Q2 2020 Insight Enterprises Inc Earnings Call

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These bigger dissinger when they should be operator today's conference is scheduled to begin momentarily until that time. Your line will again be placed on music home. Thank you for your patience.

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Ladies and gentlemen, thank you for standing by and welcome to the insight enterprises second quarter Twentytwenty operating results call.

At this time all participant lines are in listen only mode.

After the speakers presentation, there will be a question and eat your sanction.

To ask a question during this time he can press star one on your telephone keypad.

I would now like to hand, the carpet so perkier speaker today, Ms. Glynis Bryan Chief Financial Officer. Please go ahead ma'am.

Thank you welcome everyone and thank you for joining Enterprise's earnings conference call today.

Today, we really nothing to companies operating results for the quarter ended June Thirtyth Twentytwenty I'm Glynis, Bryan Chief Financial Officer Me right and join me is kinda <unk>, President and Chief Executive Officer.

I'm happy with the I'm, sorry, I was posted this morning and filed with Securities and Exchange Commission on form 8-K, no I cannot away right I think my Dot Com under Investor Relations section. Please.

Today's call, including the question and answer period.

On slide you can be exercised investor relations page or whats right I think like Uh huh.

A copy conference call will be available only two hours not leisha call and will remain on our website called limited time This conference call and the associated with <unk>.

Hi sensitive information that is accurate only as of today obviously.

Well.

This call is the property it looks like that's a great.

<unk> distribution, we transmission or rebroadcast of this call any more without the express written consent to them, but I just dystrophy.

Yes, Oh refer to certain non-GAAP financial measures at the end [laughter] recorded 2020 naturally though.

When we first non-GAAP measures as they call we will refer to adjusted funds from operations adjusted diluted earnings per share and return on invested capital you will find a reconciliation of these non-GAAP measures to actual GAAP results included in the press release and he helped me my presentation issued earlier today.

Oh Sanofi no.

I don't know highlighted the [laughter] see all amounts and growth rates are discussing it with all the time.

Finally, let me remind you about forward looking statements that was made on today's call. Although they must have a major this conference call are subject to risks and uncertainties that could cause our actual results could differ materially. He's mr. discussed in todays press release any greater detail now most recently filed annual report on form 10-K and periodic reports.

With the FCC.

With that I'll now turn the call the 10 and if you're following along those lines presentation. We will begin on slide four.

Hello, everyone and thank you for joining us to discuss our second quarter 2020 operating results.

Used to report that's who are dedicated team who do business model and the PCM acquisition, we delivered double digit adjusted earnings growth year over year on the second quarter.

Given the challenging demand environment in the second quarter property parties this quarter will clear.

First we tell you the health and safety standards in a warehouse immobilized most of our teammates work from home what's allowed us to continue to support our clients most pressing I T needs.

I couldn't be focused on reducing our cost to one of the current demand environment, reducing operating expenses by $26 million sequentially.

Third we focused on cash flow generation, delivering very strong cash flow from operations in the quarter.

Finally, we focused on optimizing our earnings results in this product line.

Turning to second quarter results on slide five.

Consolidated net sales in the second quarter were 1.97 billion up 7% year over year due to the acquisition that you see on we focused on growing our services and solutions business mix, which helped drive gross margins up 150 basis points year over year to 16.5% in the second quarter new record for a company.

Adjusted diluted earnings per share it was $1.75 up 11% year over year on a GAAP basis diluted earnings per share Dollarsthirty two.

Within these results gross profit generated from cloud solutions decreased to 19% over consolidated gross profit over the past 12 months no meaningful component of our profitability.

Given our strong execution, bringing cloud digital solutions to clients, we're proud to announce that Microsoft deep insight there 2020 use partner the year as well as the worldwide customer experience partner the year.

Moving to slide six.

During the second quarter remain key they're focused on integrating the PCM business and I'm pleased to report that we've effectively completed the onboarding of all PCM claim sort insights systems over the past year, we have migrated clients up nine ERP systems that PCM Sunset 16 of Pcms different websites and a consolidated nodded their go to market.

Brands into our one inside.

Early this year, we align the pcms teams, where north American they may go to market structure now the constant come platforms into our new organization structure in place. We believe we're well positioned to compete as a single brands in the marketplace.

In addition, we continue to expect to exit the year with approximately 50 to 55 million in annualized run rate cost savings ahead of our first your expectations on the previous as the school as total commitment that's $70 million over two years.

On slide seven.

