1%. Declining average selling prices continue to weight on revenue results, but unit volume was solid as a result of our ongoing customer penetration program, which focuses on existing customers who have not purchased printers from us previously. The printer category is primarily being driven by customer migration to multi-function and laser printers.

Video products revenue decreased 1.9% while unit growth was in the double-digits. Average selling prices in this category continued to decline significantly, demand remains strong for desktop LCD monitors and large-format LCD and plasma displays. Wide desktop LCD monitors is a growing trend. We believe some customers are purchasing these new monitors in anticipation of Vista since Vista supports the wide monitor format.

Slide 12 shows the change in revenue, unit volume and average selling prices for notebook, CPUs and desktop and server CPUs excluding Berbee sale. Notebook CPU revenue increased 13.3% and unit volume increased 18% while the average selling price decreased 4% from a year ago. Sales were strong for most of our popular brands as well as brands with more specialized features. Category drivers include thin and light notebooks that provide a mobility advantage, ruggedized notebooks, and specialized tablet notebooks for specific industry verticals, widescreen notebooks and the replacement of desktops with notebooks due to the declining price differential. In addition, incremental notebook sales continue to [make order] as a result of our focus customer penetration program which focuses on selling notebooks to existing CDW customers who have not previously purchased notebooks from us.

Revenue from desktop computers and servers excluding Berbee decreased 0.7% while unit volume increased 1.6%. The average selling price decreased 2.3% from the prior period. Positive revenue and unit growth in the server category reflected customers continued adoption of blade servers and AMD based servers. As customers continue to consolidate and utilize virtualization technology to increase overall productivity, we believe server volume growth will likely be negatively impacted but the shift will drive growth in other product categories such as software and memory.

In the desktop category, the product mix shifted more towards workstations which provide support amidst decreasing average selling prices of desktops. We continue to enhance our customer penetration program and will work with our partners to offer customers aggressive promotions in the desktop category. Barb Klein, will now review our financial results.

Barb Klein

Thank you, Harry. As John indicated in 2006 excluding the impact of the litigation settlement we set new records for annual revenue, gross profit and diluted earnings per share. In the fourth quarter of 2006, we achieved record quarterly revenue and gross profit. Both fourth quarter of 2006 and full year 2006 results include Berbee sales from the date of the acquisition on October 11, 2006 through the end of the year.

As I discuss the financial results in those instances where comments exclude Berbee, those measures will be on a non-GAAP basis. Gross profit was 15.6% of sales in the fourth quarter of 2006 compared to 15.5% of sales in the fourth quarter of 2005, an increase of 14.2% compared to the prior year. The increase was primarily due to the inclusion of Berbee from the date of acquisition through the end of the quarter partially offset by lower product margin in the corporate and public sectors.

As we indicated on our third of quarter of 2006 earnings call, Berbee's business model incorporates a higher services component that results in a higher consolidated gross margin. In the fourth quarter of 2006, Berbee contributed approximately 35 basis points to gross profit margin. Excluding the impact of Berbee, gross profit margin in the fourth quarter of 2006 was 15.25%, compared to 15.5% of sales in the fourth quarter of 2005. The decrease was primarily due to lower product margin, partially offset by a higher level of vendor incentives. The lower product margin was due to an increased percentage of larger dollar sales, which typically have a lower margin and an increase in promotions and more competitive pricing on smaller dollars sales. These factors were more prevalent in the month of December as the sales force finished out the year.

Comparing gross profit margin in the fourth quarter of 2006 of 15.6% to gross profit margin in the third quarter of 2006 of 15.4%, the sequential quarter increase was primarily due to the inclusion of Berbee from the date of acquisition through the end of the quarter, partially offset by lower product margin as previously discussed. Compared to the fourth quarter of 2006 gross profit margin of 15.25% excluding the impact of Berbee, the sequential quarter decline was primarily due to lower product margins, partially offset by an increase in commission revenue and an increase in vendor incentives.

We previously estimated that Berbee would favorably impact CDW's gross margins by approximately 30 basis points and we reiterate this estimate for 2007. Since the fourth quarter of 2006 represents our first quarter impacted by Berbee, we are providing detailed information on Berbee's impact on our total gross margins. In future quarters, we do not expect to break-out Berbee's impact on gross margin. We are reiterating our stated objective gross margin range of 15.25% to 16%, which includes Berbee.

