Good day and thank you for standing by. Welcome to the Insight Enterprises First Quarter 2022 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Glynis Bryan, our CFO. 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 quarter ended March 31, 2022. I'm Glynis Bryan, Chief Financial Officer of Insight; and joining me is Joyce Mullen, President and Chief Executive Officer. If you do not have a copy of the earnings release, or the accompanying slide presentation 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 archive 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 5, 2022. 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 2022 financial results. When discussing non-GAAP measures, we will refer to them as adjusted. You will find a reconciliation of these adjusted measures to our actual GAAP results included in either the press release or the accompanying slide presentation issued earlier today. Also, please note that unless highlighted as constant currency, all amounts and growth rates discussed are in U.S. dollar terms. As a reminder, all forward-looking statements that are made in 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 periodic reports and subsequent filings with the SEC. All forward-looking statements are made as of the date of this call and except as required by law, we undertake no obligation to update any forward-looking statements made on this call, whether as a result of new information, future events or otherwise. With that, I will now turn the call over to Joyce and if you're following along with the slide presentation, we will begin on Slide 4. Joyce?

Thanks so much, Glynis. Hello, everyone and thank you for joining us today. It is my pleasure to report our performance for the quarter. We delivered a record Q1 for revenue, gross profit and adjusted diluted earnings per share. Year-over-year net sales grew 21%, adjusted earnings from operations grew 31% and adjusted diluted EPS grew 39%. With supply constraints somewhat easing for devices, hardware net sales grew 27% year-over-year which was higher than expected. Product demand remained healthy and hardware backlog bookings grew faster than sales, resulting in another sequential increase in our ending backlog. The demand for our services business is also healthy. Bookings grew over 20% in Q1 and we expect strong double-digit bookings growth to continue in Q2. Our Cloud business continues to perform well with gross billings growing more than 20% year-over-year. These points demonstrate clients are looking to Insight to provide more services than ever as inflation and labor shortages have increased their focus on digital transformation and automation projects. We're proud of these results and even prouder of the Insight teammates who work tirelessly to meet our clients' needs and expectations. As CEO, it is my privilege and responsibility to assemble a world-class leadership team, a team that will drive the transformation required to accelerate our vision of becoming a leading solutions integrator. To that end, I am extremely pleased that we have added 2 stellar executives to our leadership team. First, Dee Burger joined us on May 2 as our President of North America. Dee joins us from Capgemini, where he led the North American business. With nearly 30 years of experience, Dee is a customer-centric leader and has a proven track record of building and delivering new services to customers, including Cloud and digital applications, AI and cybersecurity. Dee also has incredibly…

Thank you, Joyce. As Joyce mentioned, we're certainly pleased with our record results for the first quarter. We saw stronger-than-expected hardware net sales and continue to have elevated backlog, leading to record financial results in the quarter and positioning us well for the rest of the year. Our consolidated results can be found on Slides 8 and 9. Net sales in the first quarter were $2.7 billion, up 22% in constant currency and up 21% in U.S. dollars compared to the first quarter of 2021. Product net sales grew 22% year-over-year, driven primarily by hardware net sales which grew 27%. Services net sales grew 14% year-over-year, primarily driven by Insight delivered services. Gross profit of $379 million increased 14% over the prior year quarter and gross margin was 14.3%. Gross margin decreased 80 basis points over prior year, primarily driven by expanded hardware growth and more specifically, growth in devices. Product gross profit increased 18% year-over-year, driven by growth in sales of devices, as I mentioned and services gross profit increased 10% year-over-year. Our Cloud gross profit for the trailing 12 months ended March 31, 2022, was flat compared to prior year at 18% of consolidated gross profit. And our services gross profit was 49% of total gross profit on a trailing 12-month basis. SG&A expenses were up 11% year-over-year in constant currency and up 10% in U.S. dollars. As a percentage of net sales, both adjusted SG&A and SG&A GAAP basis were 11% versus 12% in prior year quarter. Adjusted earnings from operations was $90 million, up 31% year-over-year also up 19% on a GAAP basis to $80 million. And our adjusted diluted earnings per share was $1.81, up 39% versus $1.53 per share on a GAAP basis, an increase of 30%. Moving on to the results for each…

Thanks, Glynis. In closing, I would like to thank our teammates for their commitment to our clients, partners and each other, our clients for trusting Insight to help them with their transformational journeys and our partners for their continued collaboration and support in delivering innovative solutions. Insight is off to a good start in 2022. Despite the economic uncertainties, demand is strong and we're optimistic about our ability to expand our solutions business and deliver even more value to our clients as they modernize and transform. This concludes our comments and we will now open the line for your questions.

[Operator Instructions] Your first question comes from the line of Matt Sheerin from Stifel.

