Q2 2021 Insight Enterprises Inc Earnings Call
[music].
Ladies and gentlemen on today's conference is scheduled to begin shortly please continue to standby we thank you for your patience.
[music].
Good day and thank you for standing by welcome to the insight Enterprises incorporated second quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session you would need to.
They start went on your telephone if you require any further assistance. Please press star zero at but now like to hand, the conference over to your speaker today, Ms Glenys, Brian <unk> Chief Financial Officer. Please go ahead.
Thank you Pasha welcome everyone and thank you for joining the insight enterprises earnings comes from conference call. Today, we will be discussing the companies operating results from a quarter ended June 30th 2021, I'm Glynis, Brian Chief Financial Officer of insight and joining me as Ken lay on my President and Chief Executive Officer if.
If you do not have a copy of the earnings release and the accompanying slide presentation that were posted this morning and filed with the Securities and Exchange Commission on form 8-K, you will find them on our website at insight Dot com under our Investor Relations section today's call, including the question and answer period is being webcast line and can be accessed.
The Investor Relations page of our website at insight Dot Com and also had copy of a conference call will be available approximately 2 hours. After the completion of the call and will remain on our website for a limited time. This conference call and the associated webcast contained time sensitive information that is accurate only as of today August 5th 20.
21.
Please call us properties insight enterprises, any redistribution retransmission or rebroadcast on this call in any form without the express what income sensitive insight enterprises is strictly prohibited income.
Raise conference call, we will be falling to non-GAAP financial measures as we discuss the second quarter 2021 financial results.
When referring to non-GAAP measures, we will refer to such measures as adjusted non.
Non get measures to be discussed on today's call include adjusted sending an administrative expenses also referred to as suggested SG&A adjusted earnings from Operation adjusted earnings before interest taxes, depreciation and amortization also referred to as adjusted EBITDA adjusted diluted earnings per share it.
And the benefit of the note hedge on a convertible day and also adjusted return on investment capital you will find a reconciliation of these adjusted measures to a gap to actually get results included either the press release on your company into my presentation issued earlier today also please note that unless highlighted this constant currency.
See all amount on growth growth rates are discussed and you install the term.
As a reminder on forward looking statements. The remainder of this conference call Ah subjects risks and uncertainties that could cause our actual results to differ materially. These risks are discussed on today's press release and in greater detail on almost recently about periodic reports and subsequent filings with the SEC with that I will now turn the call over to Ken I need your.
Following along with a slide presentation, we will begin on slide 4 Kent.
Thank you go on with good morning, and thank you for joining US today. This goes to a second quarter 2021 operating results I wanted to start off by thinking on teammates from the harmony heart and most notably the hungry this room to.
Through the first half of the year to these values were executed on the strategy that will help us and our clients accelerated is addictive and I'll do tomorrow Watson.
<unk> continued to be a challenge during the quarter remain focused on executed on or financial on operating priorities for the year was reported and our clients inventory needs.
During the second quarter I'm pleased to report that our business on a double digit top line growth across all major categories with net sales gross margin was 64% strong performance given compression of margins due to increased hardware net sales.
But Justin earnings from operations increased 6% and drove adjusted return on a bunch of capital to 13.6% up from 12.1% in the second quarter last year.
A little book insurance continued strong throughout the second quarter, given the ongoing supply constraints on longer lead times required from hardware orders were supporting our clients were helping them forecaster inventory needs, ensuring there well positioned in the queue for fulfillment in a mountainous 30 meet those needs.
As a result, we exited the second quarter with further elevated backlog from levels at the store to the quarter. We expect about 50% of this backlog was shipped in Q3, we're pleased to see the pipeline through future sales bill to healthy levels for the second half of the year and into 2022.
<unk> continued to focus on this this is Joe the account annuity by leveraging cloud solutions were clear strategy in deep expertise delivery digital solutions led us to grow cloud sales of sauce and infrastructure as a service high double digits in the quarter.
This drove cloud gross profit to 22% up more than 300 basis points year over year for the trailing 12 months we're.
We're happy with our teams continued operational execution on the second quarter and our visibility to the second half gives us confidence and got a net sales with the high end of a range as well as increasing our EPS guidance.
