Insight Enterprises Inc (NSIT) 2012 Q2 法說會逐字稿

Good afternoon.

My name is [Lashunda] and I will be are conference operator today.

At this time, I would like to welcome everyone to the Insight Enterprises second quarter 2012 earnings call.

All lines have been placed on mute to prevent any background noise.

(Operator Instructions)

I would now like to turn the call over to your host, Ms. Glynis Bryan.

Ma'am, you may begin your conference.

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, 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 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 our 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, August 1, 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 reference the Company's return on invested capital, or ROIC, for the periods ended June 30, 2011, and 2012, a computation of which can be found on our website at Insight.com under the Investor Relations section.

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, 2011.

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

Hello, everyone.

Thank you for joining us today to discuss our second quarter 2012 operating results.

In the second quarter, our team continued to execute well, generated solid sales and earnings growth despite slowing demand and continued macroeconomic uncertainty globally.

Specifically, consolidated net sales increased 4% to $1.53 billion dollars, up from $1.47 billion in the second quarter of last year and on a constant currency basis, consolidated net sales grew 7%.

Gross profit was $201.3 million, down 1% year-over-year, and gross margin was 13.2% down from 13.9% in the second quarter of 2011.

Earnings from operations increased 2% to $55.3 million, or 3.6% of net sales, compared to $54.4 million, or 3.7% of net sales we reported in the second quarter of 2011.

Excluding the effect of currency movements in the quarter, earnings from operations were up 4%.

Net earnings were flat year to year at $35.3 million while diluted earnings per share increased to $0.79 in the second quarter of 2012, compared to $0.75 in the second quarter of 2011.

And we achieved return on invested capital of 11%.

Within our consolidated results for the second quarter, our North American segment reported flat sales performance year-to-year as strong performance in our software category offset declines in hardware and services sales.

Software sales growth was driven by increased demand by office productivity applications across the large and mid-market and public sector client groups.

Hardware and services sales declined year-to-year due to the effect of large engagements concluded in Q4 of 2011 that had not been fully replaced in 2012.

Though hardware sales grew 10% sequentially and by product category, sales of server and storage, networking and notebooks, and desktops strengthened quarter-to-quarter.

In EMEA, we saw sales growth of 24% in constant currency in the second quarter.

Also in constant currency, software sales increased 20% and services sales increased 22%, due to higher volume with existing and new client engagements.

We reported 35% growth in constant currency in our hardware category, due to the acquisition of Inmac in February 2012 and/or organic growth of approximately 11% year-over-year.

The Inmac acquisition is performing to our expectations and we expect increased contribution from this business in future quarters as we complete our integration plan.

In Asia-Pacific sales increased 5% in constant currency in the second quarter.

Low gross margin year-to-year was offset by strong expense management, which lead to 5% earnings from operation growth in the quarter, also in constant currency.

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

Thank you, Ken.

Starting with North America, net sales were $993.0 million in the second quarter, flat year-to-year and up 16% sequentially.

Sales in our hardware category decreased 4% year-to-year due to the completion of certain large multi-quarter deployments in 2011, but they increased sequentially by 10%.

Sales in our software category increased [12%] (corrected by company after the call) compared to last year, due primarily to high sales of business productivity software to large enterprise clients.

Sales of services decreased 13% year-over-year reflecting the completion of a client engagement in early Q4 2011 that was not fully replaced in 2012.

But we continue to see improved profitability in this category.

We have refined our focus on core service offerings and improved our delivery discipline.

Gross profit in North America for the second quarter increased 1% year-to-year to $130 million, and gross margin decreased 30 basis points to 13.1% compared to the prior year.

This decline is largely due to lower vendor funding and lower hardware sales.

Selling and administrative expenses for North America in the second quarter decreased 5% to $90 million and as a percentage of sales, decreased 50 basis points to 9.1%.

Within these results, (inaudible) compensation decreased $1.5 million on lower gross profit performance and other [team made] in general operating expenses were down $1.9 million as we continue to tightly manage our discretionary spending.

In addition, we recorded a $1.2 million gain on the divestiture of certain non-core services contracts in the second quarter.

The sale of these contracts is consistent with our strategy to continue to focus on services offerings where we can add the most value for our clients.

