Insight Enterprises Inc (NSIT) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Insight Enterprises first quarter earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session.

(Operator Instructions).

As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms.

Glynis Bryan, Chief Financial Officer.

Please proceed.

Thank you.

Welcome everyone, and thank you for joining the Insight Enterprises conference call.

Today, we will be discussing the Company's operating results for the quarter ended March 31, 2011.

I'm Glynis Bryan, Chief Financial Officer of Insight, and joining me is Ken Lamneck, President and Chief Executive Officer.

If you do not have a copy of the earnings release that was posted this afternoon 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 be accessed by the Investor Relations page of our website at insight.com.

An archived copy of this 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, May 4, 2011.

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.

Finally, let me remind you about forward-looking statements that will be made on today's call.

All forward-looking statements that are made in 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 Annual Report on Form 10-K for the year ended December 31, 2010.

With that, I will now turn the call over to Ken to give you an overview of our first quarter operating results.

Ken?

Hello, everyone.

Thank you for joining us today to discuss our first quarter financial and operating performance.

Strong momentum in IT spending continued in the first quarter of 2011, which resulted in double digit sales growth in our business for the fourth consecutive quarter.

Consolidated net sales increased 18% in the first quarter to $1.2 billion, up from $1 billion in the first quarter of last year.

And on a constant currency basis, consolidated net sales grew 17%.

Gross profit was $162.5 million, up 12% year-over-year, and gross margin was 13.3%, down from 14% in the first quarter of 2010.

Earnings from operations increased 32% to $22.9 million, or 1.9% of net sales, compared to $17.3 million, or 1.7% of net sales reported in the first quarter of 2010.

Net earnings and diluted earnings per share were $13.1 million, and $0.28 in the first quarter of 2011, compared to net earnings and diluted earnings per share reported first quarter of 2010 of $9.2 million, and $0.20.

Our North America operating segment reported 23% growth year-over-year, including 19% growth year-to-year in the hardware category, 22% growth in the services category, and particularly strong growth of 33% in the software business.

The software results were driven by strong demand for data protection, security, and business productivity products for both the both commercial and public sector client groups.

We also continued to see strong demand for notebooks, desktops and accessories, particularly in the large enterprise space.

We currently expect that demand in North America will continue to be driven by the corporate refresh cycle for the balance of 2011 as clients look to update their PC environment to network and data infrastructure.

In May, we saw sales go up 4% in constant currency in the first quarter, moderating somewhat from growth seen in the last several quarters due to a decrease in spending in the public sector market.

The gross margin expanded 100 basis points, reflecting a higher mix of commercial business, which resulted in over 100% increase in earnings from operations year-over-year.

In Asia-Pacific, sales increased 13% in constant currency in the first quarter.

We saw growth in all client segments in this region due to an increase in spending from existing clients and new client wins.

Before I hand the call over to Glynis, I want to bring you up-to-date on our Investor and Analyst Day.

We have scheduled this event for June 15, 2011, from 8.30AM until 1PM Eastern Time at the Intercontinental Times Square Hotel in New York City.

We look forward to giving you an overview of our strategic plan and our financial outlook for the next few years.

Notice of the event has gone out, so please let us know if you did not receive it and are interested in attending.

I will now hand the call over to Glynis, who will discuss the first quarter operating results of our business segments.

Glynis?

Thank you, Ken.

Starting with North America, net sales were $847 million in the first quarter, up 23% from the first quarter of 2010.

Sales in our hardware category increased 19% year-to-year due to generally higher volume, particularly in the large enterprise and corporate client groups.

Sales in our software category increased 33% compared to last year due primarily to higher product volume with multiple publishers, and sales of services increased 22% year-over-year.

Gross profit in North America for the first quarter increased 11% year-over-year to $109 million, while gross margin decreased to 12.9% from 14.4% in the prior year.

This change in margin reflects a 68 basis point decline in contribution from services sales; lower product margin, primarily related to unrecoverable freight expenses of 27 basis points; and a 60 basis point decline from a lower mix of fees from enterprise software agreements.

