Insight Enterprises Inc (NSIT) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2011 Insight Enterprises Incorporated earnings conference call.

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

At this time all participants are in listen only mode.

(Operator Instructions) We will be facilitating a question and answer session following the presentation.

I would now like to turn the presentation over to Glynis Bryan, Chief Financial Officer.

Please proceed.

Thank you.

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

Today we will be discussing the Company's operating results for the quarter ended September 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 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 Investors 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 the 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 contains time sensitive information that is accurate only as of today, November 2, 2011.

This call is a copy 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.

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 turn the call over to Ken for an overview of our third quarter operating results.

Ken?

Hello, everyone.

Thank you for joining us today.

Solid sales performance combined with significant operating leverage led to double digit earnings growth and operating margin expansion in the third quarter.

Consolidated net sales increased 6% in the third quarter of 2011 to $1.2 billion and at constant currency net sales grew 4%.

Gross profit was $163.5 million, up 6% year-over-year and gross margin remains steady at 13.2%.

Earnings from operations increased 12.4%, more than double the rate of sales growth, to $27.9 million or 2.3% of net sales, compared to $24.8 million or 2.1% of net sales reported in the third quarter of 2010.

Net earnings and diluted earnings per share were $17.2 million and $0.38 in the third quarter of 2011, compared to net earnings and diluted earnings per share last year of $14.4 million and $0.31.

We achieved return on invested capital of 11.1% in the quarter, up from 9.3% in last year's third quarter.

Overall, we are pleased with our third quarter financial performance.

The market for IT products softened in the quarter, but we executed very well to optimize our sales performance and were disciplined in managing our costs which filled financial performance ahead of our expectations.

North America net sales increased 5% with hardware sales growing 7%, sales of services increasing 15% and software sales declining slightly year to year.

This solid sales growth combined with continued cost management discipline led to 15% growth in earnings from operations and a 25 basis point increase in EFO margin in North America year-over-year.

We also added key services capabilities to our portfolio in North America with the acquisition of Ensynch in early October.

Ensynch, located right here in Tempe, Arizona, is a leading professional services firm with multiple Microsoft goal competencies across the complete Microsoft solutions set, including cloud migration and management.

We are excited to have Ensynch's team join Insight and have the opportunity to bring best in class Microsoft professional services to our clients.

In EMEA, constant currency sales in the third quarter were up 2% compared to the third quarter of last year as increased sales in the middle market more than offset reduced spending in the public sector market.

Our IT systems roll out projects is progressing well in EMEA and we recently launched the functionality support hardware sales in the Netherlands.

We are on track to complete our implementation in Germany in the fourth quarter and will continue roll outs to several more countries in our footprint in 2012.

In Asia-Pacific, net sales increased 3% in constant currency, reflecting increased sales in the middle market and gross profit growth in China and Hong Kong were particularly strong in the quarter while in other parts of the region, an overall lower mix of fees from enterprise agreements drove margin declines year-to-year.

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

Thank you, Ken.

Starting with North America, net sales were $914 million in the third quarter, up 5% from the third quarter 2010.

As Ken mentioned, hardware sales increased 7%, moderating from the double digit year-over-year growth rates we saw over the past several quarters.

We believe this is due to stand alone macroeconomic uncertainty in recent months and the fact that hardware sales accelerated for us in the third quarter 2010, creating a tougher comparison this year.

Software sales decreased 1% in the quarter due to declines in public sector spending and services sales increased 15% on higher professional and managed services sales.

Gross profit in North America for the third quarter increased 4% year-over-year to $115 million, while gross margin decreased 14 basis points to 12.5%.

This change in margin reflects an 11 basis point increase in product margin offset by a 23 basis point decline from a lower mix of fees from software enterprise agreements primarily.

Selling and administrative expenses for North America in the third quarter were relatively flat year-to-year at $89.5 million and as a percentage of sales decreased 42 basis points to 9.8%, compared to 10.2% in the prior year third quarter.

Within these results, employee expenses increased $1.6 million in this year's third quarter due to investments in headcount and related benefits, and higher variable compensation.

This increase was mostly offset by tight expense management in other areas.

We also recorded $476,000 in severance and restructuring expenses in this segment in the third quarter, compared to $199,000 reported in the third quarter 2010.

All of this resulted in a 15% increase in earnings from operations to $24.6 million in North America in the third quarter, and as a percentage of sales, a 25 basis point increase to 2.7%.

Moving on to EMEA.

Our EMEA operating segment reported net sales of $289 million, up 8% in US dollars and up 2% in constant currency.

Also in constant currency, sales in hardware were flat year-over-year, software sales increased 3%, sales of services increased 15% compared to the third quarter of last year.

