Q3 2021 Insight Enterprises Inc Earnings Call
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Excuse me. This is the operator speaking todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
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Good day and thank you for standing by your welcome to the Insight Enterprises, Inc. Third 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 will need to press star one on your telephone if you require any further assistance. Please press star zero.
Thank you I would now like to hand, the conference over to your speaker today.
And as Bryan Chief Financial Officer. Please go ahead.
Thank you welcome everyone and thank you for joining the insight Enterprises earnings conference call today, we will be discussing the company's operating results for the quarter ended September 32021, I'm Glynis, Bryan Chief financial officer of insight.
And joining me is Kim Ann Mink, President and Chief Executive Officer. Today. We also welcome Joyce Mullen President in say North America, who will succeed Kenneth <unk>, President and Chief Executive Officer effective effective January 1st 2022.
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 Investor Relations section of.
Todays call, including the question and answer period is being webcast live and can be accessed via the Investor Relations page of our website at insight Dot com and archived 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.
Nation that is accurate only as of today November 4th 2021.
This call is the property of insight enterprises, any redistribution retransmission or rebroadcast of this call in any form without the express written consent of insight enterprises is strictly prohibited.
Today's conference call, we will referring to non-GAAP financial measures as we discuss the third quarter 2021 financial results when discussing non-GAAP measures, we will refer to them as adjusted you will find a reconciliation of these adjusted measures to our actual GAAP results included in either the press release on the accompanying slide presentation.
Issued earlier today. Please note that unless highlighted as constant currency all amounts in growth rates discussed are in U S. Dollar terms as a reminder, all forward looking statements that are made during the conference call are subject to risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in today's press release and in greater detail in our most recently filed pure.
Nick reports and subsequent filings with the SEC with that I will now turn the call over to Ken and if you're following along with the slide presentation. We will begin on slide four Ken. Thank you Glenn Good morning, and thank you for joining us today and what will be my last earnings conference call as President and CEO of insight.
Delighted to hand, this responsibility off the choice on future calls and I'm confident about insights future under his strong and capable leadership as he steps into the role of President and Chief Executive Officer on January one.
As we also Port choice center transition to this new role at insight, we remain committed to delivering on our financial objectives and long term priorities. As a reminder, our long term priorities are to continue to innovate to capture share in high growth areas grow with solutions that drive business outcomes for clients expanded scale and strategic clients and markets and demonstrate.
Obsession by optimizing client experience through operational excellence now.
Now turning to the third quarter 2021, and operating results on slide five we.
We had an excellent quarter, driven by 26% topline growth, including hardware growth of 36% compared to prior year.
We delivered a double digit increase in adjusted earnings from operations up 30% compared to last year's third quarter.
Hardware booking trends continued strong throughout third quarter, while supply constraints did not ease up as originally anticipated throughout the supply chain, we continue to support our clients by helping them to better forecast their it needs.
We exited the third quarter with elevated hardware backlog above levels at the start of the quarter we.
We expect about 50% of this backlog will ship in Q4, we were pleased to see the pipeline for future sales continue to build to healthy levels into 2022.
Clients continue to focus on business agility and continuity by leveraging our cloud solutions with trend that increase in pace during the pandemic.
Through our deep expertise delivering digital solutions, we've grown sales at both SaaS and infrastructure as a service mid to high digit sales.
Sales growth for the quarter. This drove cloud gross profit to 21% of total gross profit up more than 200 basis points year over year for the trailing 12 months.
Over the last 18 months, we've seen a rapid acceleration of digitalization, it's gone from supporting the business to becoming the business in many industries.
For our clients' challenges arise and growth can be impaired if necessary investments in technology and transformation strategy are deferred or poorly implemented it.
At insight, we bring a wealth of knowledge and share best practices that help point our clients in the right direction to re imagine how they work.
In a recent example of this on slide six we help the client migrate their on premises data centers to the cloud as part of the shift to digital headquarters.
Our client our foodservice as chain with 250 locations across the U S, India, and Thailand recognizes that eliminating its physical ahead, the quarters would require replacing on premises data centers with a cloud solution.
Cause our client has a long standing relationship with insight. They knew we offered the expertise and experience to advise and support every step of the migration process.
