Insight Enterprises Inc (NSIT) 2017 Q1 法說會逐字稿

I'd like to hand the program over to Glynis Bryan.

Thank you, Jonathan.

Welcome, everybody.

I just wanted to give you a quick update that we've just been alerted that our press release has not crossed the line yet.

There's a technical glitch.

And we're going to be probably between 10 to 15 minutes late start of the call while we wait for the press release to cross.

We apologize for any inconvenience, but as soon as it crosses, we will start the conference call.

I just wanted to let you know that up front.

Thank you.

Good day, ladies and gentlemen, and welcome to the Insight Enterprises First Quarter 2017 Operating Results.

(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.

Thank you, Jonathan.

Welcome, everyone, and thank you for joining the Insight Enterprises earnings conference call.

Today, we will be discussing the company's operating results for the quarter ended March 31, 2017.

I'm Glynis Bryan, Chief Financial Officer of Insight; and joining me is Ken Lamneck, President and Chief Executive Officer.

If you do not have a copy of the earnings release, which was posted most recently and filed with the Securities and Exchange Commission on Form 8-K, you will find it on our website at insight.com under Investor Relations section.

Today's call, including the question-and-answer period is being webcast live and can be accessed by the Investors Relations page of our website at insight.com.

And a copy of the conference call will be available approximately 2 hours after completion of the call and will remain on our website for a limited time.

This conference call and the associated webcast contain time-sensitive information that is accurate only as of today, May 3, 2017.

This call is a 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 2017 financial results.

When referring to non-GAAP measures, we will refer to such measures as adjusted.

Adjusted measures discussed today will include severance and restructuring expenses recorded in all periods and the acquisition-related expenses recorded in the first quarter of 2017 as well as the tax effect of these items.

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 highlighted as constant currency, all amounts and gross rates are discussed in U.S. dollar terms.

(technical difficulty) core business exclude Datalink's results subsequent to the acquisition.

Finally, let me remind you about forward-looking statements that will be made on today's call.

All forward-looking statements that are made during 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, 2016, and other reports we file with the SEC.

With that, I will now turn the call over to Ken.

Ken?

Hello, everyone.

Thank you for joining us today to discuss our first quarter 2017 operating results.

I'm pleased to report that we had an outstanding start to the year with record financial results in the first quarter.

Our team delivered double-digit organic sales growth and grossed profit growth across our largely fixed expense base, which drove adjusted earnings from operations up more than 100% year-over-year.

For the first quarter of 2017, consolidated net sales were $1.48 billion, up 26% year-over-year, including both organic growth of 50% and the addition of Datalink to our business beginning January 6.

Net sales in constant currency were up 29%.

Gross profit was at $208 million for the first quarter, up 29% year-over-year and up 32% in constant currency.

Gross margins were 14.1%, up approximately 30 basis points year-over-year, reflecting the positive contribution of Datalink, partly offset by lower gross margin in our core business, driven by a lower mix of fees from software enterprise agreements and lower product margin with large accounts.

Consolidated selling and administrative expenses were $178 million in the first quarter, up 22% year-over-year, including both slight organic growth of 1% and the addition of Datalink.

Strong organic growth in sales and gross profit, combined with effective cost control, led to earnings from operations from our core business of almost double what we reported last year.

In addition, we added Datalink to our business early in the first quarter, which delivered top line results in line with our expectations and was a small positive contributor to adjusted earnings from operations for the quarter, including intangible asset amortization expense.

All this led to adjusted earnings from operations of $30.6 million, an increase of 104% compared to last year's first quarter.

On a GAAP basis, earnings from operations increased 68% to $23 million; and adjusted diluted earnings per share were $0.56, a first quarter record for us.

On a GAAP basis, diluted earnings per share was $0.38.

Our North America business executed exceptionally well in the first quarter, reporting top line growth of 34%, including organic growth of 19% as well as the addition of the Datalink business.

Through new client wins and new projects with existing clients in the first quarter, we gained market share in the data center and software categories while holding our own with devices.

By client group, our strong top line growth was primarily driven by increased volume with large enterprise and public sector clients, while sales to SMB clients grew low single digits.

