Q3 2023 Insight Enterprises Inc Earnings Call
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
I'm going to be.
Uh huh.
[music].
Good morning, and thank you for attending the insight enterprises incorporated third quarter 2023 earnings Conference call.
My name is Elisa and I will be your moderator.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
To ask a question you May press Star one.
I would now like to pass the call to our host James Morgado SVP of finance and CFO of North America. James You May proceed.
Welcome everyone and thank you for joining the insight Enterprises earnings conference call today, we will be discussing the companys operating results for the quarter ended September 32023.
And James <unk>, Senior Vice President of Finance and CFO of insight in 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 dotcom.
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 November 2nd 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 call, we will be referring to non-GAAP financial measures as we discuss the third quarter 2023 financial results.
When discussing non-GAAP measures, we will refer to them as adjusted.
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.
Please note that all growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted.
Also 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.
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.
I will now turn the call over to Joyce and if Youre following along with 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 Q3 met our expectations and delivered record adjusted earnings per share for the quarter cloud gross profit grew 17% and insight core services gross profit grew 20% demonstrating the progress we are making to becoming the leading solutions integrator. We are also confirming our adjusted.
Diluted earnings per share for the full year of 2023.
Here are a few highlights.
We achieved gross margin of 18% in Q3, reflecting both an improvement in our revenue mix as well as continued progress on our pricing and profitability initiatives Q.
Q3, adjusted EBITDA margin expanded 130 basis points to five 7%, we generated $414 million of operating cash flow in the first three quarters of the year, an increase of over $600 million from last year.
And consistent with our strategy to focus on cloud and services, we acquired from Doris and award winning software development and digital services company based in the U K I will provide more details on this acquisition later.
These highlights demonstrate we are on the right path with our strategy and making progress towards becoming the leading solutions integrator.
We remain focused on the fastest growing areas of the market cloud data AI edge and cyber while we have been leveraging AI to support clients' needs for a long time, we are really excited about the acceleration that generative AI is providing to us and more importantly to our clients.
We've recently filed Jenny I related patents focus on customer support and sales use cases. These patents integrate large language models with third party data to enhance support applications recognize and leverage human sentiment specifically for support applications reduce hallucinations inquiry time, which reduces G. P.
New usage emulate personality types and improved search capabilities for customer support applications.
Combined with our expertise these capabilities allow us to deliver business outcomes to our clients more efficiently. We are also using jennie I internally to improve efficiencies with our development team in our back office support functions.
Our clients need a partner they can trust to navigate new technologies and the infrastructure and workplace requirements to help them digitally transform this is at the heart of our strategy. As a reminder, there are four key pillars captivate clients sell solutions deliver differentiation and champion of our culture.
To illustrate this strategy in action I'd like to talk about one of our clients. He was a technology leader in the public safety industry.
They were experiencing a significant increase in customer demand and needed help to meet their delivery obligations and fulfill their growing black backlog.
They required a partner that could design implement and execute a large scale deployment of their technology to tens of thousands of vehicles across multiple locations.
Leveraging our edge expertise, we implemented a customized solution combining routers cameras and cloud software along with our services to deploy and test the solution at the edge at every stage, we made sure their key requirements around testing and quality assurance we're satisfied.
We quickly ramped up our successful pilot of several thousand vehicles and have since moved to a multi year contract.
The positive outcomes for our clients include faster time to market improved customer satisfaction and accelerated revenue growth.
The success of this project has led to exploring how we can help them seamlessly deploy more of their products at the edge. This is an excellent example of how we focus on business outcomes earn the right to do more and ultimately become the partner of our clients can't live without.
Our expertise and edge solutions as part of our heritage and very important to our clients as it solutions integrator by combining hardware software and services, we bring even more value to our clients.
I'd like to also highlight our application development strength with our recent project, we delivered for our large insurance provider.
They began an initiative to develop a new custom internal claims processing application to replace their existing outdated and high risk system.
They needed help establishing a development environment that could accelerate the time to value.
We introduced them to our proven agile development practices and deployed our user experience experts to guide their development efforts.
Deployment included user story mapping planning the project spring and performing agility health checks along the way.
The effort ultimately concluded with the rollout of our scalable Nextgen claims processing applications that help them realize significant cost savings improved claims accuracy and enable digital payments.
The two projects I highlighted were delivered by our exceptional technical team of over 6000 dedicated experts to augment our exceptional talent and wide ranging capabilities M&A remains an important element of our strategy. We are always looking to bolster our capabilities through strategic acquisitions in line with our focus on.