Selling and administrative expenses for North America in the first quarter were up $7.7 million to $93 million from the $85 million reported in the first quarter of 2010, but, as a percentage of sales, decreased to 10.9% compared to 12.3% in the prior year's first quarter.

Within these results, employee expenses increased $5.9 million in this year's first quarter due to investments in head-count and related benefits, and higher variable compensation on higher sales.

In addition, we incurred a non-cash charge of approximately $1.4 million during the quarter to write off certain capitalized software costs in conjunction with the North America IT Systems Integration Project.

Our efforts to control expenses outside of our IT and salesforce investments are clearly paying off, and we will continue to focus on this throughout 2011.

We also recorded $321,000 in severance and restructuring expenses in this segment in the first quarter, and there was no severance recorded in the first quarter of 2010.

Earnings from operations in North America in the first quarter were $16.6 million, or 2% of net sales, up 18% from $14.1 million reported in the first quarter of 2010.

Our EMEA operating segment reported net sales of $337 million, up 6% in USD; in constant currency, net sales increased 4%.

Also in constant currency, sales of hardware decreased 3% due to a decline in public sector sales, software sales increased 8%, and sales of services increased 23% compared to the first quarter of last year.

Gross profit in EMEA was up 14% in USD and up 12% in constant currency terms, with gross margins expanding 100 basis points to 14% from 13%.

This performance was driven by a 52 basis point increase in product margin due to the shift in client mix, which includes less public sector business and a higher mix of fee business from software enterprise agreements.

Selling and administrative expenses in EMEA in the first quarter were up 7%, or $2.7 million in USD, and in constant currency were up 5%.

This increase year-over-year was primarily driven by investments in headcount and related benefits, and higher variable compensation on increased sales.

EMEA also recorded $203,000 in severance expense in the first quarter of 2011 compared to $71,000 in the prior year's quarter.

As a result, earnings from operations in EMEA were $6 million in the first quarter of 2011, up 114% from the $2.8 million reported last year.

Our Asia-Pacific operating segment reported net sales of $36 million, up 24% from the prior year in USD, and up 13% in constant currency terms.

Gross profit was $5.8 million, an increase of 20% year-to-year, and 10% in constant currency, while gross margin was 16.2%, down from 16.7% in the prior year quarter due to a higher mix of sales to public sector clients and the effect of the reversal of a sales tax reserve of $480,000 in the first quarter of last year that did not recur in 2011.

Selling and administrative expenses in APAC increased 23% year-over-year in USD, or approximately $1 million, and 12% in constant currency terms, as the result of increased headcount and higher variable compensation expenses.

All of this resulted in our Asia Pacific segment reporting earnings from operations of $337,000 compared to $388,000 reported last year.

Our effective tax rate in the first quarter of 2011 was 39.1%, up from 36.7% in the first quarter of last year.

The first quarter of 2011 tax rate was higher than our expected normalized tax range of 36% to 39% due primarily to the revaluation of our deferred tax assets to reflect changes in statuary tax rates enacted in the first quarter.

Moving on to work in capital metrics and cash flow performance, in the first quarter, cash flow from operations was $84 million compared to $110 million for the same period in 2010.

In this year's first quarter we invested $5 million in capital expenditures compared to $3 million in last year's first quarter.

We also used $47 million to pay down our inventory financing facility in accordance with its required payment terms.

As a result, we ended the quarter with $140 million of cash, of which $118 million was resident in our foreign subsidiaries, and $70 million of debt outstanding under our revolving credit facility.

This compares to $85 million of cash and $80 million of debt outstanding under our revolving facility at the end of the first quarter of 2010.

Our cash conversion cycle was 14 days in the first quarter of 2011, up three days from the same period last year, reflecting investments in inventory to support client-specific engagements and generally higher volume.

Despite this we demonstrated very strong cash cycle performance that was well below our targeted range of 20-25 days.

I will now turn the call back to Ken for his closing comments.

