Q2 2022 Insight Enterprises Inc Earnings Call
Clients in those teammates need an environment, which allows them to do their best work.
I'm thrilled that we recently welcomed our teammates to our stunning new headquarters in Chandler, Arizona.
The building was based on design principles that drive collaboration problem solving and creativity, we believe the space will inspire our teammates to design and deliver the best solutions for our clients.
We are particularly proud of the new innovation Center, which provides an interactive experience to help clients visualize exactly how our solutions can address their most ambitious challenges as they work through their digital transformation journey.
And consistent with insights focus on sustainability, our headquarters will be gold LEED certified including key elements such as windows sensors that automatically opening closed based on UV intensity solar panels, which provide 80% of the facility's energy consumption during peak periods and over 800 indoor trees.
And plants to improve air quality.
In addition to moving into our new headquarters. We also celebrated some key recognitions in the quarter. We received over 13 partner awards from Microsoft that spanned cloud security modern workplace in the manufacturing vertical industry recognition.
We are particularly proud of our global VP of security and CSO, Jason radar, who was recently honored with Microsoft Security Excellence Award as the security change maker of the year.
Jason was instrumental in developing insights and in security consulting portfolio and under his leadership, our cyber security team has become a trusted advisor to help our clients navigate complexity and security and compliance. We were also named Intel's 2022 U S partner of the year for innovation and were awarded.
<unk> points Iot partner of the year Lastly, we were recognized by fast company for their world changing ideas award, which honors companies that support positive social innovation.
These recognitions cannot be achieved without the dedication of our insight team mates. So before I hand, the call back over to Glen I'd like to thank our insight teammates clients and partners around the world and reiterate how pleased I am with our first half results.
I recognize that we are moving into uncertain times economically and that the environment is rapidly evolving but as my grandmother used to say when the going gets tough the tough get going and we are going we are confident in the value of our solutions to our clients and resolute about our long term fundamentals of our business we are uniquely positioned.
And a very large market with significant expertise across hardware software and services and we will continue to invest in our solutions business to realize this opportunity.
I will now turn the call over to Glenn Thank.
Thank you Julie.
Jos mentioned, we're very pleased with our record results for the second quarter, we had strong performance in both products and services and our North America business had an outstanding quarter as we had.
As expected hardware, particularly the devices were very strong and we saw acceleration and sort of described.
All of our operating results can be found in our earnings presentation and I will start on slide eight.
Consolidated results net sales in the second quarter were $2 7 billion.
Up 26% in constant currency and up 23% in U S dollars compared to the second quarter of 2021.
Product net sales in the second quarter grew 24% year over year, primarily driven by hardware and Saf.
Services net sales in the second quarter grew 16% year over year with impact delivered or core services growth of 15% and partner and cloud services growth of 17%.
Gross profit of $438 million increased 21% in constant currency and 19% in U S dollars over prior year.
Gross margin was 16% a decrease of 40 basis points compared to prior year.
Product gross profit increased 23% year over year, driven by growth in sales of devices.
Services gross profit increased 16% year over year, driven by growth in <unk> services and partner and cloud services.
Our cloud gross profits for the trailing 12 months ended June 30 was 19% of consolidated gross profit up 50 basis points from prior year.
In our services gross profit was 48% of total gross profit also on a trailing 12 month basis.
SG&A expenses for the second quarter were up 12% year over year in constant currency and up 10% <unk> as a percentage of net sales, both adjusted SG&A and SG&A on a GAAP basis or 11% versus 12% in the prior year quarter.
Adjusted earnings from operations for the second quarter were $142 million up 49% year over year in constant currency and up 45% in U S dollars.
On a GAAP basis earnings from operations increased 46% to $130 million.
For the second quarter adjusted diluted earnings per share was $2 78.
Up 58% in constant currency and 46% in U S dollars year over year.
On a GAAP basis diluted earnings per share was $2 42 and.
An increase of 53%.
Before I discuss the performance of our operating segments I'd like to provide a little more color on backlog in Q2 as well as our expectations for the rest of 2022.
While total hardware backlog remained at elevated levels going into Q3 with the continued improvements in the device supply chain our device backlog started to decline in Q2.
