Insight Enterprises Inc (NSIT) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Insight Enterprises Fourth Quarter and Full Year 2017 Operating Results Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host for today, Ms. Glynis Bryan, Chief Financial Officer.

You may begin.

Thank you.

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

Just for your reference there's slides that we have posted on the website associated with the call today, so you may want to look at those and follow along as we go through with the script.

Today, we will be discussing the company's operating results for the quarter and full year ended December 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 that was posted this afternoon and filed with the Securities and Exchange Commission on Form 8-K, you will find it on our website at insight.com under our Investor Relations section.

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

An archived 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, February 14, 2018.

This call is the property of Insight Enterprises.

Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Insight Enterprises is strictly prohibited.

In today's conference call, we will refer to non-GAAP financial measures as we discuss the Fourth Quarter and Full Year 2017 Financial Results.

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

Adjusted measures discussed today will exclude severance and restructuring expenses and acquisition-related expenses recorded in all periods.

Adjusted measures will also exclude the loss recorded in the third quarter of 2017 on the sale of our business in Russia and the gain on the sale of real estate assets recorded in the second quarter of 2016 as well as the tax effects of these items.

Finally, adjusted measures will also exclude the income tax expense recognized as a result of the U.S. federal tax reform laws enacted in December of 2017.

You'll find a reconciliation of these adjusted measures to actual GAAP results included in the press release issued earlier today.

Also, please note that unless highlighted as constant currency, all amounts and growth rates are discussed in US dollar terms.

Additionally, any references to our core business or the organic change year to year in our performance will exclude Datalink's results subsequent to the acquisition.

Also you will notice a change in the presentation and our press release issued earlier today.

As services have become a larger portion of our consolidated net sales at just under 10% for the year ended December 31, 2017, we've changed our income statement presentation to reflect net sales and related cost of goods sold separately to products and services.

For comparability purposes, our net sales and cost of goods sold for the 2016 period have been conformed to the new presentation.

I will discuss these changes in more detail in my prepared comments later on the call.

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

All forward-looking statements 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 subsequent reports we file with the SEC.

For those following along, we will now move on to Slide 4. And with that, I will turn the call over to Ken.

Hello, everyone.

Thank you for joining us today to discuss our fourth quarter and full year 2017 operating results.

For the fourth quarter of 2017, consolidated net sales were $1.8 billion, up 22% year-over-year, reflecting organic growth of 12% and the addition of Datalink, which we acquired on January 6.

Net sales in constant currency were up 19% year-over-year.

Gross profit was $233 million in the fourth quarter, up 22% year-over-year and up 19% in constant currency, with gross margins increasing 10 basis points year-over-year to 13.1%.

Consolidated selling and administrative expenses were $185 million in the fourth quarter, up 27% year-over-year, reflecting the addition of Datalink, a 9% growth in our core business.

Adjusted earnings from operations increased 5% to $48.3 million.

On a GAAP basis, earnings from operations increased 12% to $45.5 million, and adjusted diluted earnings per share was $0.81.

On a GAAP basis, diluted earnings per share was $0.39, which includes a one-time charge relating to the recent United States federal income tax changes.

Glynis will cover that in more detail in just a few moments.

Our fourth quarter results reflect strong close to a very good year.

I'm also very pleased with the results for the full year of fiscal year 2017.

Consolidated net sales were $6.7 billion, up 22% year-over-year in US dollars and in constant currency, reflecting organic growth of 13% as well as the addition of Datalink.

Gross profit was $919 million in 2017, growing faster than sales at 24%, which drove gross margins up 20 basis points to 13.7% for the full year.

Consolidated selling and administrative expenses were $723 million in 2017, up 24% in 2017, reflecting the addition of Datalink and 4% -- or 5% growth in our core business.

Strong organic sales growth in our core business in 2017 combined with the addition of Datalink and tight cost management across the business led to an increase in adjusted earnings from operations up 24% year-over-year to $195 million.

On a GAAP basis, earnings from operations increased 20% to $179 million.

And finally, adjusted diluted earnings per share topped $3 for the first time in Insight's history, coming in at $3.24 for the full year.

On a GAAP basis, diluted earnings per share was $2.50.

On to Slide 5. Within our consolidated results for the fourth quarter, our North America business reported 30% top line growth year-over-year, including organic growth of 17% and the addition of Datalink to the business.

