Good morning, and thank you all for joining. I would like to welcome you all to the Insight Enterprises Fourth Quarter 2023 Earnings Conference Call. My name is Brika, and I will be your moderator for today. All lines are on mute during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] And now, I would like to hand the conference over to your host, James Morgado, Senior Vice President of Finance and CFO of Insight North America to begin. So 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 ended December 31, 2023. I am 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 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, February 15, 2024. 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 2023 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 both the press release and the accompanying slide presentation issued earlier today. Please note, that all growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted. Also, 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 statement 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 are following along with the slide presentation, we will begin on Slide 4. Joyce?

Thank you very much, James. Good morning, everyone, and thank you for joining us today. In the fourth quarter, our adjusted diluted earnings per share grew by an impressive 18%. This performance was strengthened by the acquisitions we made in the second half of the year. While device revenue showed sequential improvement, demand remained muted. Infrastructure orders softened in December as clients deployed shipments from earlier in the year. Despite a decline in hardware gross profit, we grew total gross profit by 4%, driven by cloud and services. Glynis will cover Q4 results in more detail. We are incredibly proud of our execution and the progress we made on our journey to becoming the leading solutions integrator. Our profitability and pricing initiatives drove significant improvements in our hardware and services gross margins, which we expect will continue. We improved our cost structure while continuing to invest in our teammates, our capabilities, our infrastructure, and our future. We continued to invest in our solution selling capabilities. We made two strategic acquisitions, strengthening our cloud and services portfolio. We launched our initial Gen AI offerings, which have been well received by clients. We improved adjusted ROIC by 140 basis points to 17.3% and we continued to make progress on our e-commerce and digital engagement platforms, enhancing the client experience. These critical shifts in our operational model allowed us to achieve outsized results in our profitability despite declines in hardware demand. The following highlights represent record level performance for 2023. Gross margin expanded by 250 basis points to 18.2%. Cloud gross profit grew 26% to $429 million. Insight Core Services gross profit grew 8% to $273 million. Adjusted EBITDA margin expanded by 100 basis points to 5.7%. Adjusted diluted earnings per share were $9.69, up 6%. And finally, operating cash flow was $620…

Thank you, Joyce. In 2023, we successfully navigated through an unpredictable macroeconomic environment that caused increased caution and slower decision making by our clients across all segments. In response to this, we accelerated our gross margin expansion and profitability improvement plans, increased our focus on optimizing our operating expenses, and built a strong foundation to support future growth. In addition, we completed two strategic acquisitions, Amdaris in the UK and SADA in North America, both of which expand our cloud and solutions capability and accelerate our ambition to become the leading solutions integrator. Both deals have been immediately accretive, which as you know, is exceptional. I’ll cover Q4 2023, then briefly summarize the full year 2023 results. It should be noted that the contributions from SADA and Amdaris post-acquisition are included in my discussions on Q4 and full year 2023 and are also included in cloud and Insight Core Services. Moving on to Q4 2023 results. Cloud and Insight Core Services gross profit were standouts in the quarter, helped by SADA and the Amdaris acquisition. As we have seen all year, the revenue decline was primarily driven by hardware, particularly devices, and most recently infrastructure. We have seen some strengthening in devices. The year-to-year decline in Q4 was in the single-digit range compared to the double-digit declines we had seen in prior quarters. The initiatives we implemented to improve profitability and increase productivity and our acquisitions helped to mitigate the effects of the slowdown in Q4. Net revenue was $2.2 billion, a decrease of 11% in U.S. dollar terms and in constant currency. The decline was primarily due to hardware, which was down 22% related to devices and infrastructure partially offset by cloud growth. In Q3, we expressed our belief that we had approached the bottom of the device market…

Thanks, Glynis. We are pleased with the numerous foundational improvements we made in 2023 and our results demonstrate the resilience of our business. We have accelerated our pricing and profitability programs, enhanced our e-commerce platform, expanded our leadership team, invested in our internal systems to increase productivity and improved our cost structure. Additionally, we acquired two strategic cloud and services companies. These improvements, coupled with our focus on the fastest growing areas of the market, position us well for the future. We have a healthy balance sheet and our business delivers strong cash flow, giving us the capacity to fund our capital allocation priorities, particularly strategic acquisitions to drive long-term profitable growth and return capital to our shareholders. We recognize the market will remain challenged in the short-term, but believe our portfolio of solutions gives us the resiliency to navigate through this economic cycle and the long-term dynamics of the IT industry are very strong and we believe we are well positioned to drive profitable growth. Our performance over the past year in the phase of a difficult hardware demand environment has reinforced our confidence in our strategy and ability to deliver outcomes to our clients. In closing, I want to thank our teammates for their commitment to our clients, partners in each other, our clients for trusting Insight to help them with their transformational journeys, our partners for their continued collaboration and support in delivering innovative solutions to our clients. This concludes my comments and we will now open the line for your questions.