We also are recorded $894,000 in severance and restructuring expenses in this segment in the second quarter, compared to $1.1 million in the same period last year.

Earnings from operations in North America were $39.1 million, or 3.9% of net sales in the second quarter of 2012, up 9% from the $36.0 million, or 3.6% of net sales, reported in the second quarter of 2011.

Moving onto EMEA, this operating segment reported net sales of $460 million, up 14% in US dollars.

In constant currency, net sales increased 24%.

Also in constant currency, sales of hardware grew 35% due to the effect of a recent acquisition, as well as organic growth.

Software sales increased 20% and sales of services increased 22%, compared to the second quarter of last year, both in constant currency.

Gross profit in EMEA was down 1% US dollars and up 7% in constant currency terms with gross margin declining to 12.9% from 14.9%.

This decline was due primarily to a higher mix of sales to large enterprise clients, which tend to transact at lower gross margins, and a low mix of fees from enterprise agreements and decreased product gross margins, driven primarily by partner program changes.

Selling and administrative expenses in EMEA in the second quarter were up 5% in US dollars and in constant currency were up 14%.

This increase year-over-year was driven primarily by investments in head count, to support the roll-out of our hardware and sales capability in France and the Netherlands, and also the addition of Inmac to our portfolio in February.

In order to fund these investments, we are continuing to implement plans to improve the efficiency of our non-sales operations in EMEA.

In the second quarter, we recorded $1.5 million charge for severance expense, associated with these initiatives and expect annualized savings of approximately $3 million beginning in third quarter.

Earnings from operations in EMEA were $10.8 million in this second quarter down from $13 million reported last year.

Our Asia-Pacific operating segment reported net sales of $76 million, flat year-to-year in US dollars and up 5% in constant currency terms.

Gross profit was $11.7 million and gross margin was 15.3%, down from 15.9% last year due to a higher mix of public sector business in this quarter.

General and administrative expenses in APAC decrease 7% in US dollars and 3% in constant currency due to lower available compensation on lower gross profit performance.

Our APAC operating segment reported earnings from operations of $5.4 million, which was flat year-to-year.

Our effective tax rate for the second quarter was 34.9%, below our expected range of 36% to 38%, reflecting benefits from the closure of a foreign tax audit and changes in estimated deferred tax assets.

Moving onto a cash flow performance, for the first six months of 2012 our operations generated $11 million of cash, compared to $3 million used in the operations last year.

We also invested $16 million in capital expenditures in the first two quarters of 2012, compared to $10 million in the same period last year, primarily related to our IT systems integration initiatives in North America, and we spent $3.8 million on the Inmac acquisition in EMEA the first quarter.

All of which led to a cash balance of $129 million at the end of the second quarter, of which $103 million was resident in our foreign subsidiaries, and $120 million of debt outstanding under [facet] facilities.

This compares to $128 million of cash and $115 million of debt outstanding at the end of 2011.

Our cash conversion cycle was 22 days in the second quarter, down from 23 days due primarily to credit inventory management in North America.

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

As you look at the back half of 2012, we expect demand to be affected by continued macroeconomic uncertainty, We will continue to make select investments in our IT integration projects and our sales force in line with our strategic plan.

For the full year of 2012, we expect consolidated net sales to grow between 3% and 5% and we expect diluted earnings per share for the full year of 2012 to be between $2.15 and $2.25.

This outlook includes an effective tax rate of 36% to 38% and a euro to US dollar exchange rate for the balance of 2012 of 1.23 to 1. It also excludes severance and restructuring expenses incurred during the year and a non-operating gain on an acquisition recorded in the first quarter.

Thank you again for joining us today.

This concludes my comments and we'll now open the line up for your questions.

(Operator Instructions)

Brian Alexander.

Thank you, guys.

Can you hear me okay?

We hear you fine.

It looks like you had some upside to revenue in the quarter, at least versus the consensus estimates out there but you're reducing your full-year outlook.

Could you go into the demand picture a little bit more?

What did you see during the quarter, linearity-wise?

Did things get weaker as quarter progressed?

Maybe more color on why you're taking the outlook down slightly for the year.

Okay, Brian.

I'll start out and then Ken will chime in as I go along.

We're taking the outlook down primarily because of the weakness that we saw starting in Q2.

