Q4 2019 Earnings Call
[music].
Greetings and welcome to the insight enterprises for fourth quarter and full year 2019 earnings conference call.
This time, all participants trying to listen only mode. A question answer session will fold formal introduction.
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A reminder, this conference is being recorded it does sound my pleasure to introduce your host Glynis Bryan Chief Financial Officer. Thank you you may begin.
Thank you Donna welcome everyone and thank you for joining the insight Enterprises earnings conference call.
Today, we will be discussing the companies operating results for the quarter and full year ended December 31st 29 I.
I'm Glynis, Bryan Chief Financial Officer site and joining me.
So that chief Executive Officer.
If you do have a copy of the earnings release that was posted this morning and filed with Securities and Exchange Commission on form 8-K, you will find it on our website at <unk> Dot Com under Investor Relations section todays call, including the question after a period to be what Castlight and can be accessed by the Investor Relations page of our website at <unk> Dot com.
And our cut copy of the conference call will be available approximately two hours after completion of calls.
They remain on our website for limited time This conference call and the associated webcast contain time sensitive information that is accurate only as of today February 12 Twentytwenty.
This call is a property of insight enterprises, any redistribution retransmission or rebroadcast of this call in any form without the express written consent did affect enterprises is strictly prohibited.
In today's conference call, we will refer to non-GAAP financial measures as we discuss the fourth quarter and full year 2019 financial results.
When I refer to non-GAAP measures will afford us such measures as adjusted.
Non-GAAP measures to be discussed in today's call include adjusted earnings from operations adjusted diluted earnings per share and return on invested capital you will find a reconciliation of these adjusted measures to actually get resolved.
Included in the press release and the accompanying slide presentation issued earlier today.
Also please note that unless highlighted in constant currency, all amounts and growth rates discussed on U.S. dollar term. Additionally, any references to our core business or to the organic change year over year No performance would exclude pcms results subsequent to the acquisition August Thirtyth 20 convention.
Finally, let me major about forward looking statement that wasn't made on today's call. All forward looking statements that are made during this conference call are subject to risks and uncertainties that could cause results to differ materially business are discussed in today's press release any greater detail into most recently filed periodic reports and subsequent filings with the FCC.
With that I would not have the color, but again and if you're following along with the slide presentation. We will begin on slide four.
Hello, everyone and thank you for joining us to discuss our fourth quarter and full year 2019 operating results in the fourth quarter, we continued to execute against our strategy to Liberace solutions to our clients globally, leading with services and solutions to try business outcomes for clients.
In addition, we focused on bringing PCM teammates into the inside organization, they completed or integration planning, while delivering solid financial results to close out the year.
Specifically for the fourth quarter 29 chain, including the results of PCM for the full quarter consolidated net sales were 2.3 billion.
31% year over year consolidated gross profit of 338 million fourth quarter was up 33% year over year end up 40, 34% in constant currency.
Gross margin expanded 20 basis points year over year to 14.7%, reflecting a higher mix of sales of insight deliberate services and cloud based another netsol proper instead, our core business.
Adjusted earnings from operations were 82 million up 29% year over year, and then a GAAP basis earnings from operations were up 14% compared to the same period last year and adjusted.
Diluted earnings per share it was $1.57 up 10% year over year, and then a GAAP basis diluted earnings per share was $1.20.
In the fourth quarter PCM delivered results in line with our expectations, including approximately 560 million and net sales of 8 million any AFFO. In addition, we incurred approximately 6 million and additional interest expense related to the acquisition.
Moving on to slide five.
Fourth quarter results reflect the scale of the momentum in our business and closure to another record year for a company.
For the full year 2019 reported record net sales of 7.7 billion, an increase of 9% over 2018.
The addition of PCM combined with our team's focus on our solution strategy and expanding our services offering drove gross profit faster than sales at 15% year over year and improved gross margin by 70 basis points to 14.7% also a new record for the company.