The inside of professional services team work with the client on the cloud economics assessment to better understand which workloads will be moved as part of the migration in which cloud solution provider would be the best fit.
Inside team work the clients through the right sizing process determined that configuration needs for its new cloud based data center at.
At insight, which started as a professional service engagement now includes ongoing managed services provided in our client greater flexibility better we don't see in resiliency and improved operation that automation for net new workloads that have migrated to the cloud.
Whether our clients are re imagining the workplace, we're looking to evolve with it in today's digital first business climate organizations are seeking more guidance on how to navigate. These key changes. These include the shift to the intelligent edge multi cloud and hybrid environments and managing spend as they move from traditional it procurement.
As a service consumption models.
On slide seven one example of innovation changing the way our clients do business is in wireless connectivity, which is becoming an increasingly critical part of everyday life, we combine innovative services and strategic partnerships to offer a full suite of integrated network and security solutions to our clients.
We achieved the designation to <unk> for Enterprise branch specialization from Cradle point, a global leader in cloud delivered LTE and <unk> wireless edge solutions with this designation, we're positioned to sell credit points comprehensive portfolio of <unk> solutions.
These capabilities are pivotal to delivering fast and consistent communication required for edge computing.
Through these efforts our clients are enhancing their business through <unk> secure connections and taken a step towards the future. The insight create a point partnership represents our commitment to offering innovative services in a way that takes the complexity. They are adopting next generation technologies by assessing the unique needs of our clients building the strategy to embrace the best solutions and then delivering.
Supporting those solutions for lasting success, our end to end skill set across our broad portfolio promises a faster more strategic way to implement innovative technologies.
We will continue to make the strategic investments in our go to market solution areas to order to achieve our long term priorities and drive value for shareholders. Our long term priorities are aligned to deliver on our financial commitments. We continue to be pleased with the execution. This year and we remain optimistic about the prospects with the supply chain of market recovery continuing to <unk>.
And into 2022 today.
Today, we increased our outlook for 2021 from our previously issued guidance, which reflects continued progress towards these goals as well as our long term goals that we outlined at our Investor day in late 2019, I will now hand, the call back over to Glenn is to review the details of our financial performance. Thank you, Ken and the third quarter of 2021.
All against our financial and strategic priorities posting continued growth across our business.
We accomplished these results while continuing to invest in strategic areas to scale and support our future growth.
We'll go now to slide 11, 10, or 11 for our consolidated results. Our net sales in the third quarter were $2 4 billion up 26% in U S dollars at 25% in constant currency compared to the third quarter of 2020. This represents record net sales for insight.
Higher hardware net sales of 36% drove gross margins of 14, 9% SG&A expenses were up 12, 6% year over year in constant currency and 13, 8% in U S dollars as a percentage of net sales adjusted SG&A was 11, 1% down 110 basis points year to year.
And in line with our expectations for the quarter as a percentage of net sales SG&A on a GAAP basis was 11, 4% down 130 basis points for the full year. We continue to expect adjusted SG&A as a percentage of net sales will be around 11, 7%.
Adjusted earnings from operations was.
Okay.
$93 5 million up 30% year on year compared to a 35% increase in earnings from operations on a GAAP basis.
And adjusted diluted earnings per share was $1 87 up 36% and $1 51 per share on a GAAP basis, an increase of 37%.
Going on to the results of each of our operating segments, starting with North America.
<unk> 12, net sales were $2 billion in the third quarter up 30% year over year, primarily related to an increase in hardware sales driven by 38%.
Hardware net sales up 38% driven by devices networking and storage solutions and services primarily related to cloud.
Similarly to the last quarter as a result of continued supply constraints and extended product lead times, we're entering the fourth quarter with higher backlog, we expect about half of this fiscal quarter.
Quarter.
Gross profit of $296 million in North America was up.
20% year over year, and gross margin was 14, 7% compared to $15 nine in the prior year North America's adjusted SG&A increased 16%, you'll hear which represents 10, 5% of net sales the increases were driven by investments in home halting of head count and other employee expenses as well as variable compensation due to higher gross.
Containment.