Thank you, Glynis.

Our first-quarter results met our internal expectations, and we expect improved demand for technology solutions to continue for the balance of the year.

As a result, for the full year of 2011, we continue to expect diluted earnings per share to be between $1.70 and $1.80.

This outlook assumes an effective tax rate between 36% and 39% for the full year, and does not include any severance or restructuring expenses.

Thank you again for joining us today.

Also want to thank our teammates around the globe, and our clients and partners, for their continued commitment to Insight.

We will now open the line up for your questions.

(Operator Instructions).

Our first question comes from the line of Brian Alexander with Raymond James.

Go ahead.

Yeah, thanks, and nice results.

I was wondering, could you guys just talk a little bit more about the hardware environment?

It sounded like you had some strength in notebooks and desktops, and you called out the PC refresh cycle remaining solid.

So maybe just an update on what inning you think we're in on the PC refresh side, and any other categories on the infrastructure side, networking, storage, etc., that you would call out as particularly strong or weak.

I'll take that, thanks, Brian.

Yes, if I knew what inning we were in, of course that would be great.

It's a little hard to predict exactly where we are, but it's remaining stronger certainly than we had certainly anticipated.

Last year we thought we did most of the real heavy lifting and big work there, but it looks like that's certainly continuing.

Definitely the PC refresh cycle is continuing on, and we don't see that slowing down right now at this stage.

But certainly, of course, it also involves infrastructure, upgrades as well, that continue on as far as the data center, networking, server and storage technologies you pointed out.

We did also see nice growth in those areas as well.

On the other question, I'm sure, last, Brian, is where did it come from.

It was actually pretty broad-based across our client sets, across the full spectrum of SMB as well as large enterprise when we looked at the various growth rates throughout.

Of course, we saw pretty consistent growth in almost all of those segments, and we break it down into about five different segments of our business, how we classify commercial accounts.

So it was pretty well-balanced across the different segments.

Great.

And then, Ken, I think you talked before about outgrowing the industry this year, and implying perhaps that the business could grow in the high single digits in 2011 from a top line perspective.

So given that you just came in at 18%, and I think your revenue results were better than most of the analysts that were modeling the company, just an update on what your expectations would be for growth for the Company and for the industry this year.

We're still staying with what we talked about.

We think the industry will continue to grow in the single digits, mid- to high-single digits.

Brian, our expectation is that we will -- we've continued to invest, as you know, in the salesforce.

So we would certainly expect that we would go faster than the industry as well.

I don't know if you wanted more color than that.

Maybe for Q2 specifically.

I think you would normally grow sequentially on the hardware side in the high single digits.

I'm just wondering, given the strength we saw in Q1, which was better than seasonal, do you think your Q2 hardware revenue would grow in line with that seasonally high single digit growth rate?

We have nothing that would indicate otherwise, Brian, from what we're seeing in the market.

Okay.

And then, maybe just a little bit more color on the software write-off, and an update on your IT system conversion plans.

Okay, Brian, I'll take that one.

So, it turns out that we had previously started an investment in upgrading our iCare platform to SAP a couple of years ago when we first did our SAP implementation back in 2007/08.

As we've gone through the process with regard to this upgrade that we're now going through - or integration, not an upgrade, more of an integration that we're going through now, including putting iCare on our SAP platform - we've determined that some work that we had done previously with that prior integration effort is not going to be applicable now, so we have written that off.

Because we have a process in place now with regard to how we're going to be doing the integration of iCare.

So we wrote off that $1.4 million of previously recorded software work that we won't be needing on a go-forward basis.

In terms of our timeline with regard to the delivery of that integration system, we're still on track with regard to a roughly 24-month time period by the end 2012 with regard to when we think it will be all pieces of five different tracks.

The five different tracks will be completed at various stages within 2012, but we anticipate it will still be completed by the end of 2012.

Great, - (multiple speakers).

As of right now it's on target with regard to costs and capital.

The key there, Brian, is that's again in North America, that's really an integration of the Software Spectrum platform and the Calence platform into the current SAP platform that we're on.