Over the past five years, we've invested in our digital marketing platforms and capabilities, our ability to lead our clients to the right technology choices to digital engagement.

Internal research and publish content, it's important to our strategy to attract and winning new clients.

In the past here and it's also earned US notable recognition from partners, including global customer experience part of the year Awards for both Microsoft Cisco.

As we've gone or digital marketing capabilities into a powerful resource, including the re imagining of insight dot com last year, we more effectively lead organizations, where they're at on their buying journeys with timely thought leadership through resources like or 2020 insight intelligent technology pulse report measured the impact of coated 19.

The enterprise business readiness, and Accordingly Tech journal, we're giving clients breast perspective, how things like supplier consolidation and managing hybrid Workforces a time when they have more questions and never about how to move forward.

Instead dot com disturbing it's a crucial starting point for clients research overall traffic to our site grew 128% of live chats with virtual agents, who got 550% year over year last quarter.

The monetization of our online experience ultimately earned insight gold status and the web presence category. The 2020 Association of National advertisers B to B Awards as well as an Oracle Marquee award for best demonstrated ROI in service.

And the normal now post cobot insights thought leadership, coupled with our investments in digital marketing in over the past five years position us well to continue the crews, we reach and grow strong relationships with our clients.

On slide eight.

Heading into the third quarter some markets in Europe in nature open for business, while most major cities in North America, or partially open and many businesses are still in the work from home mode for most of their team.

As a result, we expect demand trends to continue to be down in Q3 is line hardware bookings are down year over year more than 10% North America business as clients extend useful life for their assets is uncertain environment.

Software sales, mostly software as a service delivered in the cloud reported in our service categories approved more resilient their expected performed better than hardware sales in the third quarter.

We do not have visibility to how the global economy in overall IP demand response over the coming quarters.

With this high degree of uncertainty, we're not going to provide specific EPS guidance for the third quarter over the second half of the year to assist with your model even whatever we currently expect net sales to be in third quarter compared to last year. Due. The addition of PCM of an additional months in the quarter.

On a consolidated basis. We currently expect gross margin that business to between 14.7, and 14.9 up year over year or do the addition of PCM and a higher mix of cloud and services sales.

Finally, we will continue to focus on controlling our cost alignment the demand environment and currently expect SDMA as a percentage sales will approximate levels reported in the second quarter.

The remain significant uncertainty around the ongoing impacted cobot 19 on the economy and potential resurgence of cases in the back half of the year based on what we know right now we would expect to fourth quarter results.

Up low single digit growth compared to third quarter.

We're pleased to see each of our segments rise to the operating in demand challenges present.

That's it by posted 19 first half of 2020 I want to thank our teammates across the globe for their commitment to incitement climb as we head into the back half to 2020, we have a resistant levels of capital to meet unforeseeable operating requirements during challenging times, and we're confident that our solution area expertise.

This will allow us to support our clients need both in this environment and with economy eventually rebound.

And our financial performance.

Okay, and the teammates for their dedication and resilience during these last several.

Let's start on slide 10.

Last quarter, we knew that by key initiatives to help protect profitability. During these uncertain economic time as Ken noted we decreased our operating expenses.

Quarter compared to Q1 of 2000.

Hi, asking from lower salaries the majority of late.

Great and actions and the Rightsizing of certain support functions for current demand trends the balance of the decrease split fairly evenly between lower travel and have a discretionary expenses and lower variable compensation I look back at the Tms.

Yeah.

As we move to slide 11 in addition to the cost savings initiatives and the enhanced credit review procedures.

Cash and the second quarter, we generated strong cash flow and he said I see tension of $13 million ending the quarter with approximately $435 million of debt outstanding under our revolving ABL facility and our convertible notes.

At the end of quarter, we had $154 million from cash on hand, we also ended the second quarter with eligible accounts receivables to support access to the maximum availability on our 1.2 billion dollar ATM facility.

Exiting the quarter we're comfortable.

Leverage position of less than 1.5 times debt to cash flows for EBITDA.

Under our ABL agreement, our primary compliance covenant is a fixed charge coverage ratio.

Which includes trailing 12 month EBITDA over capital expenditure taxes and interest expense.

As of June Thirtyth, we were at four times.

And our very confident that we can put their capital requirements and liquidity.

As we highlighted last quarter, our cash cycle.

Well this converted meaning we parent Clinton has on terms shorter memory drive more cash flow and self correct.

We saw this dynamic in the second quarter, which helped drive.

Hi, just $4 million in the quarter.

