Insight Enterprises, Inc. (NASDAQ:NSIT) Q1 2024 Earnings Call Transcript May 2, 2024

Insight Enterprises, Inc. misses on earnings expectations. Reported EPS is $1.74 EPS, expectations were $1.82. Insight Enterprises, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the Insight Enterprises First Quarter 2024 Operating Results. My name is Alex. I'll be coordinating the call today. [Operator Instructions] I will now hand it over to your host, James Morgado, SVP of Finance and CFO of North America. Please go ahead.

James Morgado: Welcome, everyone, and thank you for joining the Insight Enterprises earnings conference call. Today, we will be discussing the company's operating results for the quarter ended March 31, 2024. I'm James Morgado, Senior Vice President of Finance and CFO of Insight 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.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.com.

An archived copy of this conference call will be available approximately 2 hours after completion of the call and will remain on our website for a limited time. This conference call and the associated webcast contain time-sensitive information that is accurate only as of today, May 2, 2024. 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 first quarter 2024 financial results. When discussing non-GAAP measures, we would refer to them as adjusted. You will 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 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 statements made on this call whether as a result of new information, future events or otherwise.

With that, I will now turn the call over to Joyce. And if you're following along with the slide presentation, we will begin on Slide 4. Joyce?

Joyce Mullen: Thank you very much, James. Good morning, everyone, and thank you for joining us today. We are pleased to announce another record setting Q1 with very strong performance in our key strategic areas of cloud and Insight Core services, fortified by continued SG&A discipline. Some key highlights. Gross profit grew 13% to $441 million, an all-time record for Insight. Adjusted earnings from operations increased double digits in all geos. Adjusted diluted earnings per share increased 33% to $2.37. Additionally, the following metrics represent Q1 record results. Gross margin expanded by 170 basis points to 18.5%. Cloud gross profit grew 33% to $117 million. Insight Core Services gross profit grew 24% to $76 million and adjusted EBITDA margin expanded by 130 basis points to 5.6%.

These highlights demonstrate that we are executing well against our solutions in a greater strategy. In addition, on May 1, we acquired Infocenter, an elite ServiceNow partner and 2024 Partner of the Year for Americas Consulting and Implementation. Infocenter, a pure-play services company focused on implementing and developing ServiceNow solutions across all major workflows, has earned a reputation for delivering exceptional results. And since ServiceNow is a fundamental pillar of enterprise digital transformation, this capability complements our strength in cloud, data and AI and expands our ability to support our clients as a solutions integrator. As a reminder, our strategy is to become the leading solutions integrator by integrating hardware, software and services to drive business outcomes for our clients.

They need a partner they can trust to navigate these new technologies and the infrastructure and workplace requirements to help them digitally transform. Our ambition is to be the partner our clients can't live without. I'd like to provide 2 examples of our solutions integrator strategy in action. First, I'll describe how our expertise in product sales led to services engagement. And in the second example, I'll describe how a services-led selling motion led to product sales. Our long-time client, a multinational conglomerate, has historically purchased a wide range of products from us, from software to devices to infrastructure. The client wanted to conserve capital and was looking to support their business units with improved agility and more disciplined cost management and accountability, specifically around data management.

Through our discussions, we architected an effective solution, which included public cloud compute with on-prem storage sold as a service. To address their need for flexibility with minimal CapEx, we designed and implemented an environment that included multiyear storage-as-a-service with search capacity fully managed by Insight, including 24/7 monitoring of the capacity on hand and consumption usage. Our deep client relationship, supported by strong infrastructure expertise with our broad portfolio of products, enables us to create and deliver a solution that addressed their technical and financial needs. A driving factor for the client was the need for flexibility to support changing business requirements. They are impressed by the solution and they plan to add over 30 additional locations over the next 2 years.

This is a perfect example of how we deliver results fast and earn the right to do more. The solution selling approach at Insight can also begin with a strong services relationship and expand to include products. Let's talk about one of these examples. Over several years, our longtime client, a leading manufacturer in the luxury appliances industry, engaged Insight to deliver on multiple initiatives from user experience enhancements and front-end application development to cloud integration and security. Projects included developing a connected home appliance solution and an app to enable customers to monitor their appliances. Recently, our clients faced a costly upgrade of their antiquated compute and storage environment to meet their business and security requirements.

