Q2 2023 Insight Enterprises Inc Earnings Call
Okay.
In the presentation you can register to ask a question by pressing star followed by one on your telephone keypad and if you change. Your mind you can press star followed by to terminate that question I would now like to hand over to your highest James or got a senior Vice President of finance and CFO inside North America to begin James.
Please go ahead.
Welcome everyone and thank you for joining the insight Enterprises earnings conference call.
Today, we'll be discussing the companys operating results for the quarter ended June 32023.
I'm, James Murdock Senior Vice President of Finance and CFO inside North America.
Joining me is 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.
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 August three 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 and today's conference call, we will be referring to non-GAAP financial measures as we discuss the second quarter 2023 financial results.
When discussing non-GAAP measures, we will refer to them as adjusted.
Finally, 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 with that I will now turn the call over to Joyce and if you're following along on the slide presentation. We will begin on slide four choice.
Thank you very much James good morning, everyone and thank you for joining us today.
Q2 was more challenging than expected and our performance was below our expectations. Although we did not achieve the results. We anticipated. We are pleased with many of our key performance indicators that confirm we are making progress on the strategic and financial goals. We previously outlined here.
Here are a few highlights.
We achieved record gross margin of 18, 4% as we continue to make progress on our sales mix and pricing and profitability initiatives.
Insight core services gross profit grew 7% and cloud gross profit grew 12% and both are key drivers of our solutions integrator strategy.
Adjusted EBITDA margin was five 9% up 50 basis points, and we generated $188 million of operating cash flow in the first half of the year.
These are proof points that demonstrate we are on the right path. Although we are at the beginning of this journey, we continue to gain traction in the fastest growing areas of the market cloud data AI and edge, which importantly aligned to our areas of expertise.
In addition to our focus on growing our business. We are implementing further cost reductions designed to improve the efficiency and effectiveness of our operations and preserve capital for key areas of investment.
Including M&A that support our strategy <unk> will provide more details.
Considering our Q2 results and our current expectations for the second half of the year, we are lowering our full year adjusted diluted EPS guidance range to $9 40 to $9 60 per share, which reflects a 4% year over year growth at the midpoint.
The long term dynamics of the market are very strong and our clients remain committed to digital transformation and leveraging technology, including generative AI to improve efficiency reduce risk and deliver a better customer experience. We are confident that we will see a resurgence in buyer confidence and demand in the midterm.
As a reminder, there are four key pillars underpinning our strategy that we outlined last fall at our Investor day.
First captivate clients. This is all about delivering exceptional value to our clients, we pride ourselves on delivering high quality outcome based solutions and earning the right to do more.
This leads to our second pillar sell solutions, we are transforming our sales capabilities and aligning our incentives to focus on our solutions portfolio seen here is really about focus 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 through reusable IP exceptional technical talent and are very compelling solutions portfolio.
Again, we are focusing on our strengths that align with the fastest growing areas with market and where our clients need the most health cloud data AI cyber and Ed.
And the fourth pillar is champion our culture. This has been a strategic advantage for us and is critical to attracting and retaining incredible talent.
Our ambition to be the leading solutions integrator requires a deep understanding and a passion for technology and our solutions team continually strives to develop and refresh our IP.
We recently launched our proprietary insight lens for Gen. AI. This configurable ready to deploy modern data platform solution helps organizations quickly design build and deploy infrastructure to support generative AI platforms.
A key element of our solutions integrator strategy is our deep partner network and we collaborate with industry technology leaders in their respective domains.
For example, as Nvidia is 2023 Americas retail partner of the year, our technical experts were closely with Nvidia to help our clients leverage best fit AI data analytics and machine learning solutions.
At the very heart of Gen. AI is data. This is one of our core capabilities and it's critical to effectively implementing AI projects.
We have been helping clients manage and improve their data states for many years.
Describe a couple of client use cases that are in progress leveraging journey II.
For example, we're working with a recruiting firm to reduce the time and effort associated with matching candidates tools. We are building a solution that retrieves job postings and other hiring metadata and align those with candidate profiles to identify strong potential matches.
