Ladies and gentlemen, welcome to the Insight Enterprises, Inc. Fourth Quarter Full Year 2022 Earnings Conference Call. My name is Glenn, and I will be the moderator for today's call. [Operator Instructions]. I will now hand you over to your host, James Morgado, SVP Finance and CFO in North America, to begin. James, please go ahead.

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 and full year ended December 31, 2022. I'm James Morgado, Senior Vice President of Finance and CFO of Insight North America. Joining me is Joyce Mullen, President and Chief Executive Officer; and Glynis Bryan, Chief Financial 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 also 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 9, 2023. 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 be referring to non-GAAP financial measures, as we discuss the fourth quarter and full year 2022 financial results. When discussing non-GAAP measures, we will refer to them as adjusted. You'll find a reconciliation of these adjusted measures to our actual GAAP results, included in both the press release and 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 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 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?

Thank you very much, James. Good morning, everyone, and thank you so much for joining us today. It is my pleasure, to report that we ended 2022 with an outstanding fourth quarter that topped off a record-setting year. For 2022, we delivered record net sales, gross profit, gross margin, adjusted EFO and adjusted diluted EPS, and we ended the year with positive cash flow from operations of $98 million. These are stellar results, in a volatile macro environment. For the past year, we have articulated our focus on delivering differentiated value for our clients. Improving and scaling our solutions offerings and enhancing our technical expertise in the areas where we know we excel. And while there is no finish line in this race, I feel great, about the progress we've made so far. Our clients choose us because we help them improve and transform their businesses and achieve the outcomes they need. This is evident from our record-setting results this year, and in fact, we outpaced the global IT market across all categories: Software, including cloud; services; and hardware. The foundation of our services business is based upon long-standing relationships, and understanding of the outcomes our clients need and what is required to make them successful. We deliver this through our deep technical expertise, which has led to record performance in Insight core services with gross profit growth of 14% for the year. We are still in the early stages of executing against our long-term strategy, but the progress we made in 2022 propels us forward, in pursuit of becoming the leading solutions integrator. We outlined the strategy at our Investor Day last fall. And as a reminder, there are 4 key pillars underpinning that strategy. First, captivate clients. This is a people- and outcome-focused business. We plan to drive…

Thank you, Joyce. As Joyce mentioned, we delivered record results for the year as we continued our journey to become the leading solutions integrator, despite the challenging macro environment. I'd like to start with some comments on our 2022 performance. Every year does not play out like this one, but 2022 was a year of 2 halves. The first half had very strong net sales growth of 22%, fueled by exceptionally strong devices growth in the high 30% range against a weaker first half of 2021. In the second half, net sales were essentially flat across better second half 2021 performance, but we achieved higher gross margin and positive cash flow from operations. In the second half of 2022, our operations generated cash flow of $540 million, leading to positive cash flow from operations of $98 million for 2022. As we have discussed previously, when hardware sales decelerate, we spin off significant cash flow. Our performance in the second half of 2022 is an excellent illustration of this. Our net sales performance in 2022 reflect our execution, volatile market conditions and the easing of supply chain issues that began in 2021. Although we have essentially flushed our device backlog, we still have significant backlog in networking and infrastructure, going into 2023. As we have previously discussed, we're on a multiyear journey, and we're in the early stages. In 2022, we started assembling the building blocks around sales transformation, portfolio optimization, our differentiated value proposition related to offerings and our technical talent, and our profitability initiatives to accelerate gross margin and EBITDA margin expansion. We are not finished with our efforts in these areas, but our performance to date is meeting our expectations. The slide presentation today includes details on our Q4 and full year 2022 performance for the 3 geographic…

Thank you, Glynis. 2022 was a record-setting year and we are thrilled with our results. And Q4 showed encouraging progress toward our goal. There are significant headwinds driven by the macroeconomic environment, but we believe our broad portfolio of solutions provide us with the resiliency to navigate any economic cycle. We are well positioned in the fastest-growing areas of the market. We are laser focused on execution and building momentum towards our ambition to become the leading solutions integrator. We are passionately focused on delivering against our strategic pillars of captivating clients, selling solutions, delivering differentiation and championing our culture. Our plan is to supplement this strategy, with our intentional M&A approach. Our strong results in 2022 position us well to progress toward our long-term growth and profitability targets, and all of this propels us towards our ambition to become the leading solutions integrator, defining a new category in our industry. In closing, I want 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. Our partners, for their continued collaboration and support and delivering innovative solutions to our clients. This concludes my comments, and we'll now open the line for your questions.

[Operator Instructions]. Our first question comes from Matt Sheerin from Stifel.

My first question, Joyce, is just on your outlook for hardware in general and specifically client devices. It sounds like it's been down year-over-year for the last couple of quarters. Any sense of when that bottoms? What are your customers telling you?