Slide 13 shows our operating statistics. Selling and administrative expenses as a percentage of sales were 8.1% in the fourth quarter of 2006 compared to 7% in the fourth quarter of 2005, an increase of $34.5 million. The increase in selling and administrative expenses in the fourth quarter of 2006 included the following items.

First, along with the benefit of Berbee's revenue, we of course have to add Berbee's operating expenses, which totaled $18.5 million from the date of acquisition through the end of the year. In addition, Berbee integration costs were approximately $600,000.

Second, we had incremental expenses of approximately $2.9 million associated with the operations in the new Western distribution center in North Las Vegas, Nevada and additional leased office space in the Chicago area. Total expenses were $4.2 million for these items. During 2006, total expenses for these facilities were $22 million and incremental expenses were $19.3 million in 2006 compared to 2005. Total incremental expenses for 2006 of $19.3 million were lower than our estimated $21 million. This is primarily due to lower payroll costs at the Las Vegas distribution center as coworkers learning curve improved and less overtime was needed, and some temporary workers' transitioned to fulltime coworkers. There were also lower costs for warehouse supplies. As John indicated, these infrastructure investments were made to position the company for future profitable growth.

Third, we've recorded $3.8 million of expense due to the required implementation on January 1, 2006 of the new accounting standard SFAS 123R relating to the expensing of stock options. During 2006, our stock option expense totaled $15.8 million. We estimate that the stock option expense relating to the new accounting standard will be between $15 million to $16 million pre-tax for 2007.

Fourth, we had increased payroll and benefit costs as a result of continued investment in expanding CDW sales force and additional coworkers to support the larger and growing business.

Fifth, amortization expense increased approximately $1.5 million in the quarter due primarily to the acquisition of Berbee. We estimate that amortization expense will be approximately $8 million in 2007 and that the amortization relating to Berbee will be approximately $7 million.

And finally, there were items from the fourth quarter 2005 that did not repeat. In the fourth quarter of 2005, we reversed $5.3 million from an accrual of a company-wide incentive bonus program based on a partial achievement of specific financial objectives for 2005. In addition there was a $3.7 million charge in connection with the acceleration of vesting of options for coworkers through the manager level on December 31, 2005.

Advertising expense of $28.5 million in both the fourth quarter of 2006 and the fourth quarter of 2005, as a percent of sales advertising expense was 1.6% in the fourth quarter of 2006 compared to 1.8% in the fourth quarter of 2005. Advertising as a percent of sales was slightly lower in the fourth quarter 2006, primarily due to the addition of Berbee which has virtually no advertising expense. In 2007, we expect the advertising expense to be approximately 2% of sale. We are currently in the process of launching a new advertising campaign in the first quarter of 2007 that focuses on CDW's scope of capabilities. In keeping with our focus on expenses in 2007, we are closely monitoring our advertising costs.

The operating margin in the fourth quarter of 2006 excluding the impact of litigation settlement was 5.9% compared to 6.7% in the fourth quarter of 2005. Our operating margin performance was slightly lower than our stated objective for the fourth quarter of 2006 of 6% to 6.5% on a GAAP basis. We previously stated that Berbee's stronger emphasis on services will result in higher gross margins and lower operating margins compared to CDW and that we expected the addition of Berbee to decrease our consolidated operating margin by approximately basis points -- 20 basis points which is what occurred. For 2007, our previously stated objective for operating margin was 6.1% to 6.6% on a GAAP basis, which included the assumption that Berbee would decrease our operating margin by approximately 20 basis points.

As Jim mentioned, we plan on adding a net new 350 to 400 sales force coworkers in 2007. And we also intend to hire additional engineers in order to continue to grow Berbee. We do not plan on adding any co-workers to support functions other than IT. Primarily due to the planned investment in our sales force and engineering teams, we are revising our stated objective range for 2007 operating margin to 5.8% to 6.3% on a GAAP basis.

As we have done historically, we will update our objectives only towards quarterly conference calls. The effective tax rate for the fourth quarter of 2006 was 38%. This compares to 36.2% for the fourth quarter of 2005. The decline was primarily attributable to the addition of Berbee. The change in effective tax rate decreased earnings per share in the fourth quarter of 2006 by approximately $0.02 a share compared to the fourth quarter of 2005.

