Q4 2022 Insight Enterprises Inc Earnings Call
Ladies and gentlemen, welcome to the insight Enterprises, Inc. Fourth quarter full year 'twenty earnings Conference call. My name is Glenn and I'll be the motivator for todays call if you'd like to ask a question joined up with in patient you may do so by pressing star one half from Keybanc.
I would now hand, you, but you're homeless changed morgado, SVP finance and CFO North America.
James Please go ahead.
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 and full year ended December 31 2022.
I'm, James Morgado, Senior Vice President Finance, and CFO of insight North America, joining Ms. Joyce Mullen, President and Chief Executive Officer, and Glynis, Bryan Chief Financial Officer.
If you do 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 and can also be accessed via the Investor Relations page of our website at insight Dot com and.
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 February nine 2023.
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.
In today's conference call, we will be referring to non-GAAP financial measures as we discuss the fourth quarter and full year of 2022 financial results.
When discussing non-GAAP measures were referred to them as adjusted.
You'll find a reconciliation of these adjusted measures to our actual GAAP results included in both the press release and the accompanying slide presentation issued earlier today.
Also please note that unless highlighted as constant currency all amounts and growth rates discussed are in U S dollar terms.
As a reminder, all forward looking statements that are made during this 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 periodic reports 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 statement made on this call whether as a result of new information future events or otherwise.
That I will now turn the call over to Joyce and if you're following along with the slide presentation. We will begin on slide four choice. Thank.
Thank you very much James good morning, everyone and thank you so much for joining US today. It is my pleasure to report that we ended 2022 with an outstanding fourth quarter that topped off a record setting year for 'twenty 'twenty. Two we delivered record net sales gross profit gross margin adjusted EPS.
And adjusted diluted EPS, and we ended the year with positive cash flow from operations of $98 million.
These are stellar results in a volatile macro environment.
For the past year, we have articulated our focus on delivering differentiated value for our clients, improving and scaling our solutions offerings and enhancing our technical expertise in the areas, where we know EXL.
There is no finish line in this race I feel great about the progress we've made so far.
Our clients choose us because we help them improve and transform their businesses and achieve the outcomes. They need this is evident from our record setting results. This year and in fact, we outpaced the global I T market across all categories software, including cloud services and hardware.
The foundation of our services business is based upon long standing relationships and understanding of how does that clients need and what is required to make them successful. We deliver this through our deep technical expertise, which has led to record performance and insight core services with gross profit growth of 14% for the year.
We are still in the early stages of executing against our long term strategy, but the progress we made in 2022 propels us forward in pursuit of becoming the leading solutions integrator.
We outlined this strategy at our Investor Day last fall and as a reminder, there are four key pillars underpinning that strategy first.
First captivate clients. This is a people an outcome focused business. We plan to drive continued improvement in net promoter scores by delivering exceptional results, we pride ourselves in earning the right to do more by delivering high quality and outcome based solutions and our investments in ecommerce and automation will allow our clients to transact.
So that's even more efficiently via self service.
This creates a seamless customer experience for our clients and frees up our sales teammates to focus on our second pillar, which is selling solutions. We are transforming our sales capabilities and aligning our incentives to focus on our solution portfolio. We continue to streamline our account coverage to match skills with our clients need and propensity to buy services. The theme here is really.
About focus that is doing a finite number of things and doing them really well.
Our third pillar is deliver differentiation. This is all about providing innovative scalable solutions certain reusable IP exceptional technical challenge and are very compelling solutions portfolio.
Again, we are focusing on our strengths to align with the fastest growing areas of the market in the areas, where our clients need the most help cloud data AI cyber security and edge.
The fourth pillar is to champion our culture. This has been a strategic advantage for us and we will continue to leverage our values of hunger heart in harmony to evolve our high performance culture. This is critical to attracting and retaining such incredible talent.
And speaking of incredible talent I am happy to announce the addition of two new leaders.