Thanks, Matt. So, we just had a pretty great quarter and a pretty awesome year, and it was a pretty great quarter in a period when devices were down. So I think, first of all, I just want to say that our combination of services, software, cloud and hardware, of course, give us confidence that our outlook is pretty solid. So, as I outlined the numbers. We're pretty -- we're confident in that. We see a reasonably good start to the year in that regard. In terms of hardware, we have pretty significant backlog still, near-record high backlog on infrastructure. So -- and that's going to probably not dissipate, until the back half of the year or through the summer. And then from a device point of view, yes, we're, like the rest of the industry, expecting devices to be down in the first half with some recovery in the back half of the year, primarily driven by much softer compares.

Okay. And then I wanted to talk about the fourth quarter, where you had basically your revenue down, your gross profit was up, roughly $21 million, and you're operating -- and basically, your SG&A was flat quarter-to-quarter, which seems surprising. So could you explain the relationship between the gross profit dollars, particularly in those netted down revenues and the corresponding OpEx? Because, if we look at your guidance for next year, you're looking at really, really significant gross profit growth on, I guess, low single-digit revenue. So I'm trying to figure out what that OpEx looks like underneath that model.

Sure. Okay, Matt. You're exactly correct. So in Q4, software, cloud and software in particular were strong, and you saw that reflected in the gross margin numbers that we posted in Q4. Going into 2022, you're also correct. We do anticipate gross profit dollar growth in the high single-digit range, and revenue growth is going to be lower than that. That's based on a couple of things, still. One, devices are a smaller contributor to the overall hardware in 2023. We're going to get more from infrastructure, more growth from the infrastructure side of the hardware market, that transacts at higher margin. And software and the cloud are also going to be strong going into 2023. And we have core services which are also going to be strong going into 2023. And in addition, we talked a little bit -- maybe in the -- in our Investor Day about our profitability initiatives with regard to expanding gross margin. So when you look at our numbers, gross margin is a huge driver of what we anticipate will be our success in 2023. And we have controlled SG&A in the second half of 2022. That is continuing, as we go into 2023. We will continue to fund sales and technical resources, as we have done in 2022. And we will continue to control our back office and admin resources, and leverage low-cost locations in terms of how we expand to meet the needs of the business. That is what's driving the improvement that you're seeing in our performance and the guidance we gave for 2023.

Okay. But just back to the last quarter, where your SG&A didn't grow sequentially, and your gross profits grew $21 million. Was that because there were cost cutting or variable expenses that went away with the lower hardware sales? And going forward, if let's say, gross profit margin is up 30 or 60 basis points year-on-year, would SG&A grow at a slower pace than that?

So if you look at Q4, I'll answer that question first. In Q4, we saw the value and the benefit that we had from the sales transformation and initiatives that we put in place, one, two, from just the cost control that we had around overall GP. So you're right, we grew gross margin, but SG&A didn't expand as much. But we did actually have the expansion that we normally would see on sales comp associated with the higher gross profit that was generated. That is correct. When you go into 2023, we would anticipate a similar dynamic. We're going to see gross profit dollars, that would generate gross margin expansion. That would generate higher commissions, and we're controlling SG&A around that with regard to getting to the answers that we -- the results that we showed you for 2023.

And just to supplement that. I mean we do expect continued leverage on SG&A. As we grow, we get more leverage out of our SG&A spend.

Our next question comes from Adam Tindle from Raymond James.

Okay. I just wanted to start on 2023 gross profit dollar guidance. Joyce, you mentioned you're obviously finishing a very strong year in 2022, and I think, gross profit dollars grew 13% during 2022 after a very, very strong year. As we think about 2023, you're talking about high single-digit gross profit dollar growth and called that guidance modest. And so as I kind of try to square those 2, a very strong year at 13%, but then we're expecting high single digits next year and calling that modest, there's a little bit of a disconnect. And I'm wondering if maybe, you could help bridge that, whether it's maybe some sort of backlog expectation that gives you confidence to grow at that level on a difficult comparison.

Yes. So first of all, I think -- so the top line will grow more slowly in 2023 than it grew in 2022. That's been consistently what Glynis has been talking about now, since the Investor Day, for sure. And obviously, there's some translation into gross profit dollar growth there. And we do certainly expect to see -- to get some help on our gross profit mix, due to flushing and the infrastructure backlog in the first half of the year. But as Glynis mentioned, I mean, it's really around the mix of software, cloud and services, overall in the business that are driving the gross margin expansion versus sort of our historical rate of gross margin.