We expect our current device backlog will flush in the second half of 2022 on.
On the infrastructure side backlog continues to build in Q2. However, the infrastructure supply chain is also starting to improve and we expect to see backlog start to decline in Q3 and estimate that it will be sometime in 2023 before all that backlog claris.
Moving on now to the results of our operating segments and starting with North America.
North America had an outstanding second quarter with record net sales of $2 2 billion up 28% year over year.
Product net sales grew 29% year over year, primarily driven by a 33% increase in hardware net sales, while we expected double digit growth in hardware and primarily related to devices. This was higher than expected as.
As we have discussed over the year, we believe device growth will slow in the second half of 2022. However, we expect infrastructure growth and accompanying services will accelerate at that product becomes more available.
Services net sales grew 20% year over year, primarily driven by insight core services and higher sales of software assurance.
Gross profit in North America in the second quarter increased 26% year over year and gross margin at 15, 6% was down 20 basis points, primarily driven by changes in product and services mix.
Product gross profit increased 28% year over year services gross profit increased 23% year over year, primarily driven by insight core services and cloud solutions.
Selling and administrative expenses increased 14% year over year, driven by higher personnel and variable compensation costs, primarily from higher gross profit and our investment in solutions and services teammates.
Adjusted earnings from operations grew 60% year over year to $116 million GAAP earnings from operations grew 63% year over year to $104 million.
Moving on to EMEA net sales in the second quarter grew 14% in constant currency driven by product net sales specifically software gross profit grew 6% in constant currency slowed our net sales due to a decline in software agency fees and a decline in margins and had core services adjusted earnings from <unk>.
Patients were $19 million up 4% in constant currency GAAP earnings from operations declined 7% year over year to $18 million.
APAC net sales of $70 million in the second quarter increased to 41% year over year in constant currency driven by software hardware in fact core services and cloud solutions help.
Gross profit of $18 million increased 35% year over year in constant currency, primarily due to a higher higher growth higher profit sales and services and high volume of cloud solution. This led to adjusted earnings from operations of $7 4 million in the quarter of 52% in constant currency GAAP earnings from operations.
<unk> grew 46% year over year to $7 million moving on to our tax rate our effective tax rate for the second quarter of 2022 was 25, 6% relatively flat compared to 25, 4% in 2021.
Turning to the details of our year to date 2022 cash flow performance in the first six months of 2022, our operations used $442 million of cash compared to $5 million of cash generated in the same period in 2021 as.
As we have highlighted previously our cash conversions have ignored it 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 growth decelerate, while in periods of hardware growth more cash is used in our operations.
In the first half of 2022, the decrease in cash flow from operations activities was primarily driven by growth in hardware net sales changes and partner mix, including increased volume with distributors with early payment terms and securing inventory for future client projects.
In the second quarter of 2022, our cash conversion cycle was 48 days up 15 days from the second quarter of 2021 as a result of increased volumes with distributors, resulting in lower GPO that I had just discussed an increase in DSO as a result of increased inventory, including inventory for future client projects.
Partially offset by a decrease in DSO.
In 2022, we invested $47 million in capital expenditures related to 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 also used $68 million net of cash and cash equivalents to purchase a new choice discussed earlier, we did not have any acquisitions in the prior year.
We continue to have $75 million outstanding under our current share repurchase authorization, we plan to repurchase approximately $25 million.
Of outstanding shares in the second half of 2022 under this current authorization.
At the end of the second quarter, we had a cash balance of $138 million of which a $115 million was resident in our foreign subsidiaries.
We had $1 1 billion.
Adding debt, including our senior convertible notes at the end of the quarter compared to a prior year quarter end cash balance of $108 million and total debt of $484 million.
In the second quarter, our convertible notes continue to exceed the market price trigger of $88 82.
And 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 note holders to convert their notes in the near term.
As we think about liquidity, we're exiting the quarter with a leverage position at less than two three times debt to cash flows or EBITDA within our comfort level under our ABL agreement. Our primary compliance covenant is a fixed charge coverage ratio, which includes trailing 12 months EBITDA coverage over capital expenditures.
