Insight Enterprises Inc (NSIT) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2012 Insight Enterprises, Inc.

earnings conference call.

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

We will facilitate a question-and- answer session towards the end of the presentation.

(Operator Instructions) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, 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, 2012.

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 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 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, May 2, 2012.

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 referencing the Company's return on invested capital, or ROIC, for the periods ended March 31, 2011 and 2012, a computation of which can be found on our website at insight.com under the investor relations section.

Finally, that 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, 2011.

With that, I will now turn the call over to Ken to give you an overview of our first quarter 2012 operating results.

Ken?

Hello, everyone, thank you for joining us today to discuss our first-quarter 2012 operating results.

During the first quarter we focused on integrating recent acquisitions and improving the profitability of our business through gross margin expansion and continued cost control which led to double-digit growth in earnings from operations ahead of our expectations for the quarter.

Consolidated net sales increased 2% to $1.24 billion, up from $1.22 billion in the first quarter of last year.

And on a constant currency basis, consolidated net sales grew 3%.

Gross profit was $170.4 million, up 5% year over year, and gross margin was 13.7%, up approximately 40 basis points from the first quarter of 2011.

Earnings from operations increased 12% to $25.6 million, or 2.1% of net sales, compared to $22.9 million, or 1.9% of net sales reported in the first quarter of 2011.

And excluding severance expense in both periods, earnings from operations margin in the first quarter of 2012 was 2.2%, up 25 basis points from a year ago.

Net earnings and diluted earnings per share for $17.4 million and $0.39 in the first quarter of 2012 compared to $13.1 million and $0.28 in the first quarter of 2011.

The Q1 2012 net earnings and EPS results include approximately $2 million, $1.7 million net of tax from a non-operating gain recorded on the recent acquisition which Glynis will cover more detail later in the call.

And we achieved return on invested capital of 11.3% in the first quarter, up from 10.7% at the end of the first quarter of last year.

Within our consolidated results for the first quarter, our North America segment report sales growth of 1% year over year, a strong performance our software category offset declines in hardware and services sales.

Software growth was driven by increased demand for office productivity applications in the large enterprise client group partially offset by lower software spending by certain public sector clients.

Hardware and services sales comparisons year to year reflect large client deployments that concluded the back half of 2011 that were not completely replaced in the first quarter of 2012 on new sales.

However, gross margin improved 35 basis points year over year in the first quarter due to a mix of more profitable services sales and modest improvements in gross product margins.

We have been more disciplined in setting profitability targets for our various service offerings and have sunset certain lower margins offerings and engagements in recent months.

So despite lower sales year to year, we are pleased with the improved profitability of this category.

And we continue to control our expenses in North America in the first quarter which drove just over 50 basis points of growth in earnings from operations margin year over year.

Moving on to EMEA.

We saw sales growth up 7% in constant currency in EMEA for the first quarter, strong growth of 25% in hardware sales was driven by the acquisition of Inmac in February, 2012, an organic growth of approximately 7% year over year, each in constant currency.

Software sales declined in the first quarter in EMEA driven primarily by lower volume with existing clients and certain transactions moving between quarters.

We expect to see normal seasonal increases in software sales in EMEA in the second quarter.

And we're to continue our IT system rollout in the region.

In April, we went live in France and expect to go live in the UK and complete the IT integration of Inmac later this year.

In Asia Pacific, sales increased 5% in constant currency in the first quarter.

Gross profit and SG&A also grew 5% in constant currency, which resulted in relatively flat earnings from operations year to year.

This market remains healthy in the region and we're investing in key services capabilities in order to maximize our share of our client software spending and deepen our relationship with our key partners.

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 $856 million in the first quarter, up 1% from the first quarter of 2011.

Sales in our hardware category decreased [1%], due to the completion of certain large multi quarters of (inaudible) in 2012-- 2011.

Sales in our software category increased 9% compared to last year due primarily to higher sales of business productivity software to large enterprise clients.

Sales of services decreased 10% year over year reflecting the completion of a client engagements early fourth quarter 2011 that was not replaced in Q1 of 2012.

Gross profit in North America for the first quarter increased 4% year over year to $114 million and gross margin increased 35 basis points to 13.3% compared to the prior year.

