Ladies and gentlemen, thank you for standing by, and welcome to the Insight Enterprises First Quarter 2020 Operating Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Glynis Bryan, Chief Financial Officer. Thank you. Please go ahead.

Thank you. 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 ended March 31, 2020. 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 morning and filed with the Securities and Exchange Commission on Form 8-K, you will find it on our website at insight.com under the Investor Relations section. Today's call, including the question-and-answer period, is being webcast live and can be accessed via the Investor Relations page of our website at insight.com. An archived copy of the conference call will be available approximately two hours after 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 7, 2020. This call is the property of Insight Enterprises. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Insight Enterprises is strictly prohibited. In today's conference call, we will refer to non-GAAP financial measures as we discuss the first quarter 2020 financial results. When referring to non-GAAP measures in today's call, we will refer to adjusted earnings from operations, adjusted diluted earnings per share and return on invested capital. You will find a reconciliation of these non-GAAP measures to our actual GAAP results included in the press release and the accompanying slide presentation issued earlier today. Also, please note unless highlighted as constant currency, all amounts and growth rates discussed are in U.S. dollar terms. Additionally, any reference to our core business or the organic change year-to-year in our performance will exclude PCM results subsequent to the acquisition on August 30, 2019. 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 most recently filed annual report on Form 10-K and periodic reports subsequently filed with the SEC. With that, I will now turn the call over to Ken and if you're following along with the slide presentation, we will begin on Slide 4. Ken?

Hello, everyone, and thank you for joining us today to discuss our first quarter 2020 operating results. As the COVID-19 health crisis began to accelerate in the first quarter, we were impressed by the swift response by government officials across the globe and inspired by the unrelenting commitment to help others by health care workers and first responders. At Insight, when presented with this crisis, our first step was to focus on the health and safety of our teammates and their families. Very quickly, we successfully deployed more than 10,000 teammates across the globe to work from home positions while we also ultimated protective measures at our core operating facilities. At the same time, we focused on supporting our clients' immediate IT needs as they navigated the rapidly changing business environment. Lastly, we focused on our strategic plans to optimize our performance in these uncertain times and position our business to compete as well as the market recovers in the future. The demand for IT solutions evolved throughout the quarter. We experienced increased demand for work from home and collaboration solutions as companies deployed their workforce to respond to shelter-in-place mandates. This increased demand drove hardware sales up mid-single digits year-over-year in our core business, although certain sales were delayed to future quarters by continued supply constraints by chip manufacturers. By industry, what we experienced in our business was generally consistent with commonly perceived trends. Health care institutions and schools to need new technologies to support hospital intake procedures and to enable remote learning for students. Airlines, hospitality and cruise lines pulled back on planned projects as they evaluate future demand in their businesses. And in mid-market, clients moved quickly to enable their workforce to be productive to defend their revenue streams as the macro trends began to shift in…

Thank you, Ken. As Ken noted earlier, we're pleased with our global team's execution in the first quarter in these unprecedented times. On Slide 9, we believe we're healthy with a strong balance sheet and access to capital and that we have the right team to guide us through the macro uncertainty facing us in 2020. We ended the first quarter with about $750 million of debt outstanding under our revolving ABL and our convertible notes and had $53 million of cash on hand. We generated strong cash flow in Q1 and paid down the ABL by $110 million, ending the quarter with $460 million outstanding under the ABL, and we have eligible accounts receivable to support access to the maximum availability under the $1.2 billion facility. During the quarter, we're comfortable with our current leverage position at less than 2.3 times debt to cash flows or EBITDA. We're also comfortable with our covenant performance under our debt agreement as of 3/31. Our primary compliance covenant is a fixed charge coverage ratio under our ABL agreement, which includes trailing 12 months EBITDA coverage over capital expenditures, taxes and cash interest. As of March 31st, we're at 3.8 times on a 1 time minimum requirement. We believe we're reasonably leveraged today. In addition, our cash cycle is inverted, meaning we pay our partners on terms shorter than we receive from our clients, which allows us to drive more cash flow when sales are declining. As a result, we expect cash flow generation in 2020 could exceed our previously guided annual range of $180 million to $200 million, and our priority for cash in 2020 will be to pay down our debt balances. Lastly, we will defer the start of the build-out of our new corporate headquarters and also any further repurchases…

