Insight Enterprises Inc (NSIT) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to be Insight Enterprises first-quarter earnings call.

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

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

Instructions will follow at that time.

I would now like to turn the call over to your host, 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 ended March 31, 2014.

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 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 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 the completion of the call and will remain on our website for a limited time.

This conference call and the associated webcast contain time-sensitive information that is accurate only as of today, May 1, 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 first quarter 2014 financial results.

You will find a reconciliation of these non-GAAP measures to our actual GAAP financial results included in the press release issued earlier today.

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, 2013.

With that, I will now turn the call over to Ken to give you an overview of our first-quarter 2014 operating results.

Ken?

Thank you, Glynis.

Hello everyone.

Thank you for joining us today to discuss our first-quarter 2014 operating results.

In the first quarter, solid sales execution and strict cost discipline combined with improved demand trends globally resulted in strong double-digit earnings growth year-over-year.

Consolidated net sales grew 3% year-over-year to $1.2 billion, gross profit of $164 million was up 4% year-over-year, and gross margin expanded 10 basis points to 13.5%.

SG&A expenses increased 1%.

Earnings from operations excluding severance and restructuring expenses increased 24% to $21.3 million.

On a GAAP basis, earnings from operations increased 46% to $21 million and diluted earnings per share excluding severance and restructuring expenses increased 70% year-over-year to $0.28.

On a GAAP basis, diluted earnings per share were also $0.28.

Within these results, our North America business delivered topline growth of 5% year-over-year in the first quarter.

We saw increased demand for notebooks, desktops and mobile devices in the hardware category and higher sales of business productivity and virtualization products in the software category.

By client group, we saw growth in spending by large enterprise and midmarket clients partly offset by a decline in the public sector.

Gross profit grew 5% and gross margin increased approximately 10 basis points year-over-year to 13.8% in North America as increased product margins driven by our profitability initiatives and strong execution under certain partner program changes offset the adverse effects of recently announced partner program changes in the software category.

Additionally, we continued to manage our discretionary costs in North America and that discipline helped drive earnings from operations up 37% year-over-year in the first quarter excluding severance in both periods.

In EMEA, net sales decreased 5% year-over-year in constant currency due primarily to lower sales of business productivity software to large enterprise clients.

We were pleased with the progress we are seeing in our UK hardware business as our sales improvement plans are gaining traction and our team continues to execute well against recent partner program changes in the software business.

All of this drove bottom-line performance ahead of our expectations in the first quarter.

We expect further improvements in the earnings results in EMEA in the back half of 2014.

In Asia-Pacific, first-quarter net sales increased 6% year-over-year in constant currency, gross profit increased 11% in constant currency due to higher sales of enterprise agreements.

On the expense side, planned investments in our IT systems integration project which is scheduled to conclude in May of this year, led to a slight decline in earnings from operations year-over-year.

I will now hand the call back over to Glynis who will discuss our first-quarter financial results in more detail.

Glynis?

Thank you, Ken.

Starting with North America, net sales in North America were $781 million in the first quarter, up 5% year-to-year.

Sales in our hardware category increased 4%.

Software sales increased 11% and services sales declined 14% year-to-year.

Gross profit in North America increased 5% year-over-year to $107 million and gross margin increased 10 basis points to 13.8%.

Selling and administrative expenses for North America in the first quarter were flat year-over-year at $89.2 million.

Lower IT spend resulting from the completion of our North America IT systems integration project was offset by higher (inaudible) costs and variable expenses on higher gross profit.

We also recorded approximately $80,000 in severance and restructuring expenses in this segment in the first quarter compared to $1.1 million in the same period last year.

Earnings from operations in North America were $18.2 million in the first quarter of 2014, up 37% from $13.3 million in the same quarter last year excluding severance expenses in both periods.

Moving on to EMEA, our EMEA operating segment reported net sales of $388 million, flat year-to-year in US dollars.

In constant currency, net sales decreased 5%.

Also in constant currency, hardware sales increased 1% year-over-year as we continued to see improvements in our hardware business in the UK.

Sales of software decreased 8% reflecting lower volume of large clients and services sales decreased 17% also in constant currency.