We are leveraging <unk> to streamline the development time.
And another example, we've partnered with a global technology distributor to take a proof of concept open AI conversational agent to full production. The goal of this project is to drive accuracy and the responses and streamline retrieval of information while carefully controlling the users access to information. We are also partnering with this client to.
Their gen AI roadmap and develop detailed technical plan.
Although it's still early for Gen. AI, our solutions team has been implementing AI and machine learning solutions for many years.
Example, we built a solution for one of our clients that utilize machine learning to create targeted treatments for patients with high blood pressure the.
The recommendations were based on the 800 data points per patient, including the patients symptoms medications and risk factors.
This solution has led to a more personalized care improve patient quality of life health care cost savings and improve treatments with.
With machine learning at the core of our solution, our client and significantly improving hypertension care.
We are proud of the solutions, we deliver to our clients, which are validated by the numerous industry recognitions. We received were pleased with the mine 2023, Microsoft partner of the year Awards, We recently won including worldwide solutions assessment partner of the year.
U S Azure cloud native App development partner of the year.
U S retail and consumer goods partner of the year, Australia partner of the year and Hong Kong partner of the year.
And so it has also been recognized as one of the best places to work in the U K, Italy and Spain.
And separate evaluations by great place to work and most recently as the best place to work for disability inclusion.
Recent awards are in addition to the dozens of other recognitions insight has received this year and highlight the strength of our partner ecosystem. The diverse solutions portfolio, we offer and our teammates that deliver terrific outcomes for our clients.
In summary, we are making progress towards becoming the leading solutions integrator as is evidenced by the performance indicated indicators mentioned earlier and we are focused on the fastest growing areas of the market and where our clients need the most help.
I look forward to discussing our progress as we continue our journey.
With that I'll turn the call over to glad to share the key details of our financial and operating performance in Q2 and updated outlook for 2023 got it. Thank.
Thank you Julie.
As mentioned our results for the quarter were below our expectations.
At a high level.
<unk> net sales decline of 24% year to year impacted results in the quarter. Additionally, the normal contract celebration, we typically see in late June did not occur.
The decline in net revenue, we continue to see year over year gross profit growth in software and cloud as a lot of insight quicker. We continued to grow in the high growth areas of cloud data and AI.
We also achieved record gross margin of 18, 4%.
In Q2 net revenue was $2 3 billion a decrease of 14% in U S dollar terms and constant currency compared to the prior year. This decrease was driven by significant decline in <unk>, partially offset by an increase in networking storage cloud and South Clark.
Over the past few quarters, we've communicated our expectation that devices would be down in the first half of 2023. However, the decline in Q2 was larger than we had anticipated.
We believe the device market is near the bottom in the second half of the year. We expect the rate of decline will be lower than in the first half of 2023, and we still expect devices to be down year to year in total for 2023.
Overall on a 14% decline in net sales gross profit declined 1%, reflecting the hardware performance, partially offset by a higher cloud and in fact core services growth as well as the benefit of the profitability and pricing initiatives, we began implementing last year.
Gross margin was 18, 4% an increase of 240 basis points and reflects the higher mix of cloud in fact core services and infrastructure products, which transact at higher gross margins relative to devices. In addition, our profitability and pricing initiatives also contributed to higher hardware and services.
Gross margin.
In fact core services gross profit was $72 million, an increase of 7% year over year. This performance reflects lower growth and integration and other services related to the decline in devices, but was offset by growth in applications data digital enablement and networking.
Gross profit was a record $115 million, an increase of 12% and reflects higher growth in SaaS and infrastructure as a service.
Our adjusted EBITDA margin expanded 50 basis points to a record 5.9 perfect.
For the second quarter adjusted diluted earnings per share.
$2.56 down 8% in U S dollar terms and in constant currency year to year.
We have been focused on prudent operating expense management, leveraging technology to drive productivity and efficiency in our business improving cash flow and preserving capital for critical initiatives to expand on Joyce's comment we have accelerated our cost reduction actions in the current quarter, while protecting our client experience and critical <unk>.