Thank you, Glynis. We remain committed to our long-term priorities discussed at our Analyst Day last fall, which include: continuing to innovate in order to capture share in high-growth areas, such as the cloud and the intelligent edge; developing and delivering solutions that drive better business outcomes for our clients; expanding and scaling our business to strategic clients and end markets; and lastly, continuing to optimize client experience and our execution through relentless focus on operational excellence. For the remainder of 2020, we believe the overall IT market will be challenged given the current COVID crisis and the adverse impact on the global economy. We believe we have a resilient team, a strong balance sheet and access to capital to meet our operating requirements during these times. And we're confident that our solution areas expertise will allow us to support our clients' most pressing needs in this environment and when the economy rebounds in the future. Thank you again for joining us today, and thank you to all our teammates across the globe for their support of our company, our partners and our clients. Be safe, and we look forward to talking with you again later in the summer. That concludes my comments, and we'll now open up your line for your questions.

Thank you. [Operator Instructions] Your first question is from the line of Adam Tindle with Raymond James. Please go ahead. Your line is open.

Okay, thanks. And good morning. Ken, I just wanted to start with the comments on demand, expected to decrease significantly. Largely, it seems like a lot of companies in different areas of the supply chain and OEM level specifically have spoken to stabilization or slight improvement in April versus March. The market has rallied. But you're not alone, most of the borrowers that are closest to the customers are all seeing worsening trends. So I'm just trying to understand why there would be a difference between the two? And maybe more specifically, is the weakness that you're seeing specifically in work from home areas and that demand waning? Or is it accelerated weakness in things that were already worse in late March?

Yes. Thanks, Adam. Yes. When we look at the current environment, as we said, we look at our bookings, of course, on a daily basis. And certainly, the booking trends that we're seeing are certainly down significantly from March run rates, as an example, into April. The things that we're seeing, of course, is that we all know we, most of us, of course, had elevated backlog coming out of Q1 because we couldn't get all the products we wanted, mostly on the device side of the business just due to supply constraints due to the high demand that we experienced late in Q1 because of COVID. We believe that much of that will be fulfilled by the end of Q2 within this quarter as the manufacturers, the Dell's, the Lenovo's, the Apple's, the HP's and so forth, are really doing a good job in gearing up to make sure they can deliver to that demand in Q1, I'm sorry, in Q2 that was left over from Q1. So we think that will take care of itself. We're not really sure what happens at the device as far as the second half of the year is concerned in that regard because there's no question there was elevated demand due to COVID-19, and how much of that is being fulfilled now and how much of that will bleed over into the second half is still an uncertain time. But certainly, the trend we're seeing, of course, is the world is moving more from desktops to notebooks, which is a positive for us longer term because they're higher ASPs. There's better attached to notebooks. And of course, the refresh cycle is shorter for notebooks longer term. So we think that is a positive for all of us in the industry longer term…

Yes, that's helpful. I just wanted to maybe see if we could get a little bit more color on the magnitude of the word significantly. I think a lot of competitors and private companies are talking about down north of 20%, 25% to 35%. Is that kind of the ballpark that you're seeing?

Yes. We would say certainly, slightly north of 20%, certainly is the number we're seeing.

Very helpful. And then are you seeing, you talked about monitoring this on a day basis and constantly. Is there, it's probably a little bit early to call, but are you seeing any second derivative improvement where that decline is starting to recover a little bit? Or is kind of the next day worse than the previous day?

Yes. Still early to tell on that. So we're, again, watching it closely, but certainly north of 20% is what we're experiencing. A little more in hardware than software.

Got it. Maybe just zooming out to a big picture question. Ken, just talk about structurally the competitive landscape and how you see that changing as this unfolds? We know you're in a very fragmented industry. A lot of smaller players. What structural changes are you thinking about? Do you think we emerge with an industry that's more consolidated? Why or why not?

Yes. I think certainly, we'll continue. We have been experiencing certainly some consolidation. We've been part of that consolidating effort ourselves, as you know. But as far as the small competitors, they're a resilient bunch. I came from the distribution side, so I know how resilient they really are. So we'd never take them for granted. Although I do see some things that are changing structurally in the industry where there's no question that the whole world is going to become more digital from this experience we're going through. Everybody has recognized it's just how important it is to become more digital. I do think that favors the larger players because we've made big investments in our e-commerce engines, we've made big investments in digital marketing engines. Those are probably difficult things for real small players to invest in at this point in time. So I do think that does favor some of the larger players in the industry. But again, I would never underestimate the resiliency of the smaller competitors and how they shift and move. So we'll see how that plays out. But we're certainly going to continue to invest in our whole digitization effort as we think that certainly advantages us, and it's what our clients are going to demand.

