Q1 2022 Insight Enterprises Inc Earnings Call
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Conference is scheduled to begin momentarily until that.
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Good day, and thank you first funding by welcome insight.
Their pricing.
Arthur.
This conference call.
All participants are in a listen only mode. After the speaker presentation. There will be a question and answer session will ask the question. During the session you will need to press star one on your telephone keypad. If you require any further assistance. Please press star zero I would now like to hand the conference here.
Speakers today Glynis Bryan our CFO . 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 March 31, 2022, I'm Glynis, Bryan Chief Financial Officer of insight and joining me is Joyce Mullen, President and Chief Executive Officer, If you did not have a.
Copy of the earnings release or the accompanying slide presentation 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 insight Dot com under the Investor Relations section.
Today's call, including the question and answer period is being webcast live it can be accessed via the Investor Relations page of our website at insight Dot com.
An 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 that is accurate only as of today may six 2022.
This call is the property of insight enterprises, any retrans redistribution retransmission or rebroadcast of this call in any form without the express written consent of insight.
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Prohibited.
And today's conference call, we will refer to non-GAAP financial measures as we discuss our first quarter 2022 financials account when discussing our non-GAAP measures, we will refer to them as.
You will find a reconciliation of these adjusted measures to our actual GAAP results included in the press release or the accompanying slide presentation issued earlier today also please note that unless highlighted as constant currency all amounts and groceries discussed are in U S dollar term.
As a reminder, all forward looking statements are made in this conference call are subject to risks and uncertainties that could cause our actual results could differ materially. These.
These risks are discussed in today's press release and in greater detail in our most recently filed periodic report and subsequent filings with the SEC.
All forward looking statements are made as of the date of this call and except as required by law. We undertake no obligation to update any forward looking statements made on this call whether as a result of new information future events or otherwise with that I will now turn the call over to Julie and if Youre following along with the slide presentation. We will begin on slide four.
Thanks, So much glynis Hello, everyone and thank you for joining US today. It is my pleasure to report our performance for the quarter. We delivered a record Q1 for revenue gross profit and adjusted diluted earnings per share year over year net sales grew 21% adjusted earnings from operations grew 31%.
And adjusted diluted EPS grew 39% with supply constraints somewhat easing for devices hardware net sales grew 27% year over year, which was higher than expected product demand remained healthy and hardware backlog bookings grew faster than sales, resulting in another sequential increase in our ending backlog.
The demand for our services business is also healthy bookings grew over 20% in Q1, and we expect strong double digit bookings growth to continue in Q2, our cloud business continues to perform well with gross billings growing more than 20% year over year. These points demonstrate that clients are looking to insight to provide more services than ever as.
Asian, and labor shortages have increased their focus on digital transformation and automation projects.
We're proud of these results and even prouder of the insight teammates who worked tirelessly to meet our clients' needs and expectations.
As CEO . It is my privilege and responsibility to assemble a world class leadership team a team that will drive the transformation required to accelerate our vision of becoming a leading solutions integrator to that end I am extremely pleased that we have added two stellar executives to our leadership team.
First D Burger joined US on May 2nd as our President of North America D joins us from cap Gemini, where he led the North American business with nearly 30 years of experience B as a customer centric leader and has a proven track record of building and delivering new services to customers, including cloud and digital applications AI.
Cyber security.
Do you also has an incredibly strong reputation as an effective leader his vast experience will be critical to transforming our sales organization and ensuring we have the appropriate capabilities to accelerate our solutions business.
Another key addition to the leadership team assume another party, who joined US on April 4th is our new CIO Zuma brings extensive experience with large scale digital transformation and demonstrated success delivering effective inefficient solutions her knowledge of global enterprise SaaS operations, modern infrastructure and business <unk>.
Telegent will guide our continued focus on automation agility and cyber security.
Additionally over the last several months, we have consolidated our services pre sales and solutions delivery organizations to drive a more seamless client experience. This consolidation also supports our increased focus on building innovative and scalable solutions that leverage our IP and deliver differentiated value to our clients.
And while we don't do and everything we are extraordinarily proud of our capabilities in our key areas of expertise modern workplace modern applications marvin's infrastructure data and AI cyber security and intelligent edge.