Thank you. [Operator Instructions] We have the first question from Joseph Cardoso from J.P. Morgan. Your line is now open.

Good morning, everyone, and thanks for the question. So maybe my first question here, big picture question. As we’re sitting here two months into the New Year, can you just touch on how your customer IT budgets are shaping up for 2024 in the sense of whether you have seen an expansion or contraction relative to 2023. And then within that budget framework, what are you seeing as the key investment priorities for 2024 and have you seen any dramatic shifts in key focus areas for your customers, like for example AI from security or some other infrastructure areas? Just curious if you’re seeing any dramatic shifts in terms of priorities. And then I have a follow-up on the guidance. Thanks.

Hi, Joe. Good morning. So when we think about our 2024 sort of trajectory, just as Glynis was saying, I mean, it’s really – we’re seeing some improvement sequentially, but we expect this first half to be a little bit lighter and we expect more strength in the second half. And that’s playing out certainly with what we’re seeing in the first couple of months. In terms of budget priorities, I should also note that we are seeing a bit more optimism in the commercial segment, which is kind of typical for an economic recovery, because we generally see smaller customers recover sooner, and it takes a little while for that to bleed into the enterprise space. And so I would say, we’re also seeing that. In terms of budget priorities, no real changes from where we’ve been over the last couple of quarters. I mean, lots of interest, of course, and prioritization around security. We have seen, as Glynis noted, some softening in the infrastructure space, and that’s really digestion of all of the deliveries that we shipped over the past year, frankly. And we are seeing a bit more interest in device refresh as Windows 11 sort of looms. But also AIPCs are pretty interesting to our clients. And this notion of edge management of smaller and large – small languagemodels, large language models. So I think no real dramatic changes except for infrastructure softening as we digest the deliveries that we talked about.

Appreciate the color.

The AI is also – just by the way, are probably more back end loaded for sure. And then the other thing we should probably note is, now everybody’s notebook fleets are getting pretty old. So I think that’s also driving some of the interest in device refresh. We expect that more to be stronger in the back half of the year.

No, got it. Appreciate the color there, Joyce. And then just my next question on the guidance. While the gross profit growth you’re embedding into the full year is quite robust. I think most of us were a bit surprised to see the expectation for operating expense to outpace it, particularly just given the execution relative to operating leverage over the past two years. Can you maybe just double click there and provide more granularity where those investments are being made? And probably more importantly, how we should think about the transitory nature of them versus, say, structural. Thanks. Appreciate the questions, guys.

Okay, so, Alex – Sorry, not Alex, Joe. What I would say is, when you look at the guidance embedded in there is our organic business is maintaining the standard Insight trajectory at low single digit, mid to low single digit increase in SG&A. What you’re seeing is the impact primarily of SADA, which does have higher SG&A growth relative to GP growth, and the eleven months that we have of that in 2027 that’s driving that impact, the ongoing…

2024.

2024 that’s driving that impact. I apologize. That’s driving that impact. So we anticipate that we didn’t do the SADA acquisition for cost synergies. We did it for the strategic impact and the revenue synergies that we thought we could get with being a robust multi cloud provider. We’ll take a look at SG&A over the next year or so, but for the main 2024 year, we anticipate that we will be much more focused on revenue synergies and will be on OpEx synergies associated with SADA, and we’ll address it over time.

Got it. Thanks. Appreciate the color.

Yes, despite the lower organic growth rate, if you look at North America, North America SG&A is down year-over-year. We made some reductions in North America in 2023 specifically to free up dollars to make investments in the technical areas and sales areas going forward in 2024. And we’re still continuing with those.

Thank you. Appreciate it.

Thank you. We have the next question from Matt Sheerin of Stifel. You may proceed with your question.

Yes, thank you, and good morning. A couple of questions for me. First, in terms of the hardware decline that you’ve seen, it looks like it actually accelerated year-over-year, particularly in North America. And I know part of that was on the infrastructure side, was that the first down quarter, year-over-year in terms of infrastructure and particularly networking. And what’s your sense of how many quarters it’s going to take before you start to see that recover?