We also expanded services gross profit 90 basis points year over year to 47% of consolidated gross profit up from 46% reported last year.
Blind growth in gross margin expansion combined with continued expense discipline drove adjusted earnings from operations up 11% in 2019 compared to the prior year.
Adjusted earnings per share for the full year 2019 was $5.42 an increase of 9% over 2018 results and represents another record for us.
Onto slide six.
That's right look back at our business sort of full year 2019 were pleased with all that we accomplished we completed the acquisition of PCM that third quarter and are actively working to implement our integration plans in early December 29 team. We on boarded the kind of the business tore I T systems in January 2020, we completed the systems work for PC I'm going to me.
And in early February we began the migration of Pcms U.S. clients over <unk> say platform.
We're on track to meet or previously stated goal to add more than 70 cents of adjusted diluted EPS tour results from PCM business in 2020.
Strategically we can tend to be very excited about the opportunity for growth in the combined client base a piece Yemen insight as a reminder, the PCM acquisition expands our share of the Midmarket a target market that we believe dies or expertise or a modern workplace cloud and data center and digital solutions. We've completed the internal organizational alignment to ensure we bring our solutions. This mark.
But what the right technical skills sales engagement and standardized at Liberty to grow profitably and that scale and look forward to realizing on the cross sell opportunity beginning in 2020.
Next our focus on culture teammate benefits and leadership development continues to be recognized with key awards, including placing number 70 unfortunates hundred best workplaces for diversity and number 23, Unfortunates 50 best workplaces in technology.
In addition to these national placements were recognized originally that's the best place to work in Chicago, Phoenix, Australia, and the United Kingdom.
As part of our immediate intermediate term capital planning refinanced our debt facilities and 29 team.
To be more flexible and less expensive options, including 350 million and convertible notes and a new 1.2 billion revolving asset based facility.
These facilities were comfortably cover current working capital needs it provide capacity for additional acquisitions in the future.
Well executed key elements of our long term strategy. We also delivered against our financial commitments for 2019.
Moving to slide seven.
As we head into 2020, we believe the our T. market is healthy across the markets, where we do business industry analysts expect flat to low single digit growth and hardware sales and 2020 and mid single digit growth in software and service itself or plans and 2020 are focused on driving growth in excess of the market across our operating segments.
In 2020, we will continue to empower clients to manage their I T environments more efficiently for today as they continue to drive meaningful business outcomes and transform their own visits for the future.
To do this will leverage our four solution areas to further enhance our value proposition to clients around the world.
As a reminder for solution areas are.
First digital innovation.
Where we leveraged emerging technologies to build innovative applications to prove clients business performance engage customers and uncover new revenue streams second cloud and data center transformation well, we help business is modernized to secure a critical platforms to transform I T. Two end to end services from architecture to a management we.
Up leverage the right platforms to increase agility and support innovation.
Third supply chain optimization work through insights core business as we all clients effectively and efficiently acquire all of their information technology leads leveraging our scale and supply chain expertise.
Fourth connected workforce, we help clients liver secure modern experiments to the workforce driving productivity in the workplace and helping to attract and retain talent and the competitive marketplace.
An example of our connected workforce solution area in action includes a project, we recently completed with an international airline.
Our client needed to meet a critical deadline to refresh the iPhone and iPad devices used bites flight attendants across the globe.
Our connected workforce team leveraged insights the managed deployment services to handle global distribution as part of the service our dedicated integration labs configured more than 45000 devices and Pakistan with cases screen protectors and credit card readers to ensure they are ready to use upon receipt.
Our solution provided centralized configuration streamlined deployments with greater visibility for the clients and ultimately reduced operating costs by extending the life for these devices.
This is just one example of how are connected workforce solutionary helps clients optimize the workforce productivity and end user experience.
As part of our 2020 plans, we plan to organize our resources leverage our strategic partner relationships in the line or offerings to our clients needs to ensure we participate in key areas of market opportunity across our geographic footprint.
