Q3 2019 Earnings Call
Thank you.
Greetings and welcome to the insight enterprises third quarter 2013 operating results conference call. At this time, all participants really listen only mode of question answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero like a telephone keypad. It's all my pleasure to introduce your host goodness, Brian . Please go ahead.
Thank you [noise].
Welcome everyone and thank you for joining the insight Enterprises earnings conference call today, there will be discussing the company's operating results for the quarter ended September thirtyth like Nike I'm going is fine Chief Financial Officer insight and joining me is Kilimnik, President and Chief Executive Officer. If you do not have a copy of the earnings release that was close to this one.
Filed with the Securities Exchange Commission on form 8-K, you'll find it on our website insight dotcom under our Investor Relations section.
This call, including the question. That's your period is being webcast live I can be accessed by the Investor Relations page of our website at <unk> Dot Com and archive copy.
Oh the conference call will be available approximately two hours after completion of the call romaine on our website for a limited time.
Conference call and the associated webcast contain time sensitive information that is accurate only as of today November six 2019. This call is a copy of insight enterprises.
Redistribution retransmission or rebroadcast of this call in any form without the expressed written consent insight enterprises is strictly prohibited.
Today's conference call, we will refer to certain non-GAAP financial measures as we discussed third quarter 2019 financial result.
Well I'm, referring to these measures in today's call we were purchased them as adjusted.
These measures include adjusted earnings from operations adjusted diluted earnings per share adjusted free cash flow and return on invested capital. These adjusted measures include or exclude intangible amortization expense.
Position related expenses, severance and restructuring expenses and amortization of convertible debt discount and issuance costs.
You will find a reconciliation of these measures to actual GAAP results included in the press release and the accompanying slide presentation issued earlier today also please note that I've highlighted as constant currency all amounts of growth rates I, just got to us dollar terms.
Additionally, any reference to our core business exclude P. C N b cells subsequent to the acquisition.
Finally, let me remind you about forward looking statements that will be made on today's call. All forward looking statements that are major this conference call I subject to risks and uncertainties that could cause actual results could differ materially.
These risks are discussed in today's press release in greater detail in our most recently filed annual report on Form 10-K , and before report subsequently filed with the FCC with that I'll now turn the call over to Ken and if you're following along with the slide presentation. We will begin on slide three cats.
Hello, everyone and thank you for joining us today discussed her third quarter 2019 operating results for the third quarter, we continued to execute against our strategy to deliver I T solutions to our clients globally, leading with services and solutions to drive business outcomes for clients.
In addition, we closed the PCM acquisition in August Thirtyth and two months. After the acquisition. We made excited about the opportunity to drive growth and our expanded client base and footprint.
Now turning to third quarter results on slide four.
Consolidated sales were 1.91 billion up 9% year over year, including one month of PCM yourselves.
Gross profit was 276 million in third quarter up twice the rate of sales at 18% year over year, including 6% growth and the core business and the addition of PCM.
Gross margins were 14.4% up approximately 100 basis points year over year, driven by strong cloud services growth in the core business and the addition of PCM.
Good solid sell into general administrative expenses were 222 million at third quarter up 21% year over year, including both organic growth of 8% in the addition of PCM.
All this led to adjusted earnings from operations, a 59 million an increase of 7% compared to last year's third quarter on a GAAP basis earnings from operations decreased 11% to 44 million driven by approximately 6 million a PCM acquisition related expenses, two main a PCM intangibles amortization expense and integration and restructuring expenses recorded.
In the quarter.
Adjusted diluted earnings per share was $1.10, an increase of 10% year over year on a GAAP basis diluted earnings per share was 76 cents.
Third quarter results reflect our strategy to improve our gross margins by leveraging afford solution areas to optimize our business mix and higher margin categories, including cloud solutions and services.
This led to 100 basis point improvement in gross margins in the quarter. The core business in North American EMEA regions grew gross profit dollars mid single digits Europe your constant currency well the APAC region grew gross profit dollars, 24% year over year in constant currency.
These results were driven by a higher mix of gross profit from six services sales, including cloud solutions.