And because we have a strong relationship and a track record of delivering outcomes, they asked us for help. We assessed their platform and existing infrastructure and reviewed their requirements and ultimately migrated them to an optimized, scalable cloud solution that included modern infrastructure at a fraction of the cost. This engagement further deepened our relationship, which, in turn, has led to additional services projects. We cannot deliver these optimized solutions without strong relationships with our expansive partner network, and we are honored that our innovative partners continue to recognize insight for our expertise and our results. Insight was named NVIDIA's 2024 Americas Software Partner of the Year, for our exceptional work assisting clients across industries with software, systems and services to integrate AI into their businesses.

As an elite partner, Insight engineers have incorporated the best of NVIDIA AI into deep learning solutions to help clients gain a competitive advantage seamlessly incorporating data analytics, machine learning and generative AI applications into business operations. Insight's AI proof-of-concept process, tests and validates solutions through our in-house research and innovation hubs. Additionally, as part of Broadcom's 2023 Partner Awards, Insight was recognized as VMware's Fastest Growth Partner of the Year for North America. We were also awarded 6 Partner of the Year awards from Broadcom, including North America's Cybersecurity Partner of the Year. You can see additional awards in the accompanying slide presentation. At Insight, we are passionate about using technology for good.

We're proud to share the progress we've made toward our continued commitment to the UN Global Compact in our Sixth Annual Corporate Citizenship Report. And we are proud to be recognized as one of Barron's 100 Most Sustainable Companies for 2024. Overall, we are executing against our strategy and making good progress on our initiatives. We achieved strong Q1 results and are staying focused and disciplined in an uneven market. We have expanded our global services capabilities with the addition of Amdaris, SADA and Infocenter. Our improved e-commerce and digital engagement platforms deliver better client experiences. Our state-of-the-art integration center in Texas began shipping products last week and will continue to ramp throughout the year.

And as the demand environment for devices improve, we remain ready to support our clients' needs with enhanced offerings such as device-as-a-service and storage-as-a-service. And we will continue to prudently manage operating expenses and gross margin with our pricing and profitability initiatives. As you are aware, we announced this morning that Glynis will be retiring at the end of this year. This has been part of an organized succession process with our Board. We have hired a top-tier executive search firm and are undertaking a thoughtful process to evaluate the internal and external candidates. Glynis will work with me and the team to identify the new CFO. And she has committed to continuing to lead the finance team until the right successor is appointed.

I'll now turn the call over to Glynis to share key details of our financial and operating performance in Q1, as well as our outlook for 2024. Glynis?

Glynis Bryan: Thank you, Joyce. As Joyce mentioned, we started the year with excellent results. While hardware declined, our revenue, gross profit, adjusted earnings from operations and adjusted diluted earnings per share increased year-over-year. Cloud and Insight Core Services gross profit both grew double digits. The gross profit growth was largely attributable to acquisitions as well as our pricing and profitability initiatives. In addition, we benefited from a couple of large on-prem software deals in the quarter that delivered onetime gains. Moving on to Q1 results. In Q1, net revenue was $2.4 billion, an increase of 2% in U.S. dollar terms and also in constant currency. The increase was driven by software products and services, partially offset by a decline in hardware, specifically infrastructure.

As we communicated last quarter, we're still seeing slight improvement in devices with subdued infrastructure demand. In Q1, Devices were up single digits and Infrastructure was down double digits. We continue to anticipate a modest second half improvement in Devices and believe Infrastructure demand will improve later in the year. Gross profit increased 13%, reflecting strong Cloud and Insight Core Services growth, partially offset by Hardware declines. Gross margin was 18.5%, an increase of 170 basis points and reflects a higher mix of Cloud and Insight Core Services. In addition, our profitability and pricing initiatives also contributed to higher hardware and services gross margin. Insight Core Services gross profit was $76 million, an increase of 24%.

This performance reflects the benefits of acquisitions as well as growth in Cloud and Integration Services. Cloud gross profit was $117 million, an increase of 33%, reflecting higher growth in SaaS and infrastructure as a service. Adjusted SG&A grew 7%, primarily due to acquisitions, which was partially offset by the OpEx actions we took in North America last year. This resulted in adjusted EBITDA margin expanding 130 basis points to 5.6%. Adjusted earnings from operations were $122 million, up 30%. From a geo perspective, adjusted earnings from operations increased double digits in North America, EMEA and APAC at 31%, 22% and 20%, respectively. And adjusted diluted earnings per share were $2.37, up 33% in U.S. dollar terms and 32% in constant currency.

