Q3 2020 Insight Enterprises Inc Earnings Call
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Until that time your lines will again be placed the musical.
For your patience.
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Mhm.
Hi, gentlemen, thank you for standing by and welcome to the insight enterprises third quarter Twentytwenty operating results.
At this time all participants are in a listen only mode. After.
After the speaker's presentation, there will be a question and answer session and instructions will follow at that time.
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I would now like to hand, the call over to your speaker for today.
Glynis Bryan. Please go ahead ma'am thank.
Thank you Deborah welcome everyone and thank you for joining the insight Enterprises earnings conference call.
Dan will be discussing the company's operating results for the quarter ended September Thirtyth Twentytwenty I Wonder if my Chief financial Officer of insight and joining me today is Ken <unk>, President and Chief Executive Officer.
If you do not have a copy of the earnings release that was posted this morning and filed with the Securities and Exchange Commission on form 8-K, you will find it on our website at <unk> under Investor Relations section.
These call, including the question and answer period webcast live and can be accessed by the Investor Relations page of our website I can say dotcom and.
And I've got a copy of the conference call will be available approximately two hours after completion of the call and will remain on our website for a limited time.
This conference call and the associated webcast contain time sensitive information and is accurate only as of today November 3rd Twentytwenty.
This call is the property of insight enterprises, any redistribution retransmission or rebroadcast of this call in any form without the expressed written consent of insight enterprises is strictly prohibited.
Today's conference call, we will refer to non-GAAP financial measures as we discuss third quarter 2020 financial results.
When referring to non-GAAP measures in today's call, we will refer to adjusted earnings from operation adjusted diluted earnings per share and adjusted return on invested capital.
You will find a reconciliation of these non-GAAP measures to actual GAAP results included in the press release and the accompanying slide presentation issued earlier today also please note that already highlighted as constant currency, all amounts and grocery to discuss our U.S. dollar term finally.
Finally, let me remind you about forward looking statements that will be made on today's call are both looking statements that are made during this conference call are subject to risks and uncertainties that could cause our 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.
Radek reports subsequently filed with the SEC.
I will now turn the call over to Karen and if you're following along with the slide presentation. We will begin on slide four and.
Hello, everyone and thank you for joining us today to discuss our third quarter 2020 operating results I'm pleased to report that because of our dedicated team resilient business model and the PCM acquisition, we delivered another quarter of double digit adjusted earnings from operations growth year over year in the third quarter.
The demand environment continue to be challenged what we focused on enhancing our clients' most pressing that you need well, helping many plan for investments needed to support the businesses as the economy recovers during.
During the third quarter, we drove double digit growth in services and cloud solutions, which improved gross margins through new third quarter record and.
And when combined with the positive effects of acceleration or PCM integration helped us achieve adjusted earnings from operations growth of more than 20% year over year now.
Now turning to the third quarter results on slide five.
Consolidated net sales in the third quarter were 1.94 billion.
Up 1% year over year, reflecting two additional months of PCM and it results in this year since the acquisition closed in August Thirtyth, 2019, and lower sales in EMEA and APAC, we focused on growing our service business most of the business mix, which helped drive gross margins up 150 basis points year over year to 15.9% in the third quarter.
And adjusted diluted earnings per share was $1.38 up 25% year over year, and then the GAAP basis diluted share was $1.10 up 45% year over year.
Within these results gross profit generated from cloud solutions was 18% of our consolidated gross profit over the past 12 months.
And finally, our businesses generated 462 million in cash flow from operations in the first nine months of 2020, reflecting certain payment timing differences with partners in the benefits of our disciplined cash management practices turn.
Turning to slide six turns.
During the second quarter, we completed the Onboarding of PCM clients to our insights systems in the third quarter. We completed the integration of back office operations and work to consolidate spend across key categories included items maintenance legal and accounting the marketing expenses.
And we began to realize the benefits of a real estate consolidation efforts as a result, we now expect to exit the year with approximately $60 million to $65 million in annualized run rate cost savings in connection with the PCM integration, which is ahead of our first year expectations on our previously disclosed total commitment of 70 million over two years.
And the third quarter, we also invested their sales force, adding key technical talent across our solution areas and additional sales coverage for our geographic footprint will continue to invest in this area in the fourth quarter to ensure we are positioned well to compete in the marketplace. In 2021, when we expect VIP market will start to recover.