First we are pleased to welcome Adrian Gregory as our new President of Europe , Middle East and Africa, EMEA Adrian held various leadership positions at both a top and H P and brings over 27 years of experience in the technology sector. He will lead our EMEA team as we continue to build our services and solutions capabilities in that region.
Additionally, Kate Savage joined as an SVP in our solutions segment, where she is focused on all operational aspects of our services business case joins us from cap Gemini, where she was executive Vice president driving operations and people strategies.
M&A is also an important part of our strategy and supports the four pillars I outlined above.
We enter 2023, we have nearly $1 $5 billion in financing capacity to fuel. This strategy, we will be deliberate in our acquisitions to support our solutions business in key growth areas, such as cloud data AI and cyber one such example is our acquisition of Hollywood last year as a reminder, Hollywood the Gartner magic.
Quadrant Azure migration company that allows us to scale our cloud business.
And it also has a robust recruiting and development academy to build more technical expertise in India.
And to support these changes I outlined above we stood up a global transformation office to manage the initiatives across the company.
As I mentioned earlier, we had a record setting 2022 goodness will walk you through our Q4 performance and I'll highlight some of our full year results now net sales of $10 $4 billion up 11% year on year cloud gross profit of $340 million growth of 29% year on year.
It's a core services gross profit of $253 million, an increase of 14% gross profit grew 13% and gross margin expanded 40 basis points to 15, 7% adjusted EPS was $9.11 per share and grew by 28%.
Adjusted EBITDA margin expanded by 60 basis points to four 7% and we generated operating cash flows of $304 million in Q4, taking the full year to $98 million. These results demonstrate our team's ability to execute in a challenging environment and the resilience of our business model.
We've talked a lot about our ambition to become the leading solutions integrator by combining our strengths in hardware software and services to offer comprehensive solutions that drive business outcomes for our clients.
And I want to share a recent example of this.
Italy is a nonprofit organization, whose mission is to facilitate the sharing of clinical research data and to enable their partners to develop treatments for diseases, such as Alzheimers diabetes and many others.
To do this effectively they needed an intuitive platform that would provide researchers around the globe with secure access to a vast array of clinical trial data. We worked with at least to define this new platform and determined three critical requirements for success. Those were ensure the solution was secure patient privacy is clearly Cree.
Oh create a smooth user experience with an intuitive front end and ensure the platform was scalable and manageable.
Our highly experienced technical team developed a solution using the full complement of Azure services, which ultimately drove business efficiency eliminated manual and redundant processes and made a significant impact on the research community.
They're good late success is all about adoption after delivering this project definitely has been pleased with the clinical data growth of 42% year over year and more researchers are using this platform than ever with user growth of 20% per year.
This is a great example of our purpose accelerating transformation by unlocking the power of people and technology.
We love the human aspect of this example, and how the solution has not only helped bisley, but help potentially thousands of patients at critical moments in their lives.
Customer success stories like this reinforce confidence in our strategy.
Mentioned, we see cyber security is a major focus for us and I want to talk to a really meaningful example of our capability in this space as well.
When a fortune 100 insurance and financial services provider needed to modernize security they turned to insight they.
They needed to address the challenge called secret sprawl or more plainly a situation that many organizations face when password encryption keys and other sensitive authentication information is stored in many different locations secret sprawl leads to mismatch credentials and creates a risk of security breach.
To address this challenge we implemented Hashi course bolt software to consolidate user credentials. We also developed customizable self service API templates to direct authentication between multiple applications and developed automation to monitor exploration of web security certificates.
Solution, we deployed as a seamless credential management system with automated compliance we're really proud of the work done on this project and the value. We provided I think it's a testament to the deep technical talent, we have at insight and we see that as an important differentiator in the industry.
We also earn some tremendous industry recognitions in 2022, you can see the details in the accompanying presentation. So I'll just highlight a few recent recognitions now.
We earned three Cisco partner of the year recognitions achieved all of Microsoft solutions partner designation earned Microsoft's 2022 partner of the year for manufacturing as well as the 2022 Canadian partner of the year Award.