In this working capital Diana and make we also benefited from Morgan.

Related to timing differences.

The quarter.

The food.

And we'll be on the range of 240 $280 million.

For the exceeding the top end of our previously announced annual guidance.

200 million dollar.

Moving on Slide 12, Who'll review, our operating segment results, starting with North America net sales were 1.5 billion in the second quarter up 10% from the prior year quarter year over year hardware sales increased 9% software sales were down 1% answers sales increased 27%.

Net sales growth was driven by the Pts.

Moving on the acquisition to keep their book of business has no has been mostly integrated.

Insects.

As a result, no report results for the acquired piece of business on a standalone basis.

Gross profit of $245 million in North America was up 23% year over year gross margins improved 70 basis points to 16.9%, primarily due to increased mix of cloud and some Cisco for the business. The addition of PCM and higher vendor funding realized.

In the quarter.

With American selling and administrative expenses, excluding amortization expense increased 26% you'll be here, primarily due to the PCM acquisition adjusted earnings from operations increased 16% year over year to $67 million.

Yes.

And this can suggest that we are still on target to realize between $40 million to $45 million in PCM cost synergies between between <unk> and.

And we expect to exit the year with annualized run rate cost savings between $50 million to $57 million answer to your commitment of $70 million.

Moving on to near in Fyfifteen, Yes, net sales in the second quarter grew 6% in constant currency. If he has a $92 million.

A 7% increase in hardware sales and the 15% increase in services sales were partially offset by 2% decrease software sales as claims chose cloud solutions.

Uh huh.

The increase in hardware net sales was due primarily to higher volume of services.

Sorry public sector device sales probably second line.

The increase in terms of net sales is due to higher sales cloud solution increased household referral fees and higher volume of sales in freight delivery services.

Gross profit in any of the second quarter was $16 million up 8%, you'll hear in constant currency.

Earnings from operations was $21 million up 26% from same period last year also on constant currency.

And this disruptive economic environment, we're very pleased to see our EMEA business delivered these record level financial though.

We are the impact on slide 14, any <unk> net sales in the second quarter declined 22% in constant currency to $38 million, reflecting lower volume low growth rollover public sector and enterprise client.

Gross profit was flat year over year in constant currency, while gross margin expanded from the prior year quarter due to increased mix of cloud services sales in the quarter.

Adjusted earnings from operations decreased 4%.

Yeah.

Our effective tax rate for the second quarter, 2020, or 26.2%, which was in line with pre prior quarter of 25.9%.

A little bit more detail or cash flow performance on slide 16 year to date through the second quarter 20 to 20.

Operations generated $498 million cash compared to $182 million last year.

The first half between pricing, we invested approximately $14 million and Catholic cemeteries up from $11 million last year, we've decided to the for the build out of a new corporate headquarters or the early next year as and optimizing our execution need unusual in the financial environment.

As a result, we now expect cash capex for the full year pretty between $20 million to $25 million.

As an update we have six of our building held for sale as of June Thirtyth.

We're continuing to actively marketing facility, but these times in training on the sale remains uncertain.

We've also invested $6 million to acquire Phoenix in France in February and we received $40 million in net proceeds from the sale of one of our building lastly, we used $25 million to purchase occur in the first.

All of this activity rates, what cash balance of $164 million at the end of the second quarter of which $120 million. This recognition of foreign subsidiary.

And I noted earlier, approximately $435 million to sat with outstanding under our revolving credit facility and it and congrats on them.

Yes.

This compares to $112 million cash and $45 million just outstanding at the end of second quarter of 2019.

As a reminder, we've taken several actions and how're you doing additional opportunities helped preserve our profitability during the downturn, while positioning our business team are healthy and competitive as market conditions improve.

[laughter] side, we have reduced discretionary spending across the business.

Well, our natural employee attrition to flow through and we're assessing replacement hiring in the context the current demand.

Weve right sized our operational and delivery platform expected volumes expected volume trends and we've accelerated our existing piece and innovation lab or back office sales and services and that that will allow us to meet our revised synergy goals for this year.

At the same time make remain we plan to make strategic investments in sales and technical resources across the solution area and show, we optimize our participation at market conditions improve and finally, there will be just judicious about our use of cash differing discretionary capital investments and using available.

Gross operating these uncertain economic times.

We believe all these steps will help.

Economy recovers.

I'll now turn.

Okay and for closing comments.

Thank you Glenn on Slide 16, we remain committed to our long term priorities discussed.