In the hardware category, growth was fueled by demand for client devices and higher service sales, while in the software category, cloud, office productivity and storage-related software solutions were in higher demand.

By client group, we saw a strong growth across our key client groups of large enterprise, SMB and Public Sector clients with particular strength in large enterprise clients.

Gross profit in North America in the fourth quarter grew 31% and adjusted earnings from operations increased 17% year-over-year.

As we look back at our North America business for the full year in 2017, we're pleased with all that we accomplished.

We completed the acquisition of Datalink on January 6, 2017 and completed the IT systems and back-office integration activities by mid-year.

We realized expense synergies ahead of our expectations and we're pleased with the overall financial results of the business and its first year as part of Insight.

We also added just over $1.2 billion to our top line in North America in 2017, including 17% year-over-year organic growth, driven by higher volume from new and existing clients and the addition of Datalink, which reported $524 million in net sales for the year.

In our core business, hardware sales grew 26% for the year, gaining market share across North America from competitors, according to third-party data and reflecting strong growth in data center solutions as well as devices.

We currently expect the device refresh cycle to continue to drive demand in the first half of 2018.

From a profitability perspective, gross margins in North America in 2017 increased 10 basis points year-over-year.

The effect of higher gross margins in the Datalink business were partly offset by lower margins on sales to large enterprise clients and lower services sales in our core business.

And combined with tight expense control across the business, adjusted earnings from operations in North America increased 30% year-over-year to $161 million.

Moving on to Slide 6. In EMEA, net sales decreased 6% year-over-year in constant currency in the fourth quarter of 2017 and adjusted earnings from operations were $8 million, down from $10 million last year, primarily driven by results from the Russia business in the fourth quarter of 2016 that were not replaced in 2017 following the sale of that business in the third quarter of 2017.

For the full year of 2017, in constant currency, our EMEA business grew top line by 2% and gross profit by 4% compared to 2016, executing well on its base business while continuing to transform to a leading cloud and solution provider across the region.

As part of this strategy, we invested in technical pre-sales and service delivery team aids focused on cloud technologies and grew our services sales by 15% for the full year, and were named #1 in Microsoft Azure consumption in the region for 2017.

In addition, in the third quarter of 2017, we completed the acquisition of Caase, a cloud solution provider located in Netherlands, which will further enhance our technical capabilities around Office 365 and Azure in the region.

On Slide 7, in Asia Pacific, fourth quarter net sales decreased 22% year-over-year in constant currency.

During the quarter, software sales to Public Sector clients declined, primarily due to the timing of a single client agreement, which is the largest driver of the year-to-year decline in earnings from operations.

For the full year of 2017, our Asia Pacific business was challenged by growth and earnings from operations as double-digit gross profit growth was more than offset by higher operating expenses.

This increase in operating expenses was due to our investments to support cloud and services sales in Australia, which we expect will improve our growth trends in 2018.

Moving on to Slide 8. Late in 2017, we reorganized our sales and service delivery go-to-market structure to optimize the market opportunity around solution areas that our clients and partners care the most about.

We adopted this in North America first, but then quickly rolled it out to our EMEA and Asia Pacific businesses as well.

We have defined our solution areas as supply chain optimization, Connected Workforce, Cloud and Data Center Transformation and Digital Innovation.

The Supply Chain Optimization solution area helps clients manage their technology assets and logistics more efficiently.

The Connected Workforce solution area helps improve productivity and collaboration within a client's workforce, including as a service models.

The Cloud and Data Center Transformation solution area helps clients optimize and modernize their data center strategy on-premise or in the cloud.

And the Digital Innovation solution area leverages innovative applications to improve clients' business performance and uncover new revenue streams.

Next on to Slide 9. Moving on to our 2018 operating plans.

The IT industry is healthy and growing.

More than ever clients are challenged to efficiently manage their day-to-day IT operations while they leverage technology to transform their business to bring value to their own clients.

In fact, our 2017 Intelligent Technology Index found that 85% of respondents see the company as an IT company at heart, where IT is not just about internal costs but about driving added value for their clients.

We have a full suite of solutions that we have developed over time and acquired through recent acquisitions, which positions us well to provide value to our clients' technology journey and to continue to compete in the marketplace.

Across the markets where we do business, industry analysts expect flat to low single-digit growth in hardware sales in 2018 and mid-single-digit growth in software and services sales.