Makes sense. One last one for either Glynis or Helen. I just wanted to touch on cash flow. That DSO was up 12 days year-over-year. I know mix can distort that at times, and you talked about some of the things going on there. But I guess the question would be, if you could just maybe touch on the health of the receivables, what kind of aging or other metrics that you can provide to give us a sense of the health of that and then expectations for bad debt, if any?

Good question, Adam. Thank you. So what I would say is that we don't have any expectation about degradation in the portfolio from a delinquency perspective. We do expect, and we have experienced it towards the end of Q1, extended payment terms, either requested by our clients or just enacted by our clients. So that had a little bit of an impact on Q1. But the other thing on Q1 is the PCM receivables position, they have a higher past due balance as a matter, of course, in their business, than we're accustomed to here at Insight. So that is still impacting us. And I think we may have said in Q1 that in, on the fourth quarter, when we gave our guidance at the beginning of the year, that we expected that, that will continue throughout this year. So if you look at our business and you go back to 2009, we didn't see significant deterioration or degradation in our receivables portfolio then. We had 1 large client that we took a charge for in Q4 of 2009, and then we recovered that in the second quarter of 2010. But on average, if you look at the portfolio back then and the portfolio today, given the kind of larger corporate enterprise distribution that we have, we don't anticipate seeing any degradation in our overall portfolio. And we have a mechanism that we have in place to monitor some of the smaller, not smaller, but the mid-market clients that we received from PCM. So we feel pretty comfortable with the strategy we have in place around monitoring our receivables, a prudent process around extending payment terms to clients based on the volume of business they do with us and the profitability of that business they do with us and helping them through what could be a crisis time for them now. But on a very prudent judicious basis has to come all the way up the hierarchy to get approved in that instance.

Your next question is from the line of Matt Sheerin with Stifel.

Yeah. Thank you and good morning. Just a couple of questions for me. Could you give us the PCM contribution of revenue in the quarter? I think you talked about core growth, but could you give us the PCM number if you have that?

Yes. Matt, thanks for the question. It's pretty challenging because as we've talked about, we've integrated the businesses. So there were a lot of clients, of course, that -- not a lot, but there were certainly some clients that were joint. And those are all -- now it's one sales team, it's one sales organization. So we've assigned all those account books and so forth. So all that's flowing through the system as one. So breaking out the business to that sort of magnitude to give you a precise number is not possible. But as we indicated, the core business overall did certainly grow for us in the quarter. But trying to get that granularity, unfortunately, as we integrate it quickly, which is what we wanted to do, we lose all that visibility.

Okay. I appreciate that. And then just following up on Adam's question just regarding demand and what you're seeing. In terms of the at-home, it sounds like most of your clients have situated themselves with the right products and services. But it sounds like there's also some backlog moving into the June quarter, but it sounds like orders overall are down in the June quarter. So I guess the question is, heading out of the quarter, can September even be worse given that the client device rush that you may have seen in part of this quarter is already played out and then the larger projects continue to get pushed out. What's your sense of how this may play out to the extent that you have any visibility?

Yes. I think a lot of it, Matt, so much depends upon the shelter-in-place. I think if that continues in the current situation, I think that could play out that way. Certainly, we're seeing that is loosening up. Austria and Germany are starting to come back to work. Ohio is coming back to work. Arizona shortly will start coming back to work. As the states start to release this, I think we start to get a little bit more normalcy back into the business, whereas today, I think it's strictly been a shelter-in-place. So I think that's probably the biggest thing that we're watching, and that could certainly change the demand picture, as we all know, because a lot of these projects have been delayed and pushed. And as you know, in IT, difficult to do that for a long period of time without somehow impacting your business. So I think that'll be the key catalyst for us to watch.

Okay. And then just looking at the gross margin, and I appreciate that you're not giving specific guidance, but you had very strong gross margin in the March quarter. And when you think about the mix of business in June, should we think about it kind of flat on a year-over-year basis or still up with the PCM contribution? What should we be thinking about that?