Taxes and cash interest.
As of June 30, we're at three eight times at the minimum requirement of one <unk> times and we're confident we can support our capital requirements and liquidity needs.
On July 27, we amended and extended our ABL facility and increased the capacity from $1 2 billion to $1 8 billion with comparable or better term.
As of today, we have approximately $800 million of our $1 $8 billion capacity available under our ABL facility and we have ample capacity to fund future growth.
As you think about our guidance for the first full year of 2022, we expect to deliver low double digit net sales growth. We expect adjusted diluted earnings per share for the full year of 2022 to be between $8 55, and $8 75.
This outlook assumes interest expense between 30% to $35 million.
And effective tax rate of 25% to 26% for the full year 2020 to Catherine.
Capital expenditures of $65 million to $70 million, including completion of our new corporate headquarters and an average share count for the full year of $35 4 million shares after our planned repurchase of $25 million of shape.
This outlook excludes acquisition related intangible expense of approximately $34 million assumes no acquisition related or severance restructuring and transformation expense.
And assumes no significant change in our debt instruments.
I'll now turn the call back to Julie.
Goodness.
In closing I'd like to thank our teammates for their commitment to our clients partners and each other our clients for trusting us to help them with their transformational journeys our partners for their continued collaboration and support in delivering innovative solutions to our clients.
<unk> is off to a great start in 2022, and we are optimistic about our ability to expand our solutions business and deliver even more value to our clients as they modernize and transform.
This concludes my comments and we will now open the line for your questions.
As a reminder, if you'd like to ask a question today, that's thoughtful a quick one on your telephone keypad now.
The first question today comes from Joe Cardoso from Jpmorgan. Please go ahead.
Hey, good morning, everyone and thanks for the question.
First question, if I take a look at the midpoint of your full year guide it appears like breaking into the acceleration heading into the second half versus the first half from both of them implied topline office perspective can you maybe just dive into that a bit and discuss what are the primary drivers of the slowdown you're baking into the guide, particularly given the solid momentum you've seen in the first half.
Okay.
Thanks, Joe So what we said at the start of the year was that we had envisioned that we were going to be stronger than the first half of the year versus the second half of the year, primarily based on our performance.
The rest of the year would be at the 16% level because that you. The second quarter is typically our highest quarter. However, I think that we will be recovering some of the gross margin that we gave up in the first half of the year. When we had more devices in the mix and hence our gross margin in the first two quarters were lower was lower.
And then prior year, we're gonna be.
Higher gross margin going into the second half of the year net net for the year, we will be up slightly at the gross margin line.
Got it okay.
It's helpful and then in terms of the <unk>.
And it looks like North America hardware sales were very strong again.
But not not so strong.
Where you were down.
Could you just maybe give us some color on what you're seeing in terms of macro.
As the refresh cycles sort of played out there is there are more cautious.
Customers.
Yes.
I'd say the hardware growth in North America was really strong again at several quarters in a row, we've seen incredible Hartford growth in mix of our business is stronger in hardware in North America than it is in EMEA EMEA was mix is much more software and services oriented.
Also have a fairly significant public sector business in EMEA and in that business. The heart hardware was down was was down. So that is a that is consistent with what you just recognized but I would say overall we're re.
Pleased with our with our EMEA performance in constant currency for sure.
And as I said, it's primarily driven by software and services.
Okay and just my last question regarding gross margin.
On the pricing would be.
Each of the products that you saw go up and that's typically a pass through.
It looks like.
Price competition is less severe now given the strong demand and the constraints so as things like tax upon diseases.
Well you are correct.
Competition and margin pressure.
Not particularly I mean.
We have enjoyed we generally participate in the higher sort of ASP part of the market because most of our business is custom built.
So.
We and we've been very successful at passport passing along those cost increases to our to our clients without objection and we would expect to continue to do that.
Okay. Thank you very much.
Yeah.
Thanks, Matt.
The next question comes from Katherine Hanmi from Raymond James. Please go ahead.
Hey, this is Kathy on for out of today. Thank you so much for taking a question.
Thank you thank.
Thanks for being here.