Gross profit in EMEA was up 10% in US dollars and up 4% in constant currency terms.

Gross margins expanded 33 basis points to 14.6%.

This performance was driven primarily by a 27 basis point improvement in higher services sales and high mix of fees from software enterprise agreements.

Selling and administrative expenses in EMEA in the third quarter were up 10% in US dollar terms and up 4% in constant currency.

This increase year-over-year was primarily driven by increased head count and related benefits.

EMEA also recorded $53,000 in severance expense in the third quarter 2011, compared to $99,000 in the prior year third quarter.

As a result, earnings from operations in EMEA were $2.7 million in the third quarter of 2011, up 21% from the $2.2 million reported last year.

Our Asia-Pacific operating segment reported net sales of $35 million, up 17% from the prior year in US dollars and up 3% in constant currency terms.

Gross profit was $6.8 million and gross margin was 19.1%.

Selling and administrative expenses increased 31% year-over-year in US dollars and 15% in constant currency terms.

All of this resulted in our Asia-Pacific segment reporting earnings from operations of $599,000, compared to $1.3 million reported last year.

Moving on to the tax rate, our effective tax rate in the third quarter of 2011 was 32%, down 36.2% in the third quarter last year.

The third quarter 2011 tax rate was lower than our expected normalized tax range of 36% to 39%, due primary to the recognition of tax benefits relating to the [reinvention] or settlement of [fixed] tax positions during the quarter.

Moving on to working capital and cash flow performance.

In the third quarter, we generated $13 million in cash flow from operations compared to a use of cash flow of $92 million for the same period in 2010.

Year-to-date through September, our operations have generated $10 million of cash flow from operations, down from $38 million for the first 3 quarters of 2010 due to higher working capital needs on higher sales.

We invested $6.5 million in capital expenditures in the third quarter in support of our IT integration initiatives, up from [$4] million last year.

And we received $5 million in cash through increased use of our inventory financing facility.

During the quarter, we also completed our $50 million share repurchase program using $35.9 million to repurchase just over 2 million shares of our common stock.

As a result, we ended the quarter with $99 million of cash or which $83 million was resident in our foreign subsidiaries and $165.5 million of debt outstanding on our revolving credit facility.

This compares to $94 million of cash and $164.5 million of debt outstanding on the revolving credit facility at the end of the third quarter of 2010.

Our cash conversion cycle is 28 days in the third quarter of 2011, up 3 days from the same period last year.

This increase reflects year-to-year variances in the timing of supplier payments and higher sales recorded late in this year's third quarter compared to last year, primarily in our foreign operations.

I will now turn the call back to Ken.

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

Looking into the fourth quarter, we expect demand for hardware and services to be consistent with levels experienced in the third quarter and we expect software sales to increase in the third quarter due to seasonality in that category.

As a result, we expect diluted earnings per share of $0.48 to $0.54 in the fourth quarter.

This outlook reflects the effect of our partner program changes and an effective tax rate of approximately 36% in the quarter.

And for the full year, we expect diluted earnings per share to be between $1.95 to $2.01, excluding severance and restructuring expenses incurred during the year.

Thank you again for joining us today.

I 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 lines for your questions.

(Operator Instructions)

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

Please proceed.

Ken, when you talk about consistent revenue in the fourth quarter, I just want to clarify, are you saying roughly flat sequentially?

Or are you saying that the growth rates on a year-over-year basis should be consistent?

I just wanted to make sure I understand.

Thanks, Brian, for the question.

Basically what we're saying is that we expect that it will be sequentially similar to what we saw in Q3.

Q3 was interesting in that we saw the quarter started out pretty nicely, but didn't have the acceleration that we typically would see towards the latter part of the quarter.

And we think that's going to be consistent throughout what we're going to see in Q4.

Can you talk about that?

Was that across geographies and across customer segments?

Any color on where you saw kind of the softness towards the end of the quarter or where you didn't see the pick up that you expected?

It's more of a comment in North America.

As you know, most of the other geos are software related which is typically back end loaded anyway.

But where we have significant amounts of hardware, we saw that it actually started off very nicely in July and then just didn't seem to have the robustness that we typically see towards the September close.

As far as segments of the business, certainly it was pretty consistent in regards to large client spend versus growth that you might see in SMB.

The area that, of course, was softness was the public sector piece.

That's the one that experienced the most churn for us in the quarter.

Okay.

And then any comments on software in North America down year-over-year ahead of the change with Microsoft in the fourth quarter?

I would of thought maybe you would have pulled in some business ahead of that.

At least I was surprised to see it down.

I don't know if you have any color there.

It wasn't actually -- that's pretty unrelated in regard to that.