Additionally, as champions of people leadership and culture, we strive to be a company, where our teammates have the opportunity to reach their full potential and I'm proud that insight was recognized by Forbes as one of the world's top female friendly companies.
Before handing the call over to Glenn who will share our 2023 outlook, let me briefly touch on the year ahead.
As we head into 2023, we expect continued economic uncertainty and now more than ever. It is critical that we support our clients as we navigate these uncertain times together we are.
Our uniquely positioned with our combination of deep expertise in hardware and software and our portfolio of digital transformation services focused on cloud data AI and cyber to deliver cost effective technology solutions and business outcomes for our clients.
The four trillion dollar IP market is growing in the low single digits, However, cloud data and AI cyber security and the edge are expected to grow in double digits, which plays to the strength of our portfolio and our technical talent.
We remain focused on our ambition to become the leading solutions integrator and I look forward to discussing our progress as we continue our journey.
With that I'll turn the call over to Glenn has talked you through the important details of our financial and operating performance in Q4, 2022, as well as our outlook for 2023 goodness. Thank you Joyce.
As mentioned, we delivered record results for the year as we continued our journey to become the leading systems integrator.
The challenging macro environment.
I'd like to start with some comments on our 2022 performance every year does not play out like this one but 2022 with a year or two have.
The first half had very strong net sales growth of 22% fueled by exceptionally strong devices growth in the high 30% range against a weaker first half of 2021.
In the second half net sales were essentially flat across better second half 2021 performance, but we achieved higher gross margins and positive cash flow from operations.
In the second half of 2022, our operations generated cash flow of $540 million, leading to positive cash flow from operations of $98 million for 2022.
As we have discussed previously when hardware sales decelerate, we spin off significant cash flow.
Performance in the second half of 2022 is an excellent illustration of that.
Our net sales performance in 'twenty to 'twenty, two which like our execution volatile market conditions and the easing of supply chain issues that began in 2021.
Although we have essentially flush our device backlog, we still have significant backlog in networking and infrastructure going into 2023.
As we have previously discussed well at multiyear journey and we're in the early stages. In 2022, we started assembling the building blocks around sales transformation portfolio optimization, our differentiated value proposition related to our friends and our technical talent and a possibility initiatives to accelerate.
Gross margin and EBITDA margin expansion.
We're not finished with our efforts in these areas, but our performance to date is meeting all expectations.
Our presentation today includes details on our Q4 and full year 2022 performance for the three geographic regions as well as our consolidated results.
I will focus on our consolidated himself and on the key highlights from our Q4 performance of this call. You will also find the GAAP equivalents for adjusted results in our Investor site and a reconciliation to the GAAP amounts in the appendix to the investor slides.
In Q4 gross margin was a record 16, 8% an increase of 180 basis points compared to prior year and reflects the higher mix of cloud in fact core services and infrastructure product all of which transact at higher margins are some performance was driven by 44%.
Cloud gross profit growth and 11% insight core services gross profit growth.
Combined with operating expense leverage this resulted in a record adjusted EBITDA margin of five 4% up 120 basis points over 2021.
For the fourth quarter adjusted diluted earnings per share was $2.53 up 28% in constant currency and 25% in U S dollar terms year over year.
For the year adjusted diluted earnings per share was $9.11 a record for us.
Up 31% in constant currency and 28% in U S dollar terms you'll hear.
This performance illustrates the resilience of our business model and there's a planning device market and gives us confidence as we make progress on our solutions integrator strategy as we previously discussed with the solid growth in hardware in the fourth quarter, we generated $304 million in cash flow from operations in the quarter.
In 2023, we expect our business to generate cash flow from operations in the range of $180 million to $220 million.
And to update you on our share repurchase program in Q4, we repurchased 839000 shares of our stock at an average price of $98 88 per share.
For a total cost of $83 million.
And full year 2022, we repurchased a total of one 1 million shares at an average price of $97.35 per share for a total cost of $108 million.