Gross profit in EMEA was $49 million, an increase of 1% year-over-year in US dollars but a decrease of 4% in constant currency terms with gross margins improving 10 basis points to 12.7%.

This increase in gross margin was driven by a higher mix of hardware sales which in EMEA are generally transacted at higher gross margins partially offset by the effect of lower services sales.

Selling and administrative expenses in EMEA in the first quarter were up 3% in US dollar terms and down 2% in constant currency.

This decrease year-over-year was primarily driven by lower employee costs resulting from recent restructuring actions.

In the first quarter, we recorded net severance expense of $260,000 in this segment, down from $1.7 million recorded in the same period last year.

Excluding severance expenses, earnings from operations in EMEA were $2.2 million in the first quarter of 2014, down from $2.9 million reported last year.

In APAC, our Asia-Pacific operating segment, reported net sales of $46 million, down 4% year-to-year in US dollar terms and up 6% in constant currency.

Gross profit was $7 million which was flat year-to-year in US dollars but up 11% in constant currency terms.

Selling and administrative expenses in APAC increased year-over-year due to investments in our new IT system of approximately $260,000 which led to a slight decline in earnings from operations year-to-year to $868,000.

With respect to our tax rate, our effective tax rate in the first quarter was 39.3%, in line with our expectation but higher than the 27.8% reported in the first quarter last year.

In Q1 of last year, the lower tax rate reflected certain tax benefits from the remeasurement of specific tax positions in that quarter.

Moving on to cash flow performance, in the first quarter, our operations generated $66 million of cash, up from $60 million in the first quarter of last year.

This increase is due generally to lower working capital requirements in the business.

We invested $2 million in capital expenditures in the first quarter down from $6 million last year reflecting lower IT spending as we completed our EMEA and North American IT systems projects.

And we spent $27 million to repurchase approximately 1.3 million shares of our common stock.

As of March 31, we have $15.5 million remaining under the existing authorization.

We ended the first quarter with a cash balance of $181 million of which $161 million was resident in our foreign subsidiaries and $89 million of debt outstanding under our debt facility.

This compares to $152 million of cash and $61 million of debt outstanding at the end of Q1 2013.

From a cash flow perspective, our cash conversion cycle was 24 days in the first quarter, a decrease of one day from last year.

One last item before I turn the call back over to Ken.

In April of 2014, we began final negotiations on a lease to relocate our sales office in Bloomingdale, Illinois.

We own the building in which we currently reside and will begin marketing the building for sale in the second quarter.

As a result in the second quarter of 2014, we expect to classify the building as an asset held for sale and will record a non-cash impairment loss of approximately $5 million to release the carrying amount of the building and the related assets to their estimated fair value.

I will now turn the call back to Ken.

Thank you, Glynis.

Moving on to our outlook for 2014, we believe our first-quarter results combined with improved market trends position us well to pursue our financial goals in 2014.

For the full year of 2014, we continue to expect the global IT market to grow in the low to 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 of 2014 to be between $1.97 and $2.07.

This outlook reflects the adverse affect on gross profit of previously announced partner program changes in the software category between $15 million and $20 million and an effective tax rate of approximately 38% to 39%.

This outlook does not reflect severance and restructuring expenses or the non-cash impairment loss related to our Illinois real estate assets that we expect to record in the second quarter.

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 will now open the line up for your questions.

(Operator Instructions).

Matt Sheerin, Stifel.

Thank you.

Good afternoon, everyone.

So a question, Ken, on the demand trends that you are seeing in North America, that 5% growth.

You talked about starting thin notebooks and desktops and are you seeing signs of a PC refresh cycle?

Was some of that related to some expenditures from customers ahead of the Windows XP expiration and do you see that continuing throughout the year?

Yes, I think certainly, Matt, that is part of it.

No question.

I think as you know clients have really gone more and more toward sort of a more logical refresh cycle but obviously Microsoft support here for XP going away here in April has certainly precipitated a lot of clients over the last few quarters to continue to do those refreshes in a more accelerated fashion.

It is hard to tell how much is left in the pipe there.

There certainly are numerous clients of course who have not completely converted or are in the process of doing that but we don't have a real good view of how many are left to do that.