There is such as cloud the intelligence.

Three solutions to drive better business outcomes for clients.

Expanding skill under businesses.

Dziedzic clients and end markets.

Experience in our execution through relentless focus on operational excellence.

Through the remainder of 2020, we believe the overall I T market will be challenged given the current koby crisis.

We've taken the appropriate steps to reduce of discretionary spending to ensure we have access to capital to support.

Confident we're whether this tough environment economic environment merge healthy on the other side.

Thank you again for joining us today and thank you forward teammates across the globe for their support of our company or partner Center.

Works you talked with you again later in the fall that concludes my comments will now be line the question.

Ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone keypad.

Well pause for just a moment to compile the came in a roster.

Oh hang it.

Your first question comes from Adam Tim.

Okay.

Ask your question can I, just make one correction.

When I was hot.

Cash flow and I talked about the activity that million section of the 200 million just to be Claire.

I think I was able to pare back into that but Uh huh [laughter].

Sorry for everybody listening in.

But go ahead with your question.

Ken.

In the press releases, you talked about a pronounced pronounced impact in Q.

And when I hear that I would you expect to see a disruption and operations into cash flow, but operating mark covered all cash flow was very strong.

So I guess a question would be maybe color on internal budget and the biggest areas of Berre, France, and why wouldn't you got show up and operating metric.

Issues this quarter.

Internally, we have far.

Hi, a growth not far higher we had higher growth expectation around the combination of insight and PCM in our business.

That's really.

Do we have a progressive targets and what we had aggressive targets on that position and we have given this environment. We grew but we didn't grow as much as our internal budgets. They appreciate it.

Okay, but you could you were able to achieve yeah, but seems like you were able to manage some cost in the operational yet not spending, but well get negatively yes, we've been very aggressive about managing the operational costs and then in the quarter. We have some held fairly from PCL gross margin line, but it's also here.

I find it hardware relative to the increase in Australia.

Wow, that's driving gross margin.

Okay.

And can I just wanted to ask you. It was helpful. You talked about the July trend line for North America hardware to Qlogic down 10% could you maybe just give us some context to compare that to either like may or June to give us a sensor cadence of that how does that compare to what you've been experiencing and secondly, when you look at your four.

Third indicators your backlog does that down 10% year over here in July start to improve in August and September.

Yes, you might recall into one of his last earnings call. We talked about actually this is what we're seeing trajectory was was actually a 20%.

Sort of bookings decline going into the quarter. So certainly that is an improvement we're seeing down 10% still down but certainly the prudent what we what we saw and which did playoff certainly across the board for the quarter, We just announced so and so yes, I think you could say you extract from that's what the trend line certain.

The seems to be improving.

In regards to the negativity of the booking trends.

And to your other question in regards that it's it's hard for us to predict August September what that's going to look like.

What we saw from the trends just from July of course that was that was what we experience.

Okay, and I just bigger picture do you just.

You talked about kind of suppressed Nike spending through the remainder of the year as you're talking to customers were still seems talking to customers do you get a sense of IP budgets on a go forward basis. It seems like you obviously have a pause in a freeze right knowledge customers are normalizing and evaluating because what do you think happens to budgets and Nike spending is their case that you know we're going out.

Longer period of pressure or do you think we're going to have a surgeon projects returning and go back to a 2% trend line and other to her question just any kind of color what you're getting from Salesforce customers.

Yeah, I would say that certainly lot of it.

Obviously, you know is dependent upon the coax 19, when people start to conduct offices I think that we'll certainly have an impact on the actual spending is certainly the infrastructure side of it as is the certainly clients are sweating those assets put as longer than they normally would own but does it start coming back to offices I think gotten certainly start to open up and that will stay.

To start to improve the device side I think continues to continue to see pretty strong I'm certainly the second half, we'll see a pretty robust increasing chrome chromebooks as education and starts to certainly realize distance learning becomes much more than one going forward so think of it.

There is certainly a huge increase in chrome.

It's being sold into the KC 12 market I think that's going to certainly bolster into second half the sort of the device spending category.

Excellent point of view, but I think from the infrastructure side, that's probably going to be pretty much the same for the second half for the year.

And then of course, if you indicated software certainly much more resilient cloud, which again is 90% ever GP much more resilient.

You know then certainly what we're seeing in hardware.

Okay. That's helpful. Thank you very much.

And your next question comes from the line of Matt sharing with Stifel.

Yeah. Thanks, good morning.