Our plans for 2018 are focused on driving growth in excess of the market across our operating segments.

As we head into the new year, our operating priorities are clear.

Our business is healthy and growing; in 2018 we will focus on accelerating the momentum gained over the last few years.

To do this, we will leverage our 4 solutions sales strategy areas to simplify our value proposition, align to our client needs and organize resources to target key areas of market opportunity.

At the foundation of our business is supply chain optimization.

We have decades of experience serving as a trusted adviser to our clients, helping them efficiently manage their day-to-day IT operations.

On the hardware front, endpoint devices are alive and well.

How clients access and interact with devices is changing.

We also continue to be Microsoft's largest partner globally, but how clients consume software technology is expanding.

These are just a few of the changes that will be a journey for our partners and our clients over the next few years.

In 2018, we will celebrate our 30th year in business and will focus on helping our clients continue to manage their existing IT assets smarter, while also building offerings to meet their evolving needs.

To that end, our Connected Workforce solution area is focused on delivering next-generation consumption offerings for our core business.

As the service consumption models are gaining traction in the marketplace and with our hardware and software DNA, our offerings are well positioned to help clients consume this technology more flexibly.

In 2017, we won our first large as a service device deployment with the state of Kansas.

And we look to accelerate growth of these offerings in the commercial space in 2018.

Next, helping clients manage workloads smarter in a cloud world is at the core of our Cloud and Data Center Transformation solution area.

In 2018, we will focus on this next phase integration and optimization of Datalink as part of our North America business and Caase in EMEA, both of which are core to our Cloud and Data Center Transformation solution area.

Datalink's technical sales and delivery resources will directly target hybrid cloud and data center opportunities across our combined client base.

Moreover, in EMEA, we will work to scale our data center services sales, include the cloud consulting and managed services offerings added with the Caase acquisition as well as our existing modern workplace and license management services.

Finally, we will invest in additional technical and development resources to allow us to expand our offerings in the digital innovation solution area and allow us to share repeatable intellectual property generated across our footprint.

In APAC, we'll also expand our geographic footprint for digital solutions by continuing to invest in the sales and delivery teams in Sydney and Melbourne, Australia.

Wrapped around our new go-to-market structure is a continued focus on driving operational excellence across our business.

In 2018, we will focus on profitability across every deal and every category.

We have launched initiatives around order processing, procurement, pricing review and partner program execution to better optimize our deal-level profitability.

We also are looking at robotics process automation and business intelligence solutions to help us manage our back-office processes and data sharing more efficiently.

And as Glynis will discuss shortly, our cash conversion cycle was higher than our internal targets and expectations in 2017, and we will make this a key priority for our team in 2018.

Finally, we will continue to invest in our digital marketing platform and our cloud and e-commerce platform.

In 2017, we implemented a new marketing tool set that brings multiple data sources together to create personalized experience for clients who interact with marketing generated activities.

These tools leverage machine learning, predictive modeling and artificial intelligence making a gain in efficacy over time.

In 2018, we'll also complete the implementation of a new client health service experience in Insight.com aimed at cloud subscription products and services.

I'll now hand the call over to Glynis, who will provide more details around certain elements of our financial results and revised financial presentation.

Thank you, Ken.

Starting on Slide 10, Ken covered most of the financial results for the [deal].

So I'll cover our new income statement presentation of products and services, cash flows, taxes for 2017 and the impact of the recent U.S. federal tax reform and the changes in revenue recognition effective in 2018.

On Slide 11, let me start with the income tax statement presentation -- with the income statement presentation.

Under SEC rules, a company must report services sales separately from product sales on the face of its income statement, when sales of services exceed 10% of consolidated sales.

We changed the presentation on our income statement for the year ended December 31, 2017, as our services sales were approximately 10%, and we expect services to continue to grow over time.

In the new presentation, we will report costs -- sales and cost of goods sold separately for products, which include hardware and software and for our services in our earnings releases and public filings and our 10-Qs and 10-Ks.

For comparability purposes, in our earnings release today, net sales and cost of goods sold for the 2016 period have been conformed to the new presentation.

Please note that this change in presentation has no effect on previously reported total net sales, total cost of goods sold or total gross profit amounts.

In conjunction with this change, certain fees earned from activities recorded on a net basis are considered services under U.S. GAAP.