It's difficult to sort of pull those things in based upon how they're positioned, but the softness was really all around the public sector piece in that regard for the software.

That was the reason for the decline.

Okay.

Then last one and I'll jump back in the queue, on HP, just wondering if their PC uncertainty had any impact on your PC revenue in the quarter.

And maybe give an update on where you think we are in the corporate PC refresh cycle.

And specifically on HP, did their position within your business, was that hurt at all by their uncertainty?

It's a pretty significant size business, as you know, Brian, so I think it certainly created some uncertainty initially.

Hard to say how much that actually had to do with any kind of softness in HP sales.

We didn't certainly experience that.

There was certainly a lot of discussion and talk about that, but I think now with the clarity they provided, I think certainly that's off the table in that regard.

But it would be hard for me to pinpoint to say did they lose any business, we didn't experience that loss with HP.

But, you probably have a better perspective from a full channel point of view.

As far as the corporate refresh cycle, certainly the last couple of years have been very robust, as you know, as far as notebook and desktop refresh.

I would say that it's still ongoing.

We pretty much sign up to, I think, what you've stated for a long time, that there isn't those cycles as specific as they used to be years ago, that it's on a continual basis.

There was no question coming out of the downturn there was certainly a significant amount of refresh spend.

And I think we're going more into a normal spending cycle for what you typically see for refresh type of business in the PC notebook space.

Okay.

Thanks for all the color, Ken.

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

Please proceed.

Yes, Ken, could you give us some insight a little bit on the number of execs hired -- sales execs hired in the quarter and how they continue to progress as they -- the last couple of classes over the last few months, please?

John, as you know, we've been pretty consistent now several quarters running where we've basically committed to hiring 30 account execs a quarter and we've been true to that.

We're actually just a little bit ahead of that schedule.

They go through a 12-week training program and then they hit their assigned books of business.

We track them very specifically month by month to ensure they are hitting the revenue GP targets and so forth.

And in aggregate, we are on track for their -- on those specific performances.

Obviously, there's nuances between any individual, but in total in aggregate for the 210 plus people we have hired, we are on track for what we modeled for their first year of performance.

Thanks.

Secondly, Glynis, could you remind us of what's the 9-month total on the non-recurring charges and severance at this point?

I'm sorry, I don't have the release in front of me.

I'll have to look that up, John, if you want to continue with another question, I will look it up and get back to you just in terms of the total 9-month number.

Okay, I'll just -- secondly, I guess, Ken, if you look across -- you're very pleased, obviously, with what you see in EMEA with the rollout system-wide and just remind us the next few quarters of projects that -- where you stand on those projects?

Very much so.

As I mentioned in my comments, John, we've certainly completed the migration for the Netherlands, both software and now we are actively selling hardware in the Netherlands.

We actually just did actually go live in Germany today.

So we did process a few hundred orders on the new system in Germany, so that is another success that we've had.

So, we'll migrate here this quarter towards hardware in Germany to just start at least the initial phase of that.

And then first quarter we'll go into France and then we will continue to good through the countries.

So, that project is being well-managed and very much on track with what the expectations were here that we've set.

In regards to your commentary in North America, as you know, we've had a project here to get all of our prior acquisitions on to one consolidated system, that being SAP.

And that project is tracking along nicely, is on schedule and on budget and we expect to see the initial rollouts of that to occur in the spring of 2012.

And last question, obviously, you had the higher growth in services come in a little bit there.

What's been the success factor?

Is it deeper penetration, broader products?

What would be sort of the keys there as far as that success?

Yes, it's just a matter of we've really lined compensation plans to ensure that our sales reps now have to sell hardware, software and services to achieve higher levels of commission rates.

So, we installed that system as well as a tremendous amount of focus in building out the leadership team there on the services side.

So, we certainly haven't arrived yet, but we're excited about the progress we're making there and certainly the capabilities that the recent Ensynch acquisition brings that takes us to the higher level of services, that being professional services, that certainly get us more entangled with the clients at higher levels than before and certainly comes with higher margins as well.

Great.

Congratulations, thanks.

John, the answer to your question regarding severance, year-to-date is $4.5 million.

That's up $2.8 million versus last year, year-to-date.

Thank you.

(Operator Instructions)

And our next question is from Brian Alexander with Raymond James.

Please proceed.

Yes, just on the expense side, any actions that you took during the quarter that you haven't called out to rein in expenses?

It doesn't sound like any of those were related to sales head count, but maybe just a little more color on what you did from an expense standpoint and if any of those affected growth initiatives.

It looks like your North American expenses were down about 6% sequentially, flat year-over-year despite revenue growth, so you're doing a great job there.