Also on the talent front Im pleased to announce that just two weeks ago, George Mullan joined insight as our new President of the North America business. You expect 21 years of refer adult technologies in a variety of sales service delivery at IC solution roles. She brings to inside a deep understanding of the channel and a history of leadership and delivering technology services and solutions.
Your clients.
From a demand and product bookings perspective hardware booking trends North America improved sequentially in the third quarter growing double digits, although ending down more than 10% year over year. The strong growth in hardware bookings did not fully translate to net sales in the quarter, leading to elevated backlog heading into the fourth quarter. In addition hardware bookings so far in Q4.
We are tracking ahead of Q3 trends, which we deem an additional positive data points as we close out 2020 now on to slide seven.
Revenue for the fourth quarter with the resurgence of covered across the globe. Many businesses are partially open many are still in work from home mode for most of the teammates. Moreover, as I just noted booking trends are improving as clients appear to be focused on positioning the business to compete in a possible economic recovery in 2021.
One example is that our cloud and data center transformation team, which was recently awarded a contract with the school district in Texas to build out its wireless mesh network leveraging our design project management interpretation capabilities. This county will lever leveraged federal coated stimulus funded to ensure that students are able to continue their education and an ongoing.
Your remote learning environment.
In addition, we believe we have gained critical market share and monitored datacenter categories through investments in new technical and sales talent in our differentiated offerings over the last few years or.
Our strategic partners are taking notice as we were recently named Netapps 40, 20 cloud innovation partner of the year and recognition of our leadership and Architected implementing supporting hybrid storage solutions in storage as a service solutions and in June of this year insight was named sales transformational part of the year and recognition or deep expertise and implementing modern.
Hybrid datacenter technology, as well as robust aiotv and edge infrastructures.
We also continue to innovate to help clients recovered from the impacts of the COVID-19 pandemic, including adding contact tracing capabilities to insights connected platform detected prevention solution.
This solution developed by our digitalization business helps clients deploy and operate critical sensors devices and infrastructure that could detect symptoms that help prevent the spread of the corona virus through a screening process.
This comprehensive RFP solution, which we can deliver globally as being received well in the marketplace with recent wins in the pharmaceutical and energy sectors in North America, and the mining industry in Australia.
Our focus on strategic IP solution areas has allowed us to prioritize our capital investments introduced differentiated offerings for our clients and to bring value to our partners across the globe in.
In addition, we believe our values of hunger part in harmony define our culture and allow us to attract talent to help us compete effectively in our industry.
Just last week, our culture was recognized yet again as we were named to the Forbes world's best employers 2020, less insight ranked 27, among IC companies worldwide and number 296 overall.
We believe our strong culture and clear strategy will continue to defend our business as the market rebounds in the future.
I want to thank our teammates across the globe for the commitment to insight in our clients as we close out 2020 will have a resilient team a strong balance sheet and access to sufficient level of capital to meet or foreseeable operating requirements. During these challenging times.
And we're confident that our solution expertise to allow us to support our clients needs. Both in this environment and when the economy eventually rebounds.
I'll now hand, the call over to Glynis to provide more details on our financial performance Glynis. Thank you Ken as Ken noted we are pleased with our global teams execution in the first nine months of 20 to 25.
Hi, this year the team has successfully integrated the acquisition in the company's history and have delivered integration savings well ahead of the plan timeline.
In a sluggish demand environment, we focused on selling services and solutions, which helped drive gross margin up more than 100 basis points year over year.
We reduced our operating cost in the current demand and accelerated the integration of PCM, which allowed us to drive adjusted earnings from operations growth of 15% year over year in the first nine months.
And complements our strong earnings growth our business generated record level cash flow from operations. So far this year as a result in the third quarter, we paid off the balance outstanding under our ABL facility. We now have the entire 1.2 billion dollar facility available to fund future growth.
We set a high bar for ourselves coming into this year pre coded and while earnings are down versus our original expectations, a significantly stronger cash flow performance allowed us to deliver adjusted return on invested capital of 12%.
Clearly demonstrating the resilience of our business model and the operational discipline, we haven't sales across business.
Moving on to slide $10 exiting the quarter, we are comfortable with our current leverage position of less than one times debt to cash flows or EBITDA.
Under our ABL agreement, our primary compliance covenant is a fixed charge coverage ratio, which includes trailing 12 months EBITDA coverage over our capital expenditures taxes and cash interest as.