We evaluate our effective tax rate each quarter, but for the first quarter of 2007, we currently estimate the tax rate will be similar to the fourth quarter of 2006 at approximately 38%. While we did not repurchase shares in the fourth quarter of 2006, our total share repurchases in 2006 of 4.1 million shares more than offset the dilutive effect of options exercised by coworkers during the year.

Before turning to the balance sheet, we have some additional information on Berbee. We previously estimated that Berbee would have a negative impact to GAAP diluted earnings per share in 2006 of $0.01 per share primarily due to transition costs, amortization expense and lower interest income.

Berbee's actual performance exceeded our original expectations primarily due to strong revenue performance in the fourth quarter of 2006. As a result, Berbee had a positive impact to GAAP diluted earnings per share of $0.01 a share, which is two pennies a share higher than we had estimated. This result includes lower interest income due to lower cash balance as a result of the purchase of Berbee.

Previously, we expected Berbee to be accretive to 2007 GAAP diluted earnings per share by approximately $0.05 a share. However, now that we have more experience in working with Berbee, we expect Berbee to be accretive to 2007 GAAP diluted earnings per share by a range of $0.08 to $0.10 per share.

Turning to the balance sheet, inventory turns on an annualized basis were 23 times in the fourth quarter of 2006, which includes the impact of the Western distribution center compared to 25 times in the prior year. Early in the fourth quarter of 2006, we took advantage of some opportunistic buy-ins that enabled us to achieve economic benefit due to vendor programs or anticipated price increases. This increased our average inventory and contributed to the lower inventory turns. Now that we have a full year's experience operating both the Western distribution center and the Vernon Hills distribution center, we are revising our inventory turns up to 23 to 24 turns.

Account receivable days sales outstanding were 43 days at the end of the fourth quarter of 2006 compared to 36 days at the end of the fourth quarter of 2005. Berbee increased this metric by two days. Berbee's delivery of customized solutions is different than CDWs more transactional business. Consequently Berbee's billing process is different as delivery of projects is spread out over a longer period of time. Excluding Berbee and therefore on a non-GAAP basis, accounts receivable days sales outstanding were 41 days in both the fourth quarter of 2006 and the year ended December 31, 2006.

We are revising our DSO target to 42 to 44 days to include the impact of Berbee. We ended the quarter with approximately $392 million in cash, cash equivalents and marketable securities. On October 11, we completed our acquisition of Berbee for a total purchase price $186 million, which includes final working capital adjustments.

Cash flow from operations in the fourth quarter of 2006 was approximately $15 million and approximately $220 million for 2006. Capital expenditures were approximately $46 million in the fourth quarter of 2006 and $86 million for the full year 2006.

We exercised [our offer] to purchase the Western distribution center in North Las Vegas in December 2006. The purchase price of approximately $30 million is included in 2006 capital expenditures. In 2007, we expect capital expenditures to be in a range of $55 million to $60 million. Major projects include several IT related projects and upgrades, office improvement and expansion and new equipments for Berbee data centers.

John mentioned that in the fourth quarter of 2006 we achieved return on equity of 21.8% and return on invested capital of 35.8%, including Berbee. As added detail, the purchase of Berbee and the Western distribution center as well as higher accounts receivables increased the average total assets while decreasing cash, which resulted in a lower return on invested capital for the fourth quarter of 2006 as compared to previous quarters, which is shown on slide 5.

Turning to segment results, corporate sector sales increased 3% and operating income decreased slightly in the fourth quarter of 2006. Operating income for the corporate sector decreased slightly while revenue increased primarily due to lower product margin and higher payroll costs due to investment in the selling resources.

Corporate sector operating margin was 7.6% in the fourth quarter of 2006 compared to 7.9% in the fourth quarter of 2005 and 7.7% in the third quarter of 2006. Public sector sales increased 15.4% in the fourth quarter of 2006 compared to the fourth quarter of 2005, while operating income decreased slightly in the fourth quarter of 2006.