Wanted to ask about the strong gross margin in the quarter and your guide for to be down.

Roughly 150 basis points.

Sequentially.

I I imagine that that's a mix issue, but you also talked candid about continued weakness in infrastructure hardware and and other hardware products. So you think that that mix will continue to favor.

They will use so could you talk about that that dynamic.

Yes, I think in there on the gross margin frightened when its chime in as well I think.

Certainly met the it is good it's a mix issue certainly its a very second quarters, our largest quarter. It's Microsoft's year end. So there's a big acceleration that occurs in there and of course lot of that comes in as netted so that certainly has a big impact and always historically kind of bigger impact than or Rosemarie.

And for the second quarter.

It's been the common around hardware.

Yes, there's no question that certainly software carries a higher gross margin for its overall and services and hardware does.

On the infrastructure side, a lot of then of course will tend to be.

Pretty decent gross margin overall, the devices tends to be certainly much more competitive.

In that regard because in the infrastructure side, you do get the ability of course to get deal registration on lot of the projects and so forth, which carries a pretty good gross margin, but devices certainly doesn't carry let's say.

Gross margin level of agreements to let you as well yeah, I think historically, Matt we've all seen usually about 100 900 basis points.

Declining gross margin between Q2, Q3, Q2 was our largest corridor and this teacher in particular it with our margin was helped by the fact that there was a lower percentage it hardware in our gross margin any higher percentages of services and specifically cloud related services that are 100% margin that drove that higher gross profit.

Right, just making that hardware is gonna be a bigger component of overall gross profit in Q3.

It depends that decline versus the 20% that we've talked about at the beginning of Q2, so that will have a bigger impact on overall gross margin in Q3 relative to what we saw unsecured.

Okay.

That's helpful and Ken just on the cloud.

Revenue the fast.

Products by your Sally could you be most people think about where clients are investing and you see those trends continuing through the out the end of year [noise].

Yes, I think certainly in the post crisis and everybody was certainly go from rules in claims that the perspective of how do they get their organization is very secure way.

Up and running in in a remote fashion. So the cloud became a very good solution. When you looked at no Willem VDI and so forth, providing mr. security it was very simple.

Easy to use and easy to get running so I think you saw tremendous.

Impact there certainly.

So that certainly you've shown a pretty robust increase.

From that perspective on another is a portion of either it's easier for them, we get up and running on to go to the public cloud and its you know it's it's a situation where owns it trying to look at their cost structures as well in rather have it sort of the you know as an operational expense versus a capital expense at this stage.

Page, where there's so much uncertainty so I think thats continuing and of course, you know from the cloud point of view, we're all just see the dramatic increase in tools, such as Microsoft teams, and Cisco Webex, and so forth, which of course strike a significant cloud consumption as well.

For all of our clients.

I think thats going to I'm, certainly play out and continue and and certainly in a lot of it will be sort of permanent.

Structures in place for clients as well.

I think as they start looking we know some clients is look towards BD I realize that.

It might be more temporary do that in a public cloud setting as it is it is quite expensive. So I'd be clients will start relooking at that as they start to come back more into an office setting.

Yes, and relative to that or you see.

Issues with customers basically not being on time, so some of those those integration projects that you do particularly the data link business that you have.

Are you seeing some some issues there and I just companies open up again some of those projects will will be reinstated.

Exactly that's exactly what we expect to happen I.

I mean, there. So you know the certainly certain key projects still going on but as we know it was we experienced in prior downturns and going back to 2000 in 2008 2009.

There's usually a robust increase here once we do come out of this where you can't labels project forever.

You know you go as you can only put them on hold and pause. So we do believe that there will be a significant.

Researches there once the market does turned around to be clients do have to put those projects in a much more active category.

Okay and my last question, they're going is relative to the balance sheet your cash position was up.

You've taken down some debt could you tell us about the strategy in terms of what you expect the debt reduction to be but this year and also interest expense estimates for cheaply.

I think that was what I would say is that you talked about the 200 million dollar a timing difference some of that most of that comes back in Q3. So you should anticipate that that'll be an increase in our debt usage in Q3, when you look through our backend cash flows generally we used cash.

In Q3, I mean generally a little cash in Q4, such that were relatively flat up from where we are at the end of Q2 and that should help you as you think silhouette that with the at the end of year enhances the interest expense.

As a reminder, our convert had the cash Cooper enough 0.75.

Just one for 75 basis points and our revolver that is 125% overnight.

Maybe I was at 100% actually 25% over 25 basis points over LIBOR.