As we help companies shift to cloud based solutions and modernize the infrastructure. We're also engaged in discussions were on finding solutions that help clients incorporate emerging technology into the business operations. We believe these companies that maximize the value of it.
And data will emerge as the new leaders as a business and technology landscapes on drastically changed over the past 15 months, we've been well positioned to address the greatest needs of organizations to help them makes sense of operations, such as accelerating the intelligent edge and using artificial intelligence or AI and the internet of things to scale.
Leverage data to drive real time decision, making which is essential to achieving growth cost savings and market differentiation.
Recently renamed and videos 2020 software partner of the year as it advanced technology partner, we use their technology to support organizations and utilizing deep learning to gain a competitive advantage, our technical consultants and engineers help clients modernize the infrastructure to support cutting edge AI machine learning and deep learning solutions tailored.
Individual client needs.
1 example of the type of AI that allows computers to understand on label images. This computer vision.
Computer vision uses advanced analytics to analyze understand would respond to digital images.
<unk> solution is tested and validated at our in house AI proof of concept lab utilizing the clients datasets on the latest generation of AI already platforms, including the Nvidia G. B G ex system to reduce risk and ensure smoothed deployments.
If you recall, we recognized in Q4.2020, as the Forester, new wave for computer vision Consultancies as a strong performer highlighting their expertise in computer vision solutions.
As companies move to a more digital way of life. We've established the expertise on proven strategies to guide organizations, who digital first business practices that technology has the potential to radically transform industries, we know what's important to better understand the awareness adoption and perceptions of these new technologies.
This drove us to commission ITG to conduct a survey of business and I T leaders on their perceptions of computer vision.
Survey results indicated that the overwhelming majority of respondents agree that computer vision is incredible potential to transform key areas of business.
This technology uses predictive analytics to improve security and employee safety.
Detect defects during production and manufacturing and improve customer experiences.
For example, recently worked with a printer ink manufacturer to use computer vision to count pallets with a quick snap of photos, enabling people, including those with disabilities to take on greater warehouse responsibilities, while creating more accurate inventory accounts. So.
<unk>, we've helped us steel company through computer vision identify hazardous materials before they inadvertently land in the smelter to be recycled.
Ah discussed before the pandemic accelerated technology, and our ability to pivot and meet clients, where they are today, while helping them to prepare from tomorrow has been instrumental in making us the technology partner of choice for clients.
Our success is rooted in differentiation from a competition through our company values industry expertise diverse solution offerings on our ability to create meaningful connections.
It is in these connections that were showcase our ability to meet clients needs through the use of multiple solutions.
For example, our technical Sultan's designed to Greenfield data center to support our clients current infrastructure during the evaluation process, our consultants identified opportunities for the clients to modernise throughout a date applications by utilizing our digital technology experts working for a client architecture team develop solutions that fit the environment the data set.
The solution includes a new hyperconverged infrastructure, Delcor switches Vmware right size into Microsoft licensing and networking infrastructure deployment services through the Davidson of architecture team. The client will also benefit from insight managed 1 call support services.
Which started off as a single solution ended up as a multi phased approach with us provided services across our solution errors. Additionally, the client crested that we evaluate their security strategy.
We believe the strategic investments we made in our go to market solution areas over the last several years position as well to execute our business goals are solution teams are key to achieve that are long term priorities and driving value for shareholders.
Given our strong execution, bringing cloud in digital solutions to our clients. We're proud to announce we improved 49 spots unfortunate 2021 ranking 500 Fortune 500 rankings currently at number 360.
We were only 1 of 11 providers globally to be recognized and the Gartner Magic quadrant for software asset management services and we are in for Microsoft's most prestigious awards after a record setting year.
Before I turn the call over to Glenn is I'd like to acknowledge a teammate to a recently recognized as top leaders in their respective fields.
<unk> was recognized from other top 100 women leaders in technology in 2021 by Whoopee admire and also honored as 1 on Phoenix business Journal most admired leaders.
Our Chief Information Officer, Jeff Someway was named Global C O of the year by Arizona.
And it's 16 teammates were recognized with Ciara and woman in the Channel Awards and for those have been named to see errands How're 60 solution providers insight, we're proud of our commitment to embrace diverse backgrounds appreciate diverse skill sets and respect additional viewpoints from.