We have deep capabilities operational scale them why geographic reach supported large enterprise clients, who are looking to optimize their workforce experience modernize their data center and drive internal innovation through digital solutions for their business.
PCM provides us an expanded but similar opportunity. The midmarket 2020, we expect to align dedicated solution expertise with our Midmarket motion to drive additional growth through our solution areas first were work to consolidate our sales and service delivery teams across the business to ensure a common client experience and ability to sell across the.
All the while offerings.
We also see an early cross sell opportunity to bring certain package cloud solutions wrap with Incyte managed services to this market segment.
To support a go to market strategy globally, we have strong operational platform that includes scalable I T. In E commerce systems and processes robust digital marketing capabilities and a culture of continuous business process transformation and automation.
2020 will continue investing these critical layers to deliver a great client experience, while also optimizing our infrastructure to scale with future growth.
In January celebrated my 10 year anniversary it inside I'm proud of our accomplishments over the past decade and of our team's performance and 29 team. We've made significant progress as a company transforming our business from an I.T. reseller too well respected intelligent technology solutions provider with deep expertise across the multiple technology areas our clients value most.
Today, we have a single United Global leadership team integrated and scalable I T systems and operations a highly engaged workforce in a clearly defined go to market framework around our four solution areas. We believe are well positioned to compete in the marketplace. As we had 2020 and beyond I'll now turn the call back over Douglas.
Thank you Ken as Ken noted earlier, we're pleased with the Patterson made in 2018, making strategic investments in our business will help keep in the future. While also delivering another yes, good financial results for stakeholder.
Well take a few minutes to summarize the fourth quarter and full year results of our geographic operating segment, and then cover taxes and Castille farm.
Starting with North America on slide nine in North American the fourth quarter net sales were $1.9 billion, 38% year over year, including PCM and down 2% in the core business due to lower hardware sales to large enterprise clients.
Gross profit in North America was up 44% year over year, with PCM and up 4% year over year organically.
Gross margins increased 70 basis points year over year for the combined business due to a higher mix of hardware sales to mid market clients.
In fact core business and with P sand as Ken mentioned mid market clients tend to transact at higher gross margins to other client segments.
In addition, we focused on controlling costs, including early integration savings that allowed us to grow adjusted earnings from operations.
80% year over year to $30 million to $69 million, including PCM and 14% year over year organically.
The full year on Slide 10, North America sales grew 12% year over year, including PCM performance of the year that people are with us and net sales were down 1% still there and.
Yes, I think again lot volume large enterprise where it.
Gross profit in North America grew faster than sales up 19% for the full year, including PCM and 5% organically, while gross margins increased 80 basis points to a new annual record a 14.5%.
Expenses grew 22% in the combined business, which led to adjusted earnings from operations growth of 14% for the full year of 29 team, marking the fourth consecutive quarter, a double digit earnings growth in North America business.
We're on track to deliver committed synergies at more than $35 million in the North America business and 2020, and we expect to realize the savings at an increased rate over the air such that more than half will be realized in the back half of the air.
Well, we also remain confident they will deliver on a full $70 million committed synergies by the end of 2021.
Moving onto Amir Slide 11, net sales in the fourth quarter grew 11% in constant currency.
Gross profit grew 4% in constant currency slower than sales is lower hardware margins are public sector clients and this drove adjusted earnings from operations down about $400000 year over year to $10.8 million PCM did not have a material effect on these adjusted results.
Moving on to slide 12.
Full year in constant currency EIMEA business reported net sales of $1.5 billion up 5% year over year in constant currency strong growth with mid market clients across the region was partially offset by lower volume of large clients in our.
UK operation.
Gross profit grew 8% faster than sales, including a higher mix of cloud and services sales, which drove adjusted earnings from operations up 10% year over year in constant currency to 41 million dollar.
