Insight Enterprises Inc (NSIT) 2013 Q4 法說會逐字稿

q> Operator Good day, ladies and gentlemen, and welcome to the Insight Enterprises Inc fourth quarter and full year 2013 earnings conference call.

(Operator Instructions)

As a reminder, today's program is being recorded.

I would now like to introduce your host for today's program, Glynis Bryan, Chief Financial Officer.

Please go ahead.

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 and full year ended December 31, 2013.

I am 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 8K, 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 via 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, February 12, 2014.

This call is the property 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.

In today's conference call, we will refer to non-GAAP financial measures as we discuss the fourth quarter and the full year 2013 financial results.

You will find a reconciliation of these non-GAAP measures to our actual GAAP results posted on our website on the Investor Relations page.

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, 2012.

With that, I will now turn the call over to Ken to give you an overview of our fourth quarter 2013 operating results.

Ken?

Hello, everyone, thank you for joining us today to discuss our fourth quarter and full year 2013 operating results.

We are pleased with our financial results in the fourth quarter.

We returned to year-over-year growth on the top line in North America and EMEA.

We executed better than expected against recently announced partner program changes, and we continue to control our operating costs, all leading to solid results in the quarter.

For the fourth quarter of 2013, consolidated net sales grew 4% year-over-year to $1.4 billion.

Gross profit was consistent year-to-year, while gross margin declined approximately 40 basis points to 13%.

SG&A decreased 1%.

Earnings from operation, excluding severance and restructuring expenses, increased 5% to $40.4 million.

On a GAAP basis, earnings from operations decreased 2% to $35.9 million.

And diluted earnings-per-share, excluding severance and restructuring expenses, increased 16% year-over-year to $0.57.

On a GAAP basis, diluted earnings-per-share increased 4% year-over-year to $0.48, reflecting the effect of share repurchases during the year.

Within these results, our North America business delivered solid top line growth, particularly in the hardware category, which grew 7% year-over-year in the quarter.

We saw growth in hardware sales across all client groups, and by category, we saw continued strong demand for networking solutions.

In the software category, product sales increased year-over-year, while reported net sales decreased 3% year-to-year due to higher mix of software maintenance sales which are recorded net in our financial statements.

And we saw 9% growth in our services category, driven by increased professional and managed services engagements.

Gross profit grew 4%, and gross margin was flat year-over-year in North America, as increased services gross profit offset the adverse effects of partner program changes.

Additionally, we maintained strong discipline around our costs in North America, which drove earnings from operations up 50% year-over-year in the fourth quarter and excluding severance in both periods.

In EMEA, net sales increased 2% year-over-year in constant currency, due to increased sales of business productivity and virtualization software and the large and mid-sized client groups.

Hardware sales were flat year-to-year in the quarter and constant currency, but we returned to growth in mid-market as execution and sales force productivity improved.

Our EMEA team executed well in the fourth quarter to mitigate partner program changes, resulted in a much lower impact than we originally anticipated.

But due to the residual program changes and lower services gross profit, gross profit margins during the quarter declined to 12.4% from 13.4% a year ago.

The decrease in gross profit was partly offset by lower operating costs, due to recent restructuring activities, which led to non-GAAP earnings from operations of $4.4 million down 17% from the fourth quarter of last year.

As we noted in our last conference call, we're highly focused on improving our results in the EMEA business.

Their execution is improving, and we're focused continuing to drive and improve productivity in our sales force.

These efforts are expected to drive results that more than offset the additional partner program changes, and we believe we will return to positive earnings growth year-over-year in EMEA in the back half of 2014.

In Asia-Pacific, fourth quarter net sales were flat year-over-year in constant currency.

Gross profit declined due to lower sales of enterprise agreements to large clients, and the effect of partner program changes in the software category which drove earnings from operations down 28% year-to-year.

For the full year 2013, our consolidated financial results did not meet our expectations, though we're proud of the improvements we saw throughout the year following a very slow start in the first quarter of 2013.

For example, consolidated hardware sales for the full year 2013 declined 5%; however, we saw sequential growth each quarter beginning in Q2, and exited the year with a stronger run rate in this category.

Software product sales grew year-over-year for the full year but, reported net sales declined slightly because of a higher mix of software maintenance sales which are recorded net in our financial statements.

Also in the software category, we mitigated the effects of expected partner program changes through stronger execution with a $4 million decline in incentives to our largest partner due to program changes compared to our initial expected range of $8 million to $12 million.