This change in margin reflects 31 basis points due to a higher mix of higher margin services sales year to year despite lower services volume in the first quarter.

Selling and administrative expenses for North America in the first quarter increased approximately 1% to $92 million, and as a percentage of sales decreased 20 basis points to 10.7%.

Excluding a non-cash charge of approximately $1.4 million to write off certain tax (inaudible) costs recorded in the first quarter of 2011, selling and administrative costs increased approximately $800,000 year over year.

This increase is due to investments in headcount and higher medical and other benefits expenses in the quarter which were partially offset by decreases in other areas.

We also recorded $489,000 in severance and restructuring expenses in this segment in the first quarter compared to $321,000 in the same period last year.

As a result, earnings from operations in North America were $21.2 million, or 2.5% of net sales in the first quarter of 2012, up 28% from the $16.6 million, or 2% of net sales reported in the first quarter 2011.

Moving onto to EMEA.

EMEA operating segment reported net sales of $349 million, up 4% in US dollars.

In constant currency, net sales increased 7%.

Also in constant currency, sales of hardware grew 25% due to both organic growth as well as the effects of our recent acquisition.

Software sales decreased 4% and sales of services increased 22% compared to the first quarter of last year both in constant currency terms.

Gross profit in EMEA was up 7% in US dollars and up 10% in constant currency terms, while gross margins increased 45 basis points to 14.5% primarily driven by increased gross product margin which includes vendor funding and freight partially offset by lower volume of fees from enterprise agreements.

Selling and administrative expenses in EMEA in the first quarter were up 11% in US dollars and in constant currency were up 14%.

This increase year over year was driven primarily by investments in headcount and the addition of our Inmac acquisition to our portfolio.

As we mentioned in our last conference call, in February 2012, we completed the acquisition of Inmac, a hardware reseller located in Frankfurt in Amsterdam.

This acquisition is strategically important to us as we look to extend our hardware capabilities into other countries in our EMEA footprint.

Inmac business performed in accordance with our expectations in the first quarter delivering net sales of approximately $20 million and a modest profit.

We recorded approximately $260,000 in transaction-related expenses in the quarter.

Also, we have completed our purchase accounting for this acquisition and have recorded a nonoperating gain of $2 million, $1.7 million net of tax during the first quarter of 2012 as the fair value of the net assets acquired exceeded the purchase price.

EMEA also recorded $885,000 in severance expense in the first quarter of 2012 compared to $203,000 in the same period last year.

Earnings from operations in EMEA were $4.1 million in this first quarter, down from $6 million reported last year.

Our Asia Pacific operating segment reported net sales of $39 million, up 9% from the prior year in US dollars and up 5% in constant currency terms.

Gross profit was $6.3 million and gross margin was 16.2% consistent with last year.

Selling and administrative expenses in APAC increased 10% in US dollars and 5% in constant currency.

As a result, our Asia Pacific segment reported earnings from operations of approximately $300,000 which was flat year over year.

Our effective tax rate for the first quarter was 35.6%, slightly below our expected range of 36% to 38%.

This was due to the tax on a nonoperating gain discussed earlier related to the Inmac acquisition in EMEA which was recorded at a tax rate less than our statutory US Federal tax rate.

Moving onto working capital metrics and cash flow performance.

In the first quarter, cash flow used in operations was $20 million compared to cash generation of $84 million for the same period in 2011.

In the first quarter of 2011, our cash flows benefited from the timing of a large supplier payment that according to it's scheduled payment terms was paid in April.

In addition, our cash inflows in the first quarter of 2011 included the early collection of a single significant client receivable.

It was primarily these items that drove the increase in our cash conversion cycle year to year to 26 days.

This is higher than our targeted cycle in low 20s in terms of days due primarily to a decrease in (inaudible) in North America and EMEA due to business mix.

We also invested $7.8 million in capital expenditures this quarter compared to $5 million in last year's first quarter, and we spent $3.8 million on the Inmac acquisition.

As a result, we ended the quarter with $133 million of cash of which $116 million was (inaudible) and $138.5 million of debt outstanding under our revolving credit.