But we are certainly seeing that there certainly some runway left for that to occur because it comes pretty costly for clients at this stage to get additional support from Microsoft for maintenance that they are going to need for security patches and such.

So, yes, I definitely would see that we will see that continuing for certainly the next few quarters.

Okay.

I appreciate you just give guidance for the full year and not quarterly guidance but are you expecting as you head into the June quarter, you have got a month under your belt now, are you seeing typical seasonal trends in North America and Europe both on hardware and software?

Yes, I would say that is a fair assessment as we look at Q2.

That is pretty much in line with what we had forecasted and you can see that we stayed consistent with our annual outlook as far as EPS is concerned.

In your commentary about growing slightly faster than the market, so far it looks like you are growing just in line with the market and Europe sales are still -- the growth there is still relatively slow.

So are you expecting acceleration in the businesses in the back half of the year?

Yes, for certainly the European business we definitely have indicated that would be more of a back half of the year type acceleration that would occur and we think that depending on which data you look at in North America that we are pretty much in line with where that market growth is today.

Okay.

Then your services business was down as a percentage basis slightly in North America and more so in Europe.

Is that because some large servicing engagements were rolling off and what is your outlook for your services business in general?

Yes, that is certainly usually the case is when you have big rolloffs and that has continued to plague us in that regard but we are very focused on continuing to build that pipeline and we invested pretty considerably in that business over the last few quarters to generate more and more of the pipeline for that.

So we are certainly optimistic that that will continue.

That trend will start to reverse itself and we will start to see growth here towards the second half of the year.

Okay, thanks a lot.

(Operator Instructions).

Brian Alexander, Raymond James.

Thanks.

Ken, you talked to us about demand recovering but if I look at the hardware business, it was up 4% in North America but that was a little bit slower than Q4.

And I think the comparison was a bit easier in Q1, still reasonable growth but a deceleration.

And then in Europe, I think hardware was up about 1% in constant currency which I think is pretty consistent with last quarter.

So I guess what are you hearing from customers that gives you what appears to be maybe a little bit more optimism that we are seeing a recovery particularly on the hardware side and within the commercial business?

Then I have a couple of follow-ups.

Yes, I would say if you really look at it from a category point of view, Brian, which you certainly do a good analysis on that, so I would say certainly desktops, notebooks are certainly growing faster than the average market as you know from what you are seeing.

I would say that the server market continues to see some slight growth but that is certainly a more challenging area as well as the storage area which you have certainly done a lot of reporting on.

To those areas, which of course are pretty significant parts of the total hardware growth market and then of course the next biggest growth market would be the networking area from a growth point of view and I think that we saw that to be probably a little bit -- I would say a little bit more muted as far as the growth that we saw in Q1 on the networking side.

But we continue to remain pretty bullish on that and we had a pretty strong year in networking last year and we think that is certainly going to be fine for the rest of the year.

So it is really primarily the growth had a lot to do with the XP thing which you talked about but the desktop notebook growth is certainly pretty considerable in the market at this stage.

The wildcards out there is what will happen with the server and storage markets and we do think that networking will come back toward the second part of this year and continue to show some good growth.

Any way you think you can ballpark how fast the PC business did grow, desktops and notebooks combined relative to the overall hardware growth?

A little hard to tell until we see what -- you really get information from HP and so forth when they start to give us those kind of indications.

But certainly looks to be, I would say that it is probably high single digits potentially somewhere mid to high single digits I think you might see PC growth.

Okay, I was referring more to your growth in the quarter than the overall industry.

I am not sure we share that information.

Glynis, do we?

Okay, that is fine.

And then just on the expense side, you've done a really good job holding expenses flat for really the last several quarters and so now that you are seeing better growth ahead, I'm just curious how you are thinking about investing potentially more in the business and maybe achieving more of a balance between revenue growth and expense growth going forward given that you think you are going to grow at least as fast as the market which is expected to grow low to mid single digits.

What I am getting at is do you think that you are going to ramp up expenses to grow kind of in line with revenue or do you still expect to hold expenses relatively flat?

We will control, we will keep the expenses certainly in control and I think you will see us certainly continue to invest in client facing and technical people to support that growth.

And then we will be very diligent of course on the support side of that business so you might see SG&A increase slightly but very much more in line with where we see the growth coming.

