Insight Enterprises Inc (NSIT) 2011 Q2 法說會逐字稿

Welcome to Insight Enterprises second-quarter 2011 conference call.

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

(Operator Instructions).

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

I would now like to turn the call 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 June 30, 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, which was posted this afternoon and filed with the Securities and Exchange Commission on Form 8-K, you will find on our website at insight.com under our Investor Relations section.

Today's call, including the question-and-answer period, is being webcast live and can be accessed via the Investor Relations page of our website at insight.com.

An outside copy of the conference call will be available approximately 2 hours after the completion of the call and will remain on our website for a limited time.

This conference call and the associated webcast contain time sensitive information that is accurate only as of today August 3, 2011.

This call is the property of Insight Enterprises.

Any redistribution or retransmission or rebroadcast of this call in any form without the express written consent of Insight Enteprises 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 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 second-quarter operating results.

Ken?

Hello, everyone.

Thank you for joining us today.

In the second quarter our team delivered another quarter of strong operating results.

Consolidated net sales increased 16% to $1.5 billion, up from $1.3 billion in the second quarter of last year, and on a constant currency basis consolidated net sales grew 12%.

Gross profit was $204.2 million, up 17% year over year, and gross margin was 13.9%, up from 13.7% in the second quarter of 2010.

Earnings from operations increased 22% to $54.4 million, or 3.7% of net sales, compared to $44.7 million, or 3.5% of net sales reported in the second quarter of 2010.

Net earnings and diluted earnings per share were $35.3 million and $0.75 in the second quarter of 2011 compared to net earnings and diluted earnings per share last year of $26.9 million and $0.58.

These results include severance and restructuring expenses of $3.4 million, $2.3 million net of taxes in the second quarter of 2011, compared to $1.3 million, $844,000 net taxes recorded in the same quarter last year.

Excluding severance and restructuring expenses recorded in the quarter, EFO margin improved 3.9% from the 3.6% reported last year.

All in all we are pleased with our consolidated operating results in the second quarter.

We are particular pleased with the progress we are making on improving our return on invested capital.

In the second quarter we achieved ROIC of 11.2%, up from 8.9% last year.

This is certainly a key metric for us as we pursue our long-term plans.

Our North America operating segment reported 70% growth year to year in the hardware category, 9% growth in software sales and 23% growth in services.

We continue to see double-digit growth year to year across both our large accounts and middle market client groups in the second quarter.

Our execution in North America continues to improve each quarter.

The management team is now in place, our priorities are clear and the management systems are focused on driving operational excellence.

In EMEA constant currency sales in the second quarter were flat compared to the second quarter of last year, as increased sales in the mid market were offset by reduced spending in the public sector market.

Public sector business is typically transacted at lower margin than commercial, so the change in mix of this business lead to a 200-basis point improvement in gross margin year over year.

Excluding severance recorded in the period, the EFR margin improved 100-basis points to 3.8%, the highest EFO margin reported by our EMEA business since mid 2008.

In July we went live on our new IT system in the Netherlands.

We are pleased with the performance of the system thus far and continue with our next implementation in Germany over the next few months.

Moving on to Asia-Pacific, this segment had an exceptional second quarter growth on the top and bottom line.

Net sales increased 55% while earnings from operations improved 69%, both in constant currency.

New client wins and increased penetration of existing clients drove these results.

I will now hand the call over to Glynis, who will discuss the second-quarter operating results in more detail.

Thank you, Ken.

Starting with North America, net sales were $989 million in the second quarter, up 14% from the second quarter of 2010.

As Ken mentioned, hardware sales increased 17%, software sales increased 9% and services sales increased 23%.

Gross profit in North America for the second quarter increased 10% year over year to $132 million, while gross margin decreased to 13.4% from 13.8% in the prior year.

This change in margin reflects a 15-basis point decline in credit margin related to freight expense and a 14-basis point decline from a lower mix of fees from software enterprise agreements.

Gross margin in services also declined year to year due to an increase in the mix of lower margin services sales, which resulted in an 8-basis point decrease in overall gross margin.

Selling and administrative expense for North America in the second quarter were up $8.6 million to $95 million from the $86 million reported in the second quarter of 2010 but, as a percentage of sales, decreased to 9.6% compared to 10% in the prior-year second quarter.

Within these results, employee expenses increased $6.5 million in this-year's second quarter due to investments in headcount and related benefits and higher variable compensation.

In addition, the year to year comparison is impacted by a $2.9 million benefit recorded in the second quarter of last year related to the collection of an account previously determined to be uncollectible.

We also recorded $1.1 million in severance and restructuring expenses in this segment in the second quarter compared to $943,000 recorded in the second quarter of 2010.

The severance actions are expected to result in approximately $3.3 million in annualized savings beginning late in the fourth quarter.