Hi, Matt. Infrastructure, I mean, so we started – just to remind you, we started shipping backlog basically in Q1 of last year and shipped backlog all the way through about Q3. Backlog had largely normalized, I think when we talked to you at the end of Q3, and we saw infrastructure decline in Q4. So we expect that that will be soft for a few quarters, and that’s really just everyone digesting the equipment that they’ve acquired during the last year. It’s kind of the same sort of shape of demand that we saw with devices. It just happens now that we’re starting to see sequential improvement in devices, and we expect that to strengthen through the back half of the year.

Okay, so like a three quarter lag.

Overall we expect hardware to grow – sorry, go ahead.

No, I’m sorry. You said you expect hardware to grow later this year.

Yes. Mid-single-digits all in.

Got it. Yes. And that’s – if client devices is growing faster, what’s the attach rate? I know that in the solution side, there’s a good attach rate of services and other things. I know there’s some attach rate to client devices, but in terms of how the gross margin shakes out, is it greater for the infrastructure side? So that could be a little bit of a headwind on gross margin.

So gross margin on devices is lower than the hardware gross margin on infrastructure. There is significant attachment of services, and devices are generally a bigger part of a business than infrastructure. So we expect that device recovery should help services overall, strong margin. And by the way, we’ve put in, as we’ve mentioned a few times, profitability and pricing programs on hardware that we expect to continue.

Got it. Okay. And then it looks like you’re guiding share count for the year up 700,000 shares or so. What, Glynis, is the right number for the first quarter. Is that increase due to the converts? And could you walk us through the mechanics there?

Yes. We have a schedule in the back that can help you walk in the back of the presentation that can help walk you through the mechanics. We will be doing a $35 million share repurchase. It is included in the guidance and in the share count that you have there. And we’ll evaluate where our stock price goes relative to the warrants that really trigger the increase in the share count as we go throughout the year and would be willing to make other adjustments as we go forward. The $35 million purchases primarily around equity dilution, offsetting equity dilution.

And we’re doing that in Q1.

And we’re doing that in Q1.

Got it. Okay. And just if I can ask another question regarding gross margin, just because of the significant impact from SADA last quarter, I think you said 110 basis points. So I guess, right off the bat, we would expect that decline, but it could be greater, right. Because their gross margin is much lower seasonally, correct?

No. So the seasonal impact of SADA is driven because revenue and GP, the dollars are lower in the first quarter and second quarter than they are in the second half of the year Q3 and in Q4. And essentially SG&A is flat. So the impact for SADA in Q1 is really much more around the EBIT impact that they will have on us relative to the negative…

I got it, because of the OpEx. Okay.

Because of the OpEx. Because of the OpEx. Yes, yes. But it’s not going to be a decline in [indiscernible] But overall, remember, we got the strongest quarter of SADA, strongest month of SADA in December. So the SG&A and it had an impact of 110 basis points. But I wouldn’t want you to think that every quarter is going to be 110 basis points, which is why we’re guide the gross margins to 19% range, right.

Got it. Exactly. Okay. Thank you very much.

Continue investing during periods of…

Thank you. We have the next question from Adam Tindle of Raymond James. Adam, you may proceed with your question.

Okay. Thank you. This is Jake Morrison on for Adam. I just wanted to start on linearity in the quarter. We heard from some peers that the month of December was weaker than anticipated, and they didn’t see the budget flush they were expecting. Can you just touch on the environment you saw in the core business in December and how that played into your 2024 outlook? Thank you.

Yes. Thanks, Jake. Yes, we would agree with that. It’s exactly what we saw. We didn’t expect as much budget flush as we had seen in previous years, but we definitely saw softness in December, particularly on infrastructure.

And although, we’re seeing – we saw some sequential increase in Q4 associated with devices, it’s still down on a year-over-year basis. And as you go into 2024, we do believe that we’ll see some strengthening in hardware, specifically devices throughout the year. And there’s some sequential improvement in hardware between Q4 and Q1, but it’s still ultimately muted and down relative to the first half of 2023.

Got it. That makes sense. And then last one for me, just double clicking on that. What exactly is this 19% gross margin contemplating in terms of return to device spending? What are you guys hearing? I know you mentioned this sort of AI enabled computers coming out, but what are you guys contemplating in terms of return to device spending in relative to price increases? Thank you.