Gross profit earned from cloud offerings was 19% of our consolidated gross profits for the trailing 12 months compared to 17% for the same period last year.
The improved gross profit performance in the core business or the third quarter together with the performance of PCM for one month led to high single digit growth in adjusted earnings from operations compared to last year.
In addition, we improved our cash flow from operations performance by 90 million year over year in third quarter, bringing the total for the first nine months of year to 169 million an operating cash flow.
We also reported return on invested capital of 14.9%, which includes the impact of acquiring PCM in the third quarter.
Demand continues to be solid across key markets, where we compete a third quarter results reflect lower hardware sales was a select few large enterprise clients North America, which is causing compression in our growth rate compared to the overall market trends well it may experience cyclical trends with large clients from period to period, our relationship with those clients remain strong and we expect to return to growth.
The harbor category in the fourth quarter.
Our investments in our four solution areas supply chain optimization connected workforce cloud data center transformation and digital innovation have positioned us well to compete to continue to compete in the marketplace. We're also very excited about the cross sell opportunities we see in the mid market space and the potential to leverage our solutionary strategy into the piece.
Jim client base to grow our position and as higher growth higher margin end market.
Next on slide five.
We close the PCM acquisition in August Thirtyth and are working diligently to integrate their business into ours to ensure we optimize execution of the market opportunity at the combined business and delivered to our commitment to realize 70 million in run rate cost synergies by the end of 2021.
To date, we've completed the organization review of the combined senior leadership team completed our planning efforts around brand and finalize their timeline for E Commerce and core systems integration, we expect set to be substantially complete the systems integration work by mid 2020. We're also on track to deliver more than half the expected cost synergies by the end of 2020.
Moving on to slide six.
Thanks, I want to highlight an example of how we're leveraging our solution areas to help our clients achieve better business outcomes.
Financial services from one or two attracted new generation of customers and transform its customer experience by leveraging the power of artificial intelligence to create a multichannel jackpot.
As digital natives millennials generally prefer the use of social media platforms to connect with family friends and to track and to transact banking and commerce.
Our digital innovation team helped the client launch a multichannel conversational agent or chat box with rich capabilities for buying and selling stocks located nearby branches getting quotes and more.
You could ask questions around financial topics and the chart is able to provide educational resources to forms of articles in short videos.
By providing seamless access to easily digestible information the financial services organization has experienced a 72% increase new accounts among the one out millennial generation.
With the chart thought customers getting the experience of anytime anywhere access a quick answers to questions on average it takes a human customer service represented 15 to 20 minutes to answer an inquiry. The chatbots can do this in seconds.
This is just one of many examples where our digital innovation team has delivered intelligent technology solutions to clients, which have brought application across a variety of client industries.
Moving on to slide seven before I hand, the call back over to Glynis I want to take a moment to recap key highlights from Investor Day event in mid October 1st I'd like to thank all of you who joined US slide for the event and if you weren't able to make it. Please note that there is a replay currently available on our website.
At the event, we outlined our long term strategy and key measurements, we intend to use to track our progress during the event. We noted that we believe our strategic assets give us competitive advantage in the marketplace. In addition, our strategic assets have been integral to our ability to deliver double digit growth and adjusted FFO and EPS results and more than 700 basis points improvement in.
Our R&D metric over the last five years.
They also position us well to continue to drive value in the future. Our strategic assets include our focus on culture people to the new ship.
Our heart, our innovation led approach and Solutionary expertise.
Our global reach and scale.
Our diverse and loyal client partner relationships and lastly, our operational vigor and financial health.
We will leverage the these strategic assets to achieve our key priorities, which include continuing to innovate in order to capture share in high growth areas like cloud and the intelligent edge.
Growing the business through solutions that drive better business outcomes for our clients.
Expanding that scaling our business in strategic clients and end markets, particularly in the mid market, where the recent acquisition a PCM has added clients and capabilities to our portfolio and lastly continue to optimize client experience and our execution through relentless focus on operational excellence.
Next on slide eight to measure progress against these priorities, we laid out for key metrics.
We will seek to go faster than the market a CAGR over the next five years of between eight and 10%.