In the quarter, we generated $247 million of cash flow from operations compared to $160 million in Q1 of 2023. This strength reflects favorable timing of client receipts versus partner payments that will normalize in Q2. We still expect that cash flow from operations for 2024 will be in the range of $300 million to $400 million. Our adjusted return on invested capital for the trailing 12 months ended March 31, 2024, was 18%, compared to 15.9% a year ago. This demonstrates good progress towards our long-term goal. We exited Q1 with debt of $550 million outstanding under our ABL. As of the end of Q1, we have $1.4 billion capacity under our $1.8 billion ABL facility, of which $900 million remains available. We continue to evaluate our options relative to the convertible notes.

As a reminder, the notes mature in February 2025. Our presentation shows our trailing 12-month performance through Q1 2024 relative to the metrics that we described at our Investor Day in October 2022. We believe we are on track to hit these targets by 2027, as demonstrated by a strong start from Cloud gross profit growth of 26%, adjusted EBITDA margin expansion of 110 basis points to 6%, adjusted ROIC expansion of 210 basis points to 18% and adjusted free cash flow as a percentage of adjusted net income of 188%. Although we are pleased with the performance we saw in the first quarter, we're one quarter into the year and have considered the following factors in adjusting our guidance. We believe there is increased uncertainty in the macro environment that may further impact recovery in the overall IT market.

We expect Hardware to improve modestly as the year progresses, primarily driven by device refreshes. We anticipate Cloud will remain strong and Core Services to improve, booted by the acquisitions of SADA, Amdaris and Infocenter. We continue to diligently manage our SG&A, while thoughtfully investing in sales, technical resources and systems to support our solutions integrated strategy. We have higher interest expense related to the Infocenter acquisition. Considering these factors, we now expect to deliver gross profit growth in the mid- to high teens range and that our gross margin will be approximately 19%. And we expect adjusted diluted earnings per share for the full year will be between $10.60 and $10.90. This guidance includes interest expense between $52 million to $54 million and effective tax rate of 26% for the full year, capital expenditures of $50 million to $55 million and an average share count for the full year of 35.3 million shares.

This outlook excludes acquisition-related intangible amortization expense of approximately $60 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. As Joyce mentioned, I'm retiring at the end of this year. While I'm excited about what comes next, this was a difficult decision for me, as I care deeply about my Insight family and the people I've spent the last 17 years with. I'll miss the feeling of being part of something truly special. I am excited about Insight's trajectory and the progress we have made towards becoming the leading solutions integrator. We have a strong and talented management team, led by Joyce as our CEO and incredible teammates who believe in and execute our strategy every day.

Insight is well positioned for the future. And after this year, I'll be cheering from the sidelines as the team continues to deliver impressive results. This is my 65th earnings call, and it has been a phenomenal experience for me. Thanks to all of you for your interest and on supporting Insight over the years. I will now turn the call back to Joyce.

Joyce Mullen: Thanks, Glynis. We have started this year with very positive results. Cloud and Insight Core Services' gross profit growth remains strong. We are seeing slight improvement in Device revenue. Gross margin expanded, reflecting a favorable mix of Cloud and Insight Core Services and benefits from our pricing and profitability initiatives. And we remain disciplined with our SG&A management resulting in strong EBITDA margin performance. Our acquisition of Infocenter expands our expertise and capabilities across all major ServiceNow workflows and strategically positions us as a key ServiceNow partner and increases our relevance to our clients. 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.

I would also like to thank Glynis for her leadership and energy over the last 65 earnings calls, and we will certainly have a few more of these together. So it is too soon to do a formal sendoff. Glynis has had an enormous impact at Insight over the past 65 quarters. She has led and supported 16 of the 18 acquisitions in the company's history. It was really that foundation that Glynis and team built that enabled us to accelerate our performance and adopt our strategy to become the leading solutions integrator. Glynis is loved and admired for her business acumen, strong leadership and very quick wit by our teammates, partners and clients. Glynis' partnership, support and friendship have been invaluable to me as I joined Insight. Thank you, Glynis.

We will miss you, but not yet. This concludes my comments, and we will now open the line for your questions.

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