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Operator
Good day, ladies and gentlemen, and welcome to the Insight Enterprises second quarter 2016 operating results. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. (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.
Glynis Bryan - CFO
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, 2016. I'm Glynis Bryan, chief financial officer of Insight. 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 in the investor relations section.
Today's call including the question and answer period is being webcast live and could be accessed by the investor relations page of our website at Insight.com. An on-site 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 associated webcast contain time-sensitive information that is accurate only as of today, August 3, 2016. 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.
On today's conference call we will refer to non-GAAP financial measures as we discuss the second quarter and year-to-date 2016 financial results. When referring to non-GAAP measures we will refer to such measures as adjusted. Adjusted measures discussed today will exclude the gain recorded in the second quarter of 2016 on an asset held for sale, as well as severance and restructuring expenses recorded in all periods.
You will find a reconciliation of these adjusted measures to our actual GAAP results included in the press release issued earlier today. Also please note that unless noted as constant currency, all amounts and growth rates are discussed in US dollar terms.
Finally, let me remind you of our forward-looking statements that will be made on today's call. All forward-looking statements that will be made on this conference call are subject to risks and incentives 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 in form 10K for the year ended December 31, 2015.
With that, I will now turn the call over to Ken to give an overview of our 2016 operating results. Ken?
Ken Lamneck - CEO, President
Thanks, Glynis, and hello, everyone. Thank you for joining us today to discuss our second quarter 2016 operating results. In the second quarter, I'm pleased to report that our global team came together exceptionally well to deliver on our financial objectives. Each of our operating segments drove high single-digit or better gross profit growth year over year in constant currency while continuing to control discretionary expenses, which led to strong earnings growth for the quarter.
Consolidated net sales were $1.5 billion, up 2% year-over-year and 3% in constant currency. Solid growth in our North America business was partly offset by lower net sales recorded in EMEA and Asia-Pacific. We continue to see traditional software licensing sales convert to cloud-based solutions which, like software maintenance sales, recorded net in our financial statements. It is important to note that this shift in consumption of software products in the marketplace has no effect on our profitability.
(Inaudible) gross profit of $209 million in the second quarter increased 9% year-over-year and 11% in constant currency. Gross margin increased 100 basis points year-over-year to 14.4%. This increase reflects strong sales of software enterprise agreements, higher services sales, proceeds from our $2.2 million insurance settlement, and the higher mix of software maintenance and cloud sales that I just mentioned.
Consolidated selling and administrative expenses were $150 million in the second quarter, up 1% in US dollars and 3% in constant currency. As discussed in our first quarter call, we trimmed approximally $20 million in costs for business in North America in the mid-second quarter and we have begun to see the benefits of that in the results.
Adjusted earnings from operations increased 35% year-over-year to $59 million. On a GAAP basis, earnings from operations also increased 35%. Adjusted diluted earnings-per-share were $0.97. On a GAAP basis, diluted earnings-per-share were $0.96.
Our North America business performed well in the second quarter. Net sales in North America increased 6% year-over-year to just over $1 billion. Within these results, hardware sales grew 8%, reflecting continued strength in demand for client devices as well as server and storage solutions.
Services sales increased 11% year-over-year, reflecting the Blue Metal acquisition we completed last fall, as well as low single digit organic growth. Software sales grew 2%. This growth was impacted by product mix including more cloud sales, but gross profit growth on these sales well outpaced the top line growth, and is the single largest driver of gross margin improvement in the quarter.
Solid topline growth with improved gross margin performance delivered across -- or leaner cost structure led to adjusted earnings from operations growth of 43% in North America in the second quarter. Demand for IT solutions in North America is stable and we believe we're gaining share in key categories. Our team's execution in the second quarter positions us well to deliver on our 2016 operational and financial goals.
In EMEA, net sales decreased 2% year-over-year in constant currency in the second quarter. By client group, double-digit growth in sales to service providers, otherwise known as hosters, was more than offset by lower sales to enterprise clients. By category, hardware sales in EMEA declined 3% in constant currency, driven by lower device and service sales, primarily in the public sector.
Services sales increased 38% in constant currency due to continued focus on license consulting and cloud related services. Finally, software sales declined 3% in constant currency due to a higher mix of software maintenance and cloud sales.
The same dynamic of more netted software sales that I mentioned in North America is also affecting topline software results in EMEA and AIPAC. Our EMEA team drove high single digit growth and gross profit dollars and continued to control expenses which drove adjusted earnings from operations growth of 25% in the second quarter, all in constant currency.