Terminal investments to support future growth. These actions primarily include head count reduction rationalizing backfill positions accelerating our best sure efforts in optimizing our external vendor spend.
As we previously discussed with slower growth in hardware in the quarter, we generated $28 million in cash flow from operations in the second quarter compared to a use of $158 million in Q2 of 2022 through the first half of 2023, we have generated $188 million in cash flow from <unk>.
Operations compared to a use of cash of $442 million in the first half of 2022.
And to update you on our share repurchase program in Q2, we repurchased approximately 720000 shares of our stock for a total cost of $100 million.
Through the first half of 2023, we have repurchased over one 6 million shares of our stock for $217 million, we did not repurchase any shares in the first half of 2022.
We currently have approximately $200 million.
Remaining under our current 300 million dollar share repurchase authorization, we intend to repurchase shares to offset the dilutive impact from the warrants associated with the convertible notes as appropriate.
We continue to evaluate our options relative to the convertible notes as well as the impact of the convertible notes on dilution and our share repurchase strategy. Our 2023 share forecast includes the net impact of share repurchases and anticipated dilution throughout 2023, you will see.
An illustration of the convertible note dynamics in our Investor presentation, we exited Q2 with debt of $338 million outstanding under our ABL compared to $718 million outstanding as of Q2 2022.
This reduction in our debt balance is after spending $217 million on share repurchases in the first half of 2023 and is indicative of the strong cash flow in our business.
As of the end of Q2, we have approximately $1 5 billion available under our $1 $8 billion ABL facility, we have ample capacity to fund our business operations and capital deployment priorities, including M&A.
Our adjusted return on invested capital or ROIC.
For the trailing 12 months ended June 30th 2023 was 15, 6%.
Our presentation shows our trailing 12 month performance through Q2 2023 relative to the metrics that we laid out at our Investor Day in October we continue to believe that we're on the right track to hit these metrics in 2027, adjusted EBITDA margin expansion cloud gross profit growth in.
<unk> core services gross profit growth and improvement in free cash flow as a percentage of adjusted net income.
As a reminder, 2022 is our baseline for the 2027 CAGR based metrics.
Yeah.
Since our last earnings call, we've seen a further slowdown in our clients' decision, making and an extension of the current economic environment. We now believe that these dynamics will continue throughout 2023.
We expect a high single digit decline in net sales for the year, but we anticipate low to mid single digit gross profit growth driven by continued growth in software cloud and in fact core services as well as our pricing and profitability initiatives as we execute our strategy to become the leading solutions.
Later.
In addition, we believe our operating expense management will position us well in the second half of 2023 and provide a tailwind going into 2024.
As we think about our guidance for the full year of 2023, we expect to deliver gross profit growth in the low to mid single digit range. We expect adjusted diluted earnings per share for the full year of 2023 to be between $9 40.
And $9 60.
A 4% increase at the midpoint compared to 2022.
This outlook assumes interest expense between 46, and $48 million and effective tax rate of 26% for the full year capital expenditures of $45 million to $50 million and an average share count for the full year of $34 8 million shares.
This outlook excludes acquisition related intangible amortization expense of approximately $32 million assumes no acquisition related or severance and restructuring and transformation expenses and assumes no meaningful change in our debt instruments or the macroeconomic outlook I will now turn the call back to Joyce.
Thanks, Punit as Dennis noted, we continued to make progress towards our solutions integrator strategy and we have confidence that we're on the right path for several reasons first our performance indicators continue to move in the right direction cloud gross profit grew by 12% insight core services gross profit grew 7%.
Gross margin expanded by 240 basis points to 18, 4% adjusted EBITDA margin expanded by 50 basis points to five 9% and trailing 12 months free cash flow as a percentage of adjusted net income was 224% second digital transformation is here to stay.
I will only accelerate transformation as clients seek to improve workflows and enhanced productivity, making the work we do even more important.
