Advertisement
Canada markets open in 2 hours 44 minutes
  • S&P/TSX

    22,110.11
    -89.02 (-0.40%)
     
  • S&P 500

    5,199.06
    +38.42 (+0.74%)
     
  • DOW

    38,459.08
    -2.43 (-0.01%)
     
  • CAD/USD

    0.7276
    -0.0028 (-0.38%)
     
  • CRUDE OIL

    86.18
    +1.16 (+1.36%)
     
  • Bitcoin CAD

    97,284.51
    +320.54 (+0.33%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • GOLD FUTURES

    2,416.90
    +44.20 (+1.86%)
     
  • RUSSELL 2000

    2,042.60
    +14.21 (+0.70%)
     
  • 10-Yr Bond

    4.5760
    0.0000 (0.00%)
     
  • NASDAQ futures

    18,409.50
    -75.50 (-0.41%)
     
  • VOLATILITY

    15.29
    +0.38 (+2.55%)
     
  • FTSE

    8,022.39
    +98.59 (+1.24%)
     
  • NIKKEI 225

    39,523.55
    +80.92 (+0.21%)
     
  • CAD/EUR

    0.6828
    +0.0022 (+0.32%)
     

Insight Enterprises, Inc. (NASDAQ:NSIT) Q4 2023 Earnings Call Transcript

Insight Enterprises, Inc. (NASDAQ:NSIT) Q4 2023 Earnings Call Transcript February 15, 2024

Insight Enterprises, Inc. misses on earnings expectations. Reported EPS is $2.98 EPS, expectations were $3.04. NSIT isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and thank you all for joining. I would like to welcome you all to the Insight Enterprises Fourth Quarter 2023 Earnings Conference Call. My name is Brika, and I will be your moderator for today. All lines are on mute during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] And now, I would like to hand the conference over to your host, James Morgado, Senior Vice President of Finance and CFO of Insight North America to begin. So James, 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 December 31, 2023. I am 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.

ADVERTISEMENT

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 15, 2024. This call is the property of Insight Enterprises. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed 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 2023 financial results. When discussing non-GAAP measures, we will 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 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 are 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. In the fourth quarter, our adjusted diluted earnings per share grew by an impressive 18%. This performance was strengthened by the acquisitions we made in the second half of the year. While device revenue showed sequential improvement, demand remained muted. Infrastructure orders softened in December as clients deployed shipments from earlier in the year. Despite a decline in hardware gross profit, we grew total gross profit by 4%, driven by cloud and services. Glynis will cover Q4 results in more detail. We are incredibly proud of our execution and the progress we made on our journey to becoming the leading solutions integrator.

Our profitability and pricing initiatives drove significant improvements in our hardware and services gross margins, which we expect will continue. We improved our cost structure while continuing to invest in our teammates, our capabilities, our infrastructure, and our future. We continued to invest in our solution selling capabilities. We made two strategic acquisitions, strengthening our cloud and services portfolio. We launched our initial Gen AI offerings, which have been well received by clients. We improved adjusted ROIC by 140 basis points to 17.3% and we continued to make progress on our e-commerce and digital engagement platforms, enhancing the client experience. These critical shifts in our operational model allowed us to achieve outsized results in our profitability despite declines in hardware demand.

The following highlights represent record level performance for 2023. Gross margin expanded by 250 basis points to 18.2%. Cloud gross profit grew 26% to $429 million. Insight Core Services gross profit grew 8% to $273 million. Adjusted EBITDA margin expanded by 100 basis points to 5.7%. Adjusted diluted earnings per share were $9.69, up 6%. And finally, operating cash flow was $620 million, representing an increase of $521 million from 2022. We are very pleased with our progress and remain focused on driving profitable growth, particularly as market conditions improve. Additionally, we prudently deployed capital investing in our people and technical infrastructure, including our state-of-the-art Texas integration center. We repurchased over $200 million of shares and made two strategic acquisitions that are immediately accretive and are well aligned to deliver long-term profitable growth.

As a reminder, in Q3, we acquired Amdaris, an award winning cloud and application modernization company based in the UK that significantly increases our digital and cloud enablement capabilities in EMEA. As a Microsoft Gold Certified Partner for more than 10 years, Amdaris brings more than 800 employees, the majority of whom are engineers and developers, making it an ideal addition to our existing application and data practices. It’s increasingly clear that clients operate in multi-cloud environments. In Q4, we expanded our multi-cloud capabilities with the acquisition of SADA, a leading Google Cloud and technology consultancy and six-time Google Cloud Partner of the Year. SADA adds approximately 850 employees and over 400 technical experts with deep capabilities across the Google Cloud platform, Google Workspace, security and data analytics.