So at the end of January we have $196 million remaining under our $300 million share repurchase authorization, and we anticipate executing $96 million and our planned share repurchase pending market conditions.
In the fourth quarter, our convertible notes exceeded the market price trigger of $88.82 and so our convertible at the option of the holder.
As a result, the principal amount was reclassified to current liabilities.
The 350 million principal amount of the convertible notes will always be settled in cash in future reporting periods as our average stock price in any quarter exceeds the warrant price of $103 12, then we will include shares.
Diluted and adjusted diluted earnings per share calculation.
The amount in excess of the one place in the <unk>.
Average share price throughout the quarter, you will find an illustration of this in the appendix to our investor presentation.
We continue to evaluate alternatives relative to the convertible notes as well as the impact of the convertible note. Some dilution on our share repurchase strategy. Our current share forecast for 'twenty 'twenty. Three includes the net impact of share repurchases and anticipated dilution, assuming a share price increases throughout 2023.
We exited Q4 with approximately $1 $5 billion of our $1 8 billion dollar capacity available under our ABL facility and we have ample capacity 800 business our capital deployment priorities.
Further we ended the year with adjusted <unk> of 15, 9% an increase of 50 basis points over 2021.
Our presentation shows our 'twenty to 'twenty two performance relative to the metrics that we laid out at our Investor Day in October 2022 is a baseline year.
Moving onto 2023, as we communicated last quarter, we anticipate a modest growth year as the macroeconomic environment remains challenging across the globe, given elevated inflation and interest rates.
Consistent with the market consensus, we anticipate higher borrowing cost under our ABL and we also anticipate that foreign exchange rates could create added volatility.
In the face of this uncertainty we are focused on improving cash flow and preserving capital for critical initiatives. We will continue to fund the four critical initiatives George outlined including the outfitting of the new Texas advanced integration and client fulfillment center as well as critical initiatives related to the sales transformation digital commerce.
And our differentiated value proposition.
In addition, the most recent forecast for the I T market is projecting low single digit growth for 'twenty to 'twenty three with hardware down in South Korea in select service is up in the mid to high single digit range.
The areas of cloud data and AI cyber and modern infrastructure are all forecasted to can you just grow at a double digit pace.
This place to restaurants, and we believe our performance in Q4 confirms the strength of our business model and our ambition to be the leading solutions integrator as.
As we think about our guidance for the full year of 2023, our expectations remain modest we expect to deliver gross profit growth in the high single digit range we.
We expect adjusted diluted earnings per share for the full year of 2023 to be between $9.90 and $10.10. This outlook assumes interest expense between 48 and $52 million in it.
It's a tax rate of 25% to 26% for the full year.
Capital expenditures of $55 million to $60 million and an average share count for the full year of 34.3 million shares. After an estimated completion of our current share repurchase program and net of estimated dilution. This outlook excludes acquisition related intangible amortization expense of approximately 32.
It seems no acquisition related or severance and restructuring and transformation expenses and assumes no significant change in our debt instrument or the macroeconomic outlook I will now turn the call back to do it.
Thank goodness 2022 was a record setting year and we are thrilled with our results in Q4 showed encouraging progress toward our goal.
There are significant headwinds driven by the macroeconomic environment, but we believe our broad portfolio of solutions provide us with the resiliency to navigate any economic cycle, we are well positioned in the fastest growing areas of the market. We are laser focused on execution and building momentum towards our ambition to become the leading solutions integrator.
Passionately focused on delivering against our strategic pillars of captivating clients selling solutions delivering differentiation and championing our culture. Our plan is to supplement the strategy with or intentional M&A approach. Our strong results in 2022 position us well to progress toward our long term growth and profitability targets and all of this.
Propels us towards our ambition to become the leading solutions integrator defining a new category in our industry.
In closing I want to thank our teammates for their commitment to our clients partners and each other our clients for trusting inside to help them with their transformational journeys our partners for their continued collaboration and support in delivering innovative solutions to our clients.