Racing diversity is important to our corporate culture on our focus is area was recognized in Forbes 2021, America's best employers for diversity.
We have so much to be proud of it insight proud of our brand our culture on our values and especially our teammates on 1 hand the call over to Clinton is to review the details of our financial performance. Thank you can in the second quarter of 2020 line, we executed while again just to see chicken financial priorities posting continued growth across our business 1 year out from our lowest point at the <unk>.
Pandemics and Quiche 2020.
We accomplished while continuing to invest in strategic areas to scale and support our future growth.
Moving on to slide 12, and 13 for a consolidated recounts are net Heather second quarter with $2 billion up 13% on U S dollars and 10% in constant currency compared to the second quarter of 2020 across all categories.
Gross margin was 16.4% in light of increased hardware net sales, which compressed our margins we saw only a 10 basis like contractions.
Sure.
As G&A expenses were up 10.5% year over year in constant currency and 14.2% in U S dollars as a percentage of net sales adjusted SG&A was 12.1% up 30 basis points year over year, but in line with our expectations for the quarter as a percentage of net sales SG&A on at GAAP basis was 12.
4% of Penn basis, pointing out of the air.
For the full year, we continue to expect adjusted SG&A as a percentage of net sales will be 11.7% I.
Adjusted earnings from operations was $97.7 million up 6% year over year compared to a 19% increase on a gap basis.
And adjusted diluted earnings per share with $1.91 and $1.58 per share on the gap basis.
Results for each of our operating segments are as follows.
Start with North America operating results on Slide 14, net sales were $1.8 billion on the second quarter up 14% year over year, you to increase in software licensing sales hardware sales driven by devices networking and storage solutions and services driven by cloud solutions.
Similar to last quarter as a result of supply constraints on extended critically timed or entering the third quarter with higher backlog.
Gross profit of $279 million in North America was up 14% year over year and gross margin was 15.8% compared to 59% on the prior year.
That's in part because adjusted SG&A increased 16% year over year, 11.7% of net sales driven.
Driven by increases in overall teammate head count and variable compensation due to higher gross profit attainment and also new variable compensation plan implemented January 1st.
<unk> adds a percentage of net sales on the gap basis was 12.2% on the second quarter.
For the full year of 2021, we continue to expect adjusted SG&A as a percentage of sales will be 11.3% on.
Just did earnings from operations increased 8% year over year to $72 million for the quarter on a gap basis writings from operations increased 23% every year at $64 million moving.
Moving on to EMEA on Slide 15, net sales on the second quarter decreased 4% year over year on constant currency to $417 million, while gross profit decreased 3% year on year also on constant currency.
These results were against Shawn compare in the prior year or EMEA saw growth in both net sales and gross profit year over year.
When combined with operating leverage from lower SG&A. This led to.
Just that earnings from operations of $20 million on the current quarter, a decrease of $2.4 million in constant currency.
Moving on to a pack of slide 16, net sales of 52.5 million in gross profit of $14.3 million in the second quarter increased 24, and 11% respectively year on year in constant currency due to higher sales across all categories. We've made investments in the business, resulting in a fortune.
Per cent increase in constant currency SG&A and referred to adjusted earnings from operations of $5 million on the quarter up 6% on constant currency.
Moving on to our tax rate are effective tax rate for the second quarter of 2021, with 25.4% compared to $26, 2% on the prior year quarter.
Lower effective tax it was primarily due to foreign weight adjustment offset in part by an increase in the state income tax base.
20th of the details of a second quarter cash flow performance on slide 17 year to day to the second quarter of 2021, we primarily investing in our operations generating cash flow of $5 million compared to $498 million. During the same period last year. This decrease year to year is due to changes in partner mix and net.
Sales growth with our inverted cash cycle, which resulted in lower cash from operations generated in the first half of 2021 compared to the first half of 2020.
In addition, there were discrete items in 2020 that contributed the majority of the variance approximately $280 million. This consisted of pocket payment deferrals and a large customer advanced payment on the prior year with no comparable activity on the current ear and deferred and in some cases reduce federal and other taxes to COVID-19 ninth.
Relief measures in the first half of 2020.