And we grew our services sales 3% year-to-year in 2013 at higher gross margins than we saw in 2012.

As we head into 2014, the foundation of our business is stronger.

The integration of our IT systems in North America and EMEA is complete.

Our management team has been placed, including Wolfgang Ebermann who recently joined as president of EMEA.

Market demand is improving, particularly in North America, our largest segment.

With a healthy balance sheet to support growth, and our operating trends are improving across all the markets we do business in.

Industry analysts expect low single-digit growth in hardware sales in 2014, and mid-single-digit growth in software and services sales.

Our plans for 2014 are focused on driving growth in excess of the market across our operating segments.

We will also continue to focus on our account level profitability initiatives, optimize their performance with the strategic partners, expand our capabilities in the cloud, and tightly manage discretionary costs in our business, while growing our sales force.

In North America in 2013, we worked to refine our go-to-market model, organizing our field and inside sales resources to focus on key vertical markets and client groups across specific cities in North America.

In 2014, we plan to continue to invest in sales and resources in these markets to drive new business growth.

We also expect to add additional technical sales support for strategic categories, such as software services, networking and storage, to bring more value added solutions to our clients.

And we will continue to execute our profit improvement plan at the accountant partner level, which we believe will help mitigate the effect of previously announced program changes in the software category.

In EMEA, we plan to invest modestly in our sales teams, and to continue to focus on improving the productivity of our existing sales resources, which we believe will result in improved financial performance of 2014.

Our plans include returning to growth in the hardware category and key geographic markets, or managing through partner program changes in the software category.

We will continue to tightly manage our newly reduced cost structure as well, and we believe that this focus will lead to improved earnings and performance for the full year.

Finally, in Asia Pacific, where we're almost entirely a software business, our plans are focused on continued penetration of the mid-sized and public sector markets, and the development of more specialized software services capabilities.

We also expect to integrate our Asia Pacific business into our North America IT platform in mid-2014.

I will now hand the call over to Glynis, who will discuss our full year 2013 financial results in more detail.

Thank you, Ken.

For the full year 2013, consolidated net sales were $5.14 billion, down 3% year-to-year.

North American net sales declined 4%, primarily due to lower hardware sales to large enterprise clients.

North American software sales declined due to a higher mix of software maintenance sales to public sector clients, which are recorded net on our financial statements.

In EMEA, net sales were flat year-to-year, as lower hardware sales across all client groups were offset by increased software and services sales.

In Asia Pacific, net sales declined 3%, due to lower software sales volume with large clients.

Full year 2013 consolidated gross profit was approximately $700 million, down 3%, and gross margin up 13.6% was flat year-over-year.

Gross margin expanded in North America, due to the strong execution of the partner incentive program and higher services gross profit.

This offset the adverse effects of partner program changes and lower hardware sales in EMEA.

As Ken noted earlier, partner program changes by our largest software partner resulted in approximately $4 million of lower incentives in the software business, primarily in our EMEA operating segment.

Selling and administrative expenses for the full year of 2013 were $565 million, flat year-to-year.

In North America, SG&A expenses increased $2.7 million year-over-year, investments and sales and services resources were offset by lower marketing and variable compensation expense.

Also, please recall that our 2012 SG&A results were favorably impacted by $3.2 million from the sale of certain services contracts and the recovery of legal fees from a third party.

In EMEA, SG&A expenses declined approximately $2 million year-to-year in US dollars, and $3.8 million in constant currency in 2013, due to restructuring actions taken during the year.

And in Asia Pacific, expenses declined $1.1 million year-to-year, due to lower variable compensation expense.

As a result of significant restructuring activities in EMEA and the continued review of resource moves in North America, we recorded severance and restructuring expense of $12.7 million in 2013, compared to $6.3 million in 2012.

We do not expect to incur this level of severance expense in 2014.

All of this led to earnings from operations $121 million in 2013, a decrease of 18% from 2012.

Excluding severance expenses, earnings from operations were $134 million, down 13% year-to-year.

Our expected tax rate in 2013 was 38%, compared to 35.9% in 2012.

The increase was primarily due to the effects of an increased valuation allowance against certain foreign deferred tax assets during 2013.

And finally, net earnings in 2013 were $71 million, down 23% year-to-year, and excluding severance expenses, net earnings were $80.8 million in 2013, down 15% from 2012.