This concludes my comments and we will now open the line for your questions.
Yeah.
Thank you Lady.
Ladies and gentlemen, if you would like to ask a question. Please press star followed by one on the telephone keypad now.
Maybe paying to ask your question. Please ensure your focus of music locally.
We have our first question comes from Matt Sheerin from Stifel. Your line is now open.
Yes, thanks, good morning, everyone.
First question Joyce is just on your outlook for hardware.
Hardware in general and specifically our client devices.
It sounds like it's been down year over year for the last couple of quarters.
Any sense of when that bottoms, but what what are your customers telling you.
Thanks, Matt and good morning, you know so we just had a pretty great a quarter and a pretty awesome year and it was a pretty great quarter in a period when devices were down. So I think first of all I'd say that our combination of services software cloud and hardware of course.
Give us confidence that our outlook is is pretty solid so but I felt like the numbers were pretty confident in that we see a reasonably good start to the year in that in that regard in terms of hardware. We we can we have a pretty significant backlog still near record high backlog on infrastructure.
And that's going to hopefully not dissipate until the back half of the year.
Or through the summer and then from a device point of view, yes, well like the rest of the industry expecting device to be down in the first half with some recovery in the back half of the year, primarily driven by a much softer compares.
Okay. Okay. Thank you and then.
I wanted to talk about the fourth quarter, where you had basically your revenue down your gross profit was up.
Roughly 21 million.
And you're operating in in your basically your SG&A was flat quarter to quarter.
Would would seem surprising so could you explain the relationship between the gross profit dollars, particularly in those netted down revenues and the corresponding opex because if we look at your guidance for next year, you're looking at I'm really really significant gross profit growth.
On I guess low single digit revenue, so I'm trying to figure out what that opex looks like underneath that that model.
Sure, Okay might be what you're exactly correct. So in Q4.
Software cloud and software in particular were strong and you saw that reflected in the gross margin numbers that we posted in Q4.
Going into 2022 you're also correct, we do anticipate.
Paid gross profit dollar growth in the high high single digit range and revenue growth is going to be lower than that.
Based on a couple of things one devices on a smaller contributor to the overall hardware in 2023, we're going to get more from infrastructure more growth from the infrastructure side of the hardware market trends, that's a high margin and software in the cloud are also gonna be strong going into 'twenty into 2023.
And we have core services, which also gonna be strong going into 2023 and in addition, we talked a little bit in Q in maybe in the in our Investor day about our profitability initiatives with regard to expanding gross margin. So when you look at our numbers gross margin is a huge driver of.
It will be a success in 2023, and we have controlled SG&A in the second half of 2022 that is continuing as we go into 'twenty. Two 'twenty three we will continue to fund sales and technical resources that we have done.
2022 and we will continue to control our back office and admin resources and leverage our low cost locations in terms of how we expand to meet needs that isn't as bad as what's driving the improvement that youre seeing in outperformance of the guidance we gave for 2023.
Okay.
And just back to the last quarter, where you have seen that you didnt grow sequentially.
And your gross profits grew 21 million what was that because they were cost cutting or or variable expenses that went away with the lower hardware sales.
And going forward, if let's say gross profit.
Our margin is up 30, or 60 basis points year on year with SG&A grow at a slower pace than that.
So if you look at Q4 ill answer that question first in Q4, we saw the value and the benefit that we had from them. The sales transformation. She gets that we'd put in place one two from just the cost control that we had around overall G. P. So you're right. We grew gross margin, but as Jenny didn't expand as much.
But we did actually have the expansion that we normally would see on sales comp associated with the higher gross profit that was generated.
That is correct. When you go into 2023 we would anticipate a similar dynamic we're gonna see gross profit dollars that would generate gross margin expansion that would generate higher commissions and we're controlling SG&A around that with regard to getting to the answers that we the results that we showed you for 'twenty two.
And just to supplement that I mean, we do expect continued leverage on SG&A as we grow we can get more we can get more leverage out of our SG&A spend.
Yes.