Gross profit in North America outgrew sales at 42% year-over-year, with gross margins increasing 70 basis points to 14.2%.

The power of strong gross profit growth, combined with significant operating leverage and the modest earnings contributions from Datalink, drove adjusted earnings from operations up 133% year-over-year to $27.3 million.

Our review of hardware market share suggests that Q1 growth across the channel was fueled by demand for devices.

We also grew double digits in devices, but in the data center, we outperformed the market in Q1 in our core business.

Large projects with new and existing clients drove share gains in the server and storage categories.

While we know that large projects can create volatility in our results, we've been gaining share in the data center category consistently over the last year and believe there's additional share available in the future as we begin to realize the power of the Datalink and Insight combination.

As previously announced, we closed the Datalink acquisition in early January.

We immediately began executing integration plans around sales engagement, IT systems and back-office functions.

We have driven the integration across key work streams and functional teams in short readiness for our teammates, partners, clients and systems.

I'm pleased to report that on May 1, we completed the migration of the Datalink business onto our SAP platform.

We're just a few days in and the migration went very well.

We're effectively working our way through the usual short-term challenges and change management issues.

We remain very excited about the long-term potential of Insight and Datalink together.

We believe that our new teammates are engaged and excited to be part of Insight just as we are happy to have them onboard.

We are on track to meet or exceed our expected cost synergies and are seeing early successes in the pipeline of cross-sell opportunities throughout the business.

Moving on to the first quarter results in EMEA.

Net sales increased 20% year-over-year in constant currency in the first quarter of 2017, reflecting double-digit growth in hardware, software and services for the quarter.

Gross profit grew 8% year-over-year in constant currency.

However, gross margin contracted 140 basis points year-to-year due to higher sales to large enterprise clients.

Adjusted earnings from operations grew mid-single digits in constant currency, while on U.S. dollars, adjusted earnings from operations were down 13% year-over-year.

Our EMEA results in Q1 generally met our expectations in constant currency, but we believe there's an opportunity in certain markets to realign our cost structure to match current business volume.

As a result, we took certain cost reduction actions and recorded severance and restructuring expenses in EMEA of $3.5 million in the first quarter.

We do not expect to incur the magnitude of this expense over the balance of 2017.

In Asia Pacific, first quarter net sales decreased 9% year-over-year in constant currency.

During the quarter, we continued to see clients convert from on-premise to cloud solutions in the software category, which, when recorded net, resulted in our reported software sales being down year-over-year.

This decline was partly offset by double-digit growth in hardware sales and the contribution of Ignia, an acquisition completed in the third quarter of last year.

Gross profit grew by more than 20%, reflecting the underlying growth in cloud solutions and higher services sales, which drove earnings from operations up significantly compared to last year.

Across markets where we operate, we continue to see clients migrate key workloads to the cloud.

As a global software provider with strong integration services and application-development capabilities, we're well positioned to help our clients transition to the cloud, offering scale for the needs of our clients that can be customized in a hybrid solution for large enterprises and hosters or standardized and delivered through our public cloud portal for clients in the mid-market.

Today, cloud sales drive approximately 12% of our consolidated gross profit.

With increased demand for as-a-service solutions around devices and infrastructure, we believe our multi-brand portfolio of offerings, strong data center capabilities and long history of supply chain expertise will help us serve our clients well and grow our share in this category.

Finally, the first quarter showed us that the IT industry is stable and continues to represent opportunities for us to achieve growth and share gains.

Our growing cloud, data center and supply chain capabilities, combined with our best-in-class digital marketing platform, are driving increased interest with our clients and partners.

We also remain disciplined from an expense standpoint, with a clear focus on operational excellence and believe we're well positioned to continue to compete and win in the marketplace in 2017.

I'll now hand the call over to Glynis, who'll discuss additional highlights of the first quarter financial results.

Glynis?

Thank you, Ken.

Ken covered key highlights of our excellent first quarter results very well, so I'll use my time to highlight other important factors.

The Datalink business performed in line with our expectations in the first quarter.