It's not an upgrade, it's really just an integration that we're doing.

Great.

Finally on cash flow, and I'll get back in the queue, typically I think Q1 is the high-water mark for the year in terms of operating cash flow generation.

I'm just wondering if you would expect that to be the case this year, and just generally how we should think about cash flow going forward, if you could be cash flow positive in each quarter of the year?

How should we think about that?

We're typically not cash flow positive in Q3, just based on the seasonality within our business, so that dynamic we're not expecting will change this year.

So I think that we would anticipate the same seasonality in our cash flow in Q1 through Q4.

We usually have positive cash flow in Q1 and Q2, negative cash flow in Q3, and then it turns positive again, at a slightly less extent than Q1 and Q2, in Q4.

We're not expecting that pattern to change.

Do you think cash flow for the year will exceed what it was in 2010?

No, we're anticipating that cash flow for this year will be somewhat consistent with our net income.

Okay.

All right.

Thank you very much.

(Operator Instructions).

Our next question comes from the line of John Lawrence with Morgan Keegan.

Go ahead.

Yeah, thanks.

Good afternoon.

Ken, would you comment just a little bit about the software business a little bit, and I assume, a little bit on the gross margins that Glynis talked about, how you see that going forward, etc.?

And then maybe touch on services just a little bit as well.

On the software side, we did see some really good product strength as we indicated there for the software business.

It was across -- it was pretty broad-based, John, across the different segments as we classify software and business productivity, and data protection, creative software.

All those areas actually did very, very well.

Of course, virtualization continues to be very strong as well on the software front.

So we're pleased with that growth that we're seeing on the software side.

On the services side, we did turn some nice growth in on the services side of the business as well.

Continued work to do, for us to be focused there, to continue to get a bigger pipeline in place, and then also to make sure we're getting the right mix of services, as it's important to our business.

And the economics of it, to make sure we get in the mix of even the higher-end services.

So, a little less type of function or things than maybe in the deployment service desk areas, and a little bit more in the higher end of professional service, managed service area, is where the team is focused.

And then just on that software a little bit, just in the mix of business, when you point to those client segments where the large vendor wants you to focus on, can you talk about growth in that segment?

Yes, the one large partner in there I think that you're referring to, of course, wants us to make sure that we're covering the true SMB space and less into the large enterprise.

So our teams continue to focus there, and we're seeing, I would say, certainly good growth in those segments as well.

And last question, Ken.

Since the implementation and the changes in the salesforce, give us just an update there, as you continue through into the first and second quarter, a little more detail of how that process is working and maybe some success factors that we're seeing from that.

Yes, thanks, John.

As you know, we brought the team together as one sales entity last July.

So we're three-quarters through that, so much of the pain that we were going to see actually we did already see.

So now it's just a matter of refining, fine-tuning.

We're continuing to add, in North America, 30 sales reps a quarter.

That's been our mantra here for the last three quarters, and will continue to be the same for the rest of this year, where we train them for a full quarter and then integrate them into the sales organization.

So, I think things are coming into play pretty nicely there.

The team obviously is working out any of the kinks that we had in the initial transition in July.

So we continue to make momentum, continue to stay focused on how do we really drive deeper and deeper client penetrations, and add new TAM clients to our mix of business.

So, I would say that no surprises, and things are moving in the right direction.

And just to take that one step further, the geography issue versus the legacy account issue.

How would view that at this point now that you've had nine months to look at it?

Yes, I think that was one of the key things we talked about, John, about a year ago when we first talked about rolling this out.

We've been careful to make sure that on the very key engagements, of course, if they're out of alignment geographically we're not going to make any rash decisions and move sales reps out of those accounts.

But I would say that, right now when you look at where our salesforce is and where the clients are, we're about 94% geographically aligned, meaning that the rep is calling on or lives in that specific territory of where the client is based.

So, we're probably about, for the accounts that we service, we're about 6% of those accounts are out of alignment.