The fastest growing areas of the market.
<unk> data AI edge and cyber.
In August we acquired them Darice and award winning cloud and application modernization company based in the U K with service delivery centers located in several eastern European countries.
Darice has been a Microsoft gold certified partner for more than 10 years and has a proven track record of delivering transformative digital services and Doris brings more than 850 teammates, 90% of whom are engineers and developers, making it an ideal addition to our existing application and data practices through this acquisition. We also.
Strengthen our solutions capabilities in Europe.
I'd like to share. An example of how <unk> was able to deliver on a project and earn the right to do more there client a global recruiting firm based in the U K with dealing with increasing costs, while developing their own custom built CRM system.
Darice team stepped in to deliver the project faster with a more scalable and reliable application all while saving costs.
The success of this project has led to additional work with this client, including application development product design and data migration support.
This illustrates why I'm Doris is a perfect complement to our strategy.
And our strategy is working.
To add to our track record of industry recognitions I'll highlight a few.
We've been included in the Gartner Magic Quadrant for software asset management managed services and public cloud transformation services. This highlights our strength, helping clients architect to build and manage cloud solution.
Additionally, insight has been named EMEA innovation partner at this year's Canalis Forum, which recognizes outstanding performance in achieving in driving innovation in part. This was due to our early development of insight G. P T.
And since we believe our culture is a competitive advantage we are thrilled to be recognized by Forbes as a world's best employer for 2023.
In summary, we are making great progress towards becoming the leading solutions and a greater focus on the fastest growing areas of the market and where our clients need the most help.
With that I'll turn the call over to Glenn to share the key details of our financial and operating performance in Q3 and outlook for 2023.
Thank you Joyce.
Our focus on profitability and growth in high margin cloud and services business has contributed to the expanded margins we've seen in our results. This year and we believe we're well positioned to profitably grow our topline as macroeconomic conditions improve.
Moving onto Q3 results net revenue was $2 $3 billion, a decrease of 11% in U S. Dollar terms and also in constant currency. The decline was primarily due to hardware, which was down 17% due to devices, partially offset by cloud growth.
Last quarter, we expressed our belief that we had approached the bottom of the device market and that the decline in our devices revenue.
Sequentially devices were up slightly in Q3.
Despite the 11% decline in net sales gross profit increased 2%, reflecting the hardware decline offset by higher cloud and insight core services growth as well as the benefit of profitability and pricing initiatives, we implemented last year.
In fact core services gross profit was $71 million an increase of 20%. This.
This performance reflects growth in applications data digital enablement as well as networking, partially offset by a decrease in integration and other services related to the decline in devices.
Gross profit was $96 million, an increase of 17%, reflecting higher growth in SaaS and infrastructure as a service.
Gross margin was 18% an increase of 220 basis points and reflects the higher mix of cloud insight core services and infrastructure products, all of which transact at higher margins relative to devices in.
In addition, our profitability and pricing initiatives also contributed to higher hardware and services gross margin.
Last quarter, we accelerated cost reduction actions to better align our cost structure to the market environment. These actions were completed by mid quarter and we are starting to see the benefit of the actions in North America, where adjusted operating expenses were down 4%.
Our adjusted EBITDA margin expanded 130 basis points to five 7%.
Yes.
And for the third quarter adjusted diluted earnings per share was $2.37 up 19% in U S. Dollar terms and also in constant currency and including the benefit of approximately forces related to the release of certain tax with Pacs resist.
Our adjusted return on invested capital for the trailing 12 months ended September 30th 2023 was 16, 8% compared to 15% a year ago and this also demonstrates progress towards our long term goal.
Right.
Year to date, we generated $414 million of cash flow from operations compared to a usage of $206 million for the corresponding period in 2022.
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 the anticipated dilution throughout 2023, you will find the dynamics of the convertible notes illustrated in our investor presentation.
We exited Q3 with depth of $324 million outstanding under our ABL compared to $438 million outstanding as of Q3 2022.
This reduction in the debt balances after spending $217 million of share repurchases in the first nine months of 2023 and also includes the acquisition of <unk> in Q3 and is indicative of the strong cash flow in our business.
As at the end of Q3, we had approximately 1.5 billion available under our $1 8 billion dollar ABL facility we.
We have ample capacity to fund our business operations and.
And capital deployment priorities, including M&A.
As George mentioned in August we acquired M Darice and award winning software development and digital services company.
Darice significantly increases our digital and cloud enablement capabilities in EMEA.