Operating income for the public sector decreased slightly while revenue increased primarily due to lower product margin and higher payroll costs due to the investments in additional selling resources. Public sector operating margin was 4.8% in the fourth quarter of 2006 compared to 5.5% in the fourth quarter of 2005 and 5.7% in the third quarter of 2006.

The $25 million pre-tax litigation settlement we have already discussed is included in corporate headquarters expense in our segment reporting. Excluding this expense and therefore on a non-GAAP basis, corporate headquarters expenses increased approximately $3 million in the fourth quarter of 2006. This increase was primarily due to a reversal in the fourth quarter of 2005 of an accrual for company-wide incentive bonus program based on partial achievement of specific financial objective for 2005, which did not repeat severance costs and Berbee integration costs.

Thank you for your attention. And we will now open the line for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Thank you. At this time we do have Ben Reitzes from UBS. Please go ahead.

Ben Reitzes - UBS

Yes. I want to talk more about margins, if you can. When you do the back of the envelope and you take your target range for '07 down by 30 basis points or so, I'm getting at least $0.15 hit to EPS. Can you just kind of go back, Barb and just go through again, why the 5.8 to 6.3 now and just kind of -- you went through particularly a lot of incremental expenses in the year and maybe what expenses are ongoing in '07, etcetera, just a little more color that to frame it in this question.

John Edwardson

Yes Ben, John Edwardson, and I'll start the first. And first I want to thank all of you listening for your patience as we had a lot to talk about and about 15 minutes longer than we usually go.

Ben Reitzes - UBS

Yes John, I am basically asking to repackage a lot of the little details that went into that comment.

John Edwardson

Yes, I know and Barb will do that in a minute. I think in general I want to make a couple of comments. The first is that, we expected our revenue growth to reaccelerate a little more as we went through the end of Q3 and Q4 and it did not and we let our expenses get ahead of that revenue growth. It's going to take us a quarter or two to get those back in line, so the (inaudible) is just looking those ranges where she is, is because of that fact and Barb I will let you go on and repackage those a little more.

Barb Klein

Okay. I'd just like to highlight, I guess, two key factors. We did talk about the incremental expenses that we have this year for the investment in the Western distribution center and the office space that we took for our co-workers. We have now fully annualized on those, but we still have some incremental costs associated with the space for the people that Jim is going to be hiring for the sales forces in 2007. And that's the other key factor for 2007. As Jim indicated we are going to hire a net new 350 to 400 new additions to our sales force. Most of those people will need office space to sit in, of course, and of course those co-workers will be added during the course of the year. The other thing to keep in mind is that our typical average account manager is personally breakeven when you look at their first 12 months with the company, once they are actually on the phone selling -- selling to new customers. And as a result, while we cover their expenses they are not generating much to the bottom-line. So we actually have some increase in sales, but those sales are primarily offset by the investment they were making in their salaries and commission.

Ben Reitzes - UBS

I am sorry Barb, these 350 to 400 these were unexpected though or they weren't in the prior guidance?

Barb Klein

We increased the number of new account -- new sales people that we are going to add to the sales force in 2007 versus what we had originally anticipated when we talked about the 6.1 to 6.6 range that was several months ago.

Ben Reitzes - UBS

Got it. So it seems like a combo of higher sales, they are higher people, they are hiring, but also lower revenue than expected, John.

John Edwardson

Ben, that is true.

Ben Reitzes - UBS

So, the combo of these two are the primary -- you would point these out to be the primary issues further like the 30 basis points lower range--

John Edwardson

I will just mention them again. Ben; the first is that, we expected our corporate revenue to reaccelerate more quickly than it is done as we have gone through this geographic reorganization. It's taken more time to get back to where we wanted to get to, and we were still not back there yet. So, I just want to make that clear and in anticipation of that coming back, we began to make commitments with new office space because we have not added many sales people of all incorporate throughout the year because of the reorganization. We are now ready to but we have made those commitments mid-year to take more office space and you kind of have to get it in chunks, you can't -- now that the incremental units of a few thousand square feet at a time. So, we have made commitments for that space and we are going to be aggressively now, hiring new account managers mostly in corporate, medium and large as we go through the year.

Ben Reitzes - UBS

And sorry, the lower revenue statement though, I mean what does it say about either Vista or the current corporate environment for either PC or IT spending.