I just want to understand a little more what you're doing.

In the second quarter, we called out some severance that we take and in that you saw in the second half of the third quarter, you saw a little bit of that impact on the severance that we had called out earlier from a North America perspective.

The EMEA severance won't really kick in until 2012 once we have completed that.

In North America, we had some savings also from advertising expense, rents, just some miscellaneous other corporate line items that we monitor pretty closely.

But you're right, it was not in the sales line, the sales expense line item with regard to we continue to do our hiring of the sales force, et cetera.

Okay.

And just any more color on gross margin in North America, Glynis?

And I think you called out a couple of the factors that affected it, but how should we think about gross margin going forward?

I think that we're anticipating the gross margin going forward in North America, specifically it's going to be down slightly sequentially Q3 to Q4.

As a result of some of the things that we've called up previously, the reduction in our program fees that are coming through in the fourth quarter that we've talked about before.

That primarily is going to be the biggest driver.

We're anticipating that our hardware product margin, et cetera, will stay relatively constant, but the biggest overall driver is going to be the program fees that we've called out previously on margin.

Just an update on services initiatives and the traction you guys are getting on the services side?

I know that's a strategic thrust to grow the mix there.

It is a strategic thrust to grow the mix there.

I think as we indicated in prior calls, we are getting some growth in our services operation, but it's in the lower margin segment of our services business.

We're actually quite focused now with regards to driving a pipeline with regard to building up the higher margin services elements.

I think we had talked about it on another call that we're getting a lot of kind of labor reimbursements, kind of on-site people.

But what we really need to do is to leverage our managed services, leverage our lot, leverage our labs in terms of getting that more of high end services business.

And where with some processes in place with regard to driving that, but we're not seeing that come through in the services numbers that we're seeing.

So, while we're getting growth and it's at higher margin than our base hardware and software business, it is still not at the levels that we would anticipate coming from our services business.

Okay.

Thank you.

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

Please proceed.

I want to get back to your commentary about demand in North America and Europe.

It sounds like you didn't really see the usual pickup in September in North America.

It sounds like Europe was soft because of the holidays and it has been a little softer than normal.

But it sounds like, Ken, you're not expecting really much of a typical budget flush or much of a pickup in either region except a little bit of seasonality, is that right?

I think that's probably a good way to assess it.

The budget flush is always hard to predict, Matt, in regards to that.

We all certainly hope and expect that there will be some of that, but right now it's a little bit hard for us to see that.

Europe, overall is just sort of plagued with so many economic factors that are going on over there.

So, hard to get really good traction and attention there.

Our team is doing a pretty good job in certainly squeezing out growth in that region.

But that one's a little bit harder for us to predict with so many other things going on within that region.

North America, I think your summary is a pretty good one.

And typically, your hardware sales for your North America are flat to up.

So I guess it could be flat to down in this case, right?

Yes, we're saying flat is what certainly our expectation would be.

Yes, okay.

That's helpful.

And then you've got -- you talked about the IT initiatives, and certainly sounds like there's a lot of opportunities in Europe when the hardware side and sounds like you've got some suppliers.

How many buy you in the next six months, what kind of product line up will you have?

And what kind of scale capability will you have?

Matt, just so I could make sure I understood the question, was it how many product lines?

Yes.

I'm trying to get the breadth of the project that is offered and also the scale, like how big an organization will you have to grow into in terms of volume capabilities?

As you know, of course, we have a very full offering of hardware in the UK region and we've had for years and that continues to be a very good business for us.

So we're certainly capitalizing on expertise that we have, certainly take advantage of that throughout the region.

As far as product lines, good success in bringing on the product lines, the areas that are a little bit more challenged of course, is where you need the higher levels of certifications.

Manufactures like Cisco where you do require more technically competent people and so forth within the region.

So, that's, obviously, some work and that's going to take some time to build up those level of certifications to give us the through put that we're going to need there.

As far as when you talk about the scale of the business, certainly the system gives us everything we need from that, from sort of an IT infrastructure scaling wise and now it's a matter of building the appropriate people that we have.

The good thing about it, as you well know, is that the accounts, of course, that we've been selling software to for many, many years are the same ones that are buying hardware.

So, there's a tremendous amount of training that continues to go on to, obviously, get our people well-skilled in the hardware arena.

And we'll continue to look at ways we can continue to augment those efforts, whether that be through additional people or potentially small tuck-in acquisitions that might give us skill sets that we need that might take longer.

Okay.

All right.

Thanks a lot, Ken.

Ladies and gentlemen, with no further questions, this concludes today's question-and-answer session.

We would like to thank you for your participation in today's conference.

This concludes the presentation.

And you may now disconnect.

Have a good day.