Third we have a strong balance sheet and our business deliver strong cash generation, we have the capacity to fund our capital allocation priorities in particular, M&A and stock repurchases.
Our portfolio of solutions gives us the resiliency to navigate through this economic cycle and we are prepared to capture growth opportunities while spending patterns improve.
In closing I want to thank our clients for trusting insight to help them with their transformational journeys our partners for their continued collaboration and support in delivering innovative solutions to our clients.
And our teammates for their commitment to our clients partners and each other this concludes my comments and we will now open the line for your questions.
Thank you Johnny.
Like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind. Please press star followed by two when the parent to ask your question. Please ensure your devices on mute locally.
Our first question today comes from Matt Sheerin from Stifel. Please go ahead.
Yes, Thank you and good morning, everyone.
George My first question just regarding your commentary on.
The demand environment, which still looks to be challenging a couple of your.
Tears.
Ported yesterday and both have seen a modest uptick.
And orders in tone from customers.
Coming out of the June quarter, it sounds like you're actually seeing the opposite where things continue to be challenging. So could you be a little bit more specific about what you're seeing and why you may be different.
Yeah, I mean, so first of all I mean Q2 was more challenging than we expected.
But we are pretty pleased that we're making some really good progress against our strategy to become the leading solutions integrator and we see some pretty good gross margin expansion EBITDA margin expansion. Despite the revenue decline.
Hardware declined 24% and as you know cyclicality of hardware is quite significant and and so that is actually the reason for our strategy right. We're trying to change the mix of our business and grow our services.
Services as a percentage of our mix and we're also trying to make sure we're growing in the fastest growing areas of the market like cloud data and AI.
So we do see some more strength going into Q3.
In terms of bookings and also in in terms of in terms of results. So far in Q3. So we also expect the second half to be better than the first half.
And as Glenn noted our guidance assumes that we will grow our EPS by 4% so at the midpoint. So.
I would say that we feel the second half will be better than the first half, it's just not going to be quite as robust as we initially anticipated.
Okay.
That's helpful.
Got it.
Got it and then on the hardware side.
Is that for both client devices and infrastructure products as well.
Well, we're seeing some improvement in infrastructure for sure in Q3 and what.
We think we're close to the bottom as Glenn has said on devices.
And so we expect devices to basically be down year on year in the end for the entire year, but we do expect to see that improve in Q4 or so.
Okay. Thank you wanted to date in Q1 to date, we've seen her.
The hardware decline is less at the start of Q3 than it is at the that it was in the first two quarters.
Okay, great. Thank you Glenn and then just.
My final question regarding <unk>.
Your some cost reduction actions is there a number around that.
And where we see that in terms of the P&L do you expect opex to come down.
So Matt I think what I can tell you is you will see it in Opex and I guess, what you could look at is in the second half of the year Opex as a percentage of GP will grow at a slower pace of GDP growth in opex in the second half will be slower than the growth in GP in the second half.
Okay, great very helpful. Thanks, that's how we get the expansion in EPS, Okay got it okay, alright, thanks a lot.
The next question on the line is from Joseph <unk> from JP Morgan. Please go ahead.
Hey, Thanks, good morning, and thanks for the question.
First question here just wanted to see if you can give us a peek under the hood.
Are you seeing in the services business, particularly wanted to touch on the more moderate year over year growth.
Services as well as the trends youre seeing for services, but the sequential recovery in the second quarter.
Which also came with record gross margins I believe can.
Can you just touch on the drivers of those two and then how are you thinking about those tracking into the second half of this year.
Yes, So we grew our core services business, 7%.
So keep in mind, we have sort of two components of our core services. The first is in those fast growing areas of the market that we keep talking about cloud data AI et cetera that those those parts of the services business grew.
And consistent with our expectations. The piece that we also see we have a piece of our core services business that is very much tied to devices. So think about labs and configuration capabilities et cetera, and those declined so it's a little bit of a tale of two cities there.
And then just on the year over year growth in agent services being a bit lower than what you've seen over the past four quarters.
Yeah.