This compares to $141 million of cash and $70 million of debt outstanding under our revolving credit facility at the end of our first quarter 2011.

One last update, just last week we completed the refinancing of our senior revolving credit facility and inventory financing facility extending the maturity of both until April 2017.

We also renewed our ABS facility for a new three-year term through April 2015.

Between these new facilities, we will now have access to $750 million of borrowing capacity to support the working capital requirements of our business and to fund internal projects and potential future acquisitions.

We are very pleased to have the tremendous support of our group of lenders and access to low-cost capital sources as we grow our business.

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

Thank you, Glynis.

Our first-quarter earnings results reflect the solid start to the year with stronger gross margins and tight cost control more than offset in the effects of softer sales growth.

As we look at the full year of 2012, we expect our business to grow in the mid single-digit range and we continue to expect diluted earnings per share for the full year of 2012 to be between $2.20 and $2.30.

This outlook reflects an effective tax rate of 36% to 38% through the balance of 2012 and excludes severance and restructuring expenses incurred during the year, a nonoperating gain on an acquisition recorded in the first quarter.

Thank you again for joining us today.

That concludes my comments, and we will now open up the line for your questions.

(Operator Instructions) Matt Sheerin with Stifel Nicolaus.

Yes, thank you and good afternoon.

So the first question, Ken, just trying to figure the subtle difference in the guidance for the year on the revenue front versus last quarter when you said that you expected to grow above market which expected to be mid-single digits and now you're expecting to grow the Company in mid-single digits, so I know a subtle difference there, any specific reason for that?

Is it a mix issue or you're just seeing a little bit of slower demand than you thought a couple of months ago?

Yes, Matt, what we're seeing there is if we look down as we commented a little bit there, is a few of the large enterprise deals that we had last year just aren't necessarily repeating in the first half of the year and that we think they're starting to come forward from the visibility we have towards the second half of the year.

So again, it's a slight tweak to the language but certainly expect that we'll be in line with how the market grows for the year as well of course making sure that we hit and achieve our earnings per share target that we issued last quarter as well.

So you expected some deals earlier that haven't played out yet, is that it?

That's correct.

Okay.

And then on the-- and the implication of the-- of keeping the guidance for EPS implies that margins could track a little bit better and I noticed that the gross margin in EMEA was still quite strong.

And I know that one of the reasons is because the mix, because public sector had been weak in EMEA, I know public sector particularly in the UK tends to be lower.

Is that still part of the reason where public sector is weaker and also are you seeing a higher percentage of services?

Yes, we did have good growth in the services business in EMEA as well which certainly contributed to it.

But you're correct in that the private sector market is still a little bit weaker which detracts a little bit from the margin.

However, it also should be noted, the largest market of course being North America for us, where we did have a substantial increase in the gross margin as well of 35 basis points, so that certainly has contributed nicely overall.

And much of that's attributed to the services business which we did not have a growth on the revenue side but had actually good double-digit growth from a GP dollar perspective in our services business.

So again that's all about us as we talked about prior to making sure that we're in the most profitable pieces of the services business and we did some tweaking to that strategy last year to make sure that we could double down in the areas that on the services side that we thought were the most profitable and most productive for us going forward and to eliminate pieces of those other parts of our services offering that really contribute and that we didn't have the necessary scale in our mind.

So those are the primary reasons.

And we did also see in North America some improvements in the gross profit from our product side of the business as well.

Could you guys give us examples of the higher margin services that you're involved on and focusing on versus the lower margin businesses that you're deemphasizing?

Yes, so for us certainly our network operation center is a really good business that has good annuity rates, comes in at good significant gross margin, very scalable as well.

The professional services business that we have and certainly Ensynch contributed nicely to that, only acquired them last year when that produces some significant gross margin for us as well.

And then our multi-site deployment business is a good business as well where we could provide significant services there.

Some of the lower gross margin business for us have typically been in the area of telecom expense management has been lower.

Some of the other-- those kinds of pieces, service desk, those are the areas that we're again deemphasizing where we can so we can put more and more of our efforts towards the more productive areas for us.

Okay, thanks very much, I'll get back in line.

Thanks.

Brian Alexander with Raymond James.