The outcomes, we deliver to our clients are driven by their business needs, but in general include improving their own customer or user experience, reducing operating costs and enhancing productivity through automation designing and implementing solutions to manage cyber security risk consolidating workloads and reducing data center footprint to drive efficiency and increase the <unk>.
The inability and leveraging data to build new or improved business models.
For example on slide five our longstanding fashion retailer operating in over 30 countries wanted to streamline and secure their backend operations with an updated cloud infrastructure. While also modernizing their global E Commerce shopping experience our team of cloud and security experts map their needs against the client's goal to create X.
Scalable cost effective and secure hybrid cloud platform that could accommodate future growth.
This engagement delivered impressive results. The client has passed all 44 controls for regulatory compliance and triple their identity secure score, which is an azure metrics, all while improving overall efficiency and user experience and we continue to help them with their ongoing global digital transformation demonstrating the enduring nature of many.
Of our client engagements.
Navigating digital transformation, while protecting business continuity is never simple and because digital transformation requires an intimate understanding of our clients' business, we cultivate and nurture long term relationships like this.
On slide six is an excellent example of this type of relationship with a global leader in the travel industry over the past three years. We've helped this client with various projects and are very familiar with their operations across 150 countries supporting 18000 employees around the world.
This client experienced dramatic changes in demand due to the pandemic and they needed to shift their it spend to a more flexible usage based model that can scale as demand returns our solutions experts recommended an all in one infrastructure solution deployed through consumption models fully managed by insight the results the results have been remark.
<unk> as a solution is dramatically reduced their support costs, while at the same time, improving efficiency and security and post. The initial deployment, we are providing ongoing single point of contact support for their network compute storage and hyper converged infrastructure.
These types of global engagements are delivered through our more than 4500 solutions and services experts our technical expertise is a key differentiator and we continue to invest in fact, we've added over 150, new solutions experts in the first quarter.
We also continue to invest in our people by implementing programs like our distinguished engineered program are distinguished engineers demonstrate the highest levels of technical expertise thought leadership and industry influence and they are committed to mentoring and developing the next generation of highly skilled engineers and architects.
As champions of people leadership and culture, we strive to be a place where everyone has an opportunity to reach their full potential while contributing to the sustainability of our communities.
Our culture, which is based on our values of hunger heart and harmony is also a key differentiator in attracting and retaining our talent.
Hunger is all about delivering results like these are an example of heart is the work our teammates did to donate money in center truckloads of goods to the citizens Ukraine over the past couple of months.
Harmony is all about working together and leveraging the diversity of thought background and experience that we have we have across our teammate population.
Im proud that we rank number 59 on Forbes best employers for diversity in 2022.
And have achieved a perfect score of 100 on the human rights campaign Foundation's 2022, corporate equality index.
These values combined with the meaningful work, we do to help our clients improve their businesses are key drivers that the great place to work recognitions, we have achieved critical in this labor market.
Finally sustainability is increasingly important to our clients and our teammates and I am proud that this year industry was recognized for the very first time as one of Barron's 100, most sustainable companies for 2022.
In summary, I'm very pleased with our Q1 results and the outlook of our business client demand for digital transformation solutions remains robust we have added depth and talent to our leadership team and our services and solutions business as well well positioned for continued growth now.
Now I'll turn the call back over to Glynis to review, our first quarter financial results.
Thank you Julie as Jos mentioned, we're certainly pleased with our record results for the first quarter, we saw stronger than expected hardware net sales and continue to have elevated backlog leading to record financial results for the quarter and positioning us well for the rest of the year.
Our consolidated results can be found on slides eight and nine.
Net sales in the first quarter were $2 $7 billion up 22% in constant currency and up 21% in U S dollars compared to the first quarter of 2021.
Net sales grew 22% year over year, driven primarily by hardware net sales, which grew 27%.
Services net sales grew 14% year over year, primarily driven by insight delivered services.
Gross profit of $379 million increased 14% over.
Over the prior quarter and gross margin was 14, 3% gross margin decreased 80 basis points over prior year, primarily driven by expanded hardware growth and more specifically growth in devices.
Gross product gross profit increased 18% year over year, driven by growth in sales of devices as I mentioned and services gross profit increased 10% year over year.