John Edwardson

I think there is clearly a drop in, in desktop spending and PC spending Overall. If you look at the recent announcements that have been made by IDC, Gartner and others that unit volume in the U.S. for personal computers is down 3.2% over unit volume a year ago. So, those numbers are real and at the same time we do not see much lift from the Vista yet, because Vista is just about to happen and what we hear in our surveys, these little a gradual introduction, but we also know that most of the personal computers equipment that is out there is not going to be Vista compatible. So, that should drive hardware and as Vista begins to be implemented, at the same time we believe that number one reason for our slow revenue growth in corporate is rebuilding relationships and these one-one relationships that our account managers have had with their customers has been we think the most important part of our success. We literally broke about 55,000 of those relationships and it's taken a long time that to have those relationships get rebuilt one a one-to-one basis.

Ben Reitzes - UBS

And well thanks for taking so much time with me.

John Edwardson

Okay. You're welcome.

Operator

Thank you. Our next question comes from Richard Gardner from Citigroup. Please go ahead.

Richard Gardner - Citigroup

Hi, thank you very much. I wanted to go back to your comments regarding price aggression, can you talk about whether the price aggression was primarily initiated by you or was it initiated by someone else? Was it primarily a function of you striving to hit your revenue goals as you progress throughout the quarter or I guess any color you can provide would be great? Thank you.

Jim Shanks

That was not something that was driven by us. We did not change our strategy to try to hit a revenue number. One of the things we found is that was definitely a very competitive environment across all the different segments. Of the opportunities that were out there, the majority of them were much more larger in nature and so that was what drove the mix in the resulting market.

Richard Gardner - Citigroup

Okay and then very quickly if you could just -- I don't know if you can do this, but maybe provide a mix of '07 hires between engineers, field sales and inside sales and Berbee?

Jim Shanks

We don't break it out to that level.

John Edwardson

I will just make one point. Most of the people are going to be in sales and most of them are going to be in CDW and most of those in CDW are going to be in medium and large.

Richard Gardner - Citigroup

So that would be field sales John.

John Edwardson

That would be inside account managers for the most part.

Richard Gardner - Citigroup

Okay, great. Thank you.

Operator

Thank you. Our next question comes from Brian Alexander from Raymond James. Please go ahead.

Brian Alexander - Raymond James

Thanks, good morning. John could you just expand or Jim on what segments were disappointing from a revenue perspective. It looks like you actually saw some pretty nice acceleration on the corporate side, you had strong double-digit growth in all of your segments within the public sector. So I guess why kind of the cautious commentary on revenue and tied into that why grow the sales force so aggressively if you have become more cautious on the demand environment? It looks like you are looking for about a 15% add to sales headcount this year which seems rather aggressive if you are concerned about revenue and potential pricing pressure? Thanks.

John Edwardson

Brian, a couple of things on that and there were two big disappointments. One is, it's not good to grow revenue without growing profits. So I guess if there is an area where we need to take a good hard look quickly it's in our public sector group. We had great revenue growth and no growth in operating income on a year-over-year basis as you can see. So that is one thing to for us to be paying quick attention to right now. Second on the revenue growth it's not as much as a demand issue that has held our revenue growth back. We believe is the statement I made a few minutes ago it's the relationship between account managers and customers that was broken and has been rebuilding as we have gone through the year. So that rebuilding effort took a little longer than we thought it would and we thought it would come back quicker than it has come back. But we are confident than it will, because this is the fifth time we've done this. We did this successfully in higher education, in K-12, and state and local and healthcare. So, its not the first time we've attempted, it is just bigger than all of those were combined. So, we are confident that there was market share to take. We still have 5% or 5.5% market share in the transactional business. We believe that is out there and we believe it's time to go after a lot more of it.

Brian Alexander - Raymond James

Great. And then just a quick follow-up, could you give us an update on when we should expect to see the sales forces integrate or at least when you should expect to start realizing the cross-selling synergies between CDW and Berbee?

John Edwardson

Yes. The sales forces are not being integrated, but the cross-selling opportunities are beginning to happen and we've had some good wins in Microsoft recently. And because of the large status that we have and the Berbee Group was not authorized to sell Microsoft licenses. So, that is beginning to work. There is tremendous amount of transactional business. We believe that we can do with Berbee customers and we have been ironing out and are now ready to go on how compensation works between Berbee sales people and CDW sales people and now they would jointly serve customers that Berbee brings into CDW and that will introduce Berbee to existing CDW customers.