We've reclassified certain revenue streams for which we act as an agent in the transaction to services net sales.

Previously, we included these revenue streams within the software, and to a lesser extent, hardware sales mix categories based on the type of products being sold.

For example, net sales and gross profit earned through the sale of software maintenance and cloud software products were included in software sales and represented on a net basis in our financial statements.

We will continue to report these sales on a net basis, but they will be reported in the services line of business.

For the year ended December 31, 2017 and '16, these streams whereby net sales equals gross profit on the transaction and thus are 100% gross margin was $210 million and $178 million of our total sales respectively.

We will post a schedule that provides the quarterly breakdown of this new presentation against our 2015, '16 and '17 results, and believe this may be helpful to shareholders and analysts, specifically as it relates to mix and seasonality between quarters.

Moving on to Slide 12 for a discussion on cash flow performance.

As Ken outlined earlier, net sales grew 22% in 2017 and, in particular, our North America business grew 30% or $1.2 billion.

This level of growth required significant working capital investment as we have an inverted payment cycle with our vendors versus our customers.

In addition, we experienced high demand for inventory positions with key clients and our account receivables balances got ahead of us.

For the year ended December 31, 2017, our operations used $305 million of cash, down from a $96 million of cash generated in 2016.

These results reflect the collection of a single large receivable of approximately $160 million in the fourth quarter of 2016 post the payment to the supplier was due and paid in January of 2017.

In the fourth quarter of 2015, we had a similar experience at a $60 million receivable collected in that quarter, which the payment to supplier was then made in Q1 of 2016.

Another item to note is that we report the cash flow associated with trade payables financed under inventory financing facility in the financing section of our statement of cash flow.

In 2017, and most notably in the fourth quarter, we expanded the use of that facility with certain vendors.

Had we not leveraged the facility, our cash flows associated with trade payables would have been included in the operating section of our statement of cash flows.

Accordingly, our use of cash from operations would have been lower than the $305 million reported by approximately $141 million.

In 2018, we expect to generate between $100 million to $140 million in cash flow from operations, slightly higher than the previous range that we have given.

Moving on to cash -- moving down to cash flow statement, in 2017, we also invested $19 million in capital expenditures, up from $12 million in 2016, reflecting higher investments in our core ERP systems and our e-commerce and digital marketing platform.

We also spent $187 million to acquire Datalink and Caase in 2017 compared to just $10 million used to acquire Ignia in 2016.

We did not buy back any stock in 2017.

But for comparison, we used $50 million to acquire shares in 2016.

As noted earlier, we expanded the use of our inventory financing facility, which generated $141 million in cash flow for the year, up from $49 million last year.

As you may recall, this is a trade payable facility used for specific partner purchases in the ordinary course of business.

All of this led to a cash balance of $106 million at the end of 2017, of which $87 million was recognized in our foreign subsidiaries and $309 million of debt outstanding under our debt facility.

This compares to $203 million of cash and $40 million of debt outstanding at the end of 2016.

From a cash flow efficiency perspective, our cash conversion cycle was 35 days in the fourth quarter of 2017 versus 14 days in 2016.

2016 results were below our target range of 20 to 25 days as a result of the unusually high DPO associated with the $160 million payment timing difference I discussed earlier.

2017 results are above our target range due to increases in inventory and accounts receivable balances.

We expect working capital trends to normalize to levels -- to return to normalized levels and have action plans in place in 2018 to improve our cash cycle for the full year.

Please note that there are no collectability issues with our accounts receivable.

Next I want to notify you that this week, our Board of Directors approved an authorization to repurchase up to $50 million of our common stock.

Subject to market conditions, we will commence this program during 2018.

However, the guidance we're giving today does not include -- does not include the impact of this program as we will monitor market conditions over the coming months.

We plan to update you on our first quarter earnings call regarding our progress and expected EPS impact for the year.

On Slide 13, moving on to taxes, for the full year of 2017, our effective tax rate increased to 43% compared to 39% in 2016 due primarily to the effects of the U.S. Tax Cuts and Jobs Act that was enacted in 2017, which led to the recognition of approximately $13.4 million in additional income tax expense in 2017.

These additional taxes were primarily related to the remeasurement of our deferred tax balances and certain withholding taxes.

As we head in to 2018, we expect our effective tax rate will be between 27% to 28% for the full year.