Well Brexit continues to provide a backdrop certainty for the UK economy. We did not believe it has impacted our results materially today, and we believe our EMEA business, it's healthy heading into Twentytwenty.
Moving on to APEC on Slide 13, net sales of $34 million and gross profit of $9 million in the fourth quarter decreased 2%, a 7% respectively year over year in constant currency due to lower stuff for sales and related deaths in the region and this led to adjusted earnings from operations of $2 million in the quarter.
Got a wholly on slide 14 constant currency impact business grew net sales by 2% compared to 2018 strategically our team delivered on certain large hardware and software and services offerings dislike global clients and expanded digital innovation services sales with growth in your markets as a result adjusted earnings from operations.
The full year of 29 team was $11 million up 2% in constant currency.
Before I go to Texas I wanted to provide some color about her about how our strategy is impacting our business mix and profitability in 2019, our services sales grew 20% year over year as Ken noted.
Our solution area strategy has resigned our focus on modern services solutions.
The best meet our currently.
This strategy is also important because of the positive effect overall profitability in 2019 services gross profit was 47% ever consolidated GP, an increase of 90 basis points over 28 team.
As a result, our services growth was the main driver of our gross margin expansion year over year to new annual record a 14.7%.
As we move on to our tax rate on slide 15, our effective tax rate for 2019 was 24.7% compared to 22.8% in 2018 to increase and the tax rate from 2018 to 29 team was primarily because of nonrecurring benefits recorded in 2018 to true up traditional amounts related you expect.
So far that occurred.
Rounding out of cash flow performance on slide 16, our operations generated $128 million of cash in 2018.
We've made additional working capital investments to support the PCM business since closing.
As we head into 2020, we will be focused on bringing the PCM accounts receivable aging metrics in line with ours such that for the full year of 2020, we expect cash from operations will be three and 180 $200 million.
Also in 2019, we invested approximately $69 million and capital expenditures, including the purchase of a new building for corporate headquarters for $48 million.
20 to 20, we will invest approximately $35 million and the build out of this facility.
In addition, we have been exploring the sale of several properties and have early interest from various party.
Subject to negotiation of all purchase agreements and fulfillment about closing conditions, we expect to net realized net proceeds of approximately 18 80 $81 million and we'll update you on our progress in future calls.
Sales.
Of these properties and related cash receipts are not included in guidance we gave today.
We ended the year, where the cash balance of $115 million at the entered the fourth quarter of which 100 in $2 million was residents are foreign subsidiaries, and we had $859 million outstanding under our financing arrangement.
This compares to $143 million of cash and actually $97 million the debt outstanding at the end of 28.
Our cash conversion cycle with 38 days in the fourth quarter 20, rising upside gave year over year. This increase resulted from the net effect a two day increase in DSL and a seven day decrease and DPL you traditional investment in working capital that's the piece and business equating to about three days and if I like the timing of privacy apart.
During the respective quarters in our core business.
I'll now turn the call back to catch with your 2020.
Thank you Glenn it's moving on to Slide 16, we're pleased with our execution in 2019 and believe our business is healthy across each of the markets in which we compete with.
With respect to our 2020 outlook, we expect to deliver net sales growth between 20 and 25%. We also expect adjusted diluted earnings per share for the full year of 2020 to be between $6.55 and $6.65.
This outlook assumes interest expense between 35, and 40 billion and effective tax rate of 25% to 26% for the full year 2020.
Capital expenditures, a $55 billion to $60 billion, including approximately 35, maybe for the build out of a new corporate headquarters at an average share count for the full year of approximately 36 million shares. This outlook excludes acquisition related intangibles amortization expense of approximately 37 million and noncash convertible debt discount issuance cost report.
As part of interest expense of approximately 12 million and assumes no acquisition related or severance and restructuring expenses to assist with your modeling we have posted a schedule on our website, an investor relations page that shows the expected amortization expense, a noncash convertible debt discount and issuance cost by quarter for 2020.