So when we think about the device, so, first of all, we think devices are going to improve sequentially, but as Glynis just said, they’re down still. We expect them to be in sort of the in growth – growing in the back half of the year. Overall, we expect hardware to grow mid-single digits. When it comes to devices, we believe that, first of all, everybody’s got notebooks now. There’s many fewer desktops. The life of notebooks is generally shorter. Those notebooks are aging, and there’s a lot of interest in AI enabled PCs, but also refresh due to Windows 11. And also, everyone needs to be able to operate in a hybrid environment. And so there’s improvements around quality, sound quality, cameras, et cetera, et cetera. So the ASPs are likely to be higher, and that will help us.

Perfect. Thank you.

Thanks, Jake.

Next question?

Thank you. Your next question comes from Anthony Lebiedzinski from Sidoti & Company.

Good morning, and thank you for taking the questions. So, first, I just wanted to follow-up on the last person asking the question about the AI enabled PCs. Is that something that in your conversations with your customers, have they brought up that topic as far as is there actually – do you sense that there’s pent-up demand for that? And do you think that’s part of the reason why you haven’t seen devices come back? It’s just that customers are waiting for those AI enabled PCs.

Anthony, I would not say that. I think we’re at the beginning of the beginning of this Gen AI sort of period. So I think very – customers are very, very interested in understanding what Gen AI can do. They are trying to understand things like security and policy, governance, training, change management, how to make sure their data is set up. There’s lots and lots of questions. We’re spending a lot of time on this with our clients, but I don’t think that is materially impacting spend yet in sort of standard customers. Of course, there’s a lot of people buying chips and a lot of people building data centers and things like that. But in terms of sort of normal enterprises and organizations, I would not say that that is driving it. I think the caution – the overall macro caution is driving some delay in spending. And lots and lots of our customers are just trying to figure out how their year is going to shake out. And I think that is the big issue. I think there is a forcing function in the back half of the year, primarily around refresh and also around Windows 11, that we’re starting to hear lots of questions about that. And this AIPC I think is going to help us with a certain segment of the customer base as the use cases become clear and the value is becomes more obvious. But I would not call that. I don’t think that’s a driving factor of the caution in the spend on devices.

Okay. Thanks for that color. Definitely appreciate that. And then also just overall, in terms of thinking about the guidance that you provided for this year for gross profit and operating expense growth, I guess as we move beyond this year, would it be reasonable to assume that your operating expenses would grow at a lower rate than gross profit growth? Just in terms of looking at your 2027 KPIs, I would think that once you get into next year, your operating expenses should grow at a more modest rate than gross profit growth. Is that the right way to think about that?

Absolutely. And that is really driven by the continued growth in cloud and services and software like we’ve been talking about, the fastest growing areas of the market, the areas where our customers need the most help. And also normalizing OpEx as we learn more about how to manage these businesses for sure. That is consistent with our KPIs that we put out in October of 2022.

Understood. And just a quick balance sheet question. I saw that there was a big spike in long-term accounts receivable and long-term accounts payable. Is this because of SADA or is there something else driving that?

Yes. It’s primarily related to the SADA acquisition in terms of how we reflecting the committed contract terms on our books, can walk you through that in more detail if you’d like, but that’s primarily related to the accounting mechanics of SADA.

Understood. Okay. Well, thank you very much and best of luck.

Thanks, Anthony. Appreciate it.

Thank you. We now have the question from the line of Vincent Colicchio from Barrington Research. Please – your line is now open.

Yes. Question on the pricing and profitability initiatives. Did they perform as expected in the quarter? Are there any areas of pushback?

Yes. I mean, they absolutely performed per our expectations and we’re really pleased with those initiatives and we think they have a lot of staying power. As Glynis said, we have built them into the mechanics of our operating rhythm and we expect to drive continued improvement there.

And how are you feeling about growth prospects in North America versus EMEA in 2024?

We expect North America to be stronger and we expect every segment in North America to grow, but we also expect EMEA to improve as well.

You had called out enterprise spend curious on SMB and government. Anything to call out there?

We are seeing sequential improvement in both and we expect both to grow for the year. As I said earlier, SMB spend is usually a good indicator that the other segments will follow. And so we expect that to be true and we’re encouraged by what we’re seeing in the SMB space.

Thank you.

Thanks, Vince.

Thank you. We have no further questions on the line. So I’d like to hand it back to the management team for any final remarks.

Thank you very much to all of you for your questions and your interest. We are very excited about the opportunities ahead of us and I look forward to sharing our continued progress on our journey to becoming the leading solutions integrator. You can now close the call, operator. Thank you.

Thank you. Thank you all again for joining today’s conference call with Insight Enterprises. You may now disconnect your line and please enjoy the rest of your day.