Our cloud our cloud gross profit for the trailing 12 months ended March 31, 2022 was flat compared to prior year at 18% of consolidated gross profit.
And on services gross profit was 49% of total gross profit on a trailing 12 month basis.
SG&A expenses were up 11% year over year in constant currency and up 10% in U S dollars as a percentage of net sales growth adjusted SG&A and SG&A, a GAAP basis were 11% versus 12% of current quarter prior year quarter.
Adjusted earnings from operations was $90 million up 31% year over year also up 19% on a GAAP basis to $80 million.
And our adjusted diluted earnings per share was $1 81 up 39% versus $1 53 per share on a GAAP basis, an increase of 30% moving.
Moving on to the results for each of our operating segments, we'll start with North America operating results on slide 10.
First quarter net sales were a record $2 1 billion up 25% year over year, driven by a 31% increase in hardware and net sales.
Product net sales grew 26% year over year, primarily driven by hardware net sales and more specifically devices.
Services net sales grew 15% year over year, primarily driven by insight delivered services and higher sales of software assurance.
Gross profit in North America in the first quarter increased 18% year over year and gross margin was 14, 5% down 80 basis points driven by the mix of products and services in Q1 more than 60% of the total hardware growth was related to devices the lowest margin category.
We expect that this will be similar in Q2, but as we progressed through the second half of 2022, we would anticipate more growth related to networking and infrastructure products versus devices and as I mentioned, we exited the quarter with elevated backlog in the business.
Gross profit increased 24% driven by growth in the sales of devices as I mentioned and services gross profit increased 12% year over year.
Selling and administrative expenses increased 14% year over year, driven by higher personnel and variable compensation costs associated with higher gross contract and our investments in solutions and services.
Adjusted earnings from operations grew 34% year over year to $73 million GAAP earnings from operations grew 20% year over year to $65 million.
Moving on to EMEA on Slide 11, net sales in the first quarter grew 17% in constant currency.
Gross profit grew 3% in constant currency slower than net sales due to a net decrease of 86 basis points in product margin, which includes partner funding and freight and the decline in agency fees reported in services net sales.
Adjusted earnings from operations was $13 million up 21% in constant currency gap.
GAAP earnings from operations grew 13% year over year to $11 million.
Now on to APAC on Slide 12, net sales of $55 million in the first quarter decreased 3% year to year in constant currency driven by a shift from software to cloud solutions gross profit of $14 million increased 22% year over year and in constant currency in constant currency, primarily due to a higher <unk>.
Perfect sales and services and higher volume of cloud solutions. This led to adjusted earnings from operations of $4 million in the quarter up 33% in constant currency GAAP earnings from operations grew 30% year over year.
To $4 million.
Moving onto our tax rate, our effective tax rate for the first quarter of 2022 with 24, 1% relatively flat compared to 23, 8% in 2021.
Turning to the details of our first quarter 2022 cash flow performance on slide 13.
Our operations used $284 million of cash compared to $43 million of cash generated in the same period in 2021.
As we have highlighted previously our cash conversion cycle is inverted, meaning we pay our partners on terms shorter than we received payments from our clients.
This allows us to drive more cash flow when hardware sales decline while in periods of hardware growth what cash is used in operations in the first quarter of 2022. The decrease in cash flow from operating activities was primarily driven by growth in hardware sales and changes in partner mix, including increased volume with distributors with early payment term.
In the first quarter of 2022, our cash conversion cycle was 41 days up eight days from the first quarter of 2021 as a result of the increased volume with distributors that I just discussed.
Offset by a slight reduction in DSO.
In 2022, we invested $26 million in capital expenditures mainly related.
The facility and technology investments as a reminder, we received $27 million in proceeds from the sale of real estate assets in the prior year.
We continue to have $75 million outstanding under our share repurchase authorization.
As of March 31, 2022, we have cash that we had the majority of a $1 2 billion dollar capacity available under our ABL facility and we have ample capacity for future growth.
At the end of the first quarter, we had a cash balance of $115 million of which $83 million was resident in our foreign subsidiaries.
We had $718 million of outstanding debt, including our senior convertible notes at the end of the quarter.