Thank you again for joining us today I want to once again, thank our teammates across the world for everything they do for inside amounted to be part of such a great team that concludes my comments I'll now open up your line for questions.
Thank you at this time it will be catching a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad <unk>.
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Our first question is coming from Adam Tindle of Raymond James. Please go ahead.
Hi, Thanks, and good morning, I just wanted to start can to ask a little bit on organic revenue trends.
I think you ever to look at the quarter. It's it's the second quarter now a little bit lighter revenue trends I think on an organic basis, it might be still down year over year and you can correct me if I'm wrong there.
You had some easier year over year comparisons in Q3 in Q4, so just trying to understand where that weakness. This stemming from given it's a little bit different than what we're seeing from your largest competitor there maybe something.
Gration with PCM driving that so that'd be the the first question I've got a follow up.
Yes, thanks out for the question, yes, not PCM related at all again as we mentioned we're pleased with work PCM came in at for the quarter.
And again as you suggested were pretty flat from a revenue point of view point of view for the year a lot of that of course has to do with the netting and you certainly saw that with the gross margin improvement.
For the business overall would show, which certainly benefited there and I would say it had to do primarily with some large hardware.
Clients that we did business with in the prior year that Didnt repeat as we know its large enterprise clients drive substantial volumes and it depends upon where you're positioned for there given that sort of cycle as they don't repeat each other every year. So I would say, it's really has to do solely with that again, we're pleased with where PCM came in.
For the quarter very pleased with where we are from an integration point of view as I mentioned, we completed.
Multiple ERP systems into our Canadian operations in December we converted the UK operation January and we're well on our way for the U.S. integration as well, where we started that a few weeks ago at this stage. So I'm pleased with how that is coming together.
I think to that point your 2020 guidance suggests some bounce back and I wanted to ask about that as a follow up maybe just touch on what underlies the competence and an improvement in organic revenue growth and trends I think the push back that we might get on that from investors is concerned that the PC cycle is ending in 2020, and we're going to have some deferred.
All comparisons are on Pcs, but it sounds like you're pretty confident cross selling opportunities. So maybe just touch on some of the buckets.
Some of the bounced back in 2020.
Yeah.
Yes, certainly I think you're correct you've been certainly watching the PC refresh cycle for quite some time and certainly the last three years the channel the same double digit growth in those categories.
Certainly we're approaching the end of the the win 10 cycle, there's still certainly some some runway still left there but.
As we've said it's really.
It's more about sort of a consistent refresh cycle that we see from our largest client. So it's all depends upon where your position with those large enterprise clients and our business from recessed refresh perspective. So we still think that there's certainly some gas lift in the device like a refresh I don't think it's going to be double digit this year like we've experienced in the last three years, but.
I don't think it's going away the other part to keep in mind as we talk about you know the three clouds theres. The of course, the private cloud, which we all know and that in a data center World, We're still alive and well the public cloud. We're all very conversant on the one that doesn't get a lot of play a course, yet is the intelligent edge that will ultimately be the larger.
As cloud as things move more and more to the ads with technologies like AI and Aiotv that will drive a significant amount of hardware that we haven't seen in the past we're still in very early innings I'd say, we're probably in the second anything there.
But we remain bullish that the instead of hardware will be alive, and well going forward, primarily driven by what will occur in the intelligent edge.
Which again is just starting to formulate and we're starting to see some interesting successes, there and our solution areas for that.
For those type of engagement, so that would be sort of the reasons why we we believe that theres certainly growth.
In the business, we're certainly see as you mentioned cross sell opportunities.
We're taking our cloud and Dennis said or team primarily resources, we obtained from the Datalink acquisition, a few years ago, and bringing that into the traditional insight clients and also the PCM clients, where they have deep expertise in this data center area to really helped drive.
And really engage so we've seen some nice growth.
Towards the tail half of of 2019 and Thats continuing into 2020.