Variable compensation plan implemented this year SG&A as a percentage of net sales on a GAAP basis was 10, 9% in the third quarter.
For the full year of 2021.
We expect adjusted SG&A as a percentage of sales will be 11, 3% adjusted earnings from operations increased 31% year over year to $84 million for the quarter on a GAAP basis earnings from operations increased 37% year over year to $74 million.
Moving onto EMEA operation on Slide 13, net sales in the third quarter increased 7% year over year in constant currency to $381 million due.
Due to an increase in hardware net sales driven by increased volumes to corporate clients and services, primarily insight delivered services and cloud solutions gross profit increased 6% you'll be on constant currency, we invest in the business, resulting in a 6% increase in SG&A, which led to adjusted earnings from operations of $6 million in the current quarter.
Up 3% in constant currency.
Moving on to APAC on Slide 14, net sales of $46 million and gross profit of $13 million in the third quarter increased 21% and 26% respectively.
In constant currency due to increases in hardware net sales driven by large transactions from Covid and enterprise clients and services, primarily insight delivered services.
Adjusted earnings from operations of $4 million in the quarter were up 52% in constant currency.
Moving on to our tax rate, our effective tax rate for the third quarter of 2021 was 25, 4% compared to 23, 8% in the prior year quarter.
Our effective tax rate was primarily due to beneficial changes in tax laws that were issued during the prior year, which did not recur in 2021, partially offset by current tax benefits related to equity compensation.
Turning to the details of our third quarter cash flow performance on slide 15 year to date through the third quarter of 2021, we invested in our operations in Houston to $18 million of cash compared to cash generation of $462 million.
In the same period last year, the decrease year to year is due to a 36% increase year over year in hardware net sales changes and partner mix, including increased volume with distributors and associated early patrons as well as an increase in inventory purchase to support clients year over year, which contributed to increased use of <unk>.
Cash, resulting in low cash.
From operations generated year to date September 2021, compared to the prior year in.
In addition.
Good evening.
They were discreet items in 2020 totaling $180 million that consisted of pocket payment deferrals and a customer advance payments in the prior year with no comparable activity in the current year.
And deferred federal other taxes to COVID-19 relief measures in the first nine months of 2020.
We sell hardware growth of 36% in the third quarter above our original expectations for the quarter, we now expect double digit hardware growth.
In Q4, which will further impact our cash flow generation, our current estimate of cash flow from operations for the full year 2021 is between $50 million to $75 million.
And the first nine months of 2021, we invested approximately $28 million in capital expenditures, mainly related to technology and facility investments. We also received $27 million of net proceeds from the sales three buildings in Tempe, Arizona and a property in Woodbridge, Illinois.
Lastly, we use $50 million to repurchase shares of our common of our common stock in Q2, we continued to have $75 million remaining under our share repurchase authorization as.
As of September 32021, we had approximately $1 billion available under our ABL facility and we have ample capacity to fund future growth.
At the end of the third and fourth quarter, we had a cash balance of $107 million of which $91 million was resident in our foreign subsidiaries, we had $527 million.
Debt outstanding, including our senior convertible notes at the end of the quarter compared to prior year cash balance of 75 million and total debt of $293 million.
Moving on to liquidity on slide 16, we exited the quarter with a leverage position at one three times debt to cash flows or EBITDA, which.
Which is well within our level of comfort under ABL agreement. Our primary compliance covenant is a fixed charge coverage ratio, which includes trailing 12 months EBITDA coverage over capital expenditures interest and cash taxes cash interest.
As of September 32 at four three times, the minimum requirement of one times and we're confident that we can support our capital requirements and liquidity.
For the full year guidance on slide 17, we are increasing our previously issued guidance for 2021 that we discussed in our call last quarter. We now expect to deliver low double digit net sales growth over the prior year and we expect adjusted earnings per share.
For the full year of 2021 to be between $7 $7 10.
This outlook assumes interest expense between $25 million to $28 million and effective tax rate of 25% to 26% for the full year 2021 capital expenditures of $65 million to $75 million, including the build out of our new corporate headquarters and an average share count for the full year of $35 5 million shares.