Compared to our prior cash balance of $139 million and total debt of $417 million.
Effective January one 2022, we adopted ASU 2020, cash or six the new accounting standards, the convertible debt instruments and contract during.
During the first quarter, our convertible notes exceeded the market price trigger of $88 82 firms and the notes became convertible at the option of the holders through June 32022.
If the holders exercised this option, we will be required to settle the principal principal amount of the notes in cash as such the balance is classified as current.
At March 31 2022.
The convertible notes continue to exceed the market price trigger of $88.82 in future.
The notes will remain convertible at the option of the holders and the principal amount will continue to be classified as current.
Given the market value of the convertible notes, we do not anticipate that no totals noteholders would convert their notes in the near term.
Moving on to liquidity on slide 14, we are exiting the quarter with a leverage position at less than one seven times debt to cash flows or EBITDA, which is well within our comfort range under our ABL agreement. Our primary compliance covenant is a fixed charge coverage ratio, which includes trailing 12 month EBITDA coverage over capital expenditures.
Taxes and cash interest as of March 31, we were at three nine times the minimum requirement of one point over time, and we're confident we can support our capital requirements and liquidity needs.
For our full year 2022 guidance on slide 15, we expected to deliver low double digit net sales growth. We expect diluted earnings per share for the full year of 2020 to be between $7 95, and $8 and 15 Sir.
This outlook assumes interest expense between $30 million to $35 million.
And effective tax rate of 24% to 25% for the full year 2022 capital expenditures of $65 million to $70 million, including final completion of our new corporate headquarters and an average share count for the full year of $35 6 million shares this outlook excludes acquisition related intangible amortization.
Provision expense of approximately $31 million.
There was no acquisition related or severance and restructuring expenses and assumes no significant change in our debt instruments or the macroeconomic outlook I will now turn the call back to George.
Goodness in closing I would like to thank our teammates for their commitment to our clients partners and each other our clients for trusting insight to help them with their transformational journeys and our partners for their continued collaboration and support in delivering innovative solutions insight is off to a good start in 2022. Despite the economic uncertainties demand is strong and were up.
Domestic about our ability to expand our solutions business and deliver even more value to our clients as they modernize and transform.
This concludes our comments and we will now open the line for your questions.
Thank you and participants if you would like to ask a question you May Press Star one on your telephone keypad. Your first question comes from the line of Matt Sheerin from Stifel. Your line is now open.
Yes. Thank you good morning, everyone.
First question just regarding the strength that you saw in the quarter, particularly for <unk>.
Client devices.
Jason It sounded like you said that supply is starting to open up and is that even in the enterprise level.
Devices, where we've seen shortages for a while now and it's also it sounds like your backlog is up.
So would you expect a better than seasonal June quarter because of that.
Yeah. Thank you, Matt, Yes, we do expect to see pretty strong device demand and frankly hardware demand continue through Q2 and in fact, we expect because the supply chain has opened up a bit for devices. We will see good invoicing on hard on hardware devices also in Q2 and the back half of the year.
We have really really tough compares on devices. So we would expect growth in the four devices in the back half of the year to be a bit more muted, but we would expect to start shipping more infrastructure and networking gear in the back half of the year and that supply chain is not quite as healthy. So we expect infrastructure and network.
<unk> supply constraints to persist through the first half of 2023.
Okay.
In terms of the backlog that you are seeing is that also on the infrastructure side.
Gives you confidence in <unk>.
Seeing that turnaround or that.
The step up in the second half, yes, our infrastructure backlog is at record levels multiples of record levels. So yes.
Absolutely.
Okay, and then regarding the gross margin.
I understand the mix issue and why the gross margin was down year over year.
Sound like Glen was talking about it maybe similar gross margin profile.
This quarter due to the mix.
Is that the case and what should we think about gross margins for the year would you expect it to be flat or down from last year.
We would expect gross margin to be flattish flat for the year, but we do expect gross margins to be compressed a bit in Q2 as well because of the strength of the device mix that we're seeing.
Okay.
Okay, Great and then just lastly, just regarding your Opex youre seeing youre very nice leverage there. There is also a line of.
Inflationary pressures on all businesses, particularly keeping good talent could.