Yes. First question just regarding the strength that you saw in the quarter, particularly for client devices. Joyce, it sounded like you said that supply is starting to open up. Is that even in the enterprise level devices where we've seen shortages for a while now? And it also sounds like your backlog is up. So would you expect a better than seasonal June quarter because of that?

Yes. Thank you, Matt. Yes, we do expect to see pretty strong device demand and frankly, hardware demand continue through Q2. And in fact, we expect because the supply chain has opened up a bit for devices. We will see good invoicing on hardware devices also in Q2. In the back half of the year, we have really, really tough compares on devices. So we would expect growth in the 4 devices in the back half of the year to be a bit more muted but we would expect to start shipping more infrastructure and networking gear in the back half of the year. And that supply chain is not quite as healthy. So we expect infrastructure and networking supply constraints to persist through the first half of 2023.

Okay. And in terms of the backlog that you're seeing, is that also on the infrastructure side which gives you confidence in seeing that turnaround or that step-up in the second half?

Yes. Our infrastructure backlog is at record levels -- multiples of record levels. So yes, absolutely.

Okay. And then regarding gross margin, I mean, I understand the mix issue and why the gross margin was down year-over-year. And it sounds like Glynis was talking about maybe similar gross margin profile this quarter due to the mix. Is that the case? And what should we think about gross margins for the year? Would you expect it to be flat or down from last year?

We would expect gross margin to be flat for the year but we do expect gross margins to be compressed a bit in Q2 as well because of the strength of the device mix that we're seeing.

Okay, great. And just lastly, just regarding your OpEx, you're seeing very nice leverage there. There's also a lot of inflationary pressures on all businesses, particularly keeping good talent. Could you talk about your labor pool and any pressures that you're seeing on the cost side?

Yes. So first of all, our services business is strong and bookings were pretty strong. And we've had pretty good success retaining our teammates. We attribute a lot of that to 2 things, the strength of the culture that we talk about all the time and also the interesting work that our teammates get to do in helping our clients. So retention has been reasonable. I mean it's slightly elevated from previous years but nothing like the industry, so we're happy about that. We're also very actively recruiting, of course, at all times and we have seen some -- for some types of jobs, we have seen some wage increases for sure. But I'd say overall, we've been able -- inflation has not played a huge part in our results at all. So we're able to pass that on to our clients but it's been not very significant in the aggregate for either -- on either the product side or the services side.

Your next question comes from the line of Anthony Lebiedzinski of Sidoti & Company.

Yes. So I just wanted to clarify. So it sounds like the -- overall, the sales growth was more unit volume-driven versus pricing, right? Is that fair to say?

Yes, yes. There was significant volume increases that we saw in the quarter. And I think that there were some ASP increases as well. I'm not going to say they weren't but it was primarily more volume driven than it was rate driven.

Got it. Okay, that's great to hear. And then as far as your regional performance, should we expect North America to continue to outperform the other 2 smaller regions here as far as -- I just wanted to get a better sense as to what's embedded in your guidance?

APAC had a great quarter. APAC had a great first quarter, albeit small but they did have a great first quarter. Yes, we would anticipate that North America is going to continue to outperform but each region will contribute in the guidance. So Europe, while the margin was somewhat depressed there, EFO expansion was good.

Got it. Okay. And then have you seen any notable impact from the lockdowns in China as far as the impact on your business?

Well, supply chain constraints, as we mentioned, for devices have been -- have loosened a bit. The supply chain, I would say, though, is still a bit unpredictable, Anthony. So -- and even for devices. So we're not really sure ever exactly when we're going to get what. But we have seen that improve from a device point of view. The supply chain has gotten worse for infrastructure and specifically networking products. Some of that has, certainly, China doesn't help. The lockdowns in China don't help.

Your next question comes from the line of Adam Tindle from Raymond James.

I just wanted to ask on the backlog portion. You talked about obviously supply getting better in devices. But is there a way for us to think about the size of the backlog in the devices versus the data center stuff? And I think kind of the heart of the question is if we ultimately get through the device backlog because supply is really easing, is there enough in data center to fully offset that and continue to carry us through or would backlog significantly shrink?

So I guess if you look at the, just the industry in general, our backlog is weighted like the industry. So it's more heavily weighted towards devices. However, on a year-over-year basis, as Joyce mentioned, our backlog around networking and infrastructure is up significantly on a year-over-year basis. But I don't want to say that, that backlog would be larger than the device backlog. It's not. But it's up significantly versus what you would expect there. So I think that as devices continue to flow through, we're not seeing that necessarily device backlog is going to decline. We grew 35% in Q3 of 2021 as an example. We're expecting to grow in the low to mid-single digits in 2020 -- Q3 of 2022. So we still anticipate that devices are going to be in our mix. It's just not going to be the 30-plus percent growth that it has been in Q1.