As of September Thirtyth were at four times against the minimum requirement of one times and we're confident we can support our capital requirements and liquidity needs.
As we highlighted last quarter, our cash cycle with inverted eating we pair partners and shorter terms that we receive from our clients.
This allows us to drive more cash flow when sales decline sequentially. We had expenses dynamic in the first nine months of Twentytwenty, which has helped drive our above seasonal cash flow generation of six $462 million year to date, our cash flow without have also benefitted benefitted from approximately $100 million.
Timing differences for partner payments that we expect will Claire in the fourth quarter.
For the full year, we expect cash flow generation will be in the range of 325 million to $375 million comfortably exceeding the top end of our previously announced guidance range.
In the third quarter, our cash conversion cycle was 25 days down 17 days year over year the improvement is due to.
Better collections experience and our accounts receivable or three days combined with an increase in detail of 13 days. The increase in DPL is primarily due to increased use of our inventory financing facility. As a result of recent negotiation of facility and payment timing differences I mentioned.
Before I report on the financial results I would like to remind everyone that since the closing of the acquisition in August 2019. The TCM book of business has been integrated into insight system. As a result, we no longer report results for the acquired PCM business on a standalone basis.
Now moving on to North America, starting on slide 11.
In North America, net sales were $1.6 billion in the third quarter up 3% from prior year quarter, primarily by PCM. We saw saw strong demand with public sector clients, particularly in chromebooks and device category.
We also continue to see strong services sales growth year over year at 12%.
Finally, the increased adoption of cloud solution and insights analytic services.
Gross profit of $247 million in North America was up 13% year over year and gross margin improved 160 basis points to 15.9% primarily due to an increased mix of cloud and services sales in the business and the addition of PCM nothing.
North America, selling and administrative expenses, excluding amortization expense increased 12% year over year, primarily due to the PCM acquisition adjusted earnings from operations increased 20% year over year, the $64 million for the quarter.
Moving on to EMEA on Slide 12, net sales in the third quarter decreased 8% in constant currency to $341 million year.
Year over year hardware sales increased 1% due primarily to higher volume sales of devices.
Public sector clients suffer.
Software sales decreased 12% and services sales increased 19% Chris.
Gross profit in EMEA in the third quarter was $50 million and when combined with tight expense management resulted in adjusted earnings from operations.
A $5 million up 50% from the same period last year also in constant currency.
In APAC on slide 13, net sales in the third quarter declined 15% in constant currency to $57 million, reflecting more hardware and software sales as a result of a decrease demand asus.
Associated with the client response to cover it.
Despite lower top line gross profit grew 2% year over year in constant currency and expenses decreased 3%, which drove adjusted earnings from operations up 19% year over year in the third quarter.
Moving on to our tax rate for the third quarter of Twentytwenty, our tax rate was 23.8%, which is lower than our prior year quarter.
Quarter's tax rate of 27.2% each of the rate impact of adjust acquisition related costs, which did not recur in 2020 and the beneficial impact of certain tax income tax regulations issued during the current quarter.
Turning to because of the third quarter cash flow performance on slide 14.
Year to date through the third quarter of Twentytwenty, our operations generated $462 million of cash compared to $169 million last year. During that time, we invested approximately $21 million in capital expenditures up from $17 million last year.
As we stated last quarter, we expect capex for the full year will be between $20 million to $25 million.
We've also invested $6 million to acquire Phoenix in France in February of this year, and we received $14 million in net proceeds from the sales of one of our buildings earlier in the year Lastly, we used $25 million to purchase shares of our common stock in the first quarter.
At the end of the quarter, we had a cash balance of $75 million and was $57 million, which resident in our foreign subsidiaries compared to our prior balance of $141 million.
As I noted earlier, we had total debt of approximately $296 million all of its convertible fixed rate debt.
At the end of the third quarter and this is down from total debt of $837 million as at the same point last year.
As a reminder, we've taken several actions to preserve our profitability in the downturn, while positioning our business to March merx healthy and competitive as market conditions improve.
Specifically on the cost side.
We've reduced discretionary spending across the business and rightsize, our operational and liquid platform for expected volume trends.
With accelerated or existing PCM integration plans in our back office sales and services, which allows us to realize approximately $55 million in cost savings in our results in Twentytwenty, two Q3 and positions us to exit the year with run rate between 60 and $65 million.