The impact on adjusted diluted EPS will be negligible in <unk>.
23.
Our presentation shows our trailing 12 month performance through Q3 2023 relative to the metrics that we laid out at our Investor Day in October 2022, we believe we're on track to hit these targets by 2027.
We are keeping an eye on the broader market and appreciate that demand and spending patterns are volatile with three quarters under our belt hardware has started to improve but not at the level we had anticipated.
We expect continued strength in software cloud and insight core services as well as expanded margins from a pricing and profitability initiatives.
Additionally, we believe we will benefit from the operating expense actions, we took last quarter.
Given these factors, we're maintaining our adjusted diluted EPS guidance of $9.40 to $9 60, and we recognize this is a wider range than is typical for Q4.
This guidance includes gross profit growth in the low single digit range interest expense between 45, and $47 million and effective tax rate of 25% to 26% for the full year capital expenditures of $40 million to $45 million and an average share count for the full year. It was 30.
For $34 8 million shares.
Outlook excludes acquisition related intangible amortization expense of approximately $84 million assumes no acquisition related or severance and restructuring and transformation expenses.
And it seems to be a meaningful change in our debt instruments or at macroeconomic outlook I don't know.
Turn the call back to choice.
Thanks goodness the long term dynamics of the industry are very strong digital transformation is here to stay and technologies like generative AI are accelerants at.
At insight, we are staying focused on delivering outcomes, our clients value most leveraging our skills and the fastest growing areas of the market.
To summarize our results this quarter in type core services gross profit grew 20% cloud gross profit grew 17% adjusted EBITDA margin increased to five 7% adjusted diluted earnings per share grew 19% adjusted ROIC.
Was 16, 8% and trailing 12 months free cash flow as a percentage of adjusted net income was 211%.
Our portfolio of solutions gives us the resiliency to navigate through economic cycles, and we are prepared to capture growth opportunities when spending patterns improve.
We have a healthy balance sheet and our business delivers strong cash flow, giving us the capacity to fund our capital allocation priorities in particular acquisitions and the fastest growing segments of the market and.
In closing I want to thank our teammates for their commitment to our clients partners and each other our clients for trusting insight to help them with their transformational journeys.
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.
We will now begin the question and answer session.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
If for any reason you would like to remove your question you May press star two.
As a reminder, if you are using a speakerphone. Please pick up your handset before asking your question.
Once again to ask a question press star one.
Our first question comes from the line of Joseph Cardoso with J P. Morgan. Your line is now open.
Okay.
Hey, good morning, everyone and thanks for the questions. So just starting off here if I'm looking at the full year guide you moderated the gross profit outlook modestly to the low end of your prior guide.
Was just hoping if you could walk us through the big ticket items that are resulting in the incremental pressures impacting the guide versus let's say 90 days ago, and then I have a follow up.
Sure sure so Josh Thanks for the question.
What I would say is that our device we are not seeing the improvement in the device segments of the market that we had anticipated and while that doesn't necessarily drive huge gross margin. It does actually drive some gross profit dollars.
We continue to see strength in cloud, we continue to see strength in our services, but the hardware side of the business is not recovering as we as we had anticipated and it's specifically around the device side.
And we have some improvements that we're making with regard to SG&A, we took some action.
<unk>.
Last quarter actually this quarter, we have a little bit of benefit this quarter, we expect to have more than enough benefit in 2020 'twenty three in the fourth quarter sorry.
Got it and then maybe we could just touch on that.
Devices can you just give us a little bit more color on the linearity of customer spending through the quarter, particularly as it relates to the improvement that you are seeing devices and then maybe just more broadly not specific to devices are you seeing any divergence across your various customer verticals like large enterprise SMB and public sector from a spend overall spending.
Hager standpoint, thanks for the questions I appreciate it.
Hi, Joe This choice.
You very much for asking so here's the thing I mean first of all I want to make sure. It's notable that the reason we set out on this strategy is because we know that devices, we're gonna be inherently cyclical and as we've seen a lot of that this year and still we delivered record EPS for the quarter.
So just that's kind of a backdrop, but then in terms of devices. We have seen some sequential improvement we expect to see some continued sequential improvement, but instead of seeing growth as we thought at the beginning of the year in Q4, we would expect to see that push out a couple of quarter or two probably to the back half of the year.
And we know that that's pretty consistent with what we're hearing from our partners and what we're seeing in the market.
From a from a segment point of view, but generally we see some slight some improvement first in the commercial space and it takes longer for that to take hold in the enterprise space given the dynamics of the device market. We do believe that Windows 11, Jenny I requirements hybrid work requirements will there.