Could you talk about your labor pool.
And any pressures that youre seeing on the cost side.
Yeah. So so first of all our services business is strong and bookings are pretty strong and we've had pretty good success retaining our teammates we attribute a lot of that to two things the strength of the culture that we talk about all the time and also the interesting work that our teammates get to do.
And helping our clients. So so retention has been.
Reasonable.
It's a slightly elevated from previous years, but nothing like the industry. So we're happy about that we're also very actively recruiting of course at all times and we have seen some for some types of jobs, we have seen some wage increases for sure.
But I'd say all overall, we have been able that inflation has not played a huge part in our results at all so.
We're able to pass that on to our clients, but it's been not very significant in the aggregate for either on the either the product side or the services side.
Okay. Okay, great. Thank you very much.
Hey, Matt.
Your next question comes from the line of Anthony in Libya, Shinskie, Obviously, Dougherty and co. Your line is open.
Yes. Good morning, guys. Thank you for taking the question. So I just wanted to clarify so it sounds like the overall the sales growth was more unit volume driven versus pricing right is that fair to say.
Yes, yes. There was there was there was significant volume increases that we that we saw in the quarter and I think that there were some ASP increases as well I'm not going to say they want but it was primarily more volume driven than it was.
Rate driven.
Got it okay. That's great to hear and then you know as far as your regional performance shall we expect North America to continue to outperform the other two smaller regions like Europe .
As far as I, just wanted to get a better sense as to what's.
About it in your guidance.
APAC had a great quarter APAC.
APAC had a great first quarter, albeit small, but they did have a great first quarter.
Yes, we would anticipate that North America is going to continue to to outperform but each region will contribute in the guidance.
So are you Robert.
While the margin was somewhat depressed their EFL expansion was good.
Got it Okay and then.
Have you seen any notable impact from Milwaukee Downs in China as far as the.
No impact on your business.
Well supply chain constraints as you mentioned up for devices have been.
As loosened a bit the supply chain I would say, though is still a bit unpredictable Anthony so.
And even for devices. So we're not really sure ever exactly when we're going to get what.
But but we have seen that improve from a device point of view the supply chain has gotten worse for infrastructure and specifically networking products. Some of that has some certainly China doesn't help.
October the China don't help.
Okay Alright.
That's all I have thank you very much and best of luck. Thanks.
Thanks Anthony.
Your next question comes from the line of Adam Tindle from Raymond James Your line is now open.
Okay. Thanks, good morning.
I just wanted to ask on the backlog portion you talked about obviously supply getting better in devices.
But is there a way for us to think about the size of the backlog and the devices versus the data center stuff and I think kind of the heart of the question is if we ultimately get through the device backlog because supply is really easing.
Is there enough in datacenter to fully offset that and continue to carry us through or with backlog significantly shrink.
Okay.
So I guess, if you look at the just the industry in general our backlog is weighted like the industry. So it's more heavily weighted towards devices. However on a year over year basis as Jos mentioned.
Our backlog around networking and infrastructure is up significantly on a year over year basis, but I don't want to say that that backlog would be larger than the device backlog, it's not but up significantly versus what you would expect there. So I think that as devices continue to flow through we're not saying that necessary.
Device backlog is going to decline we grew 35% in Q3 of 2021 as an example, we're expecting to grow in the low to mid single digits. In 2022 of Q3 of 2000 2022 of 2022. So we still anticipate that devices are going to be in our mix is just not going to be the.
30, plus percent growth that it has been in Q1.
Okay and that comment for Q3 was for total company because I'm just also trying to get the shape of the model for the year you obviously raised the forecast for the full year and it's more than just backlog I was talking about specifically to North America.
Which is where the bulk of the backlog is sorry.
Okay, well, maybe we could talk titled the shape of the year because of the raise for the full year is more than just the beat in Q1 and I'm just trying to think about what kind of growth rates given as you mentioned, you're facing tougher comparisons as the year progresses do we stay in sort of the high teens level in Q2, and then go closer to mid to high single.
Digits in the back half or is it more smooth than just any sense of getting our models and shape from a linearity standpoint through the year. Yeah. I think the growth in Q2 is going to be high not as high as it was in Q1. The model is more weighted towards growth in the first half of the year teens high teens potentially in the first half of the year.