That's continuing as far as we can see in July to date.

We're estimating that the continued weakness in Europe will continue, that the US is starting to soften.

We have clients who have already notified us that they've pushed back certain deployments.

So based on that, that's one of the reasons that we're lowering the guidance.

We anticipate though that gross margin will be slightly better in the second half of the year than it is in the first half of the year, so net-net for the year, we're anticipating that our gross margin will be flat.

One of the other things that's reflected in this forecast is originally when we would've last given guidance, we had a euro rate assumption in there that was 1.30 to 1. And we're now looking at an exchange rate of 1.23 to 1 so it's a combination of those factors that are driving the change in guidance, on a go-forward basis.

The guidance change, the range changed $0.05 as you saw.

In a couple of senses that is attributed to the currency as Glynis mentioned, and then the continued uncertainty and certainly softening that we're seeing, primarily in hardware.

We had really good growth in the software side, across all the regions.

It was interesting that was not just one segment.

It was across the board, as far small, medium, and even enterprise clients as well.

We're seeing softness in the enterprise side and the hardware part of the business, but certainly didn't experience that on the software side.

Okay.

Glynis, could you just go back over the gross margin weakness in Europe?

I think it was down over a hundred basis points year-over-year, if I'm looking at that correctly.

You also had pretty strong growth in Europe, surprisingly strong, on a local currency basis even if I exclude the Inmac acquisition.

Your point about Europe weakening, I'm just wondering how do we reconcile that comment with the fact that you actually had some pretty good upside in Europe this quarter?

I will answer that question.

When you look at Europe, Europe weakened at the gross margin line by about 200 basis points.

So when you look at that, it's about 50% of that number is related to the program changes that we've talked about in the past.

What we've indicated was that the program changes would have a bigger impact on margins that it would have on dollars, per se.

And in the second quarter, it's our large software quarter, our business in Europe is about 50% or so, more than 50% software-related.

That's a big impact for them in that particular quarter.

On the other side, with regard to -- we had some large deals that were transacted at pretty low margin also in the quarter and that drove the other 50% of the reduction.

On a go-forward basis, we're not anticipating in Europe that we're going to have large deals that drove some that organic revenue growth and that occurred across the board -- not across the board -- it occurred in three specific countries, related to some very specific deals.

We're not anticipating that would continue and I think that we're going to be subject to the normal seasonality in our business, software coming down in this third quarter and maybe a little bit of an uptick in the fourth quarter going forward.

Okay, that's helpful.

We will certainly expect, Brian, that we'll see growth there but just not in Europe, but not at the accelerated rate.

Though when we look at it, it was interesting that the performance was really across the board in primarily all the countries.

We saw growth in Spain, saw very good growth in Italy, places where you might be concerned about.

Very, very solid growth in Russia.

The UK grew very, very nicely.

We didn't perform as well in Germany but I think it's more on us than it is on the market overall, because you'd expect Germany to be one of the ones that would grown nicely so it wasn't on the backs of Germany at all.

So again, we don't expect it to continue to accelerate like we saw here in Q2, but we certainly do expect that there will be growth in the second half of the year in Europe.

Final one for me.

Can you give us an update on the IT systems integration?

What did you accomplish this quarter?

And what else remains for the balance of the year and next year?

Thanks.

Yes, we did successfully implement phase one of the IT project in North America in May.

That was a successful integration and we're anticipating phase two will go live here in the latter part of Q4 into Q1.

That will basically take us pretty much through completion of that project overall for North America.

The project in our European business continues to go nicely.

We did, as you know, convert France and we're actually in the midst.

This quarter, we'll actually convert the UK business as well.

We are making good strides there and things are on track, on plan, in regards to that.

Matt Sheerin.

Yes, thank you.

On the expense side, you talked about some severance costs in the quarter.

Can you tell us how that's going to roll out in terms of the SG&A savings?

You talked about flattish gross margin, but that would imply SG&A percentage coming down at the back half of the year.

What should we think about expenses?

I will start with EMEA.

EMEA took a charge in this quarter for $1.2 million -- $1.5 million.

And out of that, we anticipate that there's going to be annualized savings of about $3 million.

We anticipate that in EMEA, we'll probably might see about $1.1 million of that in the second half of the year.