We previously disclosed an expectation that cash flow from operations would normalize in 2021 answer business growth. We now expect cash flow from operations will range between 125 and $175 million as a result of subsidy on double digit hardware growth experienced and Q2 and expect it to continue.
On the second half of 2021.
Inventory to support client deployment as well as changes to the part that makes an iron for it with our inverted cash cycle.
In the first half of 2021, we invested approximately $17 million in capital expenditures, mainly related technology and facility investment.
We also increase received $27 million in net proceeds from the sale of 3 building in Tempe, Arizona and our property in Woodbridge, Illinois.
Lastly, we use $50 million repurchase shares of common stock. We now have remaining authorization of $75 million. The guidance. We're providing does not include the impact any additional repurchases.
As of June 30th 2021, we had over $1 billion available under our ABL facility and we would have a capacity from future growth at.
At the end of the second quarter, we had a cash balance of $108 million of which $76 million does regiment in our foreign subsidiaries.
We had $484 million about ending Dec, including our senior convertible notes at the end of the quarter compared to prior year cash balance of $154 million and total debt of $437 million.
Living on for liquidity on slide 18 were exiting the quarter with a leverage position of 1.3 times that cash flows or EBITDA, which was well within a comfort level under our ADL agreement our primary complaints covenant as a fixed charge coverage ratio, which includes trailing 12 month EBITDA coverage over capital expenditures.
Axes and cash interest.
As of June 30th we're at 4.5 times the minimum requirement of 1 time and we're confident we can support our capital requirements and liquidity needs.
Moving on to our full year cash flow your guidance on slide 19 today, we're increasing our previously issued guidance for 2021, we expect to deliver net sales growth at the high end of our previous this day that guidance, which is between 4% to 8% over the prior year. We now expect to just a diluted earnings per share for the full year of 2021.
To be between $6.75 and $6.90, which includes unexpected 6 cent impact of the share repurchase already completed.
With this outlook assumes interest expense between $25 million to $28 million and effective tax rate of $25 million to $26 million for the full year capital expenditures of $65 million to $75 million, including the build out of our new corporate headquarters and on average share count for the full year of 35.5 million shares.
This outlook excludes the following acquisition related intangible.
Amortization expense of $32 million, the non-cash convertible that discount on issuance costs reported as quite a interest expense of approximately $12 million and it seems no acquisition related or a separate from restructuring expensive.
I will now turn on the call back to Kenneth.
Thank you glynis on.
I think our teammates across the world for not making making this day of 1 of the best places to work with also making US the technology partner of choice for our clients, helping to maximize the value technology today and accelerating for tomorrow.
Currently industry analysts expect high single digit growth across hardware software and services sales were on it.
It remains unclear how the COVID-19 variance could impact the year. We believe we are well positioned to compete in the air as our clients the most including improving the workforce experience.
<unk> on their data centers, securing their critical platforms and utilizing their opportunity to go digital.
In closing I announced my retirement through on my last call through Board continues to make progress in the evaluation of internal and external candidates from the search from a replacement is a very critical search for insight and I will continue to work with the board to identify the new CEO are.
I remain committed to leading this team until the right successor is appointed that includes my comments. Thank you again for joining us today Ah No open up your line for questions.
Ladies and gentlemen, as a reminder to ask a question you would need to press star 1 on your telephone to withdraw your question first.
<unk>, please stand by while we compare the Q&A roster.
And your first question is from the line of Catherine Huntley with Raymond James.
Hi, This is Catherine on for Adam Thanks for taking our questions can you. Please talk about P. C demand specifically digging into notebooks are there any signs of supply catching up with demand. We have started to hear that chromebooks, specifically has been slightly we related and supply and just wondering if you've heard the same.
Yeah. Thanks Kathryn.
Definitely on the Chromebook front, there's no question that supplying us caught up pretty significantly there from work.
Was a quarter ago.
Expectations are of course will still be with the new infrastructure bills coming still increased spending in demand, but we do believe will go more towards a normal cycle and the education market for chromebooks, but no question that there is significant more availability.
4 chromebooks not the same situation on new windows platforms, those to still continue to be more and tighter supply, let's say, it's not a panic situation by any means I think it's been well managed by the by the suppliers in regards to the icy shortages.
<unk> certainly slight increases in asp's because of that as well.
And of course, we're very much encouraging our clients to give us more.