Heading into 2000 expenses on certain of our variable expenses that were not incurred 2020 to cobalt related impacts on our financial results such as sales Rep commissions executive compensation travel and certain other discretionary expenses are expected to be incurred if market conditions improve from current levels. We currently expect Esa.
The benefit from these items in 2020, hitting the range of $30 million to $35 million.
In addition, we have made and plan to continue making select strategic investments in sales and technical resources across our solution areas to ensure we optimize our participation as market conditions improve.
Our balance sheet is healthy which have access to capital sufficient operating these uncertain economic times and we believe the steps we have taken will help us emerge in a good position and Pete at economy recovers.
I'll now turn the call back to Kensit closing comments.
On to slide 15, we remain committed to our long term priorities discussed at our analyst day last fall, which include continued to innovate in order to capture share in high growth areas, such as the cloud and intelligent edge developed.
Develop and deliver solutions that drive better business outcomes for our clients.
Expanding with Sandler business and strategic clients and end markets and lastly continue to optimize client experience and our execution through a relentless focus on operational excellence.
For the remainder of 2020, we believe the overall our team Mark will be challenged given the current global prices since adverse impact on the global economy.
We've taken appropriate steps to reduce our discretionary spending to ensure we have access to capital support our short term operating plants and are confident we will weather this tougher economic environment emerge healthy on the other side.
We currently expect net sales for the fourth quarter will between 2.1 and $2.2 billion and adjusted diluted earnings per share will be swing dollar 45 and $1.55.
For the full year net sales are expected to be between 8.1 $8.2 billion and adjusted diluted earnings per share are expected to be between $5.88 and $5 to 98 cents.
Our outlook assumes a tax rate of 25.5% for the fourth quarter.
This outlook excludes acquisition related expenses severance and restructuring expenses incurred amortization of intangible assets and amortization of convertible debt discount and issuance costs. During the first nine months of 2020 and those that may be incurred during the balance of 2020.
Due to the inherent difficulty of forecast and all these types of expenses, which impact net earnings and diluted earnings per share. The company is unable to reasonably estimate the impact of such expenses funding to net earnings and diluted earnings per share.
Thank you again for joining us today and thank for all our teammates across the globe for the support of the company or partners and our clients. These safe and we look forward to talk with you again next quarter that concludes my comments I will now open the line for your questions.
If you would like to ask question. Please press star one on your telephone keypad.
And your first question comes from Adam Tindle with Raymond James.
Okay. Thanks, Good morning, Ken I, just wanted to start on the Q4 guidance and appreciate you providing that it looks like it's going to end imply that revenue is going to be up somewhere around high single digits on a sequential basis, which is pretty nice uptick kind of reminds me of prior years, where we had a lot larger budget flushes. So maybe you could just touch on how you.
Those expectations now there's been a couple of quarters in a row, where the press releases, citing impact from co bid on internal budgets, but to an outsider that just doesn't seem overly conservative. So we would be helpful. Just to understand how you built up those expectations yes.
Yes, Thanks, gentlemen, appreciate that new guidance to the you know the traditional sort of budget flush for Q4, I don't really believe that's.
In the cards now I think you know cfos are certainly taking over a quite a bit of GE. The control of spending in these environments. So I don't believe that companies are looking at budget flush its not sort of what we're talking about but.
But when we look at sort of the the backlog going into Q4, and we look at just the trending that we're seeing certainly public sector.
We'll have nice growth for Q4, when you look at the federal government state and local as well as the education market will will certainly grow very very nicely.
And then we are starting to see some enterprise clients starting to look to us to spend to get back to more of a normalcy.
If you can call it that environment. So that's all that put together of course and it gives the confidence of the of the guidance we provided for Q4.
Okay. That's helpful. Maybe just as a follow up on on the PCM savings. Obviously my job tracking ahead of where you expect it to be I think $60 million to $65 million exiting Q4's up again I just wanted to ask why not revised up the total 70 million cumulative target.
Is that because you're just kind of getting through the savings faster on the total is unchanged our or are you finding additional areas and there's an opportunity to move that cumulative $70 million.
Yes ill, let grows comment as well I think your commentary is correct, we were able to really accelerate as we focused on that pretty.
Early this year.
Sort of the wildcard in all that of course is the real estate aspects.