Okay, Alright, thank you very much.
Uh huh.
Thank you Matt.
We have our next question comes from Adam Tindle from Raymond James Adam Your line is now open.
Okay. Thanks, Good morning, I just wanted to start on a 2023 gross profit dollar guidance Joyce you mentioned, you're obviously, finishing a very strong year in 2022, and I think gross profit dollars grew 13%.
During 2022.
After a very very strong year as we think about 2022, you're talking about high single digit gross profit dollar growth and and called the guidance modest and so as I kind of tried to square those two a very strong year up 13%, but then we're expecting high single digits next year, and calling that modest there's a little bit of a disconnect and I'm.
Wondering if maybe you could help bridge that whether it's maybe some sort of backlog expectation that gives you confidence to grow at that level on a.
Difficult comparisons and things.
Yeah. So first of all I think I'm. So at the top line will grow most more slowly in 2023 than it grew in 2022, that's been consistently weight classes has been talking about now since investor day for sure and obviously there is some translation into gross profit dollar growth there and we do certainly expect to see.
So you should get some help on our gross profit Knicks due to crushing and infrastructure backlog in the first half of the year, but as Glenn has mentioned I mean, it's really around the mix of software cloud and services overall in the business that are driving the gross margin.
Expansion versus.
Versus sort of our historical range of gross margin.
If I could just add on to that what I would say is that if you look in the presentation deck not right now but at your leisure.
You will see that we gave you a couple of stats about first half of 2022 versus second half of 2022 and part of what drove the gross profit dollar growth with high hardware sales in the first quarter of 2022, which had lower gross margin associated with it so in 2022.
On that high gross profit growth that we had in the first half we actually margin declined by 70 basis points in the first half we made that up in the second half saw some primarily because devices were not as strong in the second half of the year as they were in the first half of the year. When you look at the growth that we're seeing in 2023.
It is less devices in that gross number.
Which helps us overall from a gross overall gross margin perspective, and gives us the confidence with regard to what's happening with infrastructure a backlog around infrastructure in particular as well as the performance that we have shown in cloud software and in fact core services that leaves so that gross margin expansion number.
Shame on us for not only a modest.
[laughter] Alright got you got me there.
[laughter].
What you just outlined is there a way for us.
I don't know also organic.
Yep.
I realize that is there is there a way for us to think about seasonality in 2023, given kind of the different comparisons on a year over year basis, and kind of an odd year last year, but we're going off of how to think about seasonality in 2023, Yeah. I think I've got in front of it I think you know I think it's kind of going to be the inverse of last year.
So I think the first half of this year is gonna be a little of the growth will be slower than the second half of the year and last year with theaters.
Primarily around that makes sense.
Right.
Last one for me and I'll pass it on but I did want to ask Joyce on the sales transformation initiatives.
If you could maybe just recap a little bit of more specifics I understand there's been investments in systems et cetera, but have you been moving around accounts or geographies you know what.
What's been going on with that and what do you think is left to do with the sales transformation.
Oh sure. So yeah. So we have we have spent a lot of time as we talked about at Investor day really trying to think about how to focus on going deeper in our top accounts. So we have made changes in coverage to do just that and that means for our top accounts.
We have and top sellers in those accounts, we've reduced the size of their account base or their books and that is in order to make sure that we're putting our highest propensity sellers or sellers, who sell them all services and who has the most of it services skills aligned with our customers who are most likely to buy our services.
And to that with the plan is to go deeper in those accounts. So we can increase our understanding of their businesses in a very dramatic way and proposed solutions that aren't gonna be most relevant to them to help them deliver the success in their businesses that they were looking for so we've done all of that you know you're never done of course, but we've done that.
As of the end of the year and so that's a pretty big that's a pretty big push for US. We've also made some minor changes around how we think about account planning how we're training our sales exact and things like that and that will continue that'll be an ongoing process.
So we have now moved from talking about sales transformation to actually growing the business. So we we believe we're done we're done with the planning phase and we're now into execution.