Adam, if I could just add on to that. What I would say is that, if you look in the presentation deck, not right now, but at your leisure, you will see that we gave you a couple of stats about first half of 2022 versus second half of 2022. And part of what drove the gross profit dollar growth was high hardware sales in the first quarter of 2022. Which had lower gross margin associated with it. So in 2022, on that high gross profit growth, that we had in the first half, we -- actually margin declined by 70 basis points in the first half. We made that up in the second half, plus some, primarily because devices were not as strong in the second half of the year as they were in the first half of the year. When you look at the growth that we're seeing in 2023, it is less devices in that growth number, which helps us overall -- from a overall gross margin perspective, and gives us the confidence with regard to what's happening with infrastructure, our backlog around infrastructure, in particular, as well as the performance that we have shown in cloud, software and Insight core services that leads to that gross margin expansion number. Shame on us for calling it modest.

All right. You got me there. Given what you just outlined, is there a way for..

And Adam, it is also organic.

Yes. I realize that. Is there a way for us to think about seasonality in 2023, given kind of these different comparisons on a year-over-year basis and kind of an odd year last year that we're going off of how to think about seasonality in 2023?

Yes. I think as Glynis mentioned, I think it's kind of going to be the inverse of last year. So I think the first half of this year is going to be a little the growth will be slower than the second half of the year, and last year was the inverse.

Primarily around...

Last one for me, and I'll pass it on. But I do want to ask Joyce, on the sales transformation initiatives. If you could maybe just a recap a little bit of more specifics. I understand, there's been investments in systems, et cetera. But have you been moving around accounts or geographies? What's been going on with that? And what do you think is left to do with the sales transformation?

Sure. So yes, so we have spent a lot of time, as we talked about at Investor Day, really trying to think about how to focus on going deeper in our top accounts. So we have made changes in coverage to do just that. And that means, for our top accounts, we have -- and top sellers in those accounts, we've reduced the size of their account base, or their books. And that is in order to make sure that we're putting our highest-propensity sellers -- or sellers who sell them out services, and who have the most services skills, aligned with the customers who are most likely to buy our services. And to -- what the plan is to go deeper in those accounts so we can increase our understanding of their businesses in a very dramatic way and propose solutions that are going to be most relevant to them to help them deliver the success in their business that they're looking for. So we've done all of that. You're never done, of course, but we've done that, as of the end of the year. And so that's a pretty big push for us. We've also made some minor changes around how we think about account planning, how we're training our sales execs and things like that, and that will continue. That will be an ongoing process. So we have now moved from talking about sales transformation to actually growing the business. So we believe we're done with the planning phase, and we're now into execution.

Our next question comes from Joseph Cardoso from JPMorgan Chase.

At the Investor Day, you provided a long-term revenue outlook to outperform the underlying market by 200 basis points. How should we think about that level of outperformance relative to 2023? Is that still the benchmark, we should align to our models? Or are there other factors we should consider this year that might put pressure on that?

I think, we've always said that we will perform 200 to 300 basis points ahead of the market. That hasn't changed. It's just that we really want to focus on gross profit dollars because the composition of our revenue, specifically the composition of cloud in our revenue and the netting that occurs with that, makes our revenue metric a little hard to follow, especially when you're following it each quarter. Q2 and Q4 are big cloud quarters. So that's why we gave you some -- the guidance around gross profit, but we still anticipate we will grow ahead of the market, yes, on the revenue line.

Got it. Got it. Appreciate it. And then just relative to cash generation, which is set to improve heading into 2023 based on kind of the commentary you made in your prepared remarks. I guess, just can you just remind us what the priorities are? And particularly, just given your comments around M&A, like are you seeing -- is that more attractive going into this year? Are you seeing valuations coming down? And then are you just more inclined to do some kind of transaction to bolster your portfolio? Just kind of given what we're seeing in the macro backdrop, and simultaneously with cash generation likely to improve.

I appreciate it. So first call on capital, we'll be continuing to invest in our organic business, as we have been doing over the past year. Then it would be M&A. Then it would be share buybacks, and then paying down debt. Paying down debt is at the bottom primarily because we're in an environment now where our debt is 1.2x. -- we're 1.2x levered, which is low. What I would say is that, we continue to look at M&A. We continue to look for tuck-ins of -- maybe small to medium sizes, if you want to think about it that way, that we can tuck into the existing business to fill certain capability gaps. That hasn't changed. I think, that valuations on the smaller end of the market, the nonpublic ends of the market, are finally starting to come down a little bit. As companies are out there and they haven't seen the high prices, maybe, that they were getting in 2021 and early into 2022. So we will continue to be opportunistic in terms of adding to the overall portfolio around the pieces that we talk about, data, AI, cloud, et cetera.

Our next question comes from Anthony Lebiedzinski from Sidoti & Company, LLC.

A nice job in the quarter. So just looking at your services gross profit dollars grew 15% in the quarter. Just wondering, was that mostly volume driven? Or were there any pricing benefits? And I guess, given the choppiness in the economy, are you -- I guess, based on your guidance, you're probably not seeing much in terms of pricing pressures. But I mean if -- just wondering if you could just address that topic.