Which we certainly would have expected in a normal environment, we probably would have seen more of those dollars in the next year or so.
That could be that could change obviously based upon the whole commercial real estate environment, So that sort of tempers this little bit to keep at the at the 70 number that we quoted.
First one and I think so yes.
I think we've kind of covered it I think black.
We are right, where we made a decision to try and accelerate the savings to get to the $70 million as quickly as possible our part.
Part of it like we have the environment of coal that that allowed us to do that in terms of right sizing.
The operation for the volume of business that we've ever seen so we took advantage of that to accelerate some of those savings.
Ken's comments about the real estate. In addition to what we're trying to Sal. We also look at some savings in subsequent years as we track as these hits from out we made a decision not to buy out of those leases commercially we are buying out of the commercial real estate lease today. It expenses. So we made the determination not to do that buyout, but just to keep them operate.
Final until at least.
So the lease term expires, so we'll get a incremental savings couple of hundred thousand units in and this year's going forward, but not anything significant as this case determined.
Okay. That's helpful. Thank you.
Your next question comes from Matt Sheerin with Stifel Nicholas.
Yes. Thanks good.
Good morning, Ken English I, just following up on Adam's question regarding.
Your relatively solid.
Solid guidance for Q4.
Could you talk I can in terms of where where do you see that spending going is it continued to be your work from home and client devices or is that largely played out and are you seeing a shift.
More toward the on Prem infrastructure products, where they've got obviously, you've been delayed for a couple of quarters.
Thanks, Matt for the question.
Yes and of course, the as I think you know that from a harbor perspective.
The revenue actually comes from devices.
In our business and in the channel overall to devices. This is a good player that the there is no question that chromebooks will accelerate here into Q4.
It's a lot of units that sales of about 30% of the unit volumes for devices about 13% of the revenue volumes come from growth because of lower expenses. So that will certainly continue to accelerate and I think that will actually accelerate into Q1 from what we can say as there are some shortage certainly significant shortages out there for those devices.
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The public sector piece, I think will certainly be a strong.
Growth trajectory here for certainly for Q4.
As far as the infrastructure piece I'd.
I'd say, it's a little bit mix as far as certainly some companies are recognizing that they have to digitize their business and as companies have to digitize the business.
To become more modern they also have to upgrade their infrastructure to become more modern whether that be public cloud or whether that be private infrastructure. So certain clients are looking at that and making those investments and others are still a little bit more likely let's wait and see to see how this is going to really play out of them as far as cobas concerns. So we have invested in that.
Area in regards to the.
The infrastructure side of the business with resources and so we're trying to we're going to position ourselves to make sure that we're we're in a position to capture that that rebound when it does occur and as you know this business. When you go through the tenure cycles, we've been on and go back to the great recession in 2009, where we all saw pretty substantial double digit declines in 2009 in 2000.
10, we saw 17% growth.
Go back 10 years before that with the dotcom same sort of trajectory. So we do believe that 90, it's difficult to put these investments off for for a long time and so that they will certainly start to recover we're not sure when thats going to occur in 2021, but some were certain to position ourselves to take advantage of that.
Okay and on the on the enterprise side are you seeing.
Talking about client device strength on the public sector with Chromebooks, but are you seeing the same thing on the enterprise I look at in terms of the commercial notebooks or is that does that weaker now we.
We're seeing that as against very client dependent we are seeing a certain.
Of our clients that are on the enterprise side.
Certainly coming back to life year or from a device point of view here.
Okay, Okay, and then sort of backing into your.
On your EPS guidance in revenue it implies that gross margin.
Maybe down a little bit, but still up significantly 70, 80 basis points plus from from last year.
So it's a positive mix shift that you've seen in the last couple of quarters is that continuing in terms of cloud services.
Got it down software revenue that sort of thing.
Yes, Thats correct, Matt you've got that right somewhat muted Matt by growth in hardware.
Okay, and the Chromebook margins are I would imagine lower.
Go ahead and give our cat hardware, okay, yes, okay.
Okay, and just lastly, you talked about obviously.
And from a head count additions and adding to the sales force.
Is that happening now and does that impact opex, because I would imagine that opex given that you still have some discretionary.
Discretionary spend on hold.
I can really move much from where it is now but.
But you expect you expect at that.
The sales count increase the impact that at all.