I think thats related just to the how it plays out with regard to different accelerators that we may get have may be able to take advantage us in one year that are not necessarily available in other areas.
It's not anything that we think is a structural.
Yeah.
Got it.
Then just in terms of my second question just wanted to touch on the AI opportunity to do that.
Highlighted, particularly as it relates to the generator.
I guess, how should investors think about the revenue.
Materializing for the company specifically can we can this be a material driver going into 2024, and then maybe just on the flip side of that you get this question a lot from investors around cannibalization of spend from customers as they prioritize maybe other areas to focus on AI. I guess are you seeing any of that behavior. Thanks for the question.
So so first of all we see enormous interest every single client wants to talk about generative AI.
Many start with trying to understand things like what kind of policy should I have in place what kind of governance and security should I have in place and importantly, how do I get my data estate ready for that so FERC for the use of generative AI than that morphs into let's talk about use cases, let's talk about <unk>.
Specific opportunities to drive specific outcomes at the client et cetera. So we see significant opportunity I would say, it's mostly in the discussion phase at the moment. We are we do have active engagements around general regenerative AI and and just keep in mind, we've been doing AI and data for a really long time. So this is not a big leap.
In terms of the drivers of the business. So I don't think it'll be significant in the back half of the year I do think we will see it set up as and it will provide some another tailwind for us in 2024, because there's so much interest and theres, so much opportunity to improve overall business structure and business outcomes.
And then in terms of cannibalization.
We aren't seeing any of that yet.
But you know I don't think it's it can be really separated from digital transformation broadly speaking, it's a really it's just another way to get to the same kind of outcomes that we're talking about potentially faster and potentially more efficiently.
Got it thanks for all the color I appreciate it.
Okay.
The next question on the line is from Adam Tindle from Raymond James. Please go ahead Adam.
Okay. Thanks, Good morning, Joseph I, just wanted to start by asking if you could maybe provide a little bit of color on linearity in the quarter.
I've mentioned before one of your competitors cited a surge in June and I think we're trying to figure out what happened with you guys relative to that I noticed in the comments you talked about not seeing the software surge in the month of June So maybe that's describing some of the delta, but if you could maybe just at a high level take us through the cadence of the quarter.
And if you want to tie in any trends in July that youre seeing to support your back half view that would be helpful.
Alright.
That one so we did see strength in May and June I would say that were normal cycles going in in the second quarter June historically is always the largest month of the quarter. The third month of any quarter is always the largest month for us.
And we saw probably a little bit more deterioration in hardware in June as well as not the strength in software that we typically see just at the end of the quarter I would say that going into Q3 in the second half we have seen software very strong start and in Q3.
Infrastructure still remains strong we have backlog that still continuing to flow through devices has improved the decline enterprise devices is not as is not as severe as it was in the first two quarters. So that is improving in the second half and we anticipate that it will get even stronger in Q4, but I think that would be.
The answers in terms of why we feel comfortable with regard to what we're seeing and based on conversations we've had with our clients as well as with our OEM and publisher partners.
In terms of their expectations also for the second half and most people are talking about the fourth quarter being particularly strong relative to the third quarter.
Just as a reminder for you for everybody the.
The third quarter is not typically our strongest quarter, that's been a little bit different as it relates to the pandemic.
Couple of years, but in general the first and third quarters are not our strongest quarter. So historically you would expect it to Q Q3 would be down in Q4 would be up.
It relates to the second half.
Got it okay.
And then on the cost reductions Joyce I just wanted to maybe touch on the logic to doing this now it sounds like the decline in the base or the deviation relative to your forecast was largely in the device ecosystem being maybe not as robust as expected, but you're also talking about kind of calling the bottom.
That market. So we had a delta in the device ecosystem, but it is going to accelerate from here or what went into the decision.
Implement cost reductions now and Glenn is I am sorry, if I missed it did you quantify the amount and timing of those reductions.
We didn't quantify the amount the timing is and the second is in the second half. So a principle that we have is that SG&A should grow at a slower pace than G. P.