Advanced lead times and bookings for that so we're seeing that come into play. So certainly tight I think it's going to be as you've seen tight for the next 4 quarters.
That regard, but I think it's been on them.
I'd say manageable at this stage.
Okay. Thank you for that color and then you also highlighted cloud, but can you highlight other areas of consumer spending and how they're changing as your progressive.
Yes, I would say that is certainly cloud has continued to accelerate as we've all seen in many many areas and we're pleased that.
As we mentioned this now represents 22% of our gross profit dollars coming from these infrastructure and SaaS cloud solutions in the market. So that continues to be an area of focus on services solutions for us.
So no question, that's continued to accelerate you'd already touched on of course, the the notebook on.
Migration that continues to move very very fast as well and we're seeing the infrastructure spend start to increase as.
As well as people are starting to invest into the data centers and into the.
Private infrastructure and then of course security is continuing to be very.
Very very robust with all the things that we're seeing with the continuation of cyber attacks and so forth. So those are key areas and then as I mentioned in my the script notes of course, all companies really becoming more digital so we see continued acceleration, they're very very high demand on all of our 1500.
<unk> software solution architect solutions, very very high demand on their skills and what they're doing to really help clients modernized.
6.
Your next question is from the line of Matt Sheelen with Stifel.
Yes, good morning, everyone kind of I wanted to do a follow up on on the last dot question regarding.
Particularly on the hardware side on the demand.
Situation, both from you talked about backlog being up booking is being up how much of that is related to the client devices like notebooks vs infrastructure servers storage networking.
Yeah, certainly would you'll see if you look at MPD Davis, what those shows Mad is that all.
All the categories were up substantially in in the second quarter.
The only 1 that declined really was desktops and of course as you know that's been migrating more towards notebooks, but when you look at the notebook acceleration of more than covered any of the decline that we saw on desktops overall.
So good to see that that's been going on the notebook migration and volumes of going up dramatically over the last year, but it was good to see the infrastructure type of spending to also start to increase from a revenue point of view as well as very much from our bookings point of view and of course, we're talking networking.
Storage as well as some servers. So that was that was positive to see that continue to trend in the current booking rates are continuing in that same day in here as we as we look at Q3.
Are you seeing supply uhm issues on the infrastructure side of things as well.
Yeah, not nearly to the same degree as receive certainly in the notebook side on the equation, but definitely starting to see constraints there on that as it goes through the systems. There is no question that that's.
Again, encouraging our clients to give us more advanced.
Booking rates in regards to that but yeah, that's definitely starting to impact some of that as well.
Okay, and then on a S.
You talked about I think <unk>, but are you seeing a as fees increase in other areas and is that changing.
The thought process for our customers in terms of configuration, expanding your budget Scott sort of thing.
Yes, most of the increase to think of mostly occurred on the notebook from I think we'll see another maybe 1% increase on.
Here in Q3 and that space.
I'm, a pretty pretty small increase in H PS and then for the most part it's really been.
A little bit of increases on the infrastructure side again dependent upon the supply constraints and obviously their costs are going up but I'd say, it's been pretty minimal at this stage as far as seeing those kind of any.
Any kind of ESP increases on the infrastructure scientists from pretty pretty minimized.
Okay, alright, thanks very much.
Your next question is from the line of descent Colicchio with Barrington Research.
Yeah.
Thanks for asking answering my questions. This quota Chen.
And what areas of the business are you experiencing the most of it while his share gains.
I'd say as far as where we're seeing the the share gains again as the areas that are that we're very focused on is in the area of helping their clients Diddley transform so all aspects of that we're really and begin our competition. There primarily really is the <unk> centres of the world.
That's that areas Tho those are really our primary competitors in that space cap Gemini.
On those type of not our traditional competitors.
That you are used to so that area continues to certainly accelerate.
Associated with that as we hope on our clients in that space of courses leading to cloud transformation on.
With our clients as we help the modernized so that again continues to grow very nicely as I mentioned now it's 22% of our gross profit dollars coming from the cloud so that along with the associated services.
A very very big and then I'd say the security aspects as I mentioned earlier continue to accelerate to those those would be very key on the spiritual growth.
And where do you think we are in the public sector and education cycle. It's been strong for quite some time is this.