Okay. Okay, great. Thank you.

Your next question comes from the line of pack Chung with JP Morgan.

Hi, It's Paul Coster can you hear me.

Yeah, Hi, convince thanks for taking my question I am.

Well, let me start with the free cash flows it sounds like a you know you're looking for an increase in the free cash flow for the full year 200 million Bolsa [laughter], having worked through the system.

You know that's some excess support you previously were full costing them it sounds like you're going to use it to pay down some legacy more that other opinions come complained about that makes sense I will be chose one or buyback. Some shows some in the store looks really an expensive at the moment warm up new some of the access to a focus on.

It could see ahead of the.

I believe agree with you that the stocks cheap right now [laughter].

I think that a you know until we feel a little bit more certainty about away aware of what's happening in the environment and the economic environment and like a recovery is actually going to occur I think we're just being crude I think conservative with regard to our use of cash I'm not opportunities in the marketplace I did want to take advantage job. If if if it if it if they came to fruition. So I think we just want.

On to make sure that we are as best position does.

That is just that we do have $25 million still outstanding under our authorization from the board for share repurchase.

But as of right now we don't have a plan to implement.

Okay, well after you know my opinion or be a building I know certainly fascinated by insurer.

The success, you're having in going to market.

Through the Internet through a in the digital way and it feels to me like you're developing your competitive advantage has certainly relative to the universe segmented sort of small oh, its you've all market, but maybe even relative to some of the figure plays out but can you too so it's a little bit about that.

You think that might mean in terms of operating margins over the longer term.

Yes, Thanks, Paul for the question there yeah, we've been investing as we indicated for the last pretty much five years on building up that platform. It's an extensive array of.

I T systems in SaaS solutions that comes together the really deliver that experience. So we viewed it certainly has a differentiated because there's only a few weeks in our space that could really have to work on the.

[noise] economics to really drives that kind of a platform.

So we've started to view that certainly to be a long term competitive advantage a smaller players would be challenged to break those kind of investments longer term does we know this clients look to obtain more and more information.

No that most clients now or are going to the internet for their source of information before but it was sales rep.

So it's prudent asset it's critical for us to make sure part of that conversation that dialogue, nor a team that connection to our clients. So that's been the journey that we've been on and we're seeing no significant results.

From that I'm, when we look at our or lead flow and our ability to really came to a client's needs and really understand them it to nurture them along their buying journey.

It's become a significant advantage and one that certainly our partners recognize and that's pretty heavily with us on going forward. So hard to exactly quantify but I think we'd all all agree that that's really a key part of the future.

It's sort of that companion for sales is they've got a have a strong digital marketing capabilities for the sales organization long term or you're not going to have say relevancy because you know the phone being important tool is very much little bit outdated.

In regards to try to obtain the first connection to clients.

As we all know none of us so phones today.

So very very difficult still important way to communicate but it's certainly not not what it was 510 years ago.

Got you remember if I can sneak one last question was filed the you having some success roof. So the two part question first how much of a is Microsoft male upon the question is in the past are you seeing some companies so struggle with that transitions cloud.

Because of the netting out of the revenues here in the revenue line doesn't look so good but margins look right. It doesn't seem to be impacting your the aggregate level. Just wondering if you can you comment on those two questions.

So you're right if needed and it does actually produced higher gross margin I would say that how it has impacted us if that if you looked at kind of customer generated revenue you would see growth in software in many quarters, where we report no growth flat or slightly negative growth on a net.

And that is more business moving from on Prem to ask Brian we found that in Q2 and it impacted overall how for growth for us at the top line, but it helps us ultimately at the gross margin line in terms of the 16.5% gross margin that we reported.

So if we have because we have a complement the hardware and services, maybe we don't see the reduction in revenue that much but we internally look at that gross versus net around software want to track eight conversions the crop the cloud and what business at generating but also so that we can understand the productivity of our salesforce in terms of.

Hi, there has got into the end clients.

But that trend is something that we expect will continue because over the course of the next eight I don't know how long it will take most of that and stop breakpoints convert to some kind of cloud subscription base.

Solution without becomes important just pull longer term is the managed services that would drive which of course is recurring.

Revenue stream force nuts.

I think the cloud Consumptions will will become competitive going for in the real key for us will be how we attach ourselves provided provided this managed service capability to our clients globally. So.

Last year that we're investing as we continue to build out and a recurring revenue stream that we'd like to.

Right.

And Microsoft.