Okay. And that comment for Q3 was for total company because I'm just also trying to get the shape of the model for the year? You obviously raised the forecast for the full year and it's lower than [indiscernible].

By that comment on the backlog, I was talking more specifically to North America which is where the bulk of the backlog is. Sorry.

Okay. Well, maybe we could tackle the shape of the year because the raise for the full year is more than just the beat in Q1 and I'm just trying to think about what kind of growth rates given, as you mentioned, you're facing tougher comparisons as the year progresses. Do we stay in sort of the high-teens level in Q2 and then go closer to mid to high single digits in the back half? Or is it more smooth than that? Just any sense of getting our models in shape from a linearity standpoint through the year.

Yes. I think that growth in Q2 is going to be high, not as high as it was in Q1. The model is more weighted towards growth in the first half of the year -- teens -- high teens, potentially in the first half of the year. And then the second half of the year, it's going to be in that mid-single-digit range. That's the, that's our assumption with regard to -- because of the high comps that we have relative to Q3 and Q4.

Okay, makes sense. And maybe just one for Joyce. Some of the changes that you've made internally, you talked about consolidating services and presales obviously, now adding on to the team. Are there any further changes that you're anticipating under these tenure? And what are kind of the key marching orders and KPIs?

Well, Dee just started on Monday. So I don't know if he's had a chance to figure out what kind of changes he's going to make yet. But certainly, his experience in solutions is one of the reasons why he's here. And we would expect to accelerate our solutions, the momentum that we see in our services and solutions business as a result of his expertise and his guidance and leadership for sure. I don't know when exactly, Adam, that's going to happen, so -- but that's the whole point, right? We've got to sell a whole lot more solutions and services and that's the plan.

I guess I have high expectations.

So do I. We'll let you know.

On services, I mean, like some of the data points that you're going quickly here but I was trying to jot down. Obviously, it's lagging hardware sales growth. That's somewhat understandable because hardware sales are so astronomical right now but they are lagging. I think you said TTM Cloud gross profit dollars were flat. I think that was as a percent of mix. You talked about a decline in agency fees and net sales just like the couple of things that are -- that you're seeing challenges in the services business, a little bit more specifics on what Dee can potentially do and some of the challenges or opportunities that you see?

Yes. I mean I think we're really quite happy with our services bookings rate. So we see good momentum there. We did have some tough compare, a really large deal in Q1 of last year that has made the comparison for this quarter a bit tough on the services gross profit line and the growth line but we are really happy with what we're seeing. And so -- and the demand continues unabated. So we like the momentum we're seeing. We like kind of the mix that we're seeing. Demand was strong for Insight delivered services bookings more than -- it was up more than 20% and across all major areas, including consulting, Managed Services and professional and life cycle services. So we -- I guess, the momentum in the last quarter has given us a lot of confidence. And then the client demand and the need for Managed Services is higher than ever given the labor issues. So we're feeling pretty good. And growth -- Cloud gross billings were up 22% year-on-year and up 24% for the trailing 12 months. So that's also given us some confidence.

Got it. One last one for me. Glynis, is just a quick clarification. Does the EPS guidance consider anything with the convert and warrants outstanding? I think we're kind of near or close to strike price for converting those. Maybe you could remind us of that and if guidance contemplates any additional dilution.

So no, the guidance does not include any additional dilution associated with that convert. We are evaluating what we're going to do with our convert as we move on from here. The price is -- $103.12 is the price and it would have to stay at that level -- likely would occur in Q2 -- stay at that level for 20 consecutive days of over 30 average over quarter. So we are looking at that -- actively looking at that and what our alternatives are? But none of that is contemplated in the guidance at this point.

Your next question comes from the line of Vincent Colicchio from Barrington Research.

Yes. Joyce, I'm curious on maybe your thoughts on the economic outlook? And are you seeing any signs of economic weakness in any of your geographies or verticals?

So thanks, Vince. So far, we are not. And we're pretty proud of the organic growth that we're seeing sort of across all verticals and all segments. So we're starting to hear some hints from our OEMs that there's slight, some concern around consumer demand. But we're not -- we don't participate there and so that's not impacting us. But we're watching that carefully. So -- but we have not seen any sort of pullback at all so far. I think I heard one customer say, "hey, we're taking a look at kind of our spend in the second half of the year," but that's one customer out of thousands so far. So knock on wood but so far, it looks strong.

And on the services side, how would you expect the growth to ramp which quarter should be strong as moving forward for the balance of the year?

So our bookings have been strong for the last 4 quarters, where we would expect to see that translate going through the year. And I think you'll start to see just because of the difficult compares on the hardware side, we'll start to see services growth to be equal or higher than product growth in the back half of the year.

And ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.