Ross that's a principle that we have that did not occur in the second quarter, we had been doing prudent well.
What we would call prudent expense management throughout this year in the second half of last year with regard to looking at backfill as before we felt that may be delaying some backfill and based on what we're seeing for this year, we made decisions around reductions that we needed in order to continue to fund.
<unk> and technical talent that we need for the business on a go forward basis. So hardware is not performing as well.
Have some efficiencies that we put in as it relates to how we execute on hardware.
And we believe that the reductions that we're making now will ensure that in the second half of the year SG&A growth at a slower pace than G. P and sets us up with a tailwind going into 2024 and the only thing I'd add is I mean, we're declining 14% on the top line that hurts and and it's an opportunity for us.
Look at the cost structure and set ourselves up so we're a more efficient business and that's what I said as we head into 'twenty 'twenty four.
Okay.
Clean this up on the device stuff, but I think the exciting part is the calling the bottom here and thinking about back half trends, maybe getting better but at the same time near term here just in this quarter you had expected better growth than experienced in devices. So I guess, maybe a way to try to ask this would be.
What would be different about the back half of the year and this kind of calling the bottom.
Forecast relative to what you just experienced in Q2, which Mr forecast, what's underpinning the confidence called the bottom at this point. Thanks.
Yeah, I mean, so first of all where we still want to be clear, we think devices will be down for the year. We don't think we'll see device growth until the very end of the year in Q4, if at all and that's against easier compares right for us.
So so we we we.
We didn't anticipate the Cline and devices that we saw in this quarter, we thought we'd be a little bit better and so and that was really driven also by our mix of business. So just as a reminder, we have a we have a pretty robust large enterprise and corporate sector.
Our commercial business both declined significantly public sector was up.
But it's just not a very big sector for us. So we feel like we have a pretty good handle on the beat and we've actually seen from Q1 to Q2, some reduced less severe declines in devices and we expect that to continue in Q3, and we would expect to see potentially some very slight plastic lots.
So slightly up recovery in Q4 on devices.
Okay. Thank you very much.
As a reminder to ask any further question. Please press star followed by one on your telephone keypad now.
We have a question on the line from Vince and colleagues share from Barrington Research. Please go ahead.
Yeah.
Yes, Jason I'm curious.
Valuations getting a little bit better maybe we see some proactive with some tuck ins here.
In this market.
Absolutely. We are very excited that we've started to see some normalization of evaluations and.
We are really excited about the opportunities that we've talked about as part of our strategy to build capability in those fast growing areas of the market cloud data AI apps et cetera, So, yes, and we're very comfortable with our current balance sheet and are we I think we believe we have ample capacity to support.
Those acquisitions, so we're pretty pumped up about that.
Any differentiation in what you're seeing on the demand side for enterprises versus small and midsized businesses.
I mean, they were pretty there were some slight differences in terms of overall performance.
In terms of smaller commercial business, we call it in large enterprise and corporate corporate business, but it's sort of they're both in sort of 15% to 20% range decline.
So and then obviously public sector it was up.
As I said, we just need we are public sector is only 14% of our business. So it would be great. If it would be bigger in that particular market.
And maybe.
I'll take the question.
Positioning as a solutions.
Integral.
New integrator positioning are you seeing that resonate maybe in the past few months.
Any sense, if that's having an impact.
Yeah, I mean, I think we're hearing the term repeated by our clients and our partners. We're seeing some similar type of discussion from some.
Traditional competitors as well so we think we think the notion of delivering outcomes delivering them fast, earning the right to do more makes a lot of sense.
And building those are delivering those outcomes with a combination of hardware software and services is making a lot of sense to our clients and with new technologies like Jenny I mean, that's a really great example of how we can layer in even more knowledge and value and from a services point of view to help with that.
So.
Pretty pleased with.
Kind of the the response, we've heard so far to our strategy.
Okay. Thank you.
Thanks Vince.
We have no further questions on the question Keith We will now conclude today's conference. Thank you everyone for joining you may now disconnect your lines and enjoy the rest of your day.