Yes, I want to follow up on the revenue guidance, guys, I'm a little confused.

If you think the deals just slipped from the first half to the second half, if I heard you correctly, why does that affect your annual revenue outlook per Matt's question about grow faster than the market before and now growing more in line with the market?

And how much revenue are we talking about there because it looks like your annual guidance implies that revenue will accelerate, growth will accelerate from low-single digits in the first half to roughly 10% in the second half?

Yes, so Brian as we've talked about as far as the growth, so these-- obviously some of these large deals are-- aren't just one quarter deals, so if they happen in the back half towards the year of course we're not going to have the full extent of them for the year, so that certainly has an impact.

And again it's really more of the enterprise side, our mid-site-- we calculate that sort of SMB side of the business, has actually grown nicely.

I mean we had nice significant double-digit growth in that the business in Q1.

The enterprise side of course is such a big portion of it that that certainly skewed some of the growth rates.

But I think it's really just a-- it's a matter of some very large deals as you remember last year as an example in North America we grew first quarter at 23% year over year.

So certainly was a more difficult compare as we were going into this year as well.

So that certainly had some play in regards to why you saw the growth rate being a little bit less.

How much of visibility do you have into these larger deals that you think will occur a little bit later than you initially expected?

Typically, Brian, the outlooks that we get on some of these larger enterprise scale deals is we'll get a couple of quarter outlook on those and some of them of course, we're literally working on them a year in advance.

But as far as having sort of more firmness to those, it's typically two quarters.

Okay and then just back on the services business as you rebalance that portfolio and shift to higher margin services, offerings, and it sounds like it's helping the growth profit dollars even though the revenue was down I think 14% or so in North America, what was the year-over-year change in services gross profits?

I don't know if you that handy?

Yes, we haven't actually disclosed that.

Historically on that--

But did you see growth?

Yes, oh sure.

Okay.

And then just on the expenses, it looks like they grew faster than the revenue overall primarily in Europe, I think the other regions were-- you actually saw some operating leverage.

How much of that I guess negative expense leverage in Europe was due to the acquisition of Inmac and how much savings are you looking at from some of these restructuring actions you took in the quarter?

So the Inmac component and SG&A is about $2.4 million for the two months that we have done in the first quarter, $2.4 million in SG&A.

And then we had $260,000 of a transaction related expenses associated with that.

And I don't know if you're looking at it with or without the severance charges or if you're looking at the severance in the separate line, but they had $885,000 of severance expenses associated primarily with just some of the restructuring and consolidation around Inmac.

So that we should think about that as roughly $1 million of savings going forward per year?

Relative to the first quarter, yes.

So between the $885,000 and the $260,000.

Okay.

But on an ongoing basis, I guess the SG&A will be higher in absolute dollars because Inmac is going to be reflected in each quarter going forward relative to last year.

I'm just talking about the actions that you took in the quarter that resulted in the charge, how much of that actually translate to in headcount savings on an annual basis, those actions that you took in the quarter?

Well I'm not quite sure how to answer that because the actions that we took in the quarter were related to Inmac, right?

So you're going to see the increased SG&A related to Inmac, but Inmac's SG&A is going to be lower leverage with the charges that we took, but it will still be a higher SG&A number in each quarter going forward just as we add them into the portfolio.

And remember this was a business that's different, right?

It's hardware and a hardware expansion strategy so there were some minor back office consolidation impacts, but we anticipate that they will add incremental SG&A from a sales perspective et cetera going forward to our business in EMEA.

Okay and then just finally, how should we think about cash flow for the balance of the year?

So we anticipate that we're going to end up with the-- in our typical range which is the $80 million to $110 million of cash flow from operations.

We anticipate that we're going to have capital expenditures in the $20 million to $25 million range as we kind of continue the rollout and implementation of both the iCare 2 system which is the ARP system in the Netherlands, sorry, in EMEA, as well as our project 1 system here in North America.

Okay.

All right, thanks, guys.

And we have no further questions at this time, sir.

Well great, so we appreciate everybody's time and attention.

Thank you very much.

Ladies and gentlemen, that concludes today's conference.

Thank you so much for your participation.

You may now disconnect.

Have a great day.