We do expect that the increase in sales and technical resources and pack that probably not so much in Q4 that we're starting this investment over the last quarter and going into Q4.
We'll be a bigger impact going into 2021, because we want to make sure that we're ready and prepared to address.
The improvement in E com in the economy that we anticipate in 2020 weren't when exactly we don't know, but we anticipate an improvement in the economy 2021, and some of the investments that we're making now is pretty well positioned to take advantage of that in 2021.
Okay, and you gave us the PCM integration synergy numbers, but is any of that does any of that play out in the December quarter in terms of lower opex because of that.
Yes, yes, well, we are going to end up exiting the quarter at 16 $65 million coming out of.
Q4, so there's a little incremental to that $55 million in Q4, a little okay. Alright couple of million very good okay. All right. Thanks a lot.
And your next question comes from Anthony Lebiedzinski with Sidoti intensity.
And thank you for taking the questions. So other than the Chromebooks are you guys seeing any other supply chain dislocations anything to call out there.
Yes, thanks for the question as to be a little bit on the.
On the display side glasses.
Certainly under lot of pressure so.
So dependent upon the.
You know, obviously, whether it be touched or so forth for certain certain products and notebook areas.
And certainly on the chrome side. So last is certainly a little bit of a shortage there are still a little bit as you know.
Tough situation on the processor side dependent upon where are you on that front with avian Intel.
There's obviously some depressed demand on that areas. So those two areas I'd say, we're probably the most there is that we're seeing certainly constraints that lead mostly to device type constraints that we're seeing.
Not too much in the other areas of the business that of course.
Displays are impacted as well.
Got it thanks for that and.
I know Europe is not a huge part of your business, but they are there they are doing some lockdowns they're in various countries. There how should we think about the impact of Lockdowns and some of the countries in Europe as far as impact on your business.
Yes, Anthony Chris were already in the.
The UK in sort of Germany, and France in France on previous going back to I think the where the world was for them in April so.
So it's not like we haven't seen this before.
They have weathered those storms pretty well back in the back in the spring.
So we don't right now we're not calling for any significant change in what we're seeing there I think theyre just going back to the environment, where they were but I still believe we're all now much more functional than we were in April in regards to how we conduct business. So we're not projecting or anticipate any significant.
And decline there at least at this stage in the UK sort of announced that before weeks sort of situation and they extended but.
Again, nothing that we're projecting to have a significant impact into into our numbers.
Got it okay, well, thank you and best of luck.
Thanks, Anthony Thanks.
And next question comes from Paul coaster with JP Morgan.
Yes. Thanks for taking my question so to release was put up dramatically.
The $30 million to $35 million for the third.
Or both.
<unk> expenses that you expect to be added back next year could you explain a little bit better or is that just all things being equal.
As is we'll close the boost in such good growth mode, but we.
I would tell you sold sales you could provide.
We bought Barbara Carla sure. It is actually a combination so that's something that we'll come back and regardless of growth.
But the specific larger items would be depending what happens with regard to capital. We've made some decisions around leave it with very little traveling Twentytwenty. We've made an assumption about what we can travel will be going into 2021 sales some savings, but up from where we are up from where we are today weve.
We've made some decisions around investments that we're making in the business there.
There are other discretionary areas that we pulled back on and Twentytwenty that will come back into the business bonuses and executive comp will be impacted by performance in 2020. So the combination of all those key sales, we assumed going into 2021 will come back into the business.
Foods were down year, but growing store flow, which you.
Okay.
How we budget.
[laughter].
If it's a down year with that range still apply I think the best on expenses that will come back into the business, even if it is a down year.
How we address the down year would then be in a different manner, but it's a down year their changes that we made this year that we're one year changes.
Secondly, EM.
And if there is a downturn that we will have to pick either late to address the downturn, which is kind of EBITDA.
Yeah.
The other question I had is boot sales mentioning that's taken place in net sales.
Can you quantify the approximate revenue headwind that comes with that our launch in business.
Nutrisystem goodwill melted down.
Mitch revenue with it.
Hi, good results one down.
I guess it would have had revenue.
Hi, good revenue.
Revenue growth in software.
The percentage of our business that is navigating.
Sales in the 35% to 36% range on average.
Our GP type GT.
At the netted business pure netted business.
Is about 35% to 36% of our total GP that hiring key to given the Microsoft year end then.