We would envision that with PCM, there's still going to be some improvement in gross margin. I think when we gave guidance for the full year, we said we anticipated maybe 20-plus basis points improvement over the entire year, all of them as being equal coming from PCM. So we would still anticipate that their margins are at a higher rate than ours and that we would still see that coming through in Q2. Remember, Q2 is also our big software quarter and lots of netting. So that helps us as well, too, in Q2.

Yes. I guess, within that, one thing that could change for the worst would be missing rebate, various rebate programs with your OEM partners if revenue is lower. Ken, have you been, are you in the process of renegotiating terms of those kind of programs? Or is that a potential near-term negative before that evens itself out?

Yes. No, I think you're correct, Matt. I think the partner community has been, has certainly been very agreeable and we're working with them, but there certainly is an element to volume. No question. Much of that, of course, is tied to volume. So where we've seen the partners become very flexible in a lot of their approaches. If the volume is significantly down then, of course, it does certainly impact the supplier reimbursement or rebates that we would obtain that will affect the whole channel, as you know.

[Operator Instructions] Your next question is from Paul Coster with JPMorgan.

Ken, you talked a little bit about digital innovation and trends around cloud and SaaS and security and service and collaboration and so on. And I was just trying to understand, are all of these given a boost by the work-from-home-phenomenon? Or are there certain things that you'd like to call out that you think have really been given extra momentum and have changed the IT kind of landscape permanently?

Yes. Good question, Paul. I think there's no question, there's a few areas. The cloud, of course, got acceleration both in the SaaS and an IaaS point of view, we've seen that across the board. You saw Microsoft results as well, very positive. So no question that, that is going to continue to grow and gain momentum and probably be even faster. The collaboration solutions that we mentioned, of course, we're all relying on them. There's, on any given day, you're probably on four different collaboration, five different collaboration platforms to communicate and conduct meetings. So certainly, Microsoft Teams, Cisco Webex, we see them very, very strong and doing incredibly well in the marketplace. And I think that will continue as, many companies were using it, but it wasn't really critical to their business. And now I think they realize it's an essential part of their business as they go forward. And of course, as I mentioned earlier, the movement towards higher powered notebooks to make sure that experience at home is good. You're going to see, certainly, I think, more people adding little things like accessories, headsets and better displays to attach to their notebooks when they're using them at home and so forth. So I think that's going to certainly be an impetus going forward. And then security, as I mentioned, is critical for everybody. The cyber attacks are up dramatically, the phishing attacks we see every single day. So I think the investment in security is certainly a longer-term trend as well that will continue. So all areas that, I think, as you indicated, will, or not just here for the short run, but I think for the longer term as well.

A follow-up. In '08, '09, you obviously navigated the downturn, and this one is burned from that, that you'll exploit this time around.

Yes. I think it's certainly making sure that your balance sheet is strong, it's been consistent across both of these recessions. This, of course, being more of a health crisis than a financial crisis, and that's a little harder for us to even understand what the long-term implications might be. And if there is any kind of recurrence in the fall, that could be a problem for all of us. And of course, it's affecting the global economy. This one is certainly going to have probably a bigger impact on small business because of its long-lasting effect than the others, and it's, this one actually is favoring sort of the larger sort of enterprise clients, which is positioned well for us because that's where a lot of our concentration of the business is in larger enterprise clients. So that probably helps us a bit as we get through this. But I think yes, definitely, the bigger impacts will certainly be on small business going forward. So we're all watching and monitoring that. But it all depends on how long this lasts, of course.

Lastly, this connected platform that you've put together, it sounds really interesting, but do you think it can be material? Have you developed a pipeline already for that offering?

Yes. We've seen tremendous interest in it for any companies, any organizations that have any kind of concentration of people whether it be theme parks, whether it be stadiums, whether it be warehouses that people have. Anywhere there's concentration, we're seeing very, very big interest actually. How that basically gives us order rates and so forth, that's still to be determined. And that'll be certainly an update that we'll have probably next quarter. But we're certainly seeing tremendous interest and access to all C-level folks that are very interested in these type of solutions now at this juncture. So pretty excited about that.

This concludes our Q&A portion of today's call. This concludes today's call as well. So please go ahead and disconnect. Thank you for participating today.