Brian Alexander - Raymond James

Okay. Thank you, John.

Operator

Thank you. Our next question comes from Matt Sheerin from Thomas Weisel Partners. Please go ahead.

Matt Sheerin - Thomas Weisel Partners

Yes. Thanks. You have talked about the pricing pressure hurting gross margin that obviously was a factor for hitting sales targets. What have you done in terms of talking to the managers within both the corporate and public sector about managing gross margin and balancing that against accelerating growth?

Jim Shanks

Well. One of the -- the answer to that is, our focus has always been on profitable growth and we make sure that all the managers know that. We make sure that all of our account managers -- that's why from a sales standpoint, the account managers are compensated on profits, and that keeps them very focused on that. We constantly work with all the management team, so that they understand the importance of that. We make sure that they have the information in front of them to manage to that, and it's going to be something that we are going to revisit and discuss with them, once again.

John Edwardson

And Matt, one other point everyone who sits at this table on the executive committee is paid on profit, and so that is our focus.

Matt Sheerin - Thomas Weisel Partners

Okay. And just on the Vista. Have you seen signs customers are delaying purchasing or putting things off until they get more comfortable with Vista, and could that be reason for the slower revenue growth?

Harry Harczak

Matt, this is Harry. As we have said, there is a couple of ways to get information on that. One is that account managers talk to other customers. The other is this poll that we did, and from that poll it is clear that people -- and we did it early in the quarter before Vista was really launched. They are not sure about all the advantages yet, they are studying it. They know they are going to migrate. They are not going to do it yet. So that does give us some indication that not just from buying Microsoft licensing, but from a hardware perspective that they may be holding off on those as well. Because it's clear from some of the results in our survey as well, that people don't have the infrastructure that's going to be needed to get the advantages that are inherent within Vista. So we do anticipate seeing some upgrades. Often times they're going to do that upgrade at the same time that they are actually going to implement Vista.

Matt Sheerin - Thomas Weisel Partners

Okay. And just a quick follow up on that. Given in that by let's say the third quarter of this year, customers will be ready to pull the trigger would it makes sense for you to start building your sales force expansion now in order to be prepared for that? Or are going to just wait, kind of college graduation time as you normally do?

John Edwardson

No, we will be hiring people as we go through every month of the year and so the plans begin and they are happening right now. So we will be hiring a lot of people in the first six months of the year to be ready for that. I think it might be helpful to have Paul Shain make some comments on Vista because, they at Berbee has been working on some large Vista rollouts and he sees it from a different perspective than we do because the companies that he's doing business with are a little larger than the typical CDW customer.

Paul Shain

And we've seen a number of our customers begin pilot programs looking at Vista just starting to think about their long-term road map of rolling out Vista particularly as it relates to some of the functionality coming later in the year relating to unified communications and some of those technologies. So we think customer demand is out there but it's a big undertaking and so people are going cautiously.

Matt Sheerin - Thomas Weisel Partners

Thank you.

Operator

Thank you. Our next question comes from Jason Gursky from J.P. Morgan, please go ahead.

Jason Gursky - J.P. Morgan

Good morning everyone. Jim, just may be a quick question for you, I was wondering if you could talk a little bit about trends in the public sector and specifically as it relates to the Federal Government and just whether you are you seeing any types of either acceleration or slowdown in buying trends there given all of the budgetary constraints that are going on in Washington, just kind of what signals are you getting from your federal customers at this point.

Jim Shanks

Definitely, there are some changes that are happening with the budget processes. One of the things that we've always focused on in our Federal business that's really helped us is we always continue to focus on the funded opportunities that are out there. So those are typically ones that they're even under a continuing resolution or with different budget constraints, those are still moving and charging forward. When you look at the performance of the federal sector this year, it really kind of trended what we've seen on a historic basis. There was a little more carry over into Q4, early on in Q4 than we typically see. But that's something that we're well aware of. It's something we watch for and we make sure and adjust our resources according to where the budgets are moving. One of the nicest things for that is because we have such a broad coverage in the federal that goes beyond that in the state and local. As the dollar shifts around we can stay ahead of that movement and make sure that we continue to build that. But definitely a segment that is in a little bit of conflicted state right now. So we have to make sure that we are very focused on what opportunities we chase.