Moving on to our cash flow performance, for the year ended December 31, 2013, our operations generated $76 million of cash, up approximately 13% year-over-year.

We invested $19 million in capital expenditures in 2013, down from $30 million in 2012, reflecting lower IT spending, as we completed our EMEA and North American IT systems projects.

And, we spent $58 million in 2013 to repurchase approximately 3 million shares of our common stock.

In 2014, we expect to spend between $15 million to $20 million on capital expenditures.

And in the first half of the year, to repurchase up to $42 million of our common stock under a previously announced authorization.

We ended the 2013 year with a cash balance of $127 million, of which $111 million was [resident] in our foreign subsidiaries, and $66.5 million of debt outstanding under our debt facilities.

This compares to $152 million of cash and $80 million of debt outstanding at the end of 2012.

And from a cash flow efficiency perspective, our cash conversion cycle was 27 days in the fourth quarter of 2013, an increase of three days year-to-year, as a result of lower CPOs in North America driven by the timing of payments due to suppliers in the quarter.

I will now turn the call back to Ken.

Thank you, Glynis.

Moving on to our outlook for 2014.

For the full year 2014, we expect the global IT market to grow in the low to the mid-single-digit range.

We expect our business to grow slightly faster than the market.

As a result, we expect earnings-per-share for the full year 2014 to be between $1.97 to $2.07.

This outlook reflects the adverse effect in gross profit of previously announced partner program changes in the software category of between $15 million and $20 million, an effective tax rate of 38% to 39%, the completion of our current share repurchase program of up to $42 million in the first half of the year, and capital expenditures of $15 million to $20 million.

This outlook does not reflect severance and restructuring expenses.

Thank you, again, for joining us today.

I want to thank our teammates, clients, and partners for their dedication to Insight.

That concludes my comments, and we'll now open the line for your questions.

(Operator Instructions)

The first question is from Matt Sheerin from Stifel.

Your question, please?

Ken, just regarding your outlook for the year, sort of backing into the number I'm given -- mid-single-digit revenue growth.

It looks like gross margin could be down a little bit for reasons you stated.

But operating margins should be up to get to that number, that EPS number.

Is that going to come from SG&A leverage?

And what should we be thinking about margin expansion in North America and Europe?

Europe, obviously, you're off of a lower base; but what should be we thinking about margin expansion in both of those regions?

Thanks, Matt.

And let me start, and then Glynis will add as well.

Yes, as we indicated that we do expect, of course, to see growth to that; some of that obviously growth that we'll see in the profit line will come from the top line revenue growth.

We will certainly be controlling SG&A.

There will be some increases to it all related to sales and technical head count.

And again, you'll see an acceleration for planning in some key areas, like services, of course, which come at higher margin profiles for us.

So that's pretty much what we see in regards to where we will see that, and how that will certainly more than offset the program impact change that we talked about on the software side.

But, Glynis, why don't you add a little bit more to that.

Sure.

Matt, so what we'll also see are the $15 million to $20 million impact that we indicated we'd have from the partner program changes translate roughly to a 25 to 50 basis point reduction ultimately in our gross margin.

And when you flow that through at the EFO line, you should anticipate that our EFO or earnings from operation margin will be relatively flat on a year-over-year basis, after absorbing that impact and controlling our SG&A.

On our margin percent lines, but obviously a growth (multiple speakers).

The gross dollars.

Got you.

Flat gross margin, offer higher dollars on the volumes.

But are you then looking to offset some of that margin pressure from the vendor relationships by continuing to add to your services business?

Or is it hard to get a sense of how much that's going to move the needle at this point?

We certainly expect that we'll increase our plan; it's certainly to increase and accelerate the services business to help offset that.

That's a big part of the plan.

Okay.

And it sounds like in your comments regarding Europe, it sounds like you're looking at either down of your profitability, down year-over-year for the first couple of quarters from where you were, and then improve that in the second half of the year.

Is that coming primarily, Ken, from the volumes that are expected to improve?

Or do you also have cost-cutting initiatives and other organization initiatives to improve that?

Yes, I think you coined it exactly right, Matt; that's exactly what we expect to happen.

So again, the first half, we don't expect to have increases year-over-year at the EFO line, but we certainly expect to have that in the back half.

And a lot of that, of course, is through acceleration with the team in place that we'll start to see then.

We're confident from that perspective.

And then, we'll basically be very focused on how we drive and continue to drive more of the remediation efforts as well on this one software program change.