Expand EBITDA margin to between five and 5.5% Optimizer return on invested capital to range of between 19 and 21%.
And to continue to grow services gross profit as a percent of total gross profit to between 50 and 52%.
We'll seek to make progress each share against these goals and we'll update you join our scheduled earnings calls I'll now hand, the call back over to Glenn as provide more detail on our financial performance in Q3. Thank you Ken I'll start on slide 10.
I'd like highlight change actually play to our adjusted earnings from operations adjusted net earnings and adjusted diluted earnings per share calculations reported today, we have historically, excluding severance restructuring acquisition related and onetime costs in our adjusted metrics starting in Q3 of 2019, where excluding the amortization of intangibles from.
Adjusted results.
Third quarter, we excluded approximately $6 million of amortization expense from our adjusted metrics.
In addition, as is customary our convertible notes were issued at a discount to par value effectively prepaying debt issuance.
As an entity to growth below market cash coupon on the now.
These amounts will amortize to interest expense and increase in reported convertible debt balance over the life of the note and really exclude this noncash interest expense from adjusted operating results beginning in Q3 and going forward.
I believe these changes in presentation will give investors a meaningful comparison of the cash based operating results period to period and will allow for meaningful comparisons to the bulk of our competitor potential compatibility we will make after a couple adjustments to prior period without says Wow.
Moving on to slide 11 with in North America in North America, net sales were $1.5 billion in the third quarter up 10% year over year. The core business can continue to see less spending for hardware products by select few existing clients, which gave us a top line down 2% year over year at the combined business hard with has increased.
7% year over year driven by PCM.
After sales increased 14% year over year and services sales increased 26% usually in the third quarter, including higher sales cloud solution and in fact delivered services primarily in the quarter.
Gross profit in North America was up 22% year over year and gross margins improved 130 basis point.
240, 14.4%, reflecting the increase next to cloud services sales of the business and a modest contribution from PCM for one quarter.
I'd like to selling and administrative expenses increased 27% year over year, including a 10% increase in the core business, resulting from significantly higher healthcare expenses investments in cloud subscriptions and in trolleys likely tools and increased headcount and after the scenario.
In addition, we added PCM and then on at September .
As a result adjusted earnings from operations increased 10% year over year to $53 million for the quarter.
I'd like to provide some color on PCM and its impact in the quarter.
For the month of September PCM contributed $172 million in that failed $28 million in gross profit and approximately $3 million in earnings from operations, including gift over $2 million, an intangible amortization expense.
We also incurred estimated additional interest costs related to financing the acquisition of approximately $3 million in the quarter.
We will have PCM for the entire quarter in Q4, 2019, and expect seasonal topline performance consistent with prior year PCM.
Please note that historically PCM has experienced lower gross margins in Q4 compared to earlier quarters.
In addition, also announced that we currently expect amortization expense in Q4, and the fourth quarter to be approximately $6 million, which is up $2 million from the outlook. We provided in the second quarter call. As we now have completed a preliminary assessment of the net assets acquired lastly, we have line affect the cost synergies we previously committed.
And on track delivered more than 50% by the end of 2020 .
Moving on to EMEA on Slide 12, net sales in the third quarter increased 9% in constant currency to fight $356 million.
And 11% increase in southwest sales and 8% increase in services sales year over year were partly offset by decrease in hardware sales to larger client.
Gross profit grew 7% in constant currency, while gross margin decreased 30 basis points.
You primarily to lower margin on services sales in the quarter.
And operating expenses grew 8% in constant currency and this drove adjusted earnings from operations to $3.4 million down $1.7 million year over year.
These results reflect performance in line with our expectations from the core business and a modest operating loss from the PCM business.
Looking at EMEA APAC on slide 13, net sales in the quarter increased 40% in constant currency to $42 million.
The APAC region delivered year over year growth across all product categories third quarter.
Gross profit grew 21% in constant currency and adjusted earnings from operations grew $700000.
Yeah.
The tax side, our effective tax rate for the third quarter, 2019, or 27.2% up compared to last year at higher than our guided range due to good nondeductibility certain acquisition and restructuring related expenses.