Jason Gursky - J.P. Morgan

Okay. And just as a point of clarification may be for Barb, the operating margin range, 5.8 to 6.3, I am guessing that's for the full year. I just want to make sure that there won't be any quarters that would necessarily fall below that but this is kind of a -- every quarter will be in that range. And then John, maybe a just a more philosophical question for you. At what point do you kind of turn back towards focusing on profitability versus growth. This will now make your second year of fairly significant investment with Las Vegas last year. This year it looks like it's going to be the sales force and kind of what milestones are you going to use to figure out whether this revenue growth focus is translating into the profit that you want and what point do you then -- if it's not planning outlay or working out like you have planned, turned more towards focusing on profitability.

John Edwardson

Yes, we are focusing clearly on profitability right now and the number one leverage point that we have in the company is to get more revenue through our Las Vegas distribution centers and we made a big investment there and we need to get more throughput, more utilization of capacity in Las Vegas. We can ship, we believe about 6000 more boxes a day in Vegas while adding very few if any people to do that. So, highly automated, we got a great facility.

So as we begin to hire more people they are going to be more West Coast focused, so as Jim is filling up jobs in the sales group, we're going to try to put them initially in those divisions that have customers in California, Washington, Oregon, Colorado, Arizona and so forth so we can build the revenue up through the western part of the country.

At the same time, we have got to focus on profitable deals to begin with. It's greater top line growth, but as we all know here very well if we don't have bottom line growth that goes with it, there is not a lot of point in having top line growth. So clearly there is a focus there.

Jason Gursky - J.P. Morgan

And just a quick clarification. Earlier you had said that in the first twelve months that you don't expect any of your sales people to contribute to -- was it to the bottom line or was it to the -- you said that you're focusing on profitability now, but if you are bringing out 250 people that aren't going to generate any profit for you, and they're obviously going to drive revenues higher, it seems to me that you are focusing more on revenue growth?

John Edwardson

We have to get more growth through Vegas and these people do become profitable very quickly, but there is only one way to get more revenue growth in the company and that's by adding more sales people or having more productive sales people and we will be working hard to do both those.

Jason Gursky - J.P. Morgan

Okay. Then just on the clarification on the operating margin range, is that every quarter will be within that range or is it there some quarters where it could fall below and this is a full year?

John Edwardson

We will adjust that range if we need to as we go through the year, but right now the range is what was stated?

Jason Gursky - J.P. Morgan

For every quarter.

Operator

Thank you. Our next question comes from Bernie Mahon from Morgan Stanley. Please go ahead.

Bernie Mahon - Morgan Stanley

Hi, good morning. Questions for you, I am still confused on the December quarter, your operating margins came in below your expectations and at least in my model it was on the SG&A line. What costs actually came up in the month of -- since you gave guidance in October, what costs came up that caused you to miss on the SG&A line?

Barb Klein

Bernie, I am not sure exactly what your model showed, but with respect to what we have versus what we have seen in the third quarter and so on, it wasn't an SG&A difference. It really came in the gross margin.

Bernie Mahon - Morgan Stanley

Okay. That's helpful. And then John may be just looking out into the first quarter kind of excluding the corporate sales force reorganization issues that you have, when you talk to customers what are they saying just about the overall demand environment for both the public and corporate sector?

John Edwardson

You know what I am going to let Jim answer more of that, he is a little closer than I am and I met with a number of customers as we have gone through the quarter and I guess cautious is a good word right now to use. But on the other hand, people are spending money in buying things and so, Jim what thoughts do you have?

Jim Shanks

Yes, I would agree with cautious. One of the things that we are seeing, we saw in Q4 was a lot of inquiring around technologies that are coming forward, what's on the plate. A lot of discussions around Vista and the impact that would have lot of people trying to use that information in Q4 to get their budgets together instituted for Q1. Definitely a lot of -- are very large customers. We saw some budget flushing activities, so that with Q4 a lot of caution, a lot of taking, getting their information together and trying to sit and figure out what their budgets were going to be for Q1.