Software component that we typically have associated with QQ, not taken and protect them, but on average the ne components in our business is about 35% to 36% and with hardware being down to date and that the results year over year that is lower margin that has helped boost our margins as you are seeing in our results year to date.
When you exclude you'd have delivered top line growth for these we have agreements in general just trying to kind of yeah.
Yes, yes, yes, yes, we would have delivered coupling both about the netting I myself and.
Opex as need be netting for the past couple of years and eventually to get the kind of some run rate associated with that but cloud and digital are the winners in co minutes accelerated and I actually think that it's accelerating the conversion that we have seen to date from on Prem cloud related solutions to off Prem on Prem.
Non cloud, our cloud solutions and Thats going to continue going forward and it will continue to impact on revenue.
Okay. So last question kind of actually.
I think I got the sense food.
Which is.
Hybrids are the biggest drivers, but then my comment a little bit low groups. The commentary around the clogs slowed to a halt work as well as the old story, which is still one of which is full strength of in terms of growth both.
Which is kind of driving the most sensitive.
Yeah from a hardware point of view, it's clear that devices is what's driving the growth in the <unk> and in the industry right now from a channel point of view Thats.
Thats very clear there will be positive growth in devices. This year.
And then of course, there will be declines in servers storage networking in the other categories from a hardware perspective. So the certainly devices would be would be topped the list.
We're still of course very committed to an investment in in the intelligent edge the identity areas of the business I.
I think that's been a little bit slowed down by by coded were accompanied sister.
Hustling Downs is to try to figure out how to keep their business is intact to not invest in those areas. So but that will that will come. There is no question, but that is AI continues to drive the marketplace going forward. So we're still continue to divest there. So so that was positive but were certainly more muted than we would have expected in 2020, but were caught.
With that that certainly will will recover in return.
Great. Thanks very much.
The next question comes from Mark Weisenburger, The Riley Securities.
Thank you good morning.
Can you talk about the price sensitivity across customer cohorts and maybe end product categories are you seeing demand become kind of the less elastic and what our expectations for the duration of any change in behavior.
I would say that either the the pricing pressure is always in the marketplace, but I think it's actually been pretty rational for the most part in this environment, where there's been certainly a lot less volume and demand so.
It's certainly a competitive environment, but.
We don't see it being crazy by any means or anything like that and obviously you know our gross margin certainly reflects that so.
So I'd say, it's been it's been pretty rational.
At this stage two so nothing that we would say would be a concern at this stage.
Understood are you seeing big changes in customer preference from vendor consolidation and which product categories is the lowest hanging fruit youre seeing in terms of gaining share.
So on the vendor consolidation front.
You know a couple of questions a couple of areas in that so certainly we see from a client perspective that all of our clients have been driving towards we want to do business with less partners.
As they are trying to and streamlined our business and thats, even more indicative in this environment, where their resource constrained and everybody's working from home. So they are trying to simplify their operations and do business with with less people, where they can see that consolidation I think has only accelerated during the cobi prices. So I.
I think that should favor certainly some of the larger players in the industry, who have more breadth and more capabilities, we'll see how that continues to play out so.
I think thats definitely happening I.
I think you're seeing it on the.
From a vendor point of view from a a PC front theres no question that the that the dope desktop notebook business is consolidated into the large players.
And that's been going on for quite some time, so the the dell's the hps. The Lenovo is the apples are certainly.
Garnering more and more of the of the share of the business. So I think that's that's continuing as well and I think you're seeing the consolidation efforts of course, even on the infrastructure side with all the acquisitions going on.
Out there in the marketplace. So I think thats, just going to continue to accelerate from that point of view.
And then Mark what was your the second part of your question.
Just if they are vendor consolidation provides opportunity to take share.
Yes, and I think it was a low hanging fruit will discuss product categories, which.
Which product categories, I think in a firm or how to kind of what we do from a share point of view the.
The biggest area of course again being notebooks.
The way prior to try to go into the coated it was about 52% desktop environment, 48% notebooks and of course now it's like 80% notebooks and I don't think that's going to change.
So I think that that area.
It's certainly the it's the biggest area of the business and also probably the easiest for companies to to take share.
Got it.
Are you seeing a change in preference in terms of duration of agreements.
And probably within the service segment I would imagine the most and and how should we think about.