Matt, (inaudible) expand a little bit on Ken's comments.

One of the other things that we anticipate is that we would see some recovery in the UK.

We didn't have a very strong 2013 performance in the UK.

So one of the elements that is going to aid in the recovery in Europe is the recovery in the UK, which has the full complement of hardware, software, and services in that regard.

Okay, great.

And just in terms of the demand environment, you sound relatively upbeat about the demand outlook, calling for above market growth.

And I think last year, you were below market for various reasons.

What gives you confidence that you can grow faster than the market?

And what are the key demand drivers that you see happening this year?

Yes, I think certainly we have some of the headwinds that we were looking at last year this time in regards to still completing the SAP migration here.

And then of course our ERP integration in Europe.

So we have those completed.

And then last year we did continue to invest in sales resources on both continents, and we expect to certainly start to see that result.

And we did see that, of course, in the Q4 results.

So we see that continuing.

Okay.

And then in terms of demand drivers just overall?

I think that the -- it's when you talk to the segments that we see happen that are I think doing well.

The networking segment continues to grow, we think, very strongly from what we see in all the -- our participation as well as the data that we analyze.

Storage, we certainly continue to see that to grow.

And we do think what we'll see, we'll start to see some rebound on the service side this year.

That was a pretty tough market overall from a market perspective last year, and we do think that we'll start to see that rebounding.

And desktops and notebooks continue to actually increase in volumes, even with all of the discussion about it.

When you look at the NPD data, it shows clearly that in the channel desktops, notebooks as a category grew nicely.

Okay.

All right.

Thanks a lot, and best of luck.

Thank you.

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

Your question, please

Hello, guys, it's Jeff Koche in for Brian.

Real quick -- a little surprised by the weakness in the gross margin.

I know you guys -- it sounded like you didn't have quite as much pressure from the change in the vendor program, and you're obviously benefiting from the change to net in the software side, or selling more net -- recording that more on a net basis.

And I'm just wondering, so what drove the gross margin decline this quarter?

Partly, while the program changes may not have been as severe as we'd initially anticipated, there was a $4 million impact in the fourth quarter, primarily in EMEA, and it was 100% margin.

So the impact on the margin line is greater than the impact on the dollar line, if you want to think about it that way.

That's why we're also seeing when you look at the $15 million to $20 million impact that we say we're going to have in 2014 from when the partner program changes that we anticipate it's going to be an impact on the margin also of the 25 to 50 basis points.

So to be clear, it's not like the competitive environment is getting --

It's not the competitive environment, no.

Not at all.

Not at all.

And then you said that the gross margin, the 25 to 50 bp is the headwind you're facing.

What's your outlook for a year-on-year change?

Should we expect you guys can offset that completely?

Or should we expect that gross margin will be down?

I think you should anticipate that there will be some softness in gross margins, which we will make up ultimately through SG&A control.

We're going to invest in the sales and technical resources, but we will control other SG&A such that we anticipate being relatively flat at the EFO margin line.

Got you.

Okay.

And then, can you just talk about demand improvement in North America?

And maybe break it down by customer segment and product segment?

Yes, we definitely saw a nice increase in the quarter in the large enterprise space.

And we saw that to as soon to be strong, and we saw good participation at the S&B side as well for us.

And we had good growth pretty much in all of the categories in regards to the public sector, and some key verticals like healthcare, K-12, and so forth as well.

So I think, there wasn't any -- it wasn't completely robust, but all categories certainly participated in growth.

Okay.

And then last night, actually, there was a press release that CDW is partnering or training their relationship with Google.

Do you guys see any potential or possibility for you guys to expand relationships with some of, maybe, Microsoft's competitors?

We're certainly always looking, and it's throughout the course it's always based upon what our clients are demanding.

So we've got to be able to support our clients' needs.

We're certainly always out looking at all of the alternatives there.

In that regard, we do have a Chromebook offering that we do have signed for, so we do have the appliance there for Chromebooks.

We don't currently sell the Google apps, if that's what you're referring to.

The announcement I saw as well that CDW does -- we're currently not doing that.

All right.

I think that's it for me for now.

Thanks.

Thanks, Jeff.

Thank you.

(Operator Instructions)

And that does conclude the question-and-answer session of today's program.

And this does conclude the conference call for today's program.

Thank you, ladies and gentlemen, for your participation in today's conference.

You may now disconnect.

Good day.