That's helpful and maybe just one last one on services you mentioned, how mixes up for the full year end 2019, just wanted to clarify on Q4 services revenue grew nicely year over year, but the gross margin was down pretty sizably year over year could you maybe touch on the dynamics driving that is there CCM services revenue.
Coming in year over year, that's dilutive to the total company services gross margin is there's a temporary waiting on this.
Kind of what you think about a normalized services gross margin as we think about 2020.
I don't think that the impact of P. Sand is gonna be appreciable R&D on these services gross margin percent. They have a they there they have about 200 million of services business a lot of that is a warranty and.
Fee based business related to Microsoft So I don't think it's gonna have an appreciable effect in terms of driving down our our services gross margin because it's a smaller percentage of their total it will impact our overall services as a percent of total revenue and gross profit, but it won't have an impact I don't think it'll have an impact on driving down services gross.
<unk> margin in particular.
Okay and in Q4 services gross margin was down about 500 basis points are so year over year there.
Reason that would drive that as or something temporary.
In Q4, it it's really ultimately around the mix of crowd and Ah in that particular segment of the business in Q4.
Okay, Okay, and does that nothing nothing I wouldn't say anything related to piece yeah.
Okay. Okay, alright, thank you so much.
Okay. Just go back maybe in expand a little bit on I'm guidance, because I do want to make sure that we all understand what's included in the guidance. So we started out with a 20% to 25% revenue growth that is higher in quarters 123, obviously and then low in Q4, 'cause it and it anniversaries in September.
We actually anticipate that we're gonna have about 15 to 20 basis points contribution from PCM over the period in terms of gross margin. We've schedules that include the amortization of the intangible there is it's pretty consistent for the first couple of quarters, but in Q4 changes that schedule is out there it's about 37.
In dollars as Ken mentioned in terms of his comments as we go through that.
As we look at the synergies we are on track to get to the $35 million of synergies and in 2020 that we anticipate in fact, we think we're gonna get between $35 million to $40 million of synergies coming out of PCM cost synergies coming out of P sand and twentytwenty, but the how we how those ramp.
A little bit more back end loaded towards you know three and four but starting in Q2, two Q4, specifically as we complete the onboarding of all the PCM a systems onto our Sep system. So the net of all of that is that a we anticipate that in Q1 as it relates.
It's too.
Interest expense savings that occurred throughout the year synergy savings that occurred throughout the year as well as at lower Q1, 2018 or 2020 as it relates to a large project. We had in 2019, we anticipate that in Q1, we would forecast adjusted diluted earnings per share in the mid to low low to mid single.
Does it.
Growth range with it ramping significantly in Q2, three and four thereafter, that's very helpful. Just one clarification on the 30 to 35 million dollar PCM synergies is that a run rate exiting Q4 or is that a total amount for 2020.
If I said 30 to 35 my error I 35 to 40 exiting Q4.
Savings in the quarter, so savings in the year exiting by the end of the or sorry, not exiting by the end of there.
And thirdly, we said 35 was what we anticipated.
As of right now based on what we're seeing schedule that we have around the assistance migrations et cetera, we anticipate getting somewhere between 35 and $40 million in twentytwenty.
Very helpful. Okay. Thank you.
Thank you. Our next question is coming from Matt Sheerin of Stifel. Please go ahead.
Yes, thanks, and good morning.
Just following up on those are the questions regarding the revenue growth. This year a Ken if you look like as I, just said you've got some tough comps still on the enterprise hardware side and what's your take on the other markets the PCM.
Core.
SMB market.
Are you still seeing a upgrade trends in terms of a win 10.
Is that lagging and what's your overall I take on those markets and when do we start to see easier comps on the enterprise side.
Yes. Good question, Matt So the the mid market space again, we've got a traditional insight has a pretty substantial midmarket business as well, let me see really good growth and have through 29 team.
On that business and of course PCM adds to that so we certainly are bullish in that segment. The SMB segment of of the marketplace piece and of course ads quite a bit of.