Turning to our cash flow performance on slide 14, a cash conversion cycle was 42 days and the third quarter 2019 up 48 from the third quarter of 2018, due primarily to the inclusion of Pcms full accounts receivable payables and inventory balances with only one month of related sales.
Year to date through the third quarter 2019, our operations generated $169 million, a cash compared to $247 million of cash last year.
Our prior results reflect higher than normal seasonality for cash flow performance as well as the benefits of our enhanced focus on reducing aged receivable balances.
Our year to date results to the third quarter. This year are more in line with typical seasonality.
For the full year of 29 team, we continue to expect cash flow from operations will be in our normalized annual range of between $160 million and 200 million dollar.
In the first nine months of 2019, we invested $17 million and capital expenditures with the same amount. The same amount has invested in same period last year.
We also used $28 million to buy back stock in the first nine months of this year as compared to $22 million in the same period in 2018.
All of this led to our cash balance of $141 million at the end of the third quarter of which $120 million those residents in offline subsidiaries.
$837 million with outstanding under our financing arrangement.
This compares to $111 million of cash and $269 million at that outstanding at the end of the prior year quarter.
In the third quarter, we refinanced our existing revolving credit facilities.
It into a single 1.2 billion dollar asset based loan maturing in 2024 as of September Thirtyth, we have $553 million outstanding under this facility incurring interest at an average effective rate of about 4%.
Also in the third quarter, we issued $350 million in convertible note maturing and five in half years, which bear cash coupon 0.75%.
These notes have no call feature through year, three Andy can be paid off thereafter under certain conditions.
The initial conversion premium over now to $68 some 32 cents.
In connection with the issuance cost that the convertible notes, we entered into call spread transactions effectively increased initial conversion price of the notes $203.12.
We like the convertible notes because they represent a lower lower cost of borrowing than the ABS and allow us to put a fixed price tranche of debt into our capital structure for the intermediate term.
One last item and cash flow to up 29 team we purchased.
A new corporate headquarters building in Arizona $48 million, we've outgrown our facilities in Arizona and expect to sell the facility we plan to relocate late in 2020 .
Moving on slide 15, I'd like to update you on our capital allocation priorities now let me close PCM transaction.
First we plan to continue to invest inorganic growth, including growing our technical in sales talent and optimizing our scalable infrastructure e-commerce sites and service delivery platform.
Our second priority in the near term will be the pay down debt associated with the PCM position. Our goal is to maintain a modest leverage of less than one time absent acquisitions.
Thirdly, we will continue to pursue strategic M&A opportunities.
We have developed a robust framework to guide or M&A decisions and we have demonstrated the effectiveness of our integration process with past M&A transactions, such as Datalink and Cardinals.
In general we look for M&A transactions that will be accretive within the first full fiscal year. Following the acquisition and we target an ROI. He at 300 basis points about up above our weighted average cost of capital at the end of year. Three lastly, we will return excess cash to shareholders. After meeting the other priorities I just outlined.
With that I will now turn the call back to Ken to review, our 20 banking outlook, Ken. Thank you Glen us moving on to slide 17.
With respect to our full year 2019 outlook included results of PCM for the last four months of the year, we expect net sales to increase between 911% compared to 2018, we expect diluted earnings per share for the full year of 29 team to be between $5.45 and $5.50. This outlook assumes an effective tax rate of 25%.
26% for Q4 2019.
Capital expenditures of 70 to 75 men for full year, including the purchase of real estate in the fourth quarter, approximately $48 million and an average share count for the full year for approximately 36 million shares.
This outlook excludes intangibles amortization expense acquisition related expenses severance and restructuring expenses and amortization of convertible debt discount and issuance costs during the first nine months.
Of 29 team and those that may be incurred during the balance of 29 team and assumes no for the purchase repurchases of our common stock over the balance of the year.
This outlook is equivalent to an adjusted earnings per share between $4, a 90 cents and $4 a 95 cents under our previous guidance methodology used in the second quarter now includes Pcms operations intangible amortization expense and additional financing costs for the full quarter.