We continue to expect this business to contribute approximately $600 million to top line results in 2017.

And as a reminder, Datalink gross margins have historically run around 21% to 22% of net sales.

Also, we expect SG&A as a percent of sales will be just under 20% for the full year, including expected intangible amortization expense of about $12 million and the impact of expected synergies but excluding these acquisition and integration-related expenses.

And as mentioned on our last conference call, we borrowed approximately $200 million to fund the acquisition.

Our current average borrowing rate -- average effective borrowing rate is approximately 3%.

This borrowing was a significant driver of our increased interest expense year-over-year in the first quarter.

In the first quarter, we incurred $2.9 million in acquisition-related legal and professional expenses associated with our acquisition of Datalink.

We also recorded severance and restructuring expenses in North America of $1.1 million, the majority of which was related to plan integration activity.

The bulk of this spending is now behind us.

Our effective tax rate in the first quarter was 26.2% compared to 38.2% in the first quarter of last year.

This decrease was due primarily to the recognition of $2 million of tax benefits on the settlement of employee share-based awards during the first quarter 2017 in accordance with the new accounting standard, which was adopted effective January 1, 2017.

For the balance of 2017, we expect our effective tax rate will be approximately 38%.

Moving on to cash flow performance.

Our operations used $152 million of cash in the first quarter.

As discussed in our last call, our Q1 cash flow results were adversely impacted by the effect of the timing difference between the collection of a single large receivable in Q4 2016 for approximately $160 million, for which the payment to the supplier was due and paid in January of 2017.

Also in the first quarter, we invested $10 million in capital expenditures, up significantly year-over-year due to investments in IT infrastructure upgrade, our global website and our digital marketing platform.

We expect capital expenditures to be between $20 million to $25 million for the full year of 2017.

Also in the first quarter, we acquired Datalink for approximately $181 million, reflecting the gross purchase price of $257 million and the offsetting effects of cash and cash equivalents acquired.

We will -- we did not buy back any stock in the first quarter of 2017, but for comparison purposes, we used $13 million to acquire shares in the first quarter of last year.

All of this led to a cash balance of $184 million at the end of the quarter, of which $154 million was recognized in the form of subsidiaries, and we had $376 million of debt outstanding under our revolving interim debt facility.

This compares to $174 million of cash and $140 million of debt outstanding at the end of -- of the first quarter of 2016.

We did not include a balance sheet and cash flow statement with our earnings release this afternoon.

We will file our 10-K this week with full financial statements.

We're finalizing the changes required to present the Datalink information in our balance sheet and cash flow statement.

This will not have any impact on the P&L or the consolidated cash flow performance I just discussed.

I will now turn the call back to Ken for our outlook for 2017.

Thank you, Glynis.

With respect to our 2017 outlook, for the full year 2017, we now expect our business to deliver sales growth of 15% to 18% compared to 2016.

We're also increasing our adjusted diluted earnings per share outlook for the full year of 2017 to $3.03 to $3.13.

This outlook assumes an effective tax rate of approximately 38% for the balance of 2017.

This outlook excludes severance and restructuring and acquisition-related expenses incurred during the first quarter of 2017 and those that may be incurred during the balance of 2017.

Thank you again for joining us today.

I want to thank our teammates, clients and partners for their dedication to Insight and for the hard work that resulted in our record first quarter.

We're very excited about the quarter and look forward to a strong year.

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

Our first question comes from the line of Adam Tindle from Raymond James.

I just wanted to start on the 2017 outlook, the buildup of the 15% to 18% sales growth year-over-year.

I just wanted to clarify, I think you previously said Datalink was $600 million or 11% and you're reiterating that today?

We're reiterating $600 million, yes.

Okay.

So the new assumption is basically kind of 4% to 7% organic as reported, and currency probably is about a 1% headwind to that?

Yes, I'd say that our base in U.S. dollars is in the mid-single-digit range, and then you layer on Datalink on top of that.

Currency headwind in the first half of the year is a little bit stronger than it's going to be in the second half of the year.

So if you look at the euro and the sterling, in the first half of last year, the sterling was around $1.40-ish and now, it's around $1.22 to $1.25.