Well the Microsoft to know what you think about what might that Microsoft that percentage as the total software total software publisher consistent I would say comparable.

In terms of our competition the composition of our portfolio. We clearly you other other vendors as well, it's not just Microsoft, but they're the behemoths in the industry so that in our in our confidence as well.

Okay got you think.

That's it for you.

And your next question comes from Mark Weisenburger with B. Riley.

Thank you good morning.

In the current environment can you talk about the opportunities to expand wallet share with your customers and which opportunities may be more durable relative to others and then potential impact on the piano.

Yes.

I think it's certainly been an area market.

Always focus for US of course is how do we obtain more of our clients business through.

And Thats, what we really want to our four solution areas because really our clients. All by these four solution supply chain optimization connected workforce, which is about the monobore workplace experience.

It is going to transformation digital innovation, so the ability to sell all of our clients through SMB, all the way through public sector role buying in those areas. So having the levels of expertise becomes critical as we all know the fastest way to expand to sell more of your current clients.

So thats an area that we continue to be.

Very very focused on delivering certainly more value to our clients.

Understood also wouldn't budgets across all organizations being stretched it was the duration of work we're in front on kind of continually evolving.

As the current situation provide any and producer opportunity to accelerate the device for the service offerings.

Yes, and then would say, it's certainly has and our that's all in our what we call connected workforce.

So we sort of start with that and gain assembly. We can provide devices service we find it depends on what we have to meet the client where the right because a lot of clients or completely ready for their environment to do that who will do as we say we see does the ultimate Andy for you.

We can help you along this journey, but for some large clients. It may take them actually couple of years before they can actually get there due to their internal workings infrastructure.

But we we actually map after them what it would take and then we'll meet them where they were at and then actually migrate them towards that end game towards that.

The other part of your question was a big around what what areas of technology received very resilient sort of in this environment.

Certainly you know there's a few that are very very key at the top list of course is security.

The cyber attacks continue as we know that an accelerated basis. So we see see all clients the matter how distressed or environments are continue to invest.

In security So that's certainly one of the top.

Top areas that we're focused on as well collaborative environments of course as we all know we discussed with things like teams and and Webex and so forth are critical for clients more devices more robust devices for their other teammates to work from home.

Certainly, becoming very very key things like in the networking space, especially when it's getting lots and lots of attention.

For clients is a very very cost effective.

Solution for them to network their devices together.

So those are those are certainly some of the key areas that of course, as we've talked about everything's cloud.

Is accelerating dramatically you'd see the growth rates that plus 45% for the likes of.

Google and Amazon and and answer so thats, certainly very very substantial growth rates that were certainly participating in.

Those would be certainly some of the.

Highlighted areas that we're we're focused on because our clients or so so focus in those areas.

Under setting English to more for me can you talk about the reception in the market, you're seeing too that the connected platform for detection and prevention and maybe what the margin profile for those types of engagements looks like.

Yes. Good question MRC gives us mixture, but essentially predictivv platform is basically insights IP, where we we provide basically a single pane of glass and this is all around aiotv. So we think the ability to take all this tremendous amounts of data and turn that into very useful information for our clients through disconnected platform.

I mean, it basically takes these devices at the edge in this case around hold it of course, it's around thermal imaging, which obviously helps with all the temperature.

Testing and then does optical cameras to do basically seems to us for social business being tested people bring masks I can actually do contact Tracy as well. So all those pieces. So yes, we've got quite a few clients very interested we're obviously used in that in our facility.

Eliminate our major facilities, we use we use that technology that we've developed and we certainly have quite a few clients.

Right now very actively looking at that.

I'm very large theme park type companies are looking at how they bring back.

The public to their own their environment and so forth. So there's a lot of really strong interest in that area. Certainly we've had good success in delivering that solution and the key is it's really just around aiotv and in this case koby just happens to be.

One of the solutions to that but it's a robust platform that works and works in all our key environments. We.

We've deployed in a lot of major restaurants were worried about food safety and how they actually can.

Measure.

As it are there other than send the refrigeration units and provide old ascension information to meet their two operating rooms that are concerned about.

Bacteria, how are they measure precisely temperature humidity. So the connected flat towards the very broad platform that actually helps in the Aiotv world and as we keep talking.

The biggest cause that's on the horizon is the intelligent edge and that is all about aiotv. So thats an area that we think it's very very.

Promising future and one that we're certainly very heavily invested in so as a long long winded answer to your question, but yet lots of good interest in that connected platform and certainly the around the intelligent edge.