We'll drive recent fresh cycles, but again those generally eight we see that sooner in the commercial segment and later in the enterprise segment public sector has been strong for us overall, and that's consistent with kind of the amount of money that's in the public sector at the moment.
And just on the linearity piece wins any differences really throughout the quarter in terms of how.
July versus September transacted short of a surplus of cortisol.
Yes.
Yes.
Thank you.
Next question comes from the line of Matt Sheerin with Stifel. Your line is now open.
Mhm.
Yes, Thank you and good morning, everyone.
Just unrelated to hardware sales.
Client devices are part of it but so our infrastructure products storage servers networking and I know you've commented that you've had good backlog.
Particularly on the networking side.
But that's the expectation where that backlog, where do they get worked down with improving supply. So.
Could you give us some color on what you're seeing with those products and how that plays out in Q4 and into next year.
Yeah.
So yeah. So the infrastructure backlog has largely normalized now and we are seeing some softening in infrastructure demand. It's really again consistent with what we're hearing from our partners. There's a bit of uncertainty. Just you know acquisition regard quotes are taking longer to turn it to turn into P. O's etcetera etcetera.
However, we still believe the long term dynamics are very strong again, we think gen. I ask Jenny I will be an accelerant around infrastructure and so we're spending a lot of time is just sales cycles are a little longer.
Okay, and you talked about sequential growth in client devices in Q4 and would you expect.
The infrastructure products to be also seasonally.
Well, we have a little bit of a different dynamic because we just lost a bunch of backlog in Q3, So we would not see the same dynamic there.
That's largely driven by backlog okay.
Got it Okay. That's helpful and as you noted the free cash flow has been very strong I know the inventory has been coming down.
I imagine because of the client device question also.
A better supply, but could you talk about.
Expectation for working capital and inventory going forward.
We would say that our inventory has largely normalized as of right now versus the buildup that we had back in the supply constrained era, and we would expect that it would stay around this level as we move forward our working capital has been great at this stage given that.
Hardware is very soft, it's improving but it's still very soft we would anticipate that we'd still be in a positive working capital environment.
Hardware where to grow in the kind of low to mid single digits.
It becomes more problematic because one hardware is growing in the 25 to 30 devices in particular and the 25% to 30% range like again in 'twenty one 'twenty two.
So we would anticipate that okay. Thank you.
We have right now.
Okay, Great and just lastly.
Your comments about the pricing and profitability.
Projects that you have in terms of customers and increasing pricing.
Could you talk about that is that across hardware across services, how successful has that been.
Yes.
I think it's been very successful as evidenced by the gross margin.
Appreciation that we've seen and the improvement in gross profit on declining revenues. So we have a strategy that is related to hardware I'm trying to think about it that way.
In terms of the floors that we have pricing that we wouldn't accept from large customers and approval processes that we put in place with regard to level of a.
Gross margin, while this exercise of customer et cetera, and we've also put some floors and ceilings in place around services that would help drive that improvement in gross margin as well as really looking and standardizing our utilization metrics across all of our surface practices. So that we are measuring it consistently and that.
We can really pinpoint where where we need to be focused in terms of utilization and to be fair. We've also leveraged from offshore capability to lower overall charge out rate that has helped with the gross margin as well in services. So it's been a combination of various <unk>.
Factors I would say, they're now systemic they're not one offs anymore.
Okay, and Theres been no sure sure issues of share loss issues because of that.
In terms of competitive landscape.
I would say if you look at our results relative to where our largest reseller competitor out there I'm talking about it from a hardware from a client segment perspective, we've definitely held our own with <unk>.
Definitely headroom.
Okay, great. Thank you.
Yeah.
Thank you.
The next question comes from the line of Anthony <unk> with Sidoti. Your line is now open.
Oh hi.
Alright, good morning.
Morning.
This is Stefan <unk> on for Anthony <unk>.
My first question is can you talk about the performance during the quarter for your different client groups, such as enterprise public sector and F&B.
Yeah.
So.
We publish all of this is all in the it's in the documents, but I'm happy to talk about it I think the most challenged.
Segment for the quarter were where the enterprise the enterprise business overall.
Commercial was also pretty challenged I would say public sector was strong and growth yeah. Sami So I think where we're happy with that because we think that's pretty consistent with the market.
Yeah, So our public sector grew low single digits, unless maybe mid low to mid fours.
And the enterprise.
Enterprise corporate and commercial segments were down in the double digit level.