Yeah.
Got it thank you very much.
Thank you. Thank you.
Thank you Adam.
We have our next question comes from Joseph Cardoso from J P. Morgan Chase Joseph Your line is now open.
Thanks, and thanks for the question at the Investor Day, you provided a long term revenue outlook to outperform the underlying market by 200 basis points, how should we think about that level of outperformance relative to 2023 is that still the benchmark, we should align to our models or are there. Other factors. We should consider this year that might put pressure on that.
I think we've always said that we will perform to 300 basis points ahead of the market that hasnt changed.
It's just that we really want to focus on gross profit dollars because the composition of our revenue specifically the composition of cloud in our in our revenue and the netting that occurs with that makes our revenue metric a little a little.
Hard to follow especially when you're following it each quarter Q2, and Q4 be club quarters. So that's why we gave you some guidance around.
Gross profit, but we still anticipate we will go ahead of the market yes.
On the revenue line got it got.
Scott I appreciate it and then just relative to cash generation, which is set to improve heading into 2023 based on kind of the commentary you made in your prepared remarks I guess it was can you just remind us what the priorities are and particularly just given your comments around the M&A like are you seeing is that more attractive going into this year are you seeing valuations coming down and then.
Are you are you just more inclined to do some kind of transaction to bolster your portfolio just kind of given what we're seeing in the macro backdrop and simultaneously with cash.
Generation likely temporary thanks for the question guys.
Sure I appreciate it yeah. So first call on capital will be continuing to invest in our organic business as we have been doing over the past year, then it would be M&A than it would be share buybacks and then paying down debt paying down debt is at the bottom primarily because when an environment now where a that is 1.1 0.2 times, one two times Levered, which is.
Hello, what I would say is that we continue to look at M&A. We continue to look for tuck ins of maybe small to medium sizes. If you want to think about it that way that we can tuck into the existing business to fill certain capabilities gaps that hasn't changed you know I think that valuations on the smaller end of the market the nonpublic.
And then the market are finally, starting to come down a little bit as companies are out there and they haven't seen the high prices maybe that they were getting in 2021 and early into 'twenty 'twenty. Two so we will continue to be opportunistic in terms of adding to the overall portfolio around the pieces that we talk about data.
AI cloud.
Et cetera.
Yeah.
Thanks appreciate the color.
Okay. Thanks, Joe.
Thank you Joe.
We have our next question comes from Anthony Syllabicity from Sidoti and company IOC. Anthony Your line is now open.
Uh huh.
Good morning, and thank you for taking the questions and nice job on the quarter.
So just looking at your services gross profit dollars grew 15% in the quarter I'm. Just wondering was that mostly volume driven or were there any pricing benefits and I guess given the.
The choppiness in the economy or use I guess based on your guidance, you're probably not seeing much in terms of pricing pressures, but I mean, that's it yeah.
Just wondering if you could just address that topic.
I'm so sorry.
One thing we did see some improvement in services gross profit and that is a combination of a mix of services and but in some of it was volume driven obviously gross profit outperformed the topline by a bit.
And I would not attributed to pricing I would say, we haven't actually driven a whole bunch of pricing initiatives some of it a little bit potentially because of the cost of labor certainly did increase during the last year, but I would say the same about is primarily driven by improved execution and focus on making sure.
Our utilization is improving.
Gotcha, Okay and then.
We put a lot of companies do a lot of layoffs.
So just wondering about your own hiring plans how are you guys thinking about managing that.
Yeah. So we've been since the middle of last year are working really really hard to tighten our hiring processes and make sure that we're hiring as Glenn said earlier for specific sales opportunities and technical expertise opportunities. This is a market where you can acquire terrific talent. So we will continue to do that.
And we are we don't have any plans to do any math at this point, we have no plans to do any major major layoffs. We will continue to ensure we're we're aligning our utilization rates with the demand in the market and of course, we continue to manage the performance but.
Other than that we don't have any significant plan.