Thank you again for joining us today and thank you Paula teammates across the globe for the performance and a third quarter that concludes my comments there. We'll now open your lineup questions.
Thank you will now be conducting a question answer session. If you like replacing the question Q. Please press star one of your telephone keypad.
Confirmation code will indicate your line is in the question Hugh you May Prescott, two if you'd like cubic question from the Q.
Since using speaker equipment and may be necessary to pick up your handset before pressing the star cheese once again that a star ones. We placed into question Q1 moment. Please while we pull for questions. Our first question Tony is coming from Matt Sheerin from Stifel. Your line is now lives.
Yes, Thank you and good morning.
A couple of questions.
Just first regarding the contribution from PCM I know you talked about.
A growth rates could you just give that apples to apples number what what was the the contribution in the quarter.
So it was only we only have keep him in the quarter for one month, it was $172 million of revenue $28 million.
Of GP and essentially when you net adding that had a small contribution as the CFO line, but when you netted out it was less than a sense in terms of totally passed in the quarter because of the interest below the line.
Got it okay.
If number or not but as you go through the kitting out you end up with less than a penny of bps.
Okay.
It's helpful and you talked.
I think im Ken about the expectation for I know you did Glenn it's about gross margin being down in the fourth quarter due to seasonality in North America PCM as you pointed out has higher gross margin. So.
Is that is that a function of the seasonality not business too.
Yes. So the question that we the comment that I made regarding.
Fourth quarter was specifically related to TCM. So if you look historically at the PCM business their fourth quarter has always been 100 plus basis points lower than prior quarters and my comment was related specifically to looking at expectations for TTM remember that that gross margin and.
Fourth quarter, historically and lower than other quarters.
Now, let me comment about the base insight business got it Okay. And then can you talked about relative strength in IP spending still pretty good demand in in North America I could you give us some further insight into the the hardware segments, particularly on the storage side.
We are huge starting to hear from some peers and distributors.
Have a bit of a pickup after a kind of a low or weakness for a couple of quarters.
Yes, yes, I think and you've seen lot of the date of course, some some of the major.
Suppliers out there in that regard so I would say that the business continues to I think to gain momentum there and certainly had gone through low as you saw him, but I think theres certainly.
That is coming back and we're seeing some good strength across some pretty important vendors for so overall, it's not not across the board, it's and it's in pockets, but I'd say overall net net we are definitely seen some pickup in the storage area.
Okay. Okay. That's it for me thank you.
Thanks.
Thank you. Our next question today is coming from Mark Weisenberger from B. Riley your that your line is now lives.
Hi, Good morning, it's actually Kara Anderson on for Mark.
[noise] just the first question that I had is around the property purchases for the new headquarters in Arizona. Just wondering if there are any other plans for real estate for the real estate acquired through the acquisition of PCM.
So yes welcome back Huh.
What we have a plan to PCM owned Fibra five buildings across the country, we're going to be retaining one and we will be selling five over the next within the next year for over the next year.
They will have to be replaced with other facilities.
But we will leverage the fact that they're significantly under utilized get the cash out of those building and use that to pay down debt.
Three of them are in California, and we'd actually.
Means that we should.
Actually be able to recoup some significant dollars to pay down debt with those parts sales.
Got it and then just looking at the sales mix in the quarter.
You know now with one month PCM is that kind of a reflective of the mix going forward or how should we think about that with PCM.
The sales mix you mean in hardware software services is that what you're talking about yes. Thank you.
Okay.
Well it was one month of PCM and be in that quarter I think that their business is a little bit less in terms of revenue associated with services, but the hardware software that is.
Probably a little bit more weighted towards high growth and our businesses.
So in third quarter in the fourth quarter, you should see a little bit more hardware associated coming from PCM.
And I'm not that much impact on our services number going forward because they were smaller services as a percentage of total revenue.
Got it and then can you just go back through the guidance EPS guidance I think you pointed out the underlying assumption for the core EPS guidance embedded in the $5 a 45 cents to $5 Dvps guide on is that unchanged from previous.
Guidance or did the core shift around.