Then the second half of the year, it's going to be in that mid single digit range that that's the that's our assumption with regard to <unk>.
Because of the high comps that we have relative to Q3 and Q4.
Okay makes sense and maybe just one for choice.
Some of the changes that you've made internally you talked about consolidating services and pre sales, obviously now adding the <unk> onto the team are there any further changes that you're anticipating under <unk> tenure.
What are kind of the key marching orders and Kpis.
Well do you just started on Monday, So I don't know if he's had a chance to figure out what kind of changes he's gonna make yet but.
Certainly his experience in solutions is one of the reasons why he's here and we would expect to accelerate our solutions.
The momentum that we see in our services and solutions business as a result of of his expertise and his in his guidance and leadership for sure.
I don't know when exactly Adam that's going to happen so, but that's that's the whole point right. We got to sell a whole lot more solutions and services and that's that's the plan.
<unk>.
I guess I have high expectations.
So do I.
Okay.
Uh huh.
On services I mean, like some of the data points that youre going quickly here, but you know I was trying to jot down obviously, it's lagging hardware sales growth, that's somewhat understandable because hardware sales or so astronomical right now, but they are lagging I think you said TTM cloud gross profit dollars were flat I think that was as a percent of mix you talked about the decline in <unk>.
Agency fees and net sales just like the couple of things that are that you are seeing challenges in the services business.
A little bit more specifics on what you can potentially do in some of those challenges.
Challenges or opportunities that you see.
Yes, I mean, I think we're really quite happy with our services bookings rates. So we see good momentum there.
We did have some tough compare what a really large deal in Q1 of last year that has made the compares are for this quarter a bit tough on the services gross profit line and the growth line, but but we are really happy with what we're seeing.
And so that and the demand continue continues unabated.
We like the momentum we're seeing we like kind of the mix that we're seeing demand was strong for insight delivered services bookings more than it was up more than 20% and across all major areas, including consulting managed services and professional and lifecycle services. So.
I guess the the momentum from the last quarters has given us a lot of a lot of confidence in the client demand and the need for managed services is higher than ever given the labor issues. So.
We're feeling pretty good and.
And growth cargo gross billings were up 22% year on year and up 24% for the trailing 12 months. So that's also giving us some context some confidence.
Got it one last one for me Glenn It's just a quick clarification does the EPS guidance consider anything with the convert and warrants outstanding I think we're kind of near or close to strike price for converting those maybe you could remind us of that and its guidance contemplates any additional dilution.
So no the guidance does not include any additional dilution associated with that with that convert we are evaluating what we're going to do with our convert.
As we move on from here.
The price is $3 $103.12 is the is the price and it would have to stay at that level likely would occur in Q2 stay at that level for 20 consecutive days of over 30 average over the quarter. So we're looking at that actively looking at that and what it all.
These are but none of that is contemplated in guidance.
At this point got it thank you very much okay.
Your next question comes from the line of Vincent Colicchio from Barrington Research. Your line is now open.
Yes, Jason I'm curious on maybe your.
On the economic outlook.
Are you seeing any signs of economic weakness in any of your geographies or verticals.
So thanks, Vince So far you know we are not and we're we're pretty pretty proud of the organic growth that we're seeing sort of across all verticals and all segments. So.
Starting to hear some hints from our Oems. So there's slight some some concern around consumer demand, but we're not we don't.
Participate there and so that's not impacting us.
We're watching that carefully.
So, but we have not seen any.
Any sort of pullback at all.
So far.
I've heard one customers say, hey, we're taking a look at kind of our spend in the second half of the year, but that's one customer out of thousands so far so.
Knock on wood, but so far it looks strong.
And on the services side, how would you expect.
<unk> growth too.
Graham.
Which quarter should be stronger moving forward for the balance of the year.
So our bookings have been strong for the last four quarters, where we would expect to see that translate.
Going through through the year.
And I think youll start to see just because of the mute the difficult compares on the hardware side, we will start to see services growth.
To be equal or higher than product growth in the back half of the year.
Thank you nice quarter.
Thank you. Thank you.
And ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.
[music].
Okay.