This includes the 21% U.S. federal component, state income taxes, the impact of limitations of the deductibility of certain expenses and interest expense among other changes related to the U.S. federal tax reform, and also the effective earnings in our foreign subsidiaries.

Before I hand the call back over to Ken, I wanted to update you on insight's adoption of the new earnings recognition [status] issued by the Financial Accounting Standards Board.

On Slide 14, a substantial amount of work has been completed.

And while our evaluation will continue through to when we publish our first quarter results, we currently believe that the changes overall will not lead investors to fear operating trends materially different than as reported in prior years.

A few things will change, however, primarily related to sales reported net and the timing of recognition of certain revenue streams.

A few highlights are as follows:

The renewal of -- the accounting for renewals of certain term software license will change to delay revenue recognition until the beginning of the renewal period.

Under current guidance, we recognize revenue as the renewal order is completed.

We do not believe that this will have a material effect on our sales or profitability trends as it's typically a few days difference between the two.

In sales transactions for certain security software products that are sold with related third-party delivered software maintenance, we will change to report both the software license and the accompanying software maintenance on a net basis as the agent and the arrangement.

In 2017, we estimated that we had approximately $240 million of lead sales reported on a gross basis that in future periods would be recognized net.

This will lead us to report lower net sales in future periods and it's reflected in the guidance we issued today.

This change would have no material effect on gross profit dollars, but all other things being equal, gross margin would increase compared to prior year.

The accounting for inventories not available for sale, otherwise known as bill-and-hold arrangements, will change such that a portion of revenue will be recognized earlier than we are recognizing under current accounting standards.

Bill-and-hold arrangements are inventory balances owed and paid for -- owned and paid for by the client, but for which we are warehousing the product, and will be deployed to the client's location in a future period.

At December 31, 2017, we had $37 million of these inventory balances on our balance sheet.

I'll now turn the call back to Ken for his closing comments and we are now on Slide 14.

Moving on to our outlook for 2018.

For the full year 2018, we expect our business to deliver sales growth in the low single-digit range compared to 2017.

We also expect adjusted diluted earnings per share for the full year 2018 to be between $3.90 and $4.

This outlook assumes the effects of our adoption of the new revenue recognition standards effective January 1, 2018, an effective tax rate between 27% and 28% and capital expenditures of $15 million to $20 million.

This outlook does not include the completion of our recently authorized share repurchase program or any severance restructuring or acquisition-related expenses.

Thank you, again, for joining us today.

We want to thank our teammates, clients and partners for their dedication to Insight and their contributions to a record year for our business.

We're excited to see what 2018 brings and well positioned to compete and win in the marketplace.

That concludes my comments and we'll now open up the lines for your questions.

(Operator Instructions) Our first question comes from Matt Sheerin of Stifel.

Just a few questions here from me.

Just first, so, Ken, on the revenue guide for the year, low single digits.

So as you say, if you add back the $240 million, then you're looking sort of mid-single-digits.

Because in your opening commentary, you sounded like you felt like this would still be obviously off of very tough comps last year with that big upgrade cycle.

But it sounds like you still think there is some refresh left.

And then it sounds like on the Enterprise side, in terms of solutions, cloud, et cetera, there is some pretty strong demand there?

Yes, you're exactly correct on that and all those comments, Matt.

So we would expect, yes, if you took an account for the recent change there on the software -- security software having to be netted would be in the mid-single-digit range for growth for 2018.

Okay.

And then on gross margin and it looks like just that accounting move will maybe add, I don't know, 20 to 30 basis points of gross margin.

But I would think excluding that you would think, given that there is going to be a slowdown at least some point, at least in terms of comps on the client device side, that you'd be seeing more solutions selling and services, which would also boost gross margin?

Is that a correct assumption or not?

Yes, Matt, that is a correct assumption.

We anticipate that we will have some gross margin expansion beyond the security -- the impact of the security netting effect.

Okay.

And just sort of extending that one step if I may, on the operating margin side though if you back into your guidance with the tax rate, it looks like you're guiding maybe 10 to 20 basis points improvement in operating margin.

I would think with the last big step with the Datalink integration and then the focus on solutions selling that you'd see a little bit more operating expansion, so -- margin expansion.

So what am I missing there?

We are getting the benefits in 2018 of the incremental $6-million-ish associated with Datalink.

We also probably have a little bit of currency impact in there potentially, as I think about it.