This acquisition positions Insight as a leader in both Azure and GCP, two of the three major hyperscalers and the clear leaders in generative AI, and expands our services business. With this enhanced ability to provide multi-cloud solutions to our clients, Insight is significantly differentiated from other solution providers because it is coupled with our longstanding expertise and deep capabilities with on-prem solutions. We believe this is a powerful combination for clients. While we’re still early in the process, we’re pleased with the progress we’ve achieved, including lead flow, and we’re excited about the collaboration opportunities across the Amdaris, SADA and Insight teams. Glynis will provide additional details on SADA. Lastly, in 2023, we continued to build a world class leadership team, including adding Adrian Gregory as our EMEA President, and Reem Gedeon as our Canadian leader, promoting Rob Green to Chief Digital Officer and hiring our Chief Marketing Officer, Hilary Kerner.

These financial and operating highlights demonstrate that we are on the right path with our strategy and that we’re making progress towards becoming the leading solutions integrator. Key to that strategy is to become the partner our clients can’t live without. They need a partner they can trust to navigate new technologies and the infrastructure and workplace requirements to help them digitally transform. There are four key pillars to our strategy to becoming the leading solutions integrator. Put clients first, deliver differentiation, champion our culture and drive profitable growth. Within our solutions portfolio, security is a key offering that is critical to every enterprise. The cybersecurity landscape is constantly evolving and becoming increasingly complex, with new threats and vulnerabilities emerging every day.

A cyberattack on our client, a global consumer products company resulted in a worst case scenario, causing a breach of critical systems, infrastructure and user credentials, and ultimately led to a complete outage. Because of the outage, their operations team’s remote access was revoked and therefore, they were unable to help in the recovery efforts. That’s where we stepped in. We responded immediately by deploying over 100 experts, technicians, software engineers and security professionals. We expedited the remediation process and helped our client restore critical infrastructure, employee access and credentials. Additionally, we enhanced their security posture by developing a comprehensive roadmap to secure their infrastructure and identified and segmented different parts of their network to ensure an incident at one plant wouldn’t impact the entire enterprise, and improved management and visibility of their systems to protect against future incidents.

Our expertise in cybersecurity was integral in helping our client and is an important element of our services portfolio. I’d also like to share an example of the complementary strengths that SADA brings to Insight. A large retailer had grown rapidly through acquisition, which resulted in a disparate technology stack and challenges managing data. The client selected Google Cloud and engaged with SADA as their trusted supplier to drive their cloud transformation journey. SADA built a secure and reliable cloud enabled data warehouse and consolidated the client’s fragmented data sources into a data estate for a unified view of critical business information. SADA streamlined their data flows/processing times, enabled faster data analysis that led to quicker decision making and improved business agility.

A key element to our strategy is to champion our culture, and we’re proud of the industry acknowledgments we receive. Most recently, Insight was ranked number 20 on Fortune’s World’s Best Workplaces. This prestigious accolade highlights the company’s commitment to creating an inclusive and supportive work environment. And from a partner perspective, Insight has been recognized by Cisco as the Americas IoT/Industry Partner of the Year and named HashiCorp’s 2023 Focus Partner of the Year. You can find a broader list of our recent recognitions and awards in the accompanying slide presentation. Additionally, we signed a multi-year strategic partner framework with Microsoft. This agreement drives our continued transformation as a leading solutions integrator for Azure and Microsoft 365 related offerings, including Gen AI.

As we enter 2024, we expect another year of strong growth in cloud and Insight Core Services gross profit. With regard to the hardware cycle, we believe device demand will slowly improve in the first half with a more meaningful contribution later in the year as upgrade cycles begin. Infrastructure backlog has normalized and we’re seeing slower demand as clients deploy equipment from shipments in 2023. We will continue to drive our pricing and profitability programs while also prudently managing operating expenses. We are proud of what we were able to deliver in 2023 and believe we are well-positioned to drive profitable growth in the fastest growing areas of the market. With that, I’ll turn the call over to Glynis to share the key details of our financing and operating performance in Q4 and for the full year 2023, as well as our outlook for 2024.

Glynis?

A professional at a computerscreen, working on a complex hardware solution.
A professional at a computerscreen, working on a complex hardware solution.