This outlook excludes acquisition related intangible expenses, approximately $32 million, the noncash convertible debt discount and issuance costs reported as part of interest expense.
$12 million and assumes no acquisition related or severance and restructuring expenses.
I will turn the call back. Thank you glynis I'd like to thank our insight teammates all we've accomplished during my tenure together, we have transformed insight and begun the journey to become a global solutions integrator, helping solve our clients' most pressing challenges we've seen revenue grow from 4 billion to 9 billion and adjusted diluted earnings per share on an annual basis.
From $1 eight to over $7.
Most importantly, we've seen inside become a best place to work with numerous recognitions throughout our global locations and as evidenced by Forbes recently at least last week of the top global companies were in fact ranked number 95 overall number 12 for all technology companies it.
It has been my greatest perpetual honor to lead this amazing company to work alongside a incredible teammates around the world and joined forces with our partners to serve our clients not only is inside a great place to work for our teammates, but we're creating value for our shareholders partners and clients and all we do that concludes my comments. Thank you again for joining us today and we'll now open up the line for your questions.
<unk>.
Thank you and as a reminder to ask a question you will need to press star one on your telephone again, thus far one on your telephone please standby, while we compile the Q&A roster.
Your first question comes from the line of Matt Sheerin from Stifel. Your line is open.
Yes, Thank you and good morning.
My first question, Ken just around the gross margin.
And also just the strength of hardware could you.
Maybe be a little bit more specific in terms of that mix there.
Was it more client devices versus solutions.
And if it's on the infrastructure side I would think there'd be more services attached to that so.
Meaning offsets the margins so could you give us a little bit color on that mix.
Yes, we discussed that we had 36% hardware growth pretty pretty significant.
Certainly the biggest portion of that was in the device area as we continue to see constraints in tremendous demand in that area. So that was the biggest portion but in that mix. We did see certainly high single digit growth in our data center products as well, so even though risk constraints, there's still product flowing in there, but again the majority of it being certainly in the.
A device category.
Okay and.
By devices are we talking about like commercial notebooks and desktops.
The biggest portion of course being notebooks, which of course is really accelerated desktops continues to be a good piece, but it's declining certainly from where it was prior to the pandemic.
This handhelds in there which is classified as his iPad type devices.
And there is some certainly smartphone devices in there that we also utilized really not not for consumer use but certainly for <unk>.
<unk> really more like a <unk>.
Many iPad kind of situations. So that's what we would call in the device area, but the biggest portion of that by far is notebooks.
Got it and in terms of your outlook for Q4.
Backing into that.
Our outlook for the year, it looks like youre going to be up modestly one or two points perhaps sequentially.
Typically there's a little bit more seasonality I know in your business, particularly.
In in Europe, and then also in <unk>.
North America Enterprise, so were there pull ins in the quarter why youre not going to be up that much sequentially or are there product constrained so part of that as well.
Yes, I think it's certainly all of the above and then of course, you've also got to look at you know, Matt the comparison as well Q3 compared to last year was certainly a far easier than Q4 as when it started to really recover as you might recall when we did have growth in Q4 last year. So I think it's that combination is what youre seeing there so nothing nothing abnormal I think the.
Supply constraints are going to continue as we all know for a bit but again, we also have to keep in mind that we did grow hardware, 36%. So it's not like it's a tremendous constraint.
I think it's it's working through the system and.
The good thing about that is it will lead to I believe you know next year, where people are talking about devices decline certainly Gartner is predicting that we don't see that at all we think that devices are going to continue to be strong through 2022, because there's so much pent up demand is not being supported and clients are basically increasing.
Sort of their cycle and instead of refreshing sooner they are having to basically sweat those assets longer. So so I believe it bodes well for the next year or two for devices as well.
Okay, and just lastly, looking at the Q4 gross margin.
Based on the SG&A guide you can back into it looks like an increase in gross margins sequentially is that again a mixed based on reason we're aware.
More services or less hardware mix.
Yeah, Glenn I wanted to touch on yeah, you're spot on it's going to be the fact that hardware, whilst continuing to broaden as low double digit growth in <unk>.
Q4, 36%, we saw earlier, so the impact of hardware and overall gross margin a little bit more muted in Q4 it anyway.
