CDW Probed By Feds In Connection With Vendor Incentives

Direct marketing reseller giant CDW is being investigated by the U.S. government in connection with its vendor partner program incentives, the company said Friday.

The U.S. Securities and Exchange Commission requested documents Oct. 29 from the Vernon Hills, Ill.-based company, No. 6 on the CRN Solution Provider 500, pertaining to this investigation, CDW said in a quarterly report filed with the SEC. CDW said it is cooperating with the SEC on this matter.

Wall Street was apparently reacting unfavorably to the disclosure, as CDW's stock price fell 4.6 percent afterward, to $44.12 per share. CDW did not mention the SEC inquiry during its earnings call Wednesday, even though the request for documents had come six days before.

[Related: CDW Expects $200M Bump From Dell Partnership, Moving Away From Chromebook Sales]

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CDW did not mention any specific vendor or vendors in its filing, and did not respond to a request for additional comment. The SEC also declined to comment for this story.

Vendor incentives reward resellers such as CDW for achieving vendor-specific outcomes in areas such as revenue growth, market share gains, marketing spend or resource allocation, according to Brian Alexander, director of technology research for financial services company Raymond James.

"CDW has a long history of generating strong margins, and nothing in its recent results strikes us as out of the ordinary," Alexander wrote in a research brief. "Therefore, we are not sure what prompted this investigation."

Alexander said he spoke briefly with CDW's management Friday, and the company did not provide any color on the nature or cause of the investigation. Management did, however, indicate to Alexander that the investigation wasn't considered important enough to be raised during the earnings call.

Alexander said he suspects that CDW's management would have mentioned the probe sooner if they were deeply concerned about the investigation or its potential outcome. Raymond James predicts that CDW will be able to resolve this issue without material financial restatements, but warns that CDW's stock price could be volatile until the outcome becomes clear.

Success in generating strong results from vendor incentive programs has historically enabled CDW to generate operating margins above most of their peers, Alexander wrote, noting that vendor incentives are a very important contributor to reseller profitability.

CDW reported yet another strong quarter Wednesday, with non-GAAP earnings jumping 29.3 percent, to $143.2 million, or 84 cents per share. The company's organic sales also climbed 3.6 percent to $3.5 billion after factoring out changes in foreign currency exchange rates.

PUBLISHED NOV. 6, 2015