Glynis Bryan: Thank you, Joyce. In 2023, we successfully navigated through an unpredictable macroeconomic environment that caused increased caution and slower decision making by our clients across all segments. In response to this, we accelerated our gross margin expansion and profitability improvement plans, increased our focus on optimizing our operating expenses, and built a strong foundation to support future growth. In addition, we completed two strategic acquisitions, Amdaris in the UK and SADA in North America, both of which expand our cloud and solutions capability and accelerate our ambition to become the leading solutions integrator. Both deals have been immediately accretive, which as you know, is exceptional. I’ll cover Q4 2023, then briefly summarize the full year 2023 results.

It should be noted that the contributions from SADA and Amdaris post-acquisition are included in my discussions on Q4 and full year 2023 and are also included in cloud and Insight Core Services. Moving on to Q4 2023 results. Cloud and Insight Core Services gross profit were standouts in the quarter, helped by SADA and the Amdaris acquisition. As we have seen all year, the revenue decline was primarily driven by hardware, particularly devices, and most recently infrastructure. We have seen some strengthening in devices. The year-to-year decline in Q4 was in the single-digit range compared to the double-digit declines we had seen in prior quarters. The initiatives we implemented to improve profitability and increase productivity and our acquisitions helped to mitigate the effects of the slowdown in Q4.

Net revenue was $2.2 billion, a decrease of 11% in U.S. dollar terms and in constant currency. The decline was primarily due to hardware, which was down 22% related to devices and infrastructure partially offset by cloud growth. In Q3, we expressed our belief that we had approached the bottom of the device market and that a decline in our devices revenue would slow. We did see that as devices were up slightly in Q4. Despite the 11% decline in net sales, gross profit increased 4%, reflecting the hardware decline offset by higher cloud and Insight Core Services growth. Gross margin was a record at 19.5%, an increase of 270 basis points, and reflects the contributions of SADA and a higher mix of cloud and Insight Core Services. In addition, our profitability and pricing initiatives also contributed to high hardware and services gross margin.

Insight Core Services gross profit was $69 million, an increase of 7%. 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. Cloud gross profit was $130 million, an increase of 43% reflecting SADA’s contribution, as well as higher growth in SaaS and infrastructure as a service. Our adjusted EBITDA margin expanded 170 basis points to 7.1%, a record. And adjusted diluted earnings per share was $2.98, up 18% in U.S. dollar terms and in constant currency. Moving on to full year 2023 results. Many of the factors that drove Q4 2023 were similar for the full year 2023. Specifically, our 2022 revenue decline was primarily related to hardware as we discussed throughout the year.

Our gross profit and gross margin improvements are related to strong cloud services, infrastructure growth, the profitability improvements and cost optimization initiatives in 2023, as well as the benefits of the acquisitions completed in the second half of last year. Net revenue was $9.2 billion, a decrease of 12% in U.S. dollar terms and in constant currency. On this decline, we increased gross profit by 2% and expanded gross margin by 250 basis points to 18.2%. Our cloud business was a standout with gross profit of $429 million, an increase of 26%, reflecting higher growth in SaaS and infrastructure as a service. Our adjusted EBITDA margin expanded 100 basis points to 5.7%. And adjusted diluted earnings per share were $9.69, up 6% in U.S. dollar terms and 7% in constant currency.

For the year, we generated $620 million of cash flow from operations compared to $98 million in 2022. This reflects the continued decline in devices as well as our strong cash conversion cycle, which improved by 11 days. As devices normalize in 2024, we anticipate cash flow from operations in the range of $300 million to $400 million. Our adjusted return on invested capital for the trailing 12 months ended December 31, 2023, was 17.3% compared to 15.9% a year ago, and this also demonstrates good progress towards our long-term goal. We exited Q4 with debt of $592 million outstanding under our ABL, lower than we had estimated given the acquisition of SADA in December. Our business generated strong cash flow throughout the year and despite spending over $217 million on share repurchases in 2023 and almost $500 million on the acquisition of Amdaris and SADA in the second half of the year, debt in 2023 increased by only $300 million over 2022.

As of the end of Q4, we have approximately $1.1 billion available under a $1.8 billion ABL facility and believe we have ample capacity to fund our business operations and capital deployment priorities including M&A. 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. You will find the dynamics of the convertible notes illustrated in our investor presentation. Our presentation shows 2023 performance relative to the metrics that we laid out at our Investor Day in October 2022. We believe we are on track to hit these targets by 2027 as demonstrated by the strong starts from cloud gross profit growth of 26%, adjusted EBITDA margin expansion of 100 basis points to 5.7%, adjusted ROIC expansion of 140 basis points to 17.3%, and adjusted free cash flow as a percentage of adjusted net income of 173%.