Okay.

Glynis, did you want to add anything there?

Yes, the only thing I would add, Brian, is that we have a stated strategy that says we are going to continue investing as Ken said in the front end with regard to sales, presales, resources, etc.

in terms of delivering that higher growth.

We have an impact in the overall business coming through from the partner program change that we have talked about that is going to be probably largest in Q2 as you look at our numbers on a go forward basis that will ultimately impact the overall growth.

So it is a deliberate strategy to continue investing in the face of the $15 million to $20 million.

That number hasn't changed in terms of an overall impact that we envision having on the numbers.

The biggest quarters would be Q2 and Q3 with regard to that impact.

Okay.

Then I was actually going to ask a final question on the gross profit headwind from that program change and the $15 million to $20 million for the year.

I wanted to ask how much of that was realized in the first quarter.

Part of the reason I ask is I was actually positively surprised by the gross margins being up year-over-year despite that headwind and despite more hardware mix, specifically PC mix which I assume is lower gross margin and a lower services mix.

So mixed against you and yet you were able to expand gross margin.

So maybe if you could just dive a little bit deeper into those drivers that would be helpful.

Thanks.

So we had a slightly better execution again, modestly better, modestly better execution against our program changes than we had anticipated specifically in Europe.

And I think that our anticipation is that we will see more of that program change impact in Q2 and Q3 which are the largest quarters for that program change impact in 2014.

We said previously that we think it is a headwind of between 25 to 50 basis points as we go through the year and we see how our remediation efforts are going, it is possible that that could change.

But as of right now we are saying that we think that $15 million to $20 million is going to be roughly the 20 to 25 basis points that we have talked about -- 25 to 50 basis points that we have talked about.

We also have various initiatives that we are pursuing here in North America that we have shown some success at with regard to being able to maintain our driving final profitability.

We are using that same process in EMEA and would expect to be able to minimize some of that impact in EMEA going forward.

But overall, our anticipation is that our margins will be relatively flat for the year and that is implicit in the guidance that we have reaffirmed today.

Gross margins, operating margins?

Gross margins.

Both.

Okay.

Can you just share with us how much of the headwind was experienced in Q1?

I understand it wasn't quite the full run rate but can you give us that amount?

$2 million to $4 million.

Got it.

Okay.

Thank you very much.

You are welcome.

Matt Sheerin, Stifel.

Just a follow-up on your IT integration efforts which it sounds like you have completed that in North America and in Europe.

Are there certain expenses that are going to roll off because of that?

And it doesn't look like you have had any disruption to your operations because of the integration.

Are you expecting any positive impact in terms of efficiencies or other things from the completion of that?

(multiple speakers) Yes, so we have one piece as I mentioned that we still have to complete and that is the APAC so we will actually converge here.

In a couple of week's time, we will convert all of our Asia-Pacific operations onto SAP.

So we feel very confident that we are ready for that integration and that will certainly complete the process that we have been on here, the journey we have been on for the last couple of years.

But Glynis, let me turn it over to you as far as the impact to the financial statement.

Yes, I think, Matt, that some of the impact that you would anticipate coming out of that we have already experienced going through 2013 primarily.

So we have wrapped up North America in the second quarter of 2013 and we wrapped up most of EMEA prior to 2013.

And then 2013 what we had was the smaller countries that we did in the second quarter of 2013.

So some of those benefits are already reflected as are the severance costs associated with those pieces that we took specifically in EMEA last year.

So we did anticipate some benefit coming out of those as we consolidated and drove to the one system but some of those are already reflected in the base going into 2014.

Okay, thanks.

And then, Ken, I know that the Company has been fairly acquisitive in the last few years, done some big acquisitions, some strategic acquisitions and not too much lately.

Do you still have an M&A pipeline and are there specific areas that you are looking at?

Yes, we continue to always have certainly looking at how we can benefit from that from our business so we continue to do that, nothing certainly on the horizon but that continues to be a part of the strategy going forward.

So we are still actively looking what aspects would make the most sense for our business.

Okay, thanks a lot.

(Operator Instructions).

I am showing no further questions in queue.

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

This does conclude the program and you may all disconnect.

Have a great rest of your day.

Thank you.