Earnings from operations in North America in the second quarter were $36 million, or 3.6% of net sales, an 11% increase from the $32.3 million reported in the second quarter of 2010.

Excluding severance expense in both periods, EFO margin in the second quarter was 3.8%, consistent with prior year.

Moving on to EMEA, our EMEA operating segment reported net sales of $403 million, up 12% in US dollars.

In constant currency, net sales were flat year to year.

Also in constant currency, sales of hardware decreased 2% due to a decline in public sector sales, software sales increased 1% and sales of services increased 27% compared to the second quarter of last year.

We've see growth in the commercial client groups offset by a reduction in spending by public sector clients so far this year.

We expect this trend to continue for the balance of 2011.

Gross profit in EMEA was up 29% in US dollars and up 15% in constant currency terms, with gross margin expanded 200-basis points to 14.9% from 12.9% last year.

This performance was driven by a 130-basis point increase in product margin due to the shift in client mix, which includes less public sector clients, and a 47-basis point improvement from a higher mix of fees from the enterprise software agreements.

Selling and administrative expenses in EMEA in the second quarter were up 22% in US dollars, and in constant currency were up $4.1 million, or 10%.

This increase year over year was primarily driven by investments in headcount and related benefits and higher variable compensation.

EMEA also recorded a $2.3 million severance expense in the second quarter 2011 compared to $375,000 in the prior-year second quarter.

This quarter's severance expense were driven by a plan to consolidate certain shared services activities in Europe to a lower-cost location, plus a reduction in resources following the roll out of our new IT system in the coming months.

We currently expect annualized savings of approximately $2.5 million beginning in 2012.

Earnings from operations in EMEA was $13 million in the second quarter of 2011, up 35% from the $9.6 million reported last year.

Excluding severance expense in both periods, EFO margin was 3.8%, up 100-basis points from last-year's second quarter.

In our Asia-Pacific operation, net sales were $77 million, up 82% from the prior year in US dollars and up 65% in constant currency terms.

Gross margin was $12.2 million, an increase of 58% year to year, and 34% in constant currency, while gross margin was 16.9%, down from 18.2% in the prior-year's quarter, due to the mix of -- the higher mix of sales to public sector clients.

Selling and administrative expenses in APAC increased 36% year to year in US dollars and 16% on $927,000 in constant currency terms, as a result of increased headcount and higher variable compensation expenses.

All of this resulted in our Asia-Pacific segment reporting earnings from operations of $5.4 million compared to $2.7 million recorded last year.

Our effective tax rate in the second quarter of 2011 was 33.9%, down from 36.4% in the second quarter of last year.

The second-quarter 2011 tax rate was lower than our normalized -- expected normalized tax rate range of 36% to 39% due primarily to the release of a valuation allowance in certain deferred tax assets in EMEA.

Moving on to working capital and cash flow performance, in the second quarter we used $87 million to fund the working capital needs of our business, compared to cash flow generation of $19 million for the same period in 2010.

In the second quarter of 2010 our cash flows benefited from the deferral of a large supply payment that according to it's scheduled payment terms was paid in early July.

In this year's second quarter that payment was made in the month of June.

This timing difference, along with generally-higher needs for working capital due to increased volumes in this year's second quarter, drove this cash flow performance.

We also invested $5.4 million in capital expenditures in the second quarter, generally flat year to year, and we've received $9 million in cash through increased use of our inventory financing facility.

We also launched a share repurchase program during the quarter, using $14.1 million to repurchase 872,000 shares at an average purchase price of $16.20.

As of today we have repurchased just fewer than 1.5 million shares for approximately $25 million.

Subject to market conditions and all other factors, we intend to execute the rest of our $50 million repurchase authorization beginning later this month.

As a result, we ended the quarter with $115 million in cash, of which $95 million was resident in our foreign subsidiaries, and $141 million of debt outstanding under our revolving credit facilities.

This compares to $98 million of cash and $81 million of debt outstanding on our revolving credit facilities at the end of second-quarter 2010.

Our cash conversion cycle was 23 days in the second quarter of 2011, up 11 days from the same period last year but in line with our targeted range for this metric.

The change year to year reflects the loss of the benefit from the deferral of the supply payment we saw last year, modest investments in inventory to support client-specific engagements and higher DSO in Europe due to a higher percentage of sales recorded at the end of this-year's second quarter compared to last year.

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

I'll close out today's call with just a few comments regarding our financial outlook.

Due to strong execution and favorable market conditions, our results in the second quarter exceeded our internal expectation, and for the first half of 2011 we were ahead of plan.

As result, for the full year of 2011 we now expect diluted earnings per share to be between $1.90 and $1.98, excluding severance and restructuring expenses incurred during the year.