Bernie Mahon - Morgan Stanley

So you would think in general that Q1 just kind of demand there would be a little bit worse than normal seasonality?

Jim Shanks

I wouldn't comment that it's any worse. I think that typically in each Q4 that's a situation that we've found. Customers are doing a lot of inquiring. I think that there's probably a little extra tense-up kind of concern around just exactly what impact Vista and some of these other disruptive technologies are going to have as they come rolling through.

Bernie Mahon - Morgan Stanley

Okay. Thanks.

Operator

Thank you. Our next question comes from Bill Fearnley from FTN Midwest. Please go ahead.

Bill Fearnley - FTN Midwest

Yes. Thanks. Two follow-up questions on gross margin if I could. How is the ECC in Las Vegas versus your expectations, and is that helping gross margins at all? And do you expect any benefit from that in a major way in the first half of '07? And then I have a follow-up.

John Edwardson

Barb, do you want to take that?

Barb Klein

There is a -- the cost associated with the Western distribution center are not even reflected in gross margin. Those are all in SG&A cost. So the only thing that's in gross margin is really the cost of the product and the related vendor incentives and also we have got freight in there and things like that, but we don't have costs associated with the actual operations in Las Vegas distribution center in the gross margin.

Bill Fearnley - FTN Midwest

But don't you end up getting a lift from services that would be available through the ECC in Las Vegas, though?

John Edwardson

Well, the point with the Las Vegas distribution center is the amount of depreciation and expense related to the operation. And so, there's a lot of fixed costs for that building. We built a building that we knew when we built it and we discussed this I believe with you that it would take five years or so to fill that building up. And as all of you know, who have been here in Vernon Hills we have a distribution center here that is laid out in a way that's not nearly as efficient as the new one in Las Vegas. It is because we added onto it so quickly and so many times. So what we did with this one is we built a big one and there is a lot of fixed costs associated with that and we were out of capacity in Vernon Hills. We just have to grow into it.

Bill Fearnley - FTN Midwest

Okay. And then on the competitive environment, is it -- where do you see the toughest competition here? Is it CDW versus the VARs? Is it OEM competition? Is it other DMRs? Is it Dell? I mean, from a competitive environment standpoint, where are you seeing the most pressure and where do you expect the most pressure here for the near term?

John Edwardson

Well, the name we hear the most are still the names of our friends in Austin, Texas. So that's the name that as you walk around the sales floor you hear most frequently. I think with our major vendor partners, there's been a lot more cooperation. It's never perfect. It's never all that we want it to be, but with HP, IBM, Lenovo, we have had great cooperation we think over the past 12 months.

Bill Fearnley - FTN Midwest

Thanks. Thank you.

Jim Shanks

Just to add on to that. So in aggregate, we definitely here compete against Dell more and more, specifically more on the much larger opportunities that are out there. When you get into it and look at it at a segment level, that's when we start to run up against many different bars and you will find it will be one set of bars in one segment and a completely different set of bars in a different segment.

Bill Fearnley - FTN Midwest

And do you see Dell getting more competitive on price as a factor in the price aggressiveness that you are talking about.

John Edwardson

We don't think Dell has never been not competitive on price. So not more, not less, they are always there.

Bill Fearnley - FTN Midwest

Alright, thanks guys.

Operator

Thank you. Our next question comes from Dan Renouard from Robert Baird. Please go ahead.

Dan Renouard - Robert Baird

Hi. A quick question on use of cash and I know you have talked at length on your Analyst Day about this. But I wondered if you could just refresh us, no buybacks this quarter. Is that something in -- and you -- can you just refresh us on where you are at in terms of thinking about buyback versus future acquisitions?

John Edwardson

Yes. You can see on the balance sheet here that cash balances have gone back up nicely and we unfortunately have a little bit of cash, or more than a little bit that we are going to have to pay to some creditors of Micro Warehouse. But in general, our philosophy has been to do buybacks every year in a number of shares equal to the number of options that we issue every year. We do want to save cash obviously to make some acquisitions as we go through the year. And so I -- and our theory and philosophy on buying stock back has been a very opportunistic one.

Operator

Thank you. Our next question comes from Bruce Simpson from William Blair. Please go ahead.