In Asia-Pacific, we're also pleased with our second quarter operating performance. Like in North America and EMEA, we saw a higher mix of cloud sales and software maintenance sales, which drove our reported sales down year-over-year. However, gross profit grew 7% while operating expenses declined 3%, both in constant currency, which led to strong earnings from operations growth year-over-year in the region.
As we enter the second half of 2016, we are excited about our capabilities and proud of the unique solutions our teammates create and deliver for clients every day. This innovation was recently organized by Microsoft at their latest worldwide partner conference when Blue Metal, an Insight company, was named Microsoft's 2016 Internet of Things worldwide partner of the year. We are committed to investing and growing our capabilities around IOT technologies, which is a great complement to our already strong capabilities around data center software, services and cloud.
I will now hand the call back over to Glynis, who will discuss our first half financial results.
Glynis Bryan - CFO
Thank you, Ken. Overall for the first six months of 2016, we were pleased with our consolidated results across the business. Modest topline growth combined with gross margin expansion across our reduced cost structure led to double-digit earnings growth year-over-year in the first half. Consolidated net sales of $2.6 billion in the first half are down 1% compared to the first half of last year, and in constant currency net sales are up 1%.
In North America, net sales increased 3% year-over-year in the first half of 2016 with growth reported across large enterprise, [S&B] and our public sector client groups, due to new client wins and growth with existing customers.
In EMEA, net sales year-to-date are down 6% year-over-year in constant currency as software market conditions in the UK resulted in lower hardware sales for the region and reported software cells have declined due to a higher mix of netted software sales. In Asia-Pacific, net sales are down 5% in constant currency also due to a higher mix of netted software sales.
As Ken mentioned earlier, as clients consume more of their software through the cloud we will see our topline results shift to more sales reported net. In the first half of 2016, we saw this across all three of our operating segments in addition to our typical variances in the mix of license versus maintenance sales. We expect that this trend will continue. I do want to point out that while this will have an impact on our reported topline results, this accounting does not affect the profitability of our software category.
Consolidated gross profit for the first six months of 2016 was $370 million, up 5% in US dollars, and up 6% in constant currency. Gross margin expanded 70 basis points to 14.1% in the first half of this year. About half of this increase is due to a higher mix of software sales reported net compared to the same period last year, with the balance of the increase due to generally higher selling margins in the software category, increased sales of software enterprise agreements, and a higher mix of services sales.
On the SG&A front, consolidated selling and administrative expenses were $296 million, up 3% year to date and up 4% in constant currency. This increase was driven primarily by the addition of Blue Metal to our business late last year, including purchase by amortization, investments in headcount in North America and EMEA, and notably higher health benefit expenses in north America. As discussed previously, we took action the second quarter of this year to reduced our costs in North America by approximately $20 million annually and expect to realize $10 million of this amount in the back half of 2016.
Moving on down to P&L, as a result of restructuring activities completed in the first half of 2016, we recorded severance and restructuring expense of $2.3 million compared to $1.1 million for the same period in 2015. Consolidated adjusted earnings from operations were $74 million in the first two quarters of 2016, up 14% year-over-year and up 16% in constant currency. GAAP earnings from operations increased 13% year-over-year in the first half of 2016.
Our effective tax rate year-to-date through June 30 was 37.7%, down from 38.2% last year. Finally, our share count is down over 2 million shares since the same time last year due to shares repurchased and retired as part of our capital deployment strategy.
All of this led to diluted earnings-per-share on an adjusted basis of $1.17 compared to $0.96 earned in the first half of 2015. GAAP diluted earnings per share in the first half were $1.13, up from $0.93 last year.
Moving on to cash flow performance, cash flow used in operations for the first half of 2016 was $5 million compared to $96 million generated in the first half of 2015. As a reminder, this reduction was in line with our expectations due to a single significant client receivable collected in the fourth quarter of 2015, for which the related payable was paid according to its terms in the first quarter of 2016.
We invested $5 million in capital expenses in the first half of 2016, down from $6.6 million last year. We spent $44 million to repurchase approximately 1.8 million shares of our common stock compared to $86 million during the first six months of last year. In July, we repurchased shares using the remaining $1.5 million of the current share authorization.
All of this led to a cash balance of $175 million at the end of the second quarter, of which $154 million was resident in our foreign subsidiaries, and we had $85 million of debt outstanding under revolving credit facilities. This compares to $176 million of cash and $51 million of debt outstanding at the end of last year's second quarter.
From a cash flow efficiency perspective, our cash conversion cycle was 15 days in the second quarter of 2016, up one day year-over-year due to the relative timing of client receipts and supplier payments in the quarter.