Well that's good to hear and then I think you mentioned that you're planning a new Texas fulfillment Center can you go over the timing of that and how should we think about as far as capex.
Spending for that.
Sure Anthony sorry.
I'm, sorry, Texas fulfillment center will be built out this year I would say, primarily we're not going to see any benefit from that build out in 'twenty. Two 'twenty three it will be operational very late in the fourth quarter, maybe in December if not in January of 2024. So we would anticipate going into January of 'twenty 'twenty four will you start to see the bend.
Or that it is not a net addition to our portfolio. It is gonna be a consolidation. So once that facility is up and running we're gonna be closing some of our other facilities.
So net net we will end up with two major facilities at the end of this period I think the other thing that I would say is that this facility allows us to do more advanced configurations around data center very specifically as opposed to a lab and integration work etcetera. So that's one of the top reasons for driving this at all.
Also allows us to serve as the.
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Country North America, the U S with two day delivery from almost anywhere between the two facilities that we don't have it in with regard to how we go through there and.
It's probably just under $30 million associated with that.
Capital expenditure guidance that we gave you of the 25 to 325, sorry $55 million to $60 million, our normal run rate Capex is in the $25 million to $30 million range. One more thing Anthony. It's also we are also investing in some automation. We're really excited about the government said, we're going to deliver to our clients in terms of speed and accuracy.
Got it thank you very much and best of luck.
Thank you Hugh.
Thank you Anthony.
We have our next question comes from Vincent Colicchio from Barrington Research.
Okay.
Oh, Yeah choice or where what are you seeing in terms of overall sales cycles and if you can give some color on any particular areas, where there's not any changes sequentially.
Yeah, we.
Saw this starting in Q4 and so.
Really does continue so for services projects, we are definitely seeing longer sales cycles more approvals are required our clients are asking us to figure out how to change the scope of projects to make them smaller deliver results fast that actually plays to our strengths I think we're.
You're really good at that.
So deliver deliver an ROI and then or the right to do the next project, but we are definitely seeing those services projects take a bit longer and are slightly they are a bit smaller.
Yeah.
Oh, thanks for that and one more could you comment on that.
The trends Youre seeing in your client set the enterprises public sector in SMB.
Yeah. So you know I think we're seeing pretty solid growth across all of those obviously public sector is is for us. It's a smaller piece of our business, but it is really we're not as focused on the K through 12 space there, but we're seeing some pretty solid growth there due to the infrastructure bills and.
Investments in the country. So that's good but our commercial and enterprise businesses are holding up really really well too. So we're seeing strength across the board.
Thank you and my other questions were answered.
Makes sense.
Thank you Vincent.
We have a follow up question from Mats true from FIFO match. Your line is now open.
Yes. Thank you I just had a follow up question on your software businesses in North America, and Europe , which had a lot of time sort of different.
Results here, you had double digit growth in software in North America up 80% year on year.
Whereas our business in Europe was up just 4%, but I know you also grew gross profit dollars in Europe . So is there a difference in terms of revenue recognition or the types of software cloud services that you offer.
There isn't any difference in revenue recognition across the regions. We use the same methodology in terms of revenue recognition in all all of our regions.
I think the business mix in EMEA is a little bit different with regard to the services that they can attach to the software. So we have maybe a more sophisticated software and.
Uh Huh cloud attached digital transformation process here or methodology here and offerings here that we can give to our clients, whereas in EMEA. They don't have that so that actually influence is part of the success that we have here in North America with our cloud growth versus them, yeah that would be one of the areas for an M&A opportunity for us as we go.
Forward.
Okay.
Anything different in terms of the demand environment there.
Yeah, I think the demand the demand is the demand environment is a bit slower there a bit more cautious for sure and we've seen that we've seen that for sure.
Inflation rates or higher costs are higher.
Okay. That's it for me thanks.
Thank you.
We continue to build on our.
Thank you.
We have no further questions on the line I would now.
Thank you for joining today's call.
Have a lovely day.
Thank you. Thank you.
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