So I would start by saying we did see some improvement in services gross profit, and that is a combination of a mix of services and -- but some of it was volume-driven, obviously because profit outperforms the top line by a bit. And, I would not attribute it to pricing. I would say we haven't actually driven a whole bunch of pricing initiatives. Some of it a little bit potentially because the cost of labor certainly did increase during the last year. But I would say that it's primarily driven by improved execution and focus on making sure that our utilization is improving.

Got you. Okay. And then we've heard a lot of tech companies do a lot of layoffs. And, I just wonder about your own hiring plans. How are you guys thinking about managing that?

Yes. So we've been, since the middle of last year, working really, really hard to tighten our hiring processes and make sure that we're hiring, as I said earlier, for specific sales opportunities and technical expertise opportunities. This is a market where you can acquire terrific talent, so we will continue to do that. And we don't have any plans to do any mass -- at this point, we have no plans to do any major layoffs. We will continue to ensure we're aligning our utilization rates, with the demand in the market. And of course, we continue to manage performance. But other than that, we don't have any significant plans.

Okay. That's good to hear. And then I think, Glynis, you mentioned that you're planning a new Texas fulfillment center. Can you go over the timing of that? And how should we think about as far as CapEx spending for that?

Sure, Anthony. So our Texas fulfillment center will be built out this year. I would say primarily, we're not going to see any benefit from that build-out in 2023. It will be operational very late in the fourth quarter, maybe in December, if not in January of 2024. So we would anticipate going into January 2024, we'll start to see the benefit of that. It is not a net addition to our portfolio, it is going to be a consolidation. So once that facility is up and running, we're going to be closing some of our other facilities. So net-net, we will end up with 2 major facilities at the end of this period. I think, the other thing that, I would say, is that this facility allows us to do more advanced configurations around data center very specifically. As opposed to lab and integration work, et cetera. So that's one of the reasons for driving this. It also allows us to service the country, North America -- the U.S., with 2-day delivery from almost anywhere between the 2 facilities that we don't have at the end, with regard to how we go through there. And it's probably just under $30 million associated with that, in our capital expenditure guidance that we gave you of the $25 million to $30 million -- sorry, in $55 million to $60 million. Our normal run rate CapEx is in the $25 million to $30 million range.

One more thing, Anthony, it's also -- we are also investing in some automation. We're really excited about the improvements that we're going to deliver to our clients in terms of speed and accuracy. .

Our next question comes from Winston Colicchio from Barrington Research.

Yes. Joyce, what are you seeing in terms of overall sales cycles? And if you can give some color on any particular areas where there's any changes sequentially.

Yes. We saw this starting in Q4, and so it really does continue. So for services projects, we are definitely seeing longer sales cycles, more approvals are required, our clients are asking us to figure out how to change the scope of projects to make them smaller, deliver results fast. That actually plays to our strengths. I think, we're particularly good at that. So deliver an ROI and then earn the right to do the next project, but we are definitely seeing those services projects take a bit longer, and they're slightly, say, are a bit smaller.

And one more. Could you comment on the trends you're seeing in your client set, the enterprises, public sector and SMB?

Yes. So, I think, we're seeing pretty solid growth across all of those. Obviously, public sector is, for us, it's a smaller piece of our business, but it's really -- we're not as focused on the K-12 space there. But we're seeing some pretty solid growth there, due to the infrastructure bills and the investments in the country, so that's good. But our commercial and enterprise businesses are holding up really, really well, too. So, we're seeing strength across the board.

My other questions were answered.

We have a follow-up questions from Matt Sheerin from Stifel.

I just had a follow-up question on your software businesses in North America and Europe, which had a lot of sort of different results here. You had double-digit growth in software in North America, up 18% year-on-year. Whereas, your business in Europe was up just 4%, but I know you also grew gross profit dollars in Europe. So is there a difference in terms of revenue recognition or the types of software or cloud services that you offer?

There isn't any difference in revenue recognition across the regions. We use the same methodology in terms of revenue recognition in all of our regions. I think, the business mix in EMEA is a little bit different, with regard to the services that they can attach to the software. So we have maybe a more sophisticated software and -- sorry, cloud-attached digital transformation process here or methodology here and offerings here that we can give to our clients. Whereas in EMEA, they don't have that. So that actually influences part of the success that we have here in North America with our cloud growth versus EMEA. That would be one of the areas for an M&A opportunity for us as we go forward.

Anything else different in terms of the demand environment there?

Yes. I think the demand -- yes, the demand environment is a bit slower there, a bit more cautious, for sure. And we've seen that for sure. Inflation rates are higher, costs are higher.

Thank you. We have no further questions on the line. I will now thank you for joining today's call. Have a lovely day.

Thank you.

Thank you.