You know girth to us and what were what we're doing there with our traditional business. So we're we're certainly bullish and we're seeing that the that's going to continue so yeah on the refresh cycles, we'll see that.
See that continue.
With that sort of mid market space. So very very pleased with how that's that segment of the market is progressing and of course, you see that you know with CDW of course, who's got a very dominant position in the bid market space and you saw their growth numbers.
What's your take on the enterprise and I mean previously I mean, you just said you know on the previous question about I'm expecting a hardware growth in enterprise is that going to be more of a shift toward more of the solutions. The on premise off premise hybrid solutions versus the more commodity parts like Pcs.
We think for US as we look at our enterprise clients, we definitely will see growth in hardware sales in 2020 on that segment of the business for us and yeah. It's certainly there's also a couple of of course of growing in the and the cloud.
Aspects of that business as well, but certainly the hardware sales will that will certainly grow this year for us in the enterprise segment.
Okay and I just wanted to ask about your your take on the Corona virus and the crisis in China. I know you don't have much direct exposure you do have somebody pack exposure, but in terms of any potential product constraints supply constraints or any other issues that you are seeing or planning for.
If this 50 extended shutdowns.
Yes. So we have as you might know we have three operations in China, we have we're three locations there.
Operation in Hong Kong, as well and they're all certainly.
Working from home at this stage that's extended another week as you know.
So certainly impacting certainly.
Business in the region no question about that.
For us of course, it's a very it's a small portion of our business. So we're not going to see any material effect there.
As far as the supply chain is concerned you ever monitoring that very closely as you can imagine I think.
It overlapped a little bit with the Chinese new year, so money or the Oems of course account for that already. So this is sort of now an extension of maybe sort of instead of a one week sort of Chinese new year, which everybody accounts for looking more like a three year between sort of China Chinese I saw a three week.
Chinese new year situation, so that starts to if it goes beyond that I think it definitely starts to impact the supply chain, but at this stage, we're monitoring closely but I haven't seen.
Any any impact or.
Sort of 40 enough product or anything at this stage, but again, it's a pretty dynamic situation if that continues.
Beyond that then I think we might see some impact there, but today that say.
Nothing at this stage, Okay, and just a quick clarification on cleanest or your commentary below I mean earlier about how the year plays out in revenue and margins.
And in the synergies I think you said that because it really tough comps last year, where the hardware refresh.
Cycle that you're expecting a the organic growth to be down year on year in Q1 is that correct.
Yeah. It wasn't I wasn't making a commentary around revenues so much that was making it how much around GP production. It was not related to hardware. It was related to software specifically in a large deal that we transacted in Q1 of 2019, a that was impacting overall gross margins and hence our results in the core business. Okay. Okay.
Got it okay. That's helpful. Thanks, very much okay.
Thank you. Our next question is coming from Paul Coster of Jpmorgan. Please go ahead.
Oh, yeah. Thanks, I think most of my question's been also but so are you include it's been love consolidation in the space recently some of its probably taken place now in the private equity World. What does this due to two things one is sort of pricing Sixtym you experience a couple of competitive.
Pricing and what does the students sums of your M&A prospects moving forward.
Yes on the certainly the M&A prospects on you know, we're certainly going to take our time to make sure we fully digest PCM before we do anything of some of real substantial size, but certainly always continue to monitor that so we think again as you stated there will be continued a consolidate.
And in the industry, that's just the norm and that will certainly be an area that will participate in but for the foreseeable future you might see has continued to do more sort of tuck in acquisitions as we continued to digest PCM and make sure of course, we we start paying that down here over the next couple of years.
On the pricing side it wasn't exactly clear when you talk about consolidation are you referring to consolidation of the client level, where there might be further buying power or was it really sure. There's been a study that some truth to it but I'm thinking more in terms of he knows there's fewer participants than you would expect when stock price.
Rationally.