I will now turn the call back to Ken.
Ken Lamneck - CEO, President
Thank you, Glynis. Moving onto our outlook for 2016, we were pleased with our team's execution in the second quarter. I believe we are well positioned headed into the second half to continue to win in the market place and deliver on our commitments to our clients, teammates and shareholders.
Given our first half of 2016 financial performance, we are maintaining our outlook that net sales in 2016 are expected to grow in the low single digit range year-over-year, and we are increasing our adjusted diluted earnings-per-share outlook for the full year to a range of $2.37 to $2.47. This outlook reflects an effective tax rate of approximately 37% to 38%, capital expenditures of $10 million to $15 million for the full year, this outlook excludes severance and restructuring expenses, and a gain on building sale recorded during the year.
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. I will now open up the line for your questions.
Operator
Matt Sheerin; Stifel Nicolaus
Matt Sheerin - Analyst
A couple things from me. First off, obviously you had a very strong quarter across the board. Profitability above expectations. But if you look at your guidance for the year, you are taking numbers up by your midpoint, $0.11 or so, but you basically beat consensus by $0.22, so that implies your operating margins are sort of back below 3% or so for the rest of the year.
Given the trends you are seeing in terms of the netting of the software revenue, increased services, it seems like the gross margins should at least be somewhat elevated. I'm trying to figure out what you are seeing. Is that basically -- would imply that business is going to take a step down or so.
Glynis Bryan - CFO
Great question, Matt, and one we anticipated. I guess what I would say starting off is that we don't give quarterly guidance. So our internal numbers for the second quarter were higher than the street consensus for the second quarter. Similarly, our third quarter is lower than the street consensus for the third quarter.
We gave guidance for the full year, and at the time we gave that guidance for the full year the expectation was that we would be in the middle of that range. When you look and dissect the points in there, at the time we gave the guidance, there was a $2.2 million benefit from a legal settlement that Ken mentioned. At the time we give guidance we were not aware that that was going to be actually received in the second quarter. From an accounting perspective we can't actually record it until it is received, so that was an unexpected benefit that we had in the second quarter that would not continue.
However, the second quarter is our largest quarter in general. It is usually our largest quarter. Compared to last year it was a little bit light because we didn't have a great second quarter in 2015. What drove the results in the second quarter was around software and an over performance significant with regard to software and the increased profitability that we got from software, specifically as it related to cloud [SKUs] being netted and the growth that we had in cloud SKUs.
Cloud today represents around 11% of our gross profit, and that has an impact ultimately in terms of driving to the improved performance around the cloud in this -- around software -- in this particular quarter, given it is the larger software quarter. We are not from our perspective guiding down further remainder of the year. We are guiding consistent with the outlook that we had at the point in time that we gave guidance.
I think we had a conversation then about the third quarter being soft. Unfortunately, we were not clear maybe that was going to be soft from an EFO, from an earnings perspective. I think most people interpreted our comments as a revenue comment. It is true also from a revenue comment but very specifically on a year-over-year basis we are anticipating that the third quarter from an earnings perspective will be down at the EFO line year-over-year. North America in Q3 of 2016 --
Matt Sheerin - Analyst
Your revenue will be down year over year in September?
Glynis Bryan - CFO
Our revenue will not be down year over year in September. Operating profit will be down in 2015. We had extraordinary results, if you remember, in North America last year. Revenue grew 15% and EFO grew 30% and that is not expected to continue to repeat this quarter.
Matt Sheerin - Analyst
Okay. Sure, sure. Okay. You said the addition of 200 salespeople from one of your suppliers, the call centers, I think, was there contributions in revenue in the June quarter, do you anticipate that to increase this quarter? And what is the run rate?
Ken Lamneck - CEO, President
Yes, so, Matt, as we indicated last time it fully came in place and it came in two waves. The largest wave of those folks just joined us a little over two weeks ago. As we indicated, we expect that to be a second half number, so there is really no contribution in the June quarter from the teammates that we acquired there. But we do certainly expect that contribution to start occurring in Q3 into Q4 and beyond.
Matt Sheerin - Analyst
Also it sounds like that also could weigh somewhat on SG&A, in margins, short term, as you obviously make those investments, right?
Ken Lamneck - CEO, President
Yes, we think, as we mentioned last time, that we believe that these are professionally trained salespeople that already have been in place. We believe the GP dollars will be neutral to the SG&A costs here in the second half of the year, is what we have modeled. We believe we will perform to that.