Moving on to SADA. We acquired SADA on December 1. SADA was immediately accretive to our margin expansion in Q4. Total gross margin expanded 270 basis points to 19.5% and SADA contributed 110 basis points to that performance. SADA performed at the top end of the adjusted diluted EPS guidance range we shared in December. As a reminder, December is historically the strongest month of the year for SADA and as I just outlined, was a strong contributor to our results in the quarter. Google is also very excited about our acquisition of SADA. We expect to work closely on alignment with them as we focus on our mutual priorities to significantly grow the business and our partnership. In 2024, we expect SADA to contribute between $0.55 to $0.65 of adjusted diluted earnings per share.

Let’s talk about SADA seasonality. As we discussed in December, based on the contractual commitments, revenue on multiyear contracts is recognized upfront. This creates volatility in GAAP earnings based on the historical timing of deals across the quarters. It is important to note that the underlying cash flow of business is consistent and growing quarter-over-quarter and year-over-year. For SADA, the second half of the year typically contributes over 100% of full year adjusted EBITDA and Q4 is typically between 70% to 75% of the total adjusted EBITDA. SADA typically reports negative adjusted EBITDA in the first half. Q1 is significantly negative with Q2 being breakeven. This is related to the historical timing of yields and lower revenue and GP in the first half and Q1 in particular, with essentially the same monthly operating expense level throughout the year.

In our December results, we had the benefit of SADA’s highest gross profit month on essentially flat monthly operating expenses, resulting in a high adjusted diluted EPS contribution for one month. As described in the Form8-K/A filed this morning. When we worked through the details following the acquisition, we determined that SADA is not significant to Insight under SEC rules, and therefore, we’re not planning to provide additional financial information. As we look towards 2024, we expect continued strength in software, cloud and Insight Core Services both organically and with the acquisitions we have made. We anticipate cloud gross profit will grow in excess of 35% and Insight Core Services GP will also grow in excess of 20%. We believe our pricing and profitability initiatives are now part of our operating rhythm and the improvements in our gross margin profile should continue in 2024 and beyond.

We expect our clients to remain cautious with their spending, particularly in the first half. We anticipate modest sequential improvement in device demand with a stronger second half driven by an upcoming refresh cycle based on our conversations with our partners and clients. We expect our business will strengthen throughout the year. We expect SADA will be accretive to our results and meaningfully contribute to gross margin expansion and operating cash flow, and in a more muted way, to adjusted EBITDA margin expansion. SADA has higher operating expenses as a percentage of revenue and as a percentage of gross profit, and this will drive higher operating expense growth in 2024 compared to gross profit growth. As we think about our guidance for the full year of 2024, we expect to deliver gross profit growth in the mid to high teens range and expect that our gross margin will be approximately 19%.

We expect that operating expenses will grow at a higher rate than gross profit and we expect adjusted diluted earnings per share for the full year will be between $10.50 and $10.80, which represents a 10% growth at the midpoint. With the impact of SADA seasonality, we anticipate that Insight’s Q1 adjusted diluted earnings per share will be flat compared to last year and we expect that Q4 will now be the largest quarter in all respects in terms of net sales, gross profit, gross margin, adjusted EBITDA and adjusted diluted EPS. This guidance includes interest expense between $40 million and $42 million, an effective tax rate of 26% for the full year, capital expenditures of $50 million to $55 million, and average share count for the year of 35.2 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. I will now turn the call back to Joyce.

Joyce Mullen: Thanks, Glynis. We are pleased with the numerous foundational improvements we made in 2023 and our results demonstrate the resilience of our business. We have accelerated our pricing and profitability programs, enhanced our e-commerce platform, expanded our leadership team, invested in our internal systems to increase productivity and improved our cost structure. Additionally, we acquired two strategic cloud and services companies. These improvements, coupled with our focus on the fastest growing areas of the market, position us well for the future. We have a healthy balance sheet and our business delivers strong cash flow, giving us the capacity to fund our capital allocation priorities, particularly strategic acquisitions to drive long-term profitable growth and return capital to our shareholders.

We recognize the market will remain challenged in the short-term, but believe our portfolio of solutions gives us the resiliency to navigate through this economic cycle and the long-term dynamics of the IT industry are very strong and we believe we are well positioned to drive profitable growth. Our performance over the past year in the phase of a difficult hardware demand environment has reinforced our confidence in our strategy and ability to deliver outcomes to our clients. In closing, I want to thank our teammates for their commitment to our clients, partners in 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.

See also 12 Highest Quality Knives for 2024 and 14 Best US Stocks For Foreign Investors.

To continue reading the Q&A session, please click here.