Teens area, Yeah commercial was down the most.
Yes.
Does that answer your question.
Do you think we are at the bottom.
Or if not when do we expect to see positive results for devices.
Yeah.
So we said last quarter, we thought we were at the bottom of the device market. We believe that that was true when we saw some sequential growth.
But we expect to continue largely because the compares also get a lot easier.
Thank you so much.
Yeah.
Thank you.
The next question comes from the line of Jacob Morrison with Raymond James.
Your line is now open.
Okay.
Hey, Thank you for taking my question I'm, hoping you guys could touch on the performance.
Geographically a little more maybe touch on what you saw in EMEA relative to expectations and maybe just the overall macro environment there relative to Americas. Thank you.
Okay, I'm sorry EMEA.
Business delivered to our expectations I would say that maybe the mix of business was a little bit different I think that the outlook for the EMEA region.
For Q4, as well as going into 2024, it's likely it's softer than it is anticipated to be for North America.
We did do and I'm Dara <unk> acquisition in EMEA. So as we look into 2024, we would see some growth coming through from that.
At the time, you add interest expense is not necessarily material to total inside resolved, but you will see kind of improvement in services gross margin associated with that acquisition and we think that that acquisition will also help with regard to date.
Data and cloud related sales like that drives combined with services business outcomes for our clients. So.
So we think that the acquisition should be very beneficial to me as we go into 2020 for especially in light of a softer economic environment. That's forecasted in EMEA for next year.
Yeah.
Perfect and then on the topic of M&A can you just please opine on your sort of M&A outlook or what youre thinking about fiscal 'twenty four just after coming off the <unk> acquisition. Thank you.
So we've been pretty consistent in talking about focusing on them acquisitions that help us improve our capabilities in the fastest growing areas of the market cloud data AI edge.
Edge cyber so nothing has changed there and we're really pleased by the acquisition and in EMEA and.
We remain very very focused on looking for other acquisitions that can be can offer great great capabilities choice to our clients. So we're still very very focused on.
Okay.
We also have the capacity of course on the balance sheet I think like like goodness talked about so.
No change in strategy. There. We are also we do believe that the transactions and the valuations have come down this year, so it's making it a bit more possible to do things like I'm sorry.
Thank you.
The next question comes from the line of Vincent Colicchio with Barrington Research. Your line is now open.
Yeah.
Okay.
Yes George.
And that offshore was levered to.
Boost margins will that become an increasing focus for the company going forward.
Yes for sure for specific services I just mentioned the work that we're doing to improve the structural profitability of our services business. We're pretty pleased with the work we've done so far there and as you might remember we bought her new about a year ago year, and a half ago and we have been working to figure out how to leverage those global.
<unk> in all three regions. So for specific offers and specific capabilities. We are we expect to continue to lever to leverage India and we expect we have been.
Doing that for quite some time by the way for our own internal back office, primarily in Manila and now we're doing that both in Manila and in India.
Yeah.
And I came on the call a little late you may have mentioned that.
The use of AI to improve productivity and programming.
How far off is that in the future is there a line of sight to that.
The future is now Vince it's happening now so we are we've been really really excited about the work that we've done we launched insight G. P. T about I want to say about six weeks. After Microsoft did the open AI announcement in February we've been using internal use cases.
To help educate our clients on what the opportunities and keep them possibilities are in their environment, and that's driven a lot of interest and a lot of client meetings and a lot of assessments and that's also driven some very significant opportunities to improve quality of data and data states for our clients. So they can leverage.
These these analytics capabilities and also and certainly some use case development and application development. So this is absolutely an accelerant, but we think over the long term or medium term and we're seeing it start now.
Yes, I am curious about its ability to improve programming productivity any thoughts on that.
Yeah, well, we have so the the leader of them Darice gave me a number that is very exciting in terms of the software developer productivity improvement, but I mean, and we're hearing this over and over again from our partners as well, but somewhere in the 100 to 100, plus X improvement and <unk>.
Productivity is something that we're aiming for I wouldn't say, we're there yet, but we have seen already significant improvement in productivity in the 2030 40 per cent range, primarily around quality checks quality auditing and and just development time.
Thank you.
Okay.
Thank you.
There are no additional questions registered at this time so as a reminder, if you would like to queue for a question press Star one.
We will pause here for any additional questions to register.
There are no further questions at this time.
We will now conclude the call if the team has any further remarks.
Yeah.
Okay.
That concludes today's conference call. Thank you all for your participation you may now disconnect your lines.