That maybe somewhat disguised because, remember, we have the Inmac acquisition that came in February of 2012, so that's going to be adding to the SG&A in EMEA.

But net-net, we anticipate that the base legacy SG&A will be down in addition to the normal seasonality associated with the GP around software.

It'll be down $1.1 million associated with these initiatives.

Okay.

Ken, given the more subdued IT spending environment in North America, where you've been adding account executives, are you still adding to your sales staff?

Yes, we are.

We're moving more towards -- as you know, we're focused primarily early on in the inside so we'll continue to add inside, but more as to stay in a steady state, to replenish any attrition that we might have, and are actually working to add more field reps.

We started working on that last quarter.

We'll continue that through the rest of this year.

Okay.

Could you give us the headcount?

The headcount number is 5,500.

In total, Matt, or the sales numbers?

Which one?

Maybe both.

Let me just pull that.

It's right about 5,500 in regards to total for the Company and about half of that is in sales.

Okay.

And that was up a little bit sequentially?

Or about the same?

Yes, if you look year-to-date, it's up 200.

Okay.

All right.

On the gross margin erosion in Europe, you explain that pretty well.

It sounds like some of those big deals hurt you somewhat.

But on the other side, with some of the software agreements with your vendor changing and I know that you're being incentivized to focus more on smaller SMB clients.

How is that transition going, in terms of trying to build your market share of smaller businesses that would help you improve your margins?

We're very pleased with the progress that we've made in that regard.

We're well on track in regards to making sure we're replenishing that business by really targeting that mid-tier client set, so, very pleased with the results so far.

Okay.

Ken, on your commentary about softer demand and some push-outs, are you getting the sense that customers, particularly enterprise customers, still plan to spend budget this year?

Or is the visibility so limited that it's really hard to tell at this point?

I think what you're seeing, if you looked, going back a few years and you looked at the downturn, the pull-back primarily was really impacted by hardware.

Software's impacted but not to the same extent because it's a little more difficult to do that on the software side.

When we came out of it, of course, there was pent-up demand on the hardware side so we saw, these last couple of years, significant growth in hardware.

But you didn't necessarily see that significant growth in software.

What we're seeing is now that software didn't have that big spike up that we saw.

We're starting see that's really more on a continual basis, more of a stable basis, of sales.

So we think on the software side, we'll continue to perform well on that side.

There's a little bit of, as we've said, a little bit of a cloudy picture on the hardware side.

Of course, we've got a big orientation towards enterprise clients and that's where we're seeing a little bit more of that softness, where we did see nice growth, above market growth, in that mid-tier space for us, from a client set point of view.

It was in the enterprise side, on the hardware, we specifically saw that there was some softness that we experienced.

It's still uncertain as to how that's going to play out.

Have you seen pricing pressure in that business too?

Not really.

Our margin degradation, as we mentioned, in North America is primarily due to the fact that we didn't over achieve on some of the supplier reimbursement targets.

That had the most significant impact actually as to why there was a degradation on the gross margin side [of the house].

Okay, lastly for me.

Can you update us, Ken, on the cloud initiatives that you've been working on?

Yes, as we know, we certainly foresee that the private cloud is where most of the real revenue will be generated from, here over the next few years so a lot of focus on assisting clients in migrating towards private cloud initiatives.

A lot of activity there.

And then we have our SaaS offerings that's out there.

We did announces this past quarter here that we actually surpassed two million seats that we're managing in the cloud.

That's good news and that's really more of a SaaS, software as a service, initiative that we have going on.

But our portal did come up live, I guess, the quarter before last.

We're making good strides there.

We're one of the few companies that you can actually do online provisioning for, that we have the single billing.

A lot of those initiatives.

A lot of folks out there with websites that show it, but there's not anybody that we can really see there to date [to be] doing online provisioning, which our site actually has the capability to do.

We're engaging.

It's still early days in that initiative but we continue to invest and continue to acquire clients and continue at this stage to really learn from those clients and how they want to continue to procure more and more in the future.

Great.

Thanks a lot.

There are no further questions in queue at this time.

We thank everybody for joining our Q2 earnings call.

Thank you.

This does conclude today's conference call.

You may now disconnect.