What do you think it's going to wind down at some point in the near future.
Yeah I mean, there's there's no question you saw the the robustness of Chromebooks and just by looking at the amount of supply that has caught up.
I think we would indicate that uhm.
B I think more of a moderation and I think you'll get 2 more of a normal sort of cyclical pattern here is the past year there is.
Amazing amounts of Chromebooks sold into the education market. So I would definitely expected that would start to cool off to some degree but you.
You will see that.
Will will operate from a new base level of of Chromebooks from you did before but certainly I wouldn't expect the kind of acceleration we've seen over the last 3 quarters there.
Uhm on the Chromebook side.
Hey, thanks for asking questions.
Answering my questions. Thank you 2 thing.
As a reminder, ladies and gentlemen, if you would like to ask a question. Please press star 1 on your telephone keypad. Your next question is from the lineup Anthony maybe we didn't ski with Sidoti and company.
Good morning, Thank you for taking our questions I joined the call pretty late so I apologize if I ask questions that you may have already answered but.
Looking at the back half of the year, just how should we think about the gross margins.
Just wanted to get a better sense of us so.
How should I think about that.
Yeah, <unk>, so hi, Anthony.
We set up this started yet we anticipated that are gross margins would be flat to slightly down as hardware gross hydroid is going to be continuing to grow in the second half of the year, we were at 16 point.
4% and that was down 10 basis points vs. Prior year, and Q2, which day would also include some some hardware growth. So I would say with cell Amtrak to kind of end up a flattish too slightly down from a gross margin perspective for the full year.
Great. Thank you and then.
Okay. Just wanted to get have you seen any changes lately in terms of your customer buying patterns given the delta variance that are out there and whether.
That could impact as far as it seems like some companies always have to talk about the delay when people get back into the to the.
The offices on <unk>.
So as it happens to just wondering how should we think about the potential impact on your business.
Yeah. So on the Delta variant and of course there'll be other variants coming I'm sure as well we haven't seen the impact I think people are really become pretty resilient and adjusted to this this new situation.
So we haven't really seen that certainly the U S as in far better shape than other parts of the world, but when we look at our business in APAC, which of course is under a little bit more severe.
Lockdowns when you look on Australia, and New Zealand.
Tried to get to hire vaccination rates, we really haven't seen that business you have declined at all they had a very very solid quarter. As you saw in a results in APAC Europe again, uhm closer to where the U S is but still having some issues on the very but uhm markets are open, but we definitely haven't seen any any.
Kind of change or pullback in that regard I think as we know most of the governments who are trying to keep businesses open a lot more than they did certainly last year at this time so.
So far so good uhm entered but were watching that closely.
Got it okay and can I interest also talk about broadly about performance of your different the photo vertical markets. I know you touched a little bit of a on education, but on anything else as far as what you are being.
In terms of the other vertical markets.
Yeah, I think when you look at health care is starting to certainly rebound from.
Some pretty depressed levels last year.
I would say that the the hospitality industry and including hotels Airlines cruise lines.
Starting to certainly repair, but certainly not back to where we'd see in 2019, but certainly up from where they were last year as there's hope and expectations for many of them that you know people will start cruising again, but that's that I think is increasing but not not nearly to the level of 2019, but.
Everything we hear and as we discussed with these clients that they do anticipate that to improve certainly significantly over the next next couple of quarters.
When you look at the manufacturing sector I think <unk> you see what's occurring there that's been.
Pretty well pretty well on on good Footie. So we see consistent growth there finance vertical which is a big vertical of course for it.
Continues to do well I think they're they've navigated.
Pretty well throughout the throughout the pandemic and we start to see that start to more open up but I think there's no question as people get back more on to offices, which the expectation was that would start to occur here in the early part of of.
The fall now it looks like it could be pushed out a little bit I think that will also lead to some acceleration once that gets on better footing.
Overall I would say is glimpses commented heard her notes there was the fact that we certainly do expect to be at the higher higher range of our our guidance of 4% to 8% growth for the year.
Got it alright, well, thank you very much and best of luck.
Anthony Yankee.
Mmm.
At this time, ladies and gentlemen that concludes that Q&A session. We do thank you for participating in today's call an ex set you know disconnect your lines.
[music].