That's helpful. Thank and then just a final one in the in the release. This morning, you talked about the the core business being down.

Could you quantify that in the quarter.

Yes, we basically what we indicated was that the booking rates in July has indicated to us that they're down 10%.

We of course did say that we would have growth.

In Q3, certainly lot of that due to the fact, we have two more months of PCM and the number so we will have growth.

Topline growth.

In the quarter, but.

Overall, we look at the trending information.

Booking rates are down to like a 10%, whereas last quarter actually the trending was down 20%, so improving but still it's still a negative number.

Right now everything that is.

We don't have a pure view as to the core business in what we do know is that the combination of insight and he CNS reported last year.

On a year over year basis that that combination is down.

Down consistent with a 20% booking trend that we.

That we talked about it in the first quarter at the beginning of second quarter die.

Got it thank you very helpful. Okay.

Your next question comes from the line of Anthony Lebiedzinski with Sidoti.

Yes, good morning, and thank you for taking my question. So just wanted to get a little bit more color about the fourth quarter to date trends can you, perhaps give us a sense as to.

The performance from a different vertical markets.

At the end markets, how those are performing.

Yes, thanks to the question Anthony the.

Certainly the education market is doing very well the cases health market. As you don't this is largely becomes more and more the norm specific investments there.

Chrome is.

On a anybody statistic, 75% to 85% of that market. So.

Very robust.

The success going on in K 12 markets for devices there.

I think when you look at it.

The.

The federal government spending as a lot of those dollars around covitz start to get spent recede certainly some increases at the state and local level as well as in the federal government. So this would be a key period for that for the government spending that scores. So we're anxious to see how is that really comes to fruition.

When you look at the sort of corporate accounts, certainly I think we all recognize that the lower end of the SMB space has probably been.

The most challenged in this environment.

How that Stuart's starts to bounce back I think it's anybody's guess, but certainly I wouldn't expect that to be.

An improvement in Q3 at this stage.

And then and then I think it depends upon this when you talk about corporate accounts in specific verticals.

It depends on.

Healthcare for Us overall is.

Depends on the sector that you're in is actually very challenges as hospitals of course make most of the money you know sort of an elective surgeries and they've been certainly sort of on an off.

So hospitals depends upon what aspect your Kronos and certainly the rights you spend has been challenged the we'd expect that would start to bounce back once more of a normal elective surgeries.

Is on the seasonal more consistent basis.

The hospitality industry of course is very very challenged.

Airline industry challenged anything associated Nastase you'd expect.

But we do see that you know there's we have.

Lots of business is now with the cruise lines.

Obviously, not a lot happened in that space. So they're spending is down considerably, but there is focus towards the future and what's going happen there and there will be a bounce back.

For that business certainly not this calendar year, but certainly as we look into next year. So I think you have to we have to be very granular and looking at specifically on the verticals.

We talked about the corporate accounts that so it's a little bit of certainly.

A little bit more of a mixed bag in that regard.

Got it that's very helpful. So you touched on the SMB.

Clientele, so with that in mind, how should we think about the bad debt expense for the rest of the.

I think today, we've had a pretty good handle on on bad debt expense. We've had a couple bankruptcy on associated which we've been able to cover in the normal course of our business. We had a process around our SMB clients with regard to how we creatine individual clients. We've had that would have an industry focus with.

Much of which industries are high risk.

Et cetera, and were very judicious with regard to being on top of that second to the market and I would say that we're not seeing.

Bad debt for bankruptcy so much in that segment, what we're seeing a lot on deferred delayed payments and request for extended payment terms I typically for short duration, how quickly they get back on their feet processing that would like half life Sciences, while everybody is now.

Some taking advantage and some legitimately asking for relief and far large customers, we are providing that and we have a process that we we go through the scrutinize the request and then we granted.

As as necessary, but part of it is making sure that we support our clients. During this downturn being judicious about the credit that we extend on a go forward basis and looking through at the history of their performance, but not to make a determination about how should we learned preference for them going forward. It's a very measured risk and we believe we have act.

Oh, well enhancer to exceed trucking.

Alright, well, thank you very much and best of luck.

Thank you. Thank you and welcome to your first huh, Okay. Thank you.

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Okay. Thanks, Yeah.

Yes.

That concludes our conference call today. Thank you very much for your participation and we will be talking to you in the future. Thank you.

Ladies and gentlemen, you may now disconnect from the conference call. Thank you for your participation.

Hey, Paul.