And the euro was about $1.13, and it's fluctuated in the first quarter of this year between $1.04 to $1.09.

So there's a little bit of that in the first quarter.

In the first half actually compared to the second half, they will be a little bit more consistent year-over-year.

Okay.

Are you anticipating any slowdown from the ERP implementation inherent in that guide?

And then, Ken, can you expand on the near-term ERP challenges that you mentioned?

How long do you expect those to linger?

That's interesting.

Maybe I wasn't clear, Adam, but actually, the ERP has actually transferred very nicely for us on May 1, so exactly according to our plan of what we stated.

And everything has gone as I stated, very smoothly, in regards to that.

So no, we don't see any concerns there at all.

And actually, it's -- if anything, ahead of scheduled for us, and things are flowing smoothly.

We'll see the normal sort of change management issues as people learn systems but...

Password resets.

It's just very small things.

But the training programs are well under way, and no, we don't expect that will -- if anything, have a positive impact on the performance for Datalink and the business.

So I'm glad you asked that if I wasn't clear on that.

Okay.

And if I may have misheard, I apologize.

Last one for me.

For 2017, I think you're implying EFO margin around 3%.

Can you confirm that?

And what drove the confidence to raise this range given it sounds like I think you mentioned some tough trends in the core business?

Yes, I think we gave the -- the EPS guidance is what we increased, as you saw.

And basically, if you looked at our first quarter results and you flow that through, you'd see that's certainly well performing where consensus was.

So if you flowed that through, you saw that we increased the guidance on the EPS range from where it was previously to $3.03 to $3.13.

Is that what you're asking specifically about EFO or was it...

Yes, I was trying to dig into the inherent margin assumption in that.

I guess, are you -- so I was thinking that you'd probably get to about a 3% EFO margin on that and was wondering if you had any partner program changes that have impacted you in the past baked into that number.

In the guidance that we've given, any of the partner program changes that we know about are included in the numbers that we have provided.

The 3-ish percent range is plus or minus 10 basis points, correct -- in the range.

Our next question comes from the line of Aman Gulani from the B. Riley & Co.

I just wanted to get a bit more color on the Datalink acquisition synergies.

I know you said you fully integrated a couple -- 2 days ago.

Do you expect to realize more -- maybe $10 million in synergies for the remainder of the year?

Yes.

It's $10 million to $12 million, Aman, is what we expect that we'll actually see this year.

And then it'll be a total of $20 million by the end of next year, and so we're well on track to achieve that.

Our next question comes from the line of Matt Sheerin from Stifel.

So just on the guidance, and you're guiding the Datalink business in line with your previous guide in terms of top line.

Given that you've done the SAP integration, it seems like perhaps sooner than expected, will you be generating some SG&A or OpEx savings ahead of schedule?

And is that partly the reason for the better guide for the margins for the year?

I would say it's really met it's -- it's $10 million to $12 million, what we've sort of modeled, so maybe a little towards the higher end of that number is what we're expecting for this year.

So getting a little bit earlier than we had expected, but it was pretty much in accordance with our plan was, maybe a little bit earlier.

So that's not a huge impact, but certainly, well in line to be able to execute and deliver those cost synergies of the $10 million to $12 million.

So very much in line with that.

So no, I don't think that had an impact.

I'd say, the core business, as you saw, the organic growth was pretty significant in the core business, so that had the biggest impact, of course, of us increasing our guidance for the year, was based upon the core business, both in North America as well as in Europe and Asia Pac.

And Matt, just another little point of clarification maybe is that they launched -- the system go-live for Datalink, the migration is consistent with the timeline we had internally.

It is not early for us.

We had a May 1 timeline internally, and we've hit that time line, so it is consistent with what we anticipated delivering around that systems integration in the guidance that we gave.

Okay, great.

And looking at -- I mean, I know that the seasonality of your business changes somewhat because Datalink is somewhat less seasonal in terms of the swings quarter-to-quarter, particularly given your exposure on the software side.

But looking at last year, you had a couple of, I know, one-off sort of benefits from customers, big customer projects and orders, I know, in -- at least in the June quarter that sort of threw things -- actually gave you benefits that weren't repeated.