We're on the higher end of your 10% to 20% range in terms of EFO expansion as we think through that.

And as we think about the solution areas, there are couple key investments that we're making in 2017 related to positioning ourselves around the cloud and the e-commerce platform that Ken talked about in his opening comments -- that are P&L based, not necessarily capital, but also P&L based.

Got it.

Okay.

And just one other thing with the higher solutions, you're also going to have -- pay higher commissions, right?

So the SG&A would also commensurately rise with that, right?

Yes.

Our next question comes from Adam Tindle of Raymond James.

Ken, just as you reflect on 2017 and what enabled the double-digit revenue growth for the full year, on an organic basis.

Can you just parse out how much of this is cross-selling with Datalink?

How much is a strong market?

And then maybe just help us with the $524 million for Datalink versus your initial expectations?

Not sure if there was maybe some gross versus net debt played out there?

Yes.

No question, 17% was certainly above market.

We track the third-party NPD data pretty closely.

So certainly indications are that we grew share.

And we grew share specifically in product sets such as devices, which were strong overall, but we grew faster than the market did in devices and also in the data centers.

So grew very strongly with servers and storage devices.

On the connotation of Datalink and how much did that participate, we really didn't start that activity because the first real 9 months are focused on make sure we integrate it, don't break anything kind of a concept.

And then in Q4, we really started to say how do we integrate Datalink more into the traditional Insight clients.

And as you know, those are pretty long design cycles.

So we're pleased with what we're seeing, and we definitely expect to see some pick up there in 2018 from that activity.

So your last question was around Datalink around the $524 million.

So yes, there was, as you remembered, when we first took on Datalink, there was a netting from our accounting practices that we originally took into consideration when we brought it in a year ago into the business, so that had certainly an impact.

And there was -- I would say that the scenario that we probably could have done a better job on, we could have probably grown the top line sales pretty well.

We were very pleased with the gross profit generation.

And we were pleased with the services business there, but there were some -- probably some product sales maybe initially that we left on the table there initially with Datalink.

But overall, as I said in my comments, very pleased with how Datalink's coming to play and really now being fully integrated, and we're able to now, with the Datalink account, start to sell a lot of the traditional sort of supply chain business as far as devices, software, that they didn't sell and then vice versa, using those great architects that they have into the traditional Insight clients where we maybe weren't as penetrated in the data center solution area.

So that's coming into play pretty nicely in 2018.

Okay.

That's helpful.

I also wanted to touch on gross margin, particularly in North America.

I think ex-Datalink, it's probably still somewhere in the 11%, 11% to 12% range.

I know you've been establishing the relationships with the large customers.

Can you just maybe talk about some of the moving parts impacting gross margin in North America?

And on the comment about an uptick in 2018, in gross margin, is that -- I mean I know the conversion of 606 is going to add like 50 basis points based on what it was in 2017.

If we were to strip that out is gross margin ex the accounting change still going to be up as well?

Yes, Adam.

So we do anticipate that gross margin ex the accounting change is going to be up 10 to 20 basis points over -- for North America in particular and that kind of translates as well at the [IEI] level ultimately.

So that's the expectation that we have for 2017 -- 2018, sorry.

2017 was impacted by a couple of very large clients that we've talked about on prior calls with regard to business that we were doing a land and expand strategy around.

2017 was a land year.

We knew what we were doing when we went into those accounts.

We had a significant revenue growth piece associated with that.

That revenue growth is continuing into 2017 -- '18, but we're expanding the capabilities that we do with those clients such that we'll generate greater margin coming out of those clients.

And that was a part of the strategy that we were executing against in 2017 and we'll see some of the benefit of that going into 2018.

Datalink performed well from an overall gross margin perspective.

We're anticipating that that performance will continue and that they will have growth this year, whereas, they didn't meet our growth expectations quite so much for last year for some very good reasons, but they didn't quite meet our growth expectations.

So with we will have higher growth.

And devices were a very significant driver of revenue last year and it's also the lowest product -- lowest margin product within our portfolio.

And this year, we do expect device growth to continue, but not at that same pace.

So we expect to see just naturally some rationalization of the gross margin associated with that.

And one of the things we talked about was the underperformance of our core services operation in 2017, and we think we're seeing some indications from bookings, etc., that's going to be stronger going into 2018.