Matt Sheerin - Analyst
Lastly for me, back to the software business, it sounds like your margins have been good there on mix. This is the first time in a while you haven't been talking about margin and basically pricing pressure from your biggest software vendor. Maybe talk about what you are seeing there in terms of the positioning that you have with Microsoft. Then also the margin profile of the cloud related business. Is that a better margin business maybe from an operating margin standpoint? If you could talk about that.
Ken Lamneck - CEO, President
Yes, there's no question I think as you have seen in the channel overall there's been a good acceleration in Q2. As you particularly mentioned, Microsoft is certainly accelerating strongly in the cloud with both their Office 365 platform and Azure. As was mentioned, of course, that comes in as net from a sales point of view. So it is starting to contribute meaningfully to our GP dollars. The cloud revenue, we expect that trend would certainly continue going forward based upon the knowledge that we have.
As far as the stability of the programs that you mentioned, they're the largest software provider. Yes, they look stable from everything that we have here, certainly for the foreseeable 12-month period.
Matt Sheerin - Analyst
Okay. Thanks a lot, Ken.
Operator
Adam Tindle; Raymond James & Associates, Inc.
Adam Tindle - Analyst
Just wanted to specifically drill into the EFO margin piece here, building off of Matt's question. I want to understand why the upside in the 2Q is temporary giving the expense trimming is effectively done. Why aren't we seeing a EFO margin level here?
Glynis Bryan - CFO
You are implying the EFO margin from the guidance that we were giving, is that how I should interpret it?
Adam Tindle - Analyst
For the remainder of the year, for 3Q and 4Q, based on your guidance it doesn't look like we're going to see a meaningful step up in year-over-year growth after just growing 100 basis points year-over-year. Why is that momentum so temporary in the June quarter and why is it not continuing? Given the trends in cloud aren't changing, your expense cutting is done, what is hindering us from continuing to expand EFO margins year-over-year at a meaningful pace throughout the rest of the year?
Glynis Bryan - CFO
Okay I guess the first point I would make is that the margin profile that we experienced in Q2, it's typically the highest margin profile of any one of our quarters, primarily around the impact of software that we have historically had. Also this year in particular, the impact of the netting that we talked about, specifically as we talked about the cloud and the growth of cloud SKUs on a year-over-year basis, that trend, higher netting around cloud SKUs, etc., is going to continue going into Q3. However, software as a percent of our total business in Q3 is not going to be at the same magnitudes, it won't drive the same margin impact on Q3 as it had in Q2.
We believe actually that we will see some margin expansion, gross margin and EFO margin expansion, in the second half of the year, not at the 4% range that we saw in Q2. If you're looking for a 4% number for Q3 and Q4, that is not going to be there, but we do anticipate some margin expansion in the second half. Not necessarily in Q3 because, as I said, we anticipate based on the outstanding Q3 that we had in North America in 2015 that we will see a little bit of degradation in our EFO in 2016 as it relates to North America.
Adam Tindle - Analyst
Okay. On the revenue guidance, I think you have previously talked about low to mid single-digit, and I think it is now low single-digit. I wanted to confirm that it is low single-digit and why that was brought down. Was there any impact from Brexit, or what was contemplated in the number?
Ken Lamneck - CEO, President
It is really strictly the netting impact that we are seeing with the cloud. We are again, that comes in net income versus gross. That is accelerating. That is the only reason. You are seeing hardware grew pretty nicely. I would really focus on the GP dollar portion of that because that is where it normalizes itself. I think you are seeing that, those numbers look fine. That is completely what it is.
In relation to your comment on Brexit, really early to tell on that. I think certainly the quarter performed well. It was too early to have any impact but as we go forward, I mean, the one benefit was the UK did address the government very quickly. I think that added some level of confidence to the government, but we will start to see it play out. The areas we will watch first will be, of course, public sector. As you would expect that to be the most impacted if there is an impact, and that typically happens the first quarter of the calendar year, that's the biggest quarter. But no indications of any real pause at this point in time. Just the confidence levels are something we're watching right now.
Adam Tindle - Analyst
Okay, thank you.
Glynis Bryan - CFO
Adam, I would just add to that on an actual dollar basis, the British pound is down quarter end to quarter end 13% or 15% year-over-year. It is now at $1.32 versus $1.43 or $1.44 that it was this time last year. As we do that conversion, that will have a little bit of an impact also on the revenue line.
Adam Tindle - Analyst
Is the low single-digit guidance in constant currency?
Glynis Bryan - CFO
No, that is actual dollars.
Adam Tindle - Analyst
Okay. All right.
Operator
This does conclude the question and answer session of today's program, as well as the content. Thank you for your participation. You may now disconnect. Good day.