No that is unchanged from previous guidance in Q4 and saw walk you through it in Q2, we said for 85 to 495, and we said that excluded PCM, what we're saying today is for the fourth quarter wet for 90 to 495 that does include PCM, but the contribution from PCM.
It is nominal in in that guidance, let's go within as as we view at the guidance range that we had previously expressed we do have $2 million more of intangible amortization.
Last time, we would've, giving you $4 million for intangible amortization in them in the guidance range that we provided we now have $6 million based on our preliminary assessment.
The net asset value. So that's the change I guess.
In the without items and he gets that for 94 95 number.
Got it thank you.
Thank you as a reminder, that's far ones be placed on your question Q. Our next question today is coming from Paul Coster from Jpmorgan. Your line is allies.
Hi, guys.
This is Paul it's Sean for cost or.
Thanks for taking my question so.
All the just a follow up on the kind of guidance range.
Probably the bulk is from some amortization of add backs, but just wanted to give sense.
Talk Kelly maybe.
Hi anywhere between 15 cents below is.
For the core business is that the right way to think about it.
I'm sorry touching about.
The impact of amortization expense in the for 40 545 to 550 number is that your question. Yes. That's correct I think it's maybe around 40 cents benefit from the I back is that correct and then just wanted to get a sense for putting a number around that kind of the core business.
Okay.
Sorry, just give me a second.
In Q3 on a year to date basis.
He added back for.
Intangible assets.
Okay.
[noise] I'm looking at the at schedule in the back so I would tell you the add back for intangible assets for the nine month period.
Right.
Rose 27.
Yes.
Yeah.
All right, so far and if I too and we're going to have an incremental we're going to have.
Any comment on $6 million in Q4 related to PCM.
Okay.
Okay all right.
In 2019, if you're a there's a slight in the back in the appendix Slide 19, and if you look at slide 19, the the intangible.
The stock so the side effects associated with intangible amortization.
Nine months of 2019, 38, I think you said 20 or 38 before tax before tax and we're going to at $6 million, which is roughly.
12 has to that number for PCM plus whatever the.
The normal quarterly amortization once before that.
Okay, that's that clarification and as we think about kind of that normalized run rate from for some key operating items you know.
Or is it three Q.
Vision in Opex is that since one month or the full quarter impact or.
Just want to get your thoughts on how to think about the combined business Opex run rate of on a quarterly basis or even the annual basis.
The combined isn't it.
So the impact that you softer PCM in September was just the impact of one month of their opex or revenue I'm gross margin gross profit included in our numbers. We will have three month up up PCM a in the fourth quarter and we will that started I realize.
I think some synergies not many but we'll start realizing some synergies around you know the most of the corporate cost that's starting point that start going live effective with the acquisition. So I can't give you a percentage number in terms of what that would translate to in terms of a runway for opex, which I think is what you're asking before right right. Okay.
And then.
If you look at what we told you between CFO and gross margin for PC and that's a one month impact I would assume that if you.
Let's not forget to get that impact for the quarter and then maybe a flight discount for some synergies that we get you're talking about my PCM and comes back.
And then.
And in 2020.
Okay, and then kind of on the high level last question sorry.
From purchasing decisions are you seeing kind of more acres and you know this trend of hardware as a service.
It's kind of being offered by.
Certain large OEM partners. This is how does it kind of impact your business and you see that accelerating from from what your customers are saying thank you.
Yeah. Thanks for the question Paul This is Ken Yeah, we definitely are seeing.
The world starts to move more and more towards subscription to service certainly in this offer from we're starting to see it also apply itself towards hardware. So there's some innovative programs in place I'd still say, it's pretty early innings.
In that regard from some of the the partners that we that we deal with it.
As far as the traction we're seeing a good amount over the course and the storage front, which Matt it's sort of alluded to there's certainly some of that happening and pretty strong way, there, where they're all sort of looking at opportunities to provide choices for clients in order to provided sort of as a service or on premise. So that's definitely it.
Trend, but it's again, it's still early to give you any kind of real data points yet.
Thank you.
Thank you we recently I've a question answer session, ladies and gentlemen that does conclude today's teleconference.
Disconnect. Your lines this time and have a wonderful day, we thank you for your participation today.