Maybe any potential impacts on the PNM, the near and medium term from the change in duration of agreements.
Yes.
I don't know that I would say that we're necessarily seeing any key change integration of agreement.
As we've made the move to the cloud.
And more of a subscription based model agreement have been anywhere between 12 to 36 months.
Depending on the particular vendor and how the how they delay.
Most agreements are.
Capsule ultimately sell.
It's not necessarily so term dependent in some cases anything moved by a couple of vendors to have term and not have decreased since the cloud agreement non cancelable.
That may be a trend going forward that it doesn't.
Significant impact in that regard either going forward, but I haven't noticed people, saying HC one at 12 month, chairman, our switching to 36 or vice versa.
Thats not something we are coming back from the sales force at this time.
And it's also committed it comes in a measured way for us Mark to our business. So it's not like it's it's one big sales group that would adjust our revenue and profit streams. So it's been occurring over the last four to five years in a very sort of measured ways, that's where I don't think youre seeing.
I felt like Adobe when adobes lift their business.
And that in a quarter or two it's happened in a much more measured way for us.
Understood got it and just final one for me can you remind us kind of what levels qualify for kind of how you think of large projects and how did that category performed sequentially and year over year. Thank.
Thank you.
Cleaning services projects Mark how are you talking about.
Oh sure or also maybe large hardware purchase orders as well.
Okay.
I would say that for us this year and particularly.
One of the categories impacted the north has been those large hydro owners as clients have all kind of pull back loaded with regard to easily around devices is what that would be where we do a run off our client the.
Some of our clients typically have a soft relief hardware refresh cycle I would say that in Twentytwenty. Many clients may have put those on hold on that Ken mentioned in his comments, we're starting to see a little bit of that of clients starting to reengage in that.
In the fourth quarter.
I'd say that was the hardest hit category.
In that regard in terms of large projects I guess, we would play typically I would say payment Alba.
$10 million range, when we're talking about a large project not including all the hardware associated with that okay.
That could add on another ano are easily that attends one tie back to one poll hardware software versus.
Services.
For each dollar services I'd say that those this year have also been constrained and what we're seeing much more.
On trend in there from on Prem to the cloud.
Either fat pad infrastructure as a service that are not typically $10 million onetime hit.
Thank you.
And our PNM.
Does this line overtime.
Great. Thank you very much.
Thanks Mark.
And your final question comes from Vincent Colicchio with Barrington Research.
Hi, yes, thank Ken the sales force additions.
Are these going to be fairly senior folks that could sort of ramp quickly as business improves certainly business towards next year.
Visit they are so we've.
This is a pretty good environment.
To hire folks.
Because the good folks are available so yes, very selective from a field point of view, but we are also additionally, augmenting our inside sales team as well and that tends to be a little.
Less experienced folks that we certainly.
Certainly less costly, but less experience, but to build that pipeline of talent as well, but this sort. So it's really a combination but yes. We are on the field side be able to hire people that.
Have experienced can bring books of business declines relate.
Relationships with them. So that's the goal and the objective that we've been on here.
And could you give us some color on your thoughts what are your current thoughts on acquisitions over a year in over a year into the PCM.
Maybe talk about the pipeline and pricing in the market and sort of.
To your thoughts about doing something in the near future.
Yes, I mean, we're we're certainly making sure that we maximize them optimize the TCM integration fully but were always out there looking as as you know the.
As we stated the PCM acquisition was sort of the two year coding process that they do take long.
So we always have a pipeline and of course, the timing is it's not very predictable it depends on the situation. So we're pretty active always looking at that but for right now.
We continue to look at that.
Acquisitions that will give us again more talent that we need.
More tuck in type acquisitions versus scale acquisitions, although we're not opposed any scale acquisitions, but right now we're we're making sure we maximize the full integration here so.
If we had to complete control over the timing it would certainly we wouldn't be doing a large scale acquisition year ending in the near term, but we're we're obviously always pretty active I think the market's pretty robust.
Good.
Many of the valuations are pretty reasonable.
At this stage of the game.
Others, there's definitely more.
More opportunity, there and more rational pricing in the market as far as acquisitions.
Okay. Thank you my other questions were asked.
Thanks at the bank and said okay.
Thank you.
Yes.
There are no further questions in queue.
Okay. Thanks for joining us today have a good week everyone.
This concludes today's conference call you may now disconnect.
Okay.
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