This outlook includes the following assumptions.

First, the completion of the Company's $50 million share repurchase authorization in the second half of the year.

Second, the effect of partner program changes expected to occur in the fourth quarter of 2011.

And lastly, an effective tax rate between 36% and 39% for the second half of the year.

In closing I'd like to thank you again, for joining us today.

I'd also like to thank our teammates around the globe and our clients and partners for their continued commitment to Insight.

We will now open up the line for your questions.

(Operator Instructions).

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

Please proceed.

Thank you and nice job on the quarter.

If I look at the guidance for the balance of the year, Ken and Glynis, it looks like you beat this quarter by about $0.18 if I buyback out the charges at least relative to what the consensus had.

And I think the buybacks, which had not been factored in the estimates or your guidance, adds another $0.10.

So between the two of those it looks like numbers should go up roughly $0.30 for the year and I notice that your guidance is going up by about $0.20.

Just want to understand if you're just being a little conservative, or if there's something wrong with the math I'm doing there, or if you're seeing some sort of slowdown that gives you caution for the back half as I try to reconcile your guidance to your results?

Okay, good question, Brian, thank you.

As it relates to the buyback and the impact of the buyback, because of the timing in terms of when we're doing to buyback and the averaging of the shares over year and the weighting the impact of the buyback that we are including here is in the $0.04 to $0.05 range, not the $0.10 range that you just commented on.

That may be a full-year effect, but in terms of what we're seeing for the second half it's going to be in the $0.04 to $0.05 range, most of that in the second ha -- in the fourth quarter, maybe $0.01 in the third quarter.

As it relates to what we're seeing out there that's driving the overall guidance, you are correct.

It's saying something different in the second half versus the first half.

We have a couple things that we had talked about previously.

We'd mentioned that our services business was not hitting the metrics and the thresholds that we've established for it.

As we look out, based on what we have in our pipeline, we anticipate that while we have strong services revenue growth, it's the high-margin services growth, it's a little bit of the lower-margin services growth.

That's okay because it's still higher than hardware and software margins, but it is not meeting our expectations with regard to what we would want to achieve for the second half of the year as it relates to services.

The other point is ultimately that we have -- when we did our plan for the year we talked about our project one and the impact of that project one -- it's our integration project -- business integration and systems integration project in North America to integrate the Calence and the Software Spectrum acquisitions onto the SAP platform.

Those costs are little bit back-end loaded.

We didn't spend as much in the first half but we envision that keeping the plat -- the project on time and on budget that we will spend that in the second half.

So it's a little bit of incremental cost in the second half that we weren't considering -- or we did not consider when we had done our guidance initially.

So I think it's those two things primarily that are driving the change in the guidance.

And I would say -- the economies, who knows what's going to happen with regard to the economy.

Europe's going to be a little bit slower.

We anticipate that Europe will be kind of flat on a constant currency basis.

Going forward we're not sure what's going to happen with the economy there.

And we haven't seen any slowing, really, here per se, but there's a little bit of a pullback as we look out.

Okay, that's really helpful.

Just maybe on the hardware side, which you didn't really call out as factoring into the second-half outlook.

Maybe just help us understand the hardware trends you're seeing in the business.

You had very strong growth in North America, specifically, again, double digits, I think, for the fourth or fifth consecutive quarter on a year-over-year basis.

Where are you seeing relative strength and weakness in the hardware business, primarily in North America, and did you notice any trend change in the hardware side of your business throughout the quarter and into July?

Yes, Brian, this is Ken, so I'll touch that one.

Yes, I think the hardware the growth continues.

Certainly the upgrade cycle is continuing rather nicely, so desktops, notebooks continue to perform pretty strong and we think that all indications are that's continuing at this stage in the second half.

We also saw a nice growth in servers and storage of revenue for the quarter, as well, so that certainly contributed nicely.

So overall we are definitely seeing the hardware segment continuing that high single-digit, double-digit growth rates and we anticipate that will continue from everything that we have visibility to for the second half of the year.

Great, and then just final one for my and I'll get back in the queue.

Any metrics around your performance in SMB.

I know that's a focus area for you and just wondering if you could share any metrics on the growth you saw there or new customer additions or anything that reflects the traction that you're (inaudible) in penetrating SMB?

Yes, we continue very focused on that.

As you know, we're continuing to add 30 reps a quarter, which we've done for the last five quarters now at this stage.

So we are continuing that and it's all about getting to that mid space clients that are the SMB, so continuing to make penetration.

It's moving along and hitting the metrics that we've established and it's certainly going to be a long-term focus for us to continue that.

As far as the growth rates, I would say we continue to see nice growth rates in SMB, as well as enterprise class clients, as well, so it contributed actually pretty nicely in both categories in Q2 for us.