First George could you touch on the demand environment for Pcs I know you talked a little bit about the supply environment and how that's alleviating, but what is PC demand look like across large enterprises and small businesses.
Yeah, we haven't seen significant so so far we haven't seen significant declines in demand. So that as mentioned we have very very strong prepares, especially on the device side for the back half of this year and the early part of back half of 2022 and the early part of <unk>.
2022 was also a very very strong.
And we are starting to see slower growth rates on those compares.
But so far we haven't seen significant decline now we are looking at that very carefully we are flushing, it but a lot of inventory in devices as Glenn noted.
But still.
Still we see.
Reasonable demand.
You look at all the forecasts and all.
Chip the chip the.
The chip providers and the Oems are all forecasting a unit decline.
That is so it since we don't participate in the consumer space that really sort of started there.
We are being cautious about it. So we are anticipating that devices will slow and potentially decline near the end of the year, but I would say so far we're basically holding pretty flat to last year.
Okay perfect. Thank you so much for all that color.
And then could you just touch a little bit on the hiring environment and do you expect to incrementally higher from here given that you just hired 700 technical expert in the first half.
We are going to continue hiring absolutely, especially in the areas of technical experts and specific skills around data cloud AI security. So we are focused on you.
Using this opportunity of potentially an uncertain market to acquire more talent and we're actually looking at also continuing our M&A strategy.
Okay.
Awesome. Thank you.
The next question comes from Anthony <unk> from Sidoti <unk> Company. Please go ahead.
Yes, good morning, and thank you for taking the questions.
So I.
I guess.
Hey, good morning so.
Typically in your 10-Qs you guys breakout.
Client group revenues and so on but.
So as we look at.
Enterprise versus public sector versus SMB are you seeing any notable changes as far as demand levels.
Curious to get your take on that.
So I would say generally at the very at the.
Sort of large corporate and enterprise space, we are seeing a little more deliberate.
That process.
Slightly slower.
Commitment cycle, two large projects, but so far demand is holding very strong.
Our clients take a few a few extra a week or two to actually commit to a project.
In.
The mid market space is really quite quite strong our commercial space is really quite strong. So we haven't seen significant slowdown there at all and I would say from a topline point of view and our outlook point of view, we expect corporate enterprise to stay strong.
Although against some pretty tough compares in clinic noted in the back half of the year, especially around devices.
And so Anthony in Q2 in Q2 all.
And it's performed well.
Got it okay understood, Okay, and then yes.
We would take the midpoint of your EPS guidance now.
How should we think about cash from operations any sort of ballpark estimate as necessary.
It could shake out.
Hello.
And that we're gonna be that hardware is going to decline sequentially and that there's going to be slower growth in hardware in the second half would say that we're going to start generating cash.
As the business kind of as that deceleration occur. So we would envision that at the point as we go through the rest of the year that you would see cash flow from operations declining from the negative 442 that it is today getting towards positive territory I don't.
Have enough visibility today given to.
So the performance of hardware in Q4 for me to really be able to give you a firm number as to where we think it will end up but you should see the cashless operations start to decline as we go through the rest of this year.
Got it yeah, I'm just I understand there was a lot of pieces there.
Probably increased.
<unk> had declined.
It's going to increase the negative will get lower and we get.
Understood.
Yeah Gotcha, Okay right.
Right and then lastly, as far as these behind the software acquisition I know, it's relatively small but.
Can you help us just understand how we should think about.
On an annualized basis revenue or EBITDA contribution from the acquisition.
So no impact.
We're excited about the incremental capacity at.
The additional teammates that's going to help us serve our customers better, but it's not a meaningful financial number.
Got it okay, all right well thanks best of luck.
Thank you.
Thank you.
The next question is from Vincent Colicchio from Barrington Research. Please go ahead.
Yes, a question on the acquisition side.
So is your pipeline meaningful.
Can you remind us of your current priorities and is there any change in terms of valuations in the market and you're using them.
Multiples out there.
Yeah. So we do have a meaningful pipeline, we are focused on building our capacity and our skills and data.
Data and AI cloud and security.
And we always are looking for opportunities to increase their scale, because we do believe that scale matters.