And again, some of them are pretty large-scale clients that --

So that's probably as good as you'll get?

We with think so.

We'll tweak it over time, John, but it's certainly a big difference from where we were a year ago.

So we're pleased with the focus that we can get and the engagement we can get with our partners who are in those specific territories and are aligned specifically to those geographies.

We've made good progress there and we've seen very little fallout from our client base, which was the most important part of the initiative.

Great.

Thanks.

Congratulations.

Thank you.

(Operator Instructions).

We have a question from the line of Brian Alexander with Raymond James.

Go ahead.

Just maybe a couple follow-ups, supply chain question.

Ken, are you guys, or Glynis, seeing any impacts from the earthquake in Japan in terms of product availability, or having any discussions with suppliers that would suggest constraints going forward?

Brian, that's a very asked question all the time.

Of course, we stay close to the distributors who start to see that even before we do, at times, from a supply chain point of view.

We've seen very, very little impact.

In one notebook supplier case, we had a very minor issue, and it was hard for us to determine if that was ever related to what was occurring from a component piece in Japan or not.

But very, very minor to this stage.

We're still staying close to the equation, but I would say it's had virtually no impact on our business in Q1.

And then maybe just gross margins, Glynis.

I think you laid out a couple of factors, maybe three, for why the North American gross margins were down despite the fact that the mix was actually in your favor with more services in software versus hardware.

Can you go through those again?

And did trade credits play into that?

I'm trying to understand what drove the gross margin down in North America year-on-year and how we should be thinking about that going forward.

Okay, that's a fair question, Brian.

So in North America, what we said was that we had a 58 basis point decline in the contribution from services sales.

That was one component.

We had a 27 basis point decline associated with freight, on recoverable freight expense.

And we had a 50 basis point decline from a lower mix of fees from the enterprise software agreements.

The impact from the trade credits was also a reduction of about 18 basis points.

So we had less trade credit activity in the first quarter of this year than we had in the first quarter of last year.

So the trade credits were a negative with regard to margin performance this year.

And I think on a go-forward basis, trade credits in 2011 are going to be lower than they were in 2010 on a go-forward basis.

Not large, it's a 22 basis point impact, so it will be somewhere in and around or lower than that range on a go-forward basis.

The other thing that I would say is that overall, when Ken walked through on the guidance, we have guidance out there of $1.70 to $1.80 (inaudible) in the range, we haven't changed that range.

It's based on current volume and gross margin expectations, and I would say at the IEI level, at the Insight level, what we're anticipating is that there will be a decline between 25 to 50 basis points in our gross margins in 2011.

We previously had said in the fourth quarter, when we did our earnings announcement back in February, that we expected them to be flat on a year-over-year basis.

We're anticipating that they're going to be down 25 to 50 basis points on a go-forward basis, but we're still maintaining our guidance range, because we assume that we're -- we project that we're going to have some incremental hardware and software volume that will offset that reduction.

We've factored in all the partner changes, anticipated partner changes or known partner changes at this time, into that guidance as well.

What are the main drivers of the full year gross margin reduction of all the variables that you just talked about?

Which are the ones that are playing a bigger role versus your previous expectations?

Then related to that, it sounds like the revenue's coming in better than you expected.

Are you also doing things on SG&A to bring that down to hit your original earnings target?

We're doing all of those.

Brian, when you look at that, the biggest driver, of course, has to be the acceleration we're seeing in the product - the hardware, the software product revenue that we're seeing.

Of course, that comes in as a lower gross margin to us.

So that's a good story.

Of course, it does have the one downside effect where it is coming in at a lower gross margin, but that growth was higher than we had certainly anticipated.

Okay.

Okay.

I can follow up offline.

Thanks.

Ladies and gentlemen, we show no further questions at this time.

I'd like to turn the call back over to management for any closing remarks.

Please proceed.

We'd like to thank again everybody for participating in our Q1 call.

We look forward to updating you a quarter from now.

Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference.

That does conclude the presentation.

You may disconnect.

Have a wonderful day.