Okay, well, thanks, very much and Ken congratulations on your career and insight enjoys best of luck to you.
Thanks, Matt appreciate it.
We will be with you in a few moments.
And your next question comes from the line of Adam Tindle from Raymond James Your line is open.
Okay. Thanks, Good morning, everybody, Tim My congrats as well I always enjoy your strategic commentary on these calls so wanted to throw an open ended question to have you maybe reflect on industry evolution. During your tenure and your expectation for the next decade or so it's still very fragmented at the bar level the distributor.
<unk> has recently significantly consolidated wondering if you see error bar consolidation in a bigger way or any big themes that you want to highlight on a go forward basis.
Yeah, Thanks, Adam for that.
Certainly the model that we've seen certainly in my tenure has been moving certainly from in general the reseller type model to really be what we call a solutions integrator Theres no question delivering more value and I think youre seeing that with many of the scale players delivering.
More and more services more and more solutions to the marketplace.
There is a big trend of course towards as a service consumption models, that's occurring as well.
I do believe that that does favor in many cases, the larger scale players due to the complexity of that the systems that are required to really implement that properly. So I do think those aspects do favor the scale players not to say that the smaller niche players aren't still going to have a have a play they always do they're very very nimble, but I think overall.
There are some pretty big changes there that the challenge and we've been pretty acquisitive as you know the challenge that we find on.
A lot of the smaller players and trying to consolidate them is in many cases, there there isn't a lot of cost synergies as you know they are very very heavily geared towards.
Owner model, where the owner does quite a bit of the work and there's a lot of relationships. So those things become a.
A little bit challenging when you try to roll those things out and we spent a lot of time trying to understand if that was that was it possible play now theres a lot of mid tier companies that certainly have more scale that does make some sense and I think youll see more consolidation there on that front, but yes that is certainly the trend I think that's what our partners are demanding and very importantly, what our clients are demanding it.
Difficult to go to a client today and just basically be one truck you've got it you know the clients are looking for companies that really can deliver solutions across as an example, their datacenter you can't just do one aspect of the data center anymore. You have got to do it all and you've got to have a security umbrella onto that as well. So it takes a lot of skills and a lot of complexity.
They're so so I do believe that that is starting to favor and youre seeing that of course in the growth areas. When you look at the numbers and so forth for the largest scale players are having some more significant growth in these smaller players are over the past few years. So.
Yes, so I think the industry couldnt be in a better position in my mind. When you look at what's going on and it's all about the data. It's all about AI, which is just starting its all about the intelligent edge, which is again just starting.
So I think it's going to be really robust outlook for the next 10 years in my mind.
Interesting.
I wanted to I do want to talk about some near term questions and Ken Im sure Youre not going to Miss these.
Maybe maybe we can touch on backlog and the composition of backlog in particular I'm just wondering if the devices are the predominant.
Portion of mix within your backlog and if so how do you that demand as you invest in inventory to fulfill that is there any penalty for cancellations or double ordering.
Yes, unless joyce to touch on some of that and I'll add some commentary as well. So just wanted to jump in and give you a perspective on that.
Yes so.
So Adam I think that the.
So first of all I would say that we still see very robust demand.
Backlog is is reflective of our overall demand that we've seen so notebooks certainly are still a very significant component of our backlog. We did see some some I wouldn't call. It recovery because the backlog still grew in in notebooks that we did see some catch up in terms of demand and invoicing.
Q3, so we got those numbers a little closer together.
We did see increased backlog in networking and storage.
Desktop so actually.
And displays so our backlog is pretty robust as as a glynis and Ken both stated we expect about 50% of the backlog to ship in Q4.
And we've seen no evidence zero evidence of the demand perishable demand or double booking we have of course seen and actually supported some cancellations of orders and re booking to make sure we optimize for delivery time, and helping clients get what they need but we have.
<unk> not seen evidence of of double booking and we certainly keep keep in very close contact with our distributors and our partners to make sure that's not happening.
Got it maybe just one final one for me so I can spread it around to everybody glynis.
I wanted to ask on the cash cycle. So I did notice that you obviously had a heavy mix of devices that put pressure on gross margin of course like you talked about in the quarter hardware was up significantly but on the cash cycle. We would typically think those turn quicker and help the cash cycle. So.