For business.
Okay suspects it sort of like mentioned, the that's not a consideration, but I'm interested in your I'm sort of.
Yeah, No I think certainly if you look at history that would certainly prove the case fallen today, that's still a pretty fragmented markets. So it has a long way to go.
In that regard, but certainly does does have an impact when when you do have more rational players coming together and consolidate and that's certainly has an impact but I think in our segment of the industry, where it's still pretty fragmented. We're you know the top sort of 10 players represent a pretty small portion of the overall share it's still as ways to.
Go I think before we see meaningful impact from a pricing sort of rationalization point of view.
Certainly that's happened on the distribution front, where there's.
No really now primarily you know three sort of core distributors. So three to four that we buy from that certainly been rationalized.
My follow up question moves to do with a couple of your Oems.
I would just be a variation on the cloud migration, the but we're seeing some of the Oems push the absolute service.
Business power time more aggressively at the moment, what does that do for you is it good bad just a neutral outcome.
We certainly participate pretty heavily as we discuss now you know cloud sales for US, which is primarily sort of a subscription based services based sort of business that was 18% of our GP dollar. So we continue to you know whatever which where customers want to go will support them if they want to do it on prime.
Yes, they want to do in subscription base. So.
So for us, we're agnostic to which way it goes but we're certainly participating pretty heavily as clients do that migrations. We're certainly participate in that business and we think certainly for the future they'll become a more meaningful part, whereas if I went back five years ago. It was it was very very small portion of our GP dollars being generated from.
Lot sales and now it's in 2019, it was 18% and.
And I'm not talking private cloud im not talking about datacenter private cloud infrastructure at all this is really sort of in that what we call the public cloud well being a substantial portion of what we do.
Okay. Thanks very much.
Once again, ladies and gentlemen that is star one to register a question at this time.
Our next question is coming from Mark we've been Berger of B. Riley. Please go ahead.
Thank you good morning.
I'm wondering if you could provide some clarification on the gross margin contraction in APAC and EMEA, maybe expectations for those markets going forward.
The gross margin contraction in both well and I've talked to EMEA first it is related to just the mix of business in terms of less cloud related.
Kind of fee based business in EMEA and more hardware business transacted in Q4 in particular adds a little margins 'cause it lets try Matt primarily transact at the growth came from public sector business.
APAC.
I think it's also the mix of cloud business in the portfolio versus other other forms of business in terms of selling through in that location as well.
It's really around the mix of business that drives the gross margin.
When you have more using your makes you had higher gross margin. When you have more fee based business around cloud et cetera, you have high gross margin as that mix changes in any given quarter. It has a direct impact on gross margin, but I wouldn't say that there is a trend toward declining gross margins as a matter of course either in EMEA.
Or in a back.
Understood. Thank you.
Can you mentioned edge devices potentially being a growth for for hardware has the potential slower five year olds, fiveg rollouts, maybe slowing that growth or maybe talk a little bit more about what you're seeing with deployments there.
Yes, I mean, I think fiveg ultimately will accelerate that but in our mind. We're we're now planning for that for a couple of years before that becomes any kind of meaningful driver for that.
So we're basically just looking at you know what is occurring with with Aiotv today, when I talk edge devices, So thats really not dependent upon fiveg rollouts.
This stage, but again, that's probably realistically again I think two to three years from now before that becomes meaningful and that will be certainly an accelerator of this trend towards the intelligent edge, but in of itself. The intelligent edge is alive and well ins and starting to make some again, we're starting to see some some meaningful movements in that area.
Understood and last one from me excuse me last one for me historically, what have you seen around spending around election cycles, and and kind of how have you been planning that into the guidance.
Yeah, we really havent.
I haven't seen that have a significant impact and during the during the cycle for us. So so for US we actually do you know planning that doesn't influence.
Any of our playing in that regard.
Okay. Thank you.
Thank you. This concludes today's session and today's conference. We thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
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