Is there any real difference between the growth rates of enterprise and SMB, Ken?

Are you seeing --?

No, I think -- I would say this quarter they sort of maybe became more equal whereas in prior quarters we had seen more enterprise growth than we had maybe growth rates in the SMB side and I think we saw that to start to equalize.

But both actually pretty good.

It wasn't at the expense of enterprise, but I think if you've been tracking S&B it's certainly starting to pick up.

Okay, thanks a lot.

Our next question comes from the line of Matt Sheerin with Stifel Nicolaus.

Please proceed.

Yes, thank you.

Could you elaborate, Glynis, on your remarks about expenses for that integration project, that SAP integration later this year?

Can you give us a ballpark of what we should expect in terms of expenses over the next couple quarters, and is that going to continue into 2012?

Yes.

It is a two-year project that we launched at the back half -- back end of 2010 and we anticipated that we're going to have expenses in 2011 P&L -- hitting our P&L of between $5 million to $10 million.

That is still our expectation.

The front half has been a little bit light as it relates to that so it wasn't $5 million and $5 million.

Has been a little bit light.

We anticipate going into 2012 that we will also have an additional $5 million to $10 million also of that cost in 2012 related to the project.

And over the course the project between 2011 in 2012 we're going to have between $10 million to $20 million of hardware and capital expense associated with that.

We didn't give a guidance specific number for the first half or the second half, so I would just say that it's probably going to be in the $5 million range in the second half and the first half was light.

Okay.

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

Please proceed.

Ken, would you comment just a little bit more granular on what you talk about the internal plan for this quarter, what was the surprises there?

And obviously you touched on services a little bit., I assume that would be the mix that was a little disappointing?

Yes.

Thanks John.

The -- overall, as you know, this is, of course, a significant quarter for Microsoft's year end in Q2 for anybody that plays in that space, so that performed nicely for us overall, so we're very -- certainly pleased and met the expectations that we had set forth.

As you indicated and as Glynis had touched on, the services piece is an area that's still very strategic for us.

We're hitting the revenue line but a little bit lighter in some of the margin front.

But we've got tremendous focus with the sales organization and our services support organization to really drive the pipelines across all segments of the business there to grow that services revenue going forward.

And that's also on a global basis that we're talking about, not just in North America but doing that, of course, in our EMEA business, as well as APAC business, as we view that strategically very important.

It comes in higher margin and, of course, it gets us much stickier with our clients with those kind of arrangements and they certainly tend to be more longer term.

So strategically we haven't taken our eye off the ball there, just hasn't come in.

We're basically getting a little bit lower margin-type services coming in.

Again, as Glynis touched on, it's still higher than what we normally achieve in hardware and software, but not to the expectations that we have.

And to follow that, Ken, would you just give me a simple example of the difference of that bandwidth of services?

What would be the example of a lower-margin services versus the high end?

Could be if you're doing a managed services offering, a professional services offering you'd have, certainly, gross margin much higher.

In the, certainly, 30%, 40% range would be an expectation there on some of those offerings and those are -- when you get into the managed services they tend to also be pretty scalable.

When you get into some of the potential deployment-type services they can be a little bit more difficult when you start talking about things like service desk and those types of things.

Very competitive market, they could come at lower gross margins.

Great, thanks, and last question.

Glynis, you mentioned -- I think I picked up about $6 million of annual savings through the two basic -- I guess through the severance payments, is that correct?

Yes, there's about $2.5 million coming out of EMEA in 2012 related to their severance action and there's $3.3 million in North America starting late in this quarter -- late in the fourth quarter for their severance actions.

So just under $6 million.

Great.

Thanks, good luck.

Thank you.

Our next question comes from the line of Matt Sheerin with Stifel Nicolaus.

Please proceed.

Yes, just a couple of follow ups.

The commentary about the gross margin in Europe on mix given the public sector has been weak, is that a trend in terms of year-over-year positive impact, is that something that you would expect to continue this year?

Yes, we will expect to continue this year.

I will say, though, that that trend probably started in the third or fourth quarter of last year.

So the Cisco pullback started earlier in the UK, in particular, and I think it started in the second half of last year.

Okay, great.

And then looking at the change of the software leadership -- the Microsoft relationship in the fourth quarter, could you remind us again what the gross margin impact approximately will be per quarter?

So it's going to start in the fourth quarter and we're estimating that the fourth-quarter impact for Microsoft that's reflected in the guidance that we've given is in the $2.5 million to $3 million range.

Okay, great.

Thanks so much.

You're welcome, thanks for asking that question.

(Operator instructions).

And there being no further questions in the queue this concludes today's question-and-answer session.

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

This concludes the presentation and you may now disconnect.

Have a wonderful day.