Maybe you can comment on why gross margin is down in working capital was up.
Oh, so the combination of the tightened.
Equipment kind of where we get the product from and we have shorter payment terms with certain this season Oems versus others and it's just the mix of the business with regard to those shorter payment terms relative to let's.
Let's just say other Oems, where we have 30 day facilities or inventory financing facility that we have our 60 day terms that will support two primary two primary vendors.
Those were not the ones that we're a high in Q3. It was other vendors that were high in Q3 and it is just the mix of business in terms of how how we have the early pay discounts that help us from a margin perspective, but also credits from an overall cash cash flow perspective.
Okay got it.
After then we're collecting we're paying to vendor faster than we're expecting kind of a client it's.
It's the inverse of what happened in 2020.
Right understood Ken Congrats again Joyce welcome to the call. Thank you. Thank you all congrats on the quarter.
Thanks, Adam.
Thank you and your next question comes from the line of Vincent from Barrington Research. Your line is open.
Yes.
And what.
What product categories currently offer the most opportunity.
To gain share.
Big question, there I think again the market is robust in so many areas.
Areas of course that we're very focused on as you know is in the solutions side. So the as a service consumption models. The multi cloud approach to the business is an area that we're very focused on so we think there's ample opportunity to continue to grow with.
Microsoft Azure as an example huge opportunities there on that front, so thats an area and of course everything is about security today, there isn't one client that's not.
Talking to us about security with all the <unk>.
<unk> attacks and so forth out there social security again continues to be a very robust opportunity and then of course as George touched on Glen touched on the hardware situation again very robust.
At this stage.
As you can see what the growth factors supply constraints are troublesome, but they're not.
Having a dramatic impact on or limiting our growth and I think it's actually going to help us as we go into 2022, where there'll be lots of pent up demand here is still in the ability to flush this backlog out to them to really provide some good growth in the hardware sector next year as well.
And could you give us some more color on the mix of the software business.
Yes, the software business of course for us.
Extremely important big portion of our business very strong of course, with Microsoft and all of their their product categories across the board.
We do a significant amount of business of course.
More and more vendors are moving their Cisco has got a big software business today, that's real important to us of course, Vmware very important on the infrastructure side.
Well then of course Adobe Rep.
It represents a good portion of our of our revenue stream and then of course.
Plethora of security software solutions out there as well so a very important part of the business.
More and more.
You know partners of course, we're driving more towards software and these consumption models. So that's an area that we certainly continue to invest in.
What areas stand out as.
Our strongest quarter in terms of growth.
For Q3, certainly the biggest growth areas were certainly hardware as you can see but we're also very pleased with.
The ability of our.
Our cloud software.
Offerings cloud now as a percent of our GP is up to 21%. So that continues to be very very robust part of our growth portfolio that.
That we're really pleased with and that's a key indicator for us going forward.
And are you seeing any impact a significant impact from wage inflation.
In terms of.
Are your existing employee base.
Is this something that you.
Worry about when you go to sleep at night.
Yes, I think everybody every industry is seeing that from fast food chains to you know to our industry certainly we're all seeing that.
We've been able to manage it very very closely but certainly there is no question. There is there is wage inflation throughout all positions.
Most sought after physicians of course are the real technical architects software development areas for us, but we've been able to continue certainly to grow that head count year over year pretty nicely, but certainly not without its challenges and certainly.
Increases, but we're also seeing increases.
Our integration centers and warehouses like everybody else's.
We're competing there so we've been able to manage it it hasnt been.
It hasnt drained and our ability to support our clients, but it's certainly something that we continue to watch and we think it's it certainly it looks it looks to be that's going to increase and continue to increase certainly into 2022.
Okay.
Yeah, So Ken Congrats on your tenure and choice. Good luck, that's all I have thank you.
I appreciate it.
There are no further questions I would now like to turn the call back to Ken for final remarks. Please go ahead.
Yes, so again, thanks, everybody for joining and we appreciate you listening in thank you.
This concludes today's conference call. Thank you all for participating you may now disconnect.
Okay.
Yes.
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