And at that higher gross margin that will also help us ultimately as the mix of the portfolio changes in 2018.

Okay, that's helpful.

Maybe just one last one for Ken on the decision to authorize a buyback at this point.

It would seem like Datalink has overall gone well and, given the market is so fragmented, there would be more of those opportunities out there.

And maybe this doesn't preclude you from pursuing that, but maybe just talk about the trade-off that you and the Board considered when deciding to do the buyback authorization now?

I think a good question, Adam, and certainly I agree with you: We don't think it precludes us at all.

So we're constantly always looking for opportunities that make sense to expand our portfolio both from a scales point of view as well as scale where it makes sense.

So we don't believe at all that the $50 million buyback would preclude us from engaging and considering other opportunities in the market.

So we definitely took that into consideration.

Right.

And just to add on to that, Adam, we have the $50 million authority and we're just going to evaluate market conditions, et cetera, with regard to when we execute that.

We have up to $50 million and we can be selective as to when we execute that for 2018.

That's why it's not included specifically in the guidance at this time.

(Operator Instructions) Our next question comes from Kara Anderson of B. Riley FBR.

Most of my questions have been asked.

But are you seeing any evidence of expanding IT budgets from excess capital to deploy under tax reform?

I don't think that to-date we've seen that.

We have an expectation or maybe an anticipation that that would happen because they get some accelerated deductibility under the new laws going forward.

They get deduct it from a tax perspective so it's a cash timing benefit that they get.

But to date, we haven't seen any acceleration of that coming through from our very large clients to date.

May be a little early as they're kind of working through their budget considerations as well, but we haven't seen that yet.

And to be fair, they have it over the next 5 to 10 years, I forget if it [unzips] at 5 or if it continues through 10 years, but we do still have that benefit anytime over the next at least 5 years that we can accelerate that.

And we do have a follow-up from Matt Sheerin of Stifel.

Just a couple more from me.

One, on the -- if you look at some of the competitors, Ken, they did talk about some supply chain bottlenecks on the networking and storage side that kept them from closing deals in the quarter.

Did you see any of that?

And then in terms of the memory component environment, it looks like we're starting to see signs at least of some ASP stability if not erosion and capacity coming online.

And what kind of impact is that having on your business?

Yes.

So Matt, yes, the networking and the storage side, we actually -- certainly we were aware of it.

We seemed to work through it pretty well for our client set.

So there was a few deals certainly that would have happened in the quarter that have shifted into Q1, but nothing of material nature for us.

Our teams really work well together in regards to support our clients.

So we feel we're in pretty good shape, but it wasn't anything that was significant that we would have called out for our business.

On the memory component side, yes I mean you're on top of that certainly with the portfolio of products that you track pretty well.

And certainly that's had a pretty significant impact in the ASP increments for devices over the last 2017 and into 2018, which is why our comments were that we -- all the data we have shows that that looks like that's going to pretty much hold through the first half of the year.

We don't know what the second half will bring.

Meaning will people start to compete and lower memory prices and could that actually translate into lower ASPs for devices that we sell, we're not really sure yet.

But to date, it's -- the supplies were managed well through those increases, and of course, we pass those increases on.

We think for our business, it's probably -- the ASP impact of capacitors and memory type device increases is probably about 7% in total for the device itself.

So it's had a meaningful impact on, I think, the revenue increases that we've all seen for devices over 2017 and we think into the first half of 2018.

Okay.

And I appreciate you don't give guidance for the first quarter and just for the year.

But last year, you came out of the blocks, obviously, very strong, much better than seasonal with that big client device upgrade.

Are you seeing more seasonal trends as we go into Q1 here?

I mean, that's what basically most of your competitors are saying.

Yes, I would say so.

I think you're correct in that regard.

I think there is -- on the device side, I think, there is, which I think it actually should stabilize to some degree is that Win 10 has not been fully adopted by any means.

And I think clients will continue to adopt Win 10 in their environments and that's going to lead of course to device upgrades.

The security aspects are so relevant to everybody that there is a lot of good reasoning to upgrade to Win 10 in the marketplace, and we see clients doing that in a measured way, they're not rushing to do it, but we see it in a measured way, which I think should -- we see as an important element for our sales for devices for 2018.

And ladies and gentlemen, this does conclude our question-and-answer session.

Thank you for participating in today's conference.

This concludes today's program.

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