Do you have any visibility in terms of some of those programs where you may see any of that, whether it be the next quarter or sometime this year?

We have visibility with -- pretty good visibility into the second quarter with regard to our expectations about results in the second quarter, so we feel pretty confident with the -- our internal forecast as it relates to the second quarter and perceive that we are going to be -- we will show some year-over-year growth in the second quarter associated with the results that we posted last year.

We have less visibility as we go throughout the year.

And so when you look at the guidance that we gave that got you to the $3.03 to the $3.13, it is primarily based on flowing through the benefit that we saw -- that we got in Q1 that was over and above our expectations, and then Q1 -- Q2 being -- visibility that we currently have with regard to what we anticipate happening with the large projects.

We sometimes look out and have large products repeat or have new customers that come in that also deliver significant projects for us in subsequent years as well as our view for what's going to happen towards the rest of the year.

It's a relatively strong IT market is what we would say.

And our large customers are buying IT, and that's what we're seeing in our results.

Okay.

And so are you then expecting your operating profit then to increase year-over-year against very tough comps last year in the June quarter?

It's a very specific question and we're not going to answer it.

Okay, okay, fair enough.

And -- but the -- so maybe, Ken, you can address the -- some of the operating issues in Europe.

I know you're seeing good growth in constant currency, but certainly lower gross margin because of the mix of business.

And you talked about taking costs out there, and I know it takes a while before you realize those costs in Europe.

But maybe walk us through how that plays out in terms of your margins and any margin targets that you have for the European business.

Yes.

So it's -- I'll address and then Glynis can chime in.

So yes, I mean, the sales growth, obviously, you saw was pretty -- 20% constant-currency growth, so really solid there.

A few big deals brought down the gross margin related to some large software enterprise agreements and some large hardware deals lowered the margin there for it, but certainly, good growth on the top line, and obviously, growth year-over-year on the earnings line as well.

But we looked at it.

We said, "Hey, there's a couple of markets where there's some inefficiencies." So we've taken that very specific action, so I think you should see that model with the $3.5 million will probably occur (inaudible) over the next -- certainly, with -- some of it's already been done this quarter, but you should start to see that pretty much work its way through at the end of the quarter.

Right.

But I just want to remind you that when we take charges in Europe, in general, the benefit that we get from the charge is not typically recovered in the first year.

So we took a $3.5 million charge, the benefit that went to (inaudible) getting (inaudible) on an annual basis is $2 million.

So most of that benefit, we're not going to end up seeing in 2017.

We will see that more in 2018, just to level set expectations.

You'll see a little bit of it in the second half, but primarily, you'll see the benefit of that in 2018.

And it's roughly a 2-year payback on that.

Okay.

And then, Ken, just on the strength you're seeing on the hardware side, in CDW, you talked about seeing an acceleration in terms of corporate PC refresh.

What do you think's driving that right now?

Yes, I mean, I think it's -- there's been a lot of good innovation, actually, in the product categories when you look at the partners, which, I think, has been lacking for a bit.

So I think you've seen some really good products at some very, very attractive price points, and so I think that's certainly accelerating.

A lot of the need, as people go through the migration, it's become very attractive for people to continue to upgrade devices.

But yes, that continues to grow, and it has been a pretty consistent grower in double digits.

And as we track the NPD data very carefully every week, we held our own, but it was definitely a double-digit growth in the marketplace, and we held share there, but I think everybody's seen the benefit of that continued growth.

And it's been pretty consistent for -- I'd say, for the last couple of years.

It's very interesting.

But we're seeing people go to this sort of a 3-year sort of life cycle, refresh cycle, and it occurs on a continuous basis now.

There isn't sort of one sea change like there used to be of a new process or a new operating system.

Companies now basically do this on a very sort of repetitive basis now, do -- "core to the organization every year" kind of a thing.

So I think that's what's leading to this continued growth there.

(Operator Instructions) And this does conclude the question-and-answer session as well as today